U.S. Bancorp’s USB shares gained 3.2% in the pre-market trading session, following the release of second-quarter 2020 results. The company reported earnings per share of 41 cents, which surpassed the Zacks Consensus Estimate of 34 cents. However, the bottom line compares unfavorably with $1.09 reported in the prior-year quarter.
Higher loan and deposit balances were tailwinds. Also, fee income surged on higher corporate bond issuance fees and trading revenues. Further, capital position remained strong.
However, a substantial rise in provisions, owing to the coronavirus outbreak-related concerns, was a headwind. Also, escalating expenses and contraction of margin were the undermining factors.
Net income applicable to shareholders was $614 million compared with $1.74 billion reported in the prior-year quarter.
Fee Income Increases, Costs & Provisions Rise
U.S. Bancorp’s net revenues were $5.84 billion in the second quarter, up slightly year over year. An increase in non-interest income led to the upside. The top-line figure also surpassed the Zacks Consensus Estimate of $5.53 billion.
The company’s tax-equivalent net interest income totaled $3.22 billion in the reported quarter, down 3.2% from the prior-year quarter. The decline mainly stemmed from lower interest rates, partially offset by deposit pricing and a shift in funding mix along with loan growth.
Average earning assets were up 15.7% year over year, supported by growth in average total loans, average investment securities and average other earning assets. However, net interest margin of 2.62% shrunk 51 basis points year over year.
U.S. Bancorp’s non-interest income climbed 5% on a year-over-year basis to $2.61 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 $1.74 billion in the June-end quarter. The increase was due to deteriorating economic conditions, driven by the impact of COVID-19 on the economy.
U.S. Bancorp’s average total loans moved up nearly 7% sequentially to $318.1 billion. This stemmed primarily from a rise in commercial loans, reflecting the utilization of bank credit facilities by customers to support liquidity requirements along with the impact of loans made under the Paycheck Protection Program.
Average total deposits were up 11.2% from the previous quarter to $403.3 billion. The upside resulted from growth in interest-bearing and non-interest-bearing deposits.
Non-interest expenses jumped 5.2% year over year to $3.32 billion. This was due to an upsurge in compensation, technology and communications, and postage costs.
Efficiency ratio was 57.6% compared with the year-ago quarter’s 54.3%. An increase in the ratio indicates lower profitability.
Credit Quality Worsens
Credit metrics at U.S. Bancorp worsened in the June-end quarter. Net charge-offs were $437 million, up 24.9% from the year-ago quarter. On a year-over-year basis, the company witnessed deterioration mainly in net charge-offs in the commercial real estate, commercial and retail portfolios. Also, the total allowance for credit losses was $7.89 billion, up 76.6% year over year.
U.S. Bancorp’s non-performing assets were $1.17 billion, up 23.1% year over year.
During the second quarter, the company maintained a solid capital position. The Tier 1 capital ratio was 10.6%, down 4 bps year over year. Common equity Tier 1 capital ratio under the Basel III standardized approach fully implemented was 9% as of Jun 30, 2020, down from 9.5%.
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% as of Jun 30, 2020, compared with 9.7% 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 $30.46 as of Jun 30, 2020, from $29.63 at the end of the year-earlier quarter.
The company put up a decent show during the second quarter. Improvement in the commercial lending scenario and higher deposit balance were the key positive factors. Also, strong capital position keeps it well-poised for growth. However, lower interest income on account of the contraction of margins and escalating expenses remain headwinds.
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
First Republic Bank FRC delivered an earnings surprise of 16.7% in second-quarter 2020, aided by top-line strength. Earnings per share of $1.40 surpassed the Zacks Consensus Estimate of $1.20. Additionally, the bottom line climbed 12.9% from the year-ago quarter.
Wells Fargo’s WFC shares lost more than 6% in the pre-market trading session, following the release of second-quarter 2020 results. The company reported a loss per share of 66 cents, which was attributed to a reserve build of $8.4 billion for the coronavirus outbreak-related crisis. The Zacks Consensus Estimate for the same was pegged at a loss of 7 cents.
Citigroup C delivered an earnings surprise of 6.4% in second-quarter 2020 on robust revenue strength. Earnings per share of 50 cents for the quarter handily outpaced the Zacks Consensus Estimate of 47 cents. Results were, however, down significantly from the prior-year quarter.
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