It has been about a month since the last earnings report for U.S. Bancorp (USB). Shares have added about 0.6% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is U.S. Bancorp due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
U.S. Bancorp Q1 Earnings Meet Estimates, Revenues Up
Riding on higher revenues, U.S. Bancorp’s first-quarter 2019 earnings per share of $1.00 came in line with the Zacks Consensus Estimate. Also, the reported figure is up 4.2% from the prior-year quarter.
Higher revenues, along with loan and deposit growth, were the driving factors. Though lower mortgage banking revenues, and escalating expenses and provisions disappointed, easing margin pressure on rising rates and overall higher fee income were tailwinds.
Net income came in at $1.7 billion compared with $1.67 billion reported in the prior-year quarter.
Revenues & Loans Grow, Costs & Provisions Flare Up
U.S. Bancorp’s net revenues came in at around $5.6 billion in the first quarter, up 2% year over year. Increase in net interest as well as non-interest income led to this upside. Revenues met the Zacks Consensus Estimate.
U.S. Bancorp’s tax-equivalent net interest income totaled $3.3 billion in the quarter, up 3.1% from the prior-year quarter. The upswing mainly stemmed from earning assets growth, increased security yields and rising interest rates. These positives were partially mitigated by higher rates on deposits and shift in funding mix.
Average earning assets inched up 1.9% year over year, supported by growth in average total loans, average investment securities and average other earning assets. Furthermore, net interest margin of 3.16% expanded 3 basis points (bps) year over year, driven by higher interest rates and average investment securities, along with loan portfolio mix, partly mitigated by deposit and funding mix.
U.S. Bancorp’s non-interest income escalated around 1% on a year-over-year basis to $2.3 billion. The upswing can primarily be attributed to rise in corporate payment products revenues, merchant processing services and other non-interest income, partially offset by lower credit and debit card revenues, treasury management fees, deposit service charges and mortgage banking revenues.
Provision for credit losses increased 10.6% year over year to $377 million in the reported quarter.
U.S. Bancorp’s average total loans inched up 0.9% sequentially to $286.1 billion. This stemmed from a rise in commercial loans, residential mortgages, credit card and other retail loans.
Average total deposits were up 0.3% from the prior quarter to $335.4 billion. This rise stemmed from growth in interest-bearing deposits.
Non-interest expenses jumped 1% year over year to $3.1 billion at U.S. Bancorp. The upswing in mostly all components of non-interest expenses was partially offset by lower marketing and business development expenses and other expenses, along with postage, printing and supplies.
Efficiency ratio came in at 55.4%, improving from 55.9% in the year-ago quarter. A decrease in the ratio indicates improved profitability.
Credit Quality: A Mixed Bag
Credit metrics at U.S. Bancorp remained mixed in the March-ended quarter. Net charge-offs came in at $367 million, up 7.6% year over year. On a year-over-year basis, the company witnessed deterioration, mainly in net charge-offs in the credit card and commercial segments, which was offset by improvement in residential mortgages and commercial real estate.
U.S. Bancorp’s non-performing assets (excluding covered assets) came in at $1 billion, down 16.5% year over year. Total allowance for credit losses was $4.5 billion, up 2.3%.
Strong Capital Position
During the quarter under review, U.S. Bancorp maintained a solid capital position. The Tier 1 capital ratio came in at 10.9% compared with 10.4% in the prior-year quarter. Common equity Tier 1 capital to risk-weighted assets ratio under the Basel III standardized approach fully implemented was 12.8% as of Mar 31, 2019, up from 12.5% reported at the end of the year-ago quarter.
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, the Tier 1 common equity to risk-weighted assets ratio was estimated to be 12% as of Mar 31, 2019, compared with 11.5% witnessed at the end of the prior-year quarter.
The tangible common equity to tangible assets ratio was 7.9% as of Mar 31, 2019, marginally up from the prior year’s 7.7%.
U.S. Bancorp posted an improvement in book value per share, which increased to $28.81 as of Mar 31, 2019, from $26.54 recorded at the end of the year-earlier quarter.
Capital Deployment Update
Reflecting the company’s capital strength during the first quarter, U.S. Bancorp returned 77% of earnings to its shareholders through common stock dividends and buybacks.
For second-quarter 2019, management expects fully taxable equivalent net interest income to increase in the low single-digits on a year-over-year basis.
Management expects fee revenues to increase in the low single-digits year over year, including the negative impact of the sale of the ATM business. Mortgage banking revenues for full-year 2019 are expected to trend up.
Management expects to deliver positive operating leverage on a core basis in the range of 100-150 bps for 2019.
In 2019, management expects taxable equivalent tax rate to be about 20%. Credit quality is expected to remain relatively stable in the second quarter of 2019 compared to the year-ago quarter. Loan loss provision expense growth will continue to be reflective of loan growth.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
At this time, U.S. Bancorp has a subpar Growth Score of D, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, U.S. Bancorp has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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