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U.S. Bancorp (USB) Q1 Earnings Beat Estimates, Costs Rise

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U.S. Bancorp (USB - Free Report) has reported first-quarter 2020 earnings per share of 72 cents, which surpassed the Zacks Consensus Estimate of 49 cents. However, the bottom line declined 28% from the prior-year quarter figure.

The stock declined more than 2% in pre-market trading, reflecting investors’ disappointment with the results. Notably, the full-day trading session will display a clearer picture.

Higher loan and deposit balances came as tailwind. Also, rise in fee income was recorded. However, a substantial rise in provisions, owing to the coronavirus-related concerns, was a headwind. Also, escalating expenses and contraction of margin were the undermining factors.

Net income applicable to shareholders was $1.09 billion compared with $1.86 billion reported in the prior-year quarter.

Revenues Increase, Costs & Provisions Rise

U.S. Bancorp’s net revenues were $5.77 billion in the first quarter, up 3.5% year over year. An increase in non-interest income led to the upside. The top-line figure also surpassed the Zacks Consensus Estimate of $5.58 billion.

The company’s tax-equivalent net interest income totaled $3.25 billion in the reported quarter, down 1.2% from the prior-year quarter. The decline mainly stemmed from lower interest rates, partially offset by deposit pricing and shift in funding mix along with loan growth.

Average earning assets were up 6.7% year over year, supported by growth in average total loans, average investment securities and average other earning assets. However, net interest margin of 2.91% shrunk 25 basis points year over year.

U.S. Bancorp’s non-interest income climbed 10.2% on a year-over-year basis to $2.53 billion. The rise can be attributed to higher trust and investment management fees, and commercial product revenues.

Provision for credit losses increased substantially year over year to $993 million in the March-ended quarter. The upside is accountable to deteriorating economic conditions, driven by the impact of COVID-19 on the economy.

U.S. Bancorp’s average total loans inched up nearly 1% sequentially to $297.7 billion. This stemmed from a rise in commercial loans, residential mortgages and commercial real estate loans.

Average total deposits were up 1.8% from the previous quarter to $362.8 billion. The upside resulted from growth in interest-bearing deposits.

Non-interest expenses jumped 7.4% year over year to $3.32 billion. This was due to an upsurge in employee benefits, technology and communications, and other costs.

Efficiency ratio was 58% compared with the year-ago quarter’s 55.4%. An increase in the ratio indicates lower profitability.

Credit Quality: A Mixed Bag

Credit metrics at U.S. Bancorp remained mixed in the March-end quarter. Net charge-offs were $393 million, up 7.1% from the year-ago quarter. On a year-over-year basis, the company witnessed deterioration, mainly in net charge-offs in the credit card, commercial and retail portfolios. Also, total allowance for credit losses was $6.59 billion, up 48.1%.

U.S. Bancorp’s non-performing assets were $946 million, down 5.9% year over year.

Capital Position

During the first quarter, U.S. Bancorp maintained a solid capital position. The Tier 1 capital ratio was 10.5%, down 4 bps year over year. Common equity Tier 1 capital ratio under the Basel III standardized approach fully implemented was 9% as of Mar 31, 2020, down from 9.3%.

All regulatory ratios of U.S. Bancorp continued to be in excess of well-capitalized requirements. In addition, based on the Basel III fully implemented advanced approach, tangible common equity to risk-weighted assets ratio was estimated at 9.3% as of Dec 31, 2019, compared with 9.4% witnessed at the end of the year-ago quarter.

The tangible common equity to tangible assets ratio was 6.7%, down from 7.9%.

U.S. Bancorp recorded an improvement in book value per share, which increased to $30.24 as of Mar 31, 2020, from $28.81 at the end of the year-earlier quarter.

Conclusion

The company put up a decent show during the first quarter. Improvement in the commercial lending scenario and higher deposits balance were the key positive factors. Also, strong capital position keeps it well-poised for growth.

However, lower interest income on account of contraction of margins and escalating expenses remain headwinds. Also, economic slowdown and weakness in corporate lending are near-term concerns.

U.S. Bancorp Price, Consensus and EPS Surprise

 

U.S. Bancorp currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Other Major Banks

Driven by top-line strength, First Republic Bank delivered a positive earnings surprise of 30.4% in first-quarter 2020. Earnings per share of $1.20 surpassed the Zacks Consensus Estimate of 92 cents. However, the bottom line was down 4.8% from the year-ago quarter.

Wells Fargo (WFC - Free Report) reported first-quarter 2020 earnings of 1 cent per share, including a reserve build of $3.1 billion and certain other items amid coronavirus scare. The Zacks Consensus Estimate for the same was pegged at 22 cents.

JPMorgan’s (JPM - Free Report) first-quarter 2020 earnings were 78 cents per share, which missed the Zacks Consensus Estimate of $1.70, thanks to a substantial rise in provisions, owing to coronavirus-related concerns.

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