U.S. Bancorp (USB) Q4 Earnings Beat on Improved Lending

U.S. Bancorp’s USB fourth-quarter 2016 earnings per share of 82 cents came a penny above the Zacks Consensus Estimate. Also, earnings increased 2.5% year over year.

Better-than-expected results were driven by growth in net interest income (NII) and non-interest income. Further, the quarter recorded a rise in loan and deposit balances, while capital position remained strong. However, a rise in expenses and higher credit costs were on the downside.

Net income remained relatively stable year over year at $1.48 billion in fourth-quarter 2016.

 

For 2016, earnings per share of $3.24 beat the Zacks Consensus Estimate by a cent. Further, net income was $5.89 billion, marginally above the 2015 level.

NII & Fee Income Growth Drive Revenues, Costs Rise

U.S. Bancorp’s revenues of $5.39 billion climbed 4.4% year over year. In addition, revenues surpassed the Zacks Consensus Estimate of $5.35 billion.  

For 2016, revenues of $21.11 billion rose 5% from the 2015 level. Revenues outpaced the Zacks Consensus Estimate of $21.05 billion.

Tax-equivalent net interest income grew 4.6% from the prior-year quarter to $3 billion. The rise was mainly due to loan growth partially offset by lower net interest margin.

Average earning assets increased 7.7% year over year, supported by growth in average total loans, average investment securities and average cash balances.

However, net interest margin of 2.98% was down 8 basis points year over year. The fall was mainly due to lower yields on securities purchases, lower reinvestment rates on maturing securities and higher cash balances.

Non-interest income increased 3.9% from the year-ago quarter to $2.43 billion. The rise was primarily stemmed by increase in almost all components of non-interest income, except commercial products revenue, investment products fees and other income.

Non-interest expenses were up 6.9% year over year to $3 billion. The rise reflects higher expenses in nearly all categories, except employee benefits and other intangibles.

Strong Balance Sheet

Average total loans inched up 1.1% sequentially to $272.7 billion. This was mainly driven by growth in total commercial loans, total other retail loans, residential mortgages and credit card loans. Excluding covered loans, average total loans rose 1.2% from the third-quarter level.

Average total deposits were up 3.3% from the prior quarter to $329.2 billion. The rise was attributable to growth in non-interest-bearing deposits and total savings deposits, partly offset by lower time deposits.

Deteriorating Credit Quality

Net charge-offs were $322 million, up 5.6% year over year. Moreover, provision for credit losses increased 12.1% year over year to $342 million.

Total allowance for credit losses was $4.36 billion, up 1.2% on a year-over-year basis. Further, non-performing assets (excluding covered assets) were $1.57 billion, up 5.9% year over year.

Strong Capital Position

As of Dec 31, 2016, tier 1 capital ratio was 11.0%, down from 11.3% in the prior-year quarter. Common equity tier 1 capital to risk-weighted assets ratio under the Basel III standardized approach fully implemented was 9.1% as of Dec 31, 2016, stable from the year-ago quarter level.

All regulatory ratios of U.S. Bancorp continued to exceed “well-capitalized” requirements.

Our Take

U.S. Bancorp has posted an encouraging quarter. A robust capital position and increased lending activities were the tailwinds. The company follows a conservative growth strategy and has made small but strategic acquisitions.

However, weakness in the company’s asset quality as well as rising expenses remains headwinds. Further, the company continues to face margin pressure. However, the company’s growth prospects should continue to get support from its solid business model, core franchise and diverse revenue streams.

 

U.S. Bancorp Price, Consensus and EPS Surprise

 

U.S. Bancorp Price, Consensus and EPS Surprise | U.S. Bancorp Quote

U.S. Bancorp currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Other Major Banks

Bank of America Corporation’s BAC fourth-quarter 2016 earnings surpassed the Zacks Consensus Estimate. Impressive growth in fixed income trading revenues, rebound in equity trading and significant rise in mortgage banking income supported revenues. However, as anticipated, investment banking fees declined. Further, absence of legal costs and efficient expense management were sufficient in aiding the bottom line.

Driven by interest income, Wells Fargo & Company’s WFC fourth-quarter 2016 earnings outpaced the Zacks Consensus Estimate. The company witnessed organic growth aided by strong loans and deposit balances, along with elevated interest income. However, higher expenses and lower non-interest income remained a concern.

Among other Wall Street giants, SunTrust Banks, Inc. STI is scheduled to report fourth-quarter 2016 earnings on Jan 20.

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