U.S. Bancorp's (USB) Q3 Earnings As Expected, Revenues Up

U.S. Bancorp’s (NYSE:USB) third-quarter 2017 earnings per share of 88 cents came in line with the Zacks Consensus Estimate. Results came ahead of the prior-year quarter earnings of 84 cents.

Easing margin pressure on rising rates was witnessed in the quarter. Moreover, revenues improved on a year-over-year basis aided by rise in net interest income. Further, elevated average loans and deposits balances were tailwinds. However, escalating expenses, lower mortgage banking revenues and provisions were major drags.

Net income was $1.6 billion, up 3.5% year over year.

Revenues, Loans & Deposits Growth Recorded, Costs & Provisions Flare Up

U.S. Bancorp’s net revenues came in at around $5.6 billion in the quarter, up 4.1% year over year. The increase in net interest income was partly offset by lower non-interest income. Also, revenues came in line with the Zacks Consensus Estimate.

U.S. Bancorp’s tax-equivalent net interest income totaled $3.2 billion in the quarter, up 8.3% from the prior-year quarter. The rise was mainly due to loan growth and rising interest rates.

Average earning assets climbed 3.8% year over year, supported by growth in average total loans and average investment securities, along with elevated average other earning assets. Furthermore, net interest margin of 3.10% was up 12 basis points year over year, driven by higher interest rates and loan portfolio mix. Higher funding costs and elevated cash balances partially mitigated rise in margins.

U.S. Bancorp’s non-interest income edged down around 1% on a year-over-year basis to $2.4 billion. The decline was primarily due to lower merchant processing services, mortgage banking revenues and reduced securities gains.

Provision for credit losses increased 10.8% year over year to $360 million in the reported quarter.

U.S. Bancorp’s average total loans climbed 3% year over year to $277.6 billion. The growth was stemmed by a rise in commercial loans, residential mortgages, total other retail and credit card loans. These increases were partially offset by a drop in commercial real estate and covered loans. Excluding covered loans, average total loans rose 3.3% year over year.

Average total deposits were up 5.2% from the prior-year quarter to $335.2 billion. The upsurge was due to growth in interest-bearing deposits, partly offset by lower non-interest-bearing deposits.

Non-interest expenses rose 3.7% year over year to $3 billion at U.S. Bancorp. The upsurge in mostly all components of non-interest expenses was partially offset by lower professional services, marketing and business development expenses along with other intangibles.

Deteriorating Credit Quality

Credit metrics at U.S. Bancorp deteriorated in the reported quarter. Net charge-offs came in at $330 million, up 4.8% year over year. On a year-over-year basis, the company experienced deterioration, mainly in net charge-offs in the credit card segment.

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Total allowance for credit losses was $4.4 billion, slightly up on a year-over-year basis. U.S. Bancorp’s non-performing assets (excluding covered assets) came in at $1.3 billion, down 23.5% year over year.

Strong Capital Position

During the quarter under review, U.S. Bancorp maintained a solid capital position. Effective Jan 1, 2014, the regulatory capital requirements for the company comply with Basel III, subject to certain transition provisions from Basel I over the next four years to full implementation by Jan 1, 2018.

The tier 1 capital ratio came in at 11.1%, in line with the prior-year quarter. Common equity tier 1 capital to risk-weighted assets ratio under the Basel III standardized approach fully implemented was 9.6% as of Sep 30, 2017, up from 9.5% in 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 at 11.8% as of Sep 30, 2017, compared with 12.1% as of Sep 30, 2016.

The tangible common equity to tangible assets ratio was 7.7% as of Sep 30, 2017, compared with 7.5% as of Sep 30, 2016.

U.S. Bancorp posted an improvement in book value per share, which increased to $25.98 as of Sep 30, 2017, from $24.78 recorded at the end of the year-earlier quarter.

Capital Deployment Update

Reflecting the company’s capital strength during the third quarter, U.S. Bancorp returned 79% of earnings to its shareholders through common stock dividends and buybacks. It came within the company’s long-term goal of returning 60-80% to its shareholders.

Conclusion

U.S. Bancorp posted a decent quarter. Along with elevated revenues, a solid capital position and increased lending activities were added advantages. In addition, rising margins was a positive.

Nevertheless, weakness in the credit card portfolio adversely affected its asset quality. Additionally, there are concerns related to the impact of legal issues and the company’s global exposure. Also, escalating expenses, along with provisions, remain headwinds.