U.S. Bancorp (USB) Q3 Earnings Top Estimates, Costs Increase
U.S. Bancorp’s USB reported third-quarter 2020 earnings per share of 99 cents, which surpassed the Zacks Consensus Estimate of 93 cents. However, the bottom line compares unfavorably with $1.15 reported in the prior-year quarter.
Shares of the company gained nearly 2% in pre-market trading as investors reacted positively to fee income growth aided by higher mortgage banking, corporate bond issuance fees and trading activities. A full day’s trading session will depict a better picture.
Further, capital position remained strong and deposit balances increased.
However, a substantial rise in provisions, owing to the coronavirus outbreak-related concerns, was a headwind. Also, higher expenses and contraction of margin were undermining factors.
Net income applicable to shareholders was $1.49 billion compared with $1.82 billion reported in the prior-year quarter.
Fee Income Increases, Costs & Provisions Rise
U.S. Bancorp’s net revenues were $5.96 billion in the third quarter, up nearly 1% year over year. An increase in non-interest income led to the upside. The top line also surpassed the Zacks Consensus Estimate of $5.74 billion.
The company’s tax-equivalent net interest income totaled $3.25 billion in the reported quarter, down 1.6% 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 11.6% year over year, supported by growth in average total loans, average investment securities and average other earning assets. However, net interest margin of 2.67% shrunk 35 basis points (bps).
U.S. Bancorp’s non-interest income climbed 3.7% on a year-over-year basis to $2.71 billion. The rise can be attributed to strong mortgage banking revenues along with higher commercial product revenues, treasury management fees, investment products fee and credit and debit card revenues.
Provision for credit losses more than doubled year over year to $635 million in the September quarter. The increase was due to continued concerns over the impact of COVID-19 on the economy.
U.S. Bancorp’s average total loans moved down 2.2% sequentially to $311 billion. This stemmed primarily from a fall in commercial loans, reflecting continued paydowns by corporate customers. The downside was partially offset by higher residential mortgages on low rates and increase in credit card loans due to the acquisition of the State Farm credit card portfolio during the quarter.
Average total deposits were up 0.6% from the previous quarter to $405.5 billion. The upside resulted from growth in non-interest-bearing deposits, driven by Consumer and Business Banking and Corporate and Commercial Banking segments.
Non-interest expenses jumped 7.2% year over year to $3.37 billion. This was due to an upsurge in compensation, technology and communications, and other costs.
Efficiency ratio was 56.6% compared with the year-ago quarter’s 53.3%. An increase in the ratio indicates lower profitability.
Credit Quality Worsens
Credit metrics at U.S. Bancorp worsened in the third quarter. Net charge-offs were $515 million, up 46.3% 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 and commercial portfolios. Also, the total allowance for credit losses was $8.01 billion, up 78.8%.
U.S. Bancorp’s non-performing assets were $1.27 billion, up 29.7% year over year.
During the third quarter, the company maintained a solid capital position. The Tier 1 capital ratio was 11%, down 2 bps year over year. Common equity Tier 1 capital ratio under the Basel III standardized approach fully implemented was 9.4% as of Sep 30, 2020, down from 9.6%.
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 9.3% as of Sep 30, 2020, compared with 9.7% witnessed at the end of the year-ago quarter.
The tangible common equity to tangible assets ratio was 7%, down from 8%.
U.S. Bancorp recorded an improvement in book value per share, which increased to $30.93 as of Sep 30, 2020 from $30.26.
The company put up a decent show during the third quarter. Strength in mortgage banking and higher deposit balance were the key positive factors. Also, a 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
Unexpected lower provisions along with improvement in trading and mortgage banking businesses drove JPMorgan’s JPM third-quarter 2020 earnings of $2.92 per share. The bottom line handily outpaced the Zacks Consensus Estimate of $2.35.
As expected, Citigroup C delivered a positive earnings surprise of 38.6% in third-quarter 2020 on robust market revenues. Earnings per share of $1.40 for the quarter handily outpaced the Zacks Consensus Estimate of $1.01. Results are, however, down significantly from the prior-year quarter.
First Republic Bank FRC delivered a positive earnings surprise of 16.7% in third-quarter 2020 aided by solid top-line strength. Earnings per share of $1.61 surpassed the Zacks Consensus Estimate of $1.38. Additionally, the bottom line climbed 22.9% from the year-ago quarter.
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