Why Is U.S. Bancorp (USB) Down 2.6% Since the Last Earnings Report?

More than a month has gone by since the last earnings report for U.S. Bancorp USB. Shares have lost about 2.6% in that time frame, underperforming the market.

Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

U.S. Bancorp's Q3 Earnings In Line, Revenues Up

U.S. Bancorp’s 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.

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 came 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.

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 shareholders through common stock dividends and buybacks. It came within the company’s long-term goal of returning 60-80% to its shareholders.

Outlook

Fourth-quarter 2017

Total average loan is expected to grow in line with the third quarter.

Management expects net interest margin to be essentially flat sequentially.

Since the third quarter was seasonally the highest quarter for fee income growth, management anticipates fee revenues to be essentially flat sequentially and on a year-over-year basis.

Management anticipates to record positive operating leverage on a year-over-year basis in the fourth quarter and 2018 as well, supported by expense growth in the 3-5% range. Sequentially, expenses are estimated to be seasonally impacted by the timing of professional services and higher tax credit amortization expense.

Credit quality is projected to remain stable.

The taxable equivalent income tax rate is estimated to be approximately 29%.

Given the anticipated revenue impact from hurricanes to continue, management expects year-over-year merchant acquiring revenues will likely be essentially flat in the fourth quarter.

Full-Year 2017

Management expects compliance costs to grow in late 2017 and into 2018.

The company commits to deliver positive operating leverage for full-year 2017.

The year-over-year non-interest expense growth is expected to be in-line with long-term target range of 3-5%. Management believes a strong balance sheet, diversified revenue mix and focus on expense management, combined with participation in some significant expenses headwinds, provides momentum for the remaining of 2017 and 2018.

Management anticipates its total interest bearing deposit beta to trend toward a 50% level, assuming interest rate hikes to continue in future.

How Have Estimates Been Moving Since Then?

Analysts were quiet during the past month as none of them issued any earnings estimate revisions.

VGM Scores

At this time, the stock has a poor Growth Score of F, however its Momentum is doing a bit better with a D. 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 F. If you aren't focused on one strategy, this score is the one you should be interested in.

The company's stock is suitable solely for value based on our styles scores.

Outlook

The stock has a Zacks Rank #3 (Hold). We are expecting an inline return from the stock in the next few months.

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