US Bancorp Earnings Benefitting from Rising Interest Rates and Loan Growth

Minneapolis-based U.S. Bancorp reported better than expected third quarter earnings on Friday before the market opened.  However, U.S. Bancorp’s profit fell 10.7% to $1.8 billion as it set aside more reserves for potential credit losses and booked more charges related to its planned acquisition of MUFG Union Bank. With rising interest rates and increased loan activity, the bank saw net interest income rise 20.6%. Average total loans grew 13.5% over the year, driven in part by more commercial loans. $USB is expected to add net interest income with the disciplined approach on deploying cash, and now has the opportunity to extend duration at higher rates.

US Bankcorp

BlackRock (NYSE: BLK) reported Thursday. First Republic Bank (FRC), Coastal Financial (CCB), JP Morgan (JPM), PNC Financial Services (PNC), Morgan Stanley (MS), Wells Fargo (WFC), Citigroup (C), Goldman Sachs Group Inc., and Bank of America Corp will all report Friday through Monday.

US Bancorp Earnings

Q3 2022 earnings release at 7 a.m. ET; conference call at 8:30 a.m. ET

  • U.S. Bancorp’s profit dropped 10.7% to $1.8 billion
  • Adj EPS $1.16 (est $1.16)
  • Revenue rose 7.4% to $6.33B (est $6.22B)
  • Provisions For Credit Losses $362M (est $351M), a $200 million increase in its loan loss reserves due to strong loan growth and growing economic uncertainty.
  • Net interest income rose 20.6%.
  • Average total loans grew 13.5% over the year, driven in part by more commercial loans.
  • Noninterest income fell 8.3% as it saw lower mortgage banking revenue. This was driven by a decline in refinancing activities as mortgage rates continue to rise.
  • $USB Pre-market41.00−0.37 (0.89%)

“Borrowing costs are increasing, inflation is high, savings rates are starting to decline, and the stock market is well off its highs,” CEO Andy Cecere said. “So while the backdrop is favorable today, it would not be surprising to us to see an economic slowdown develop at some point driven by lower confidence levels, which may lead to reduced spending and business investment.”

Higher rates increase margins

USB benefited from rising interest rates and increased loan activity; the bank saw net interest income rise 20.6%. Average total loans grew 13.5% over the year, driven in part by more commercial loans.

The brighter outlook for bank profits coincides with higher Treasury yields. The benchmark 10-year Treasury yield has risen dramatically for the year-to-date, with higher interest rates boosting banks income from their core lending businesses.  The bank’s net interest margin, a measure of what it collects on loans minus what it pays for deposits rises with rates.

Acquisition of MUFG Union Bank

U.S. Bancorp logged more charges related to its planned acquisition of MUFG Union Bank. U.S. Bancorp recorded about $42 million in charges related to its planned $8 billion acquisition of MUFG Union Bank.

Executives first announced that deal in September 2021 and planned to complete the acquisition in the first half of this year. However, the bank is still awaiting regulatory approval and now is hoping to close in the fourth quarter. The company had initially planned to convert MUFG to U.S. Bank this fall, executives said those plans are now pushed back to the first half of next year.

Analysts Outlook on Banks

Oppenheimer issued a note generally positive on bank stocks due to cheap valuation. The firm noted that in in two of the last three recessions, bank stocks bottomed relative to the market either at the beginning or well before the recession began. Oppenheimer’s favorite names are Bank of America (BAC), Citigroup (C), Goldman Sachs (GS), Jefferies (JEF), Morgan Stanley (MS), and U.S. Bancorp (USB).

Citigroup predicts strong earnings beat and share price pop for JPMorgan Chase (JPM) off better-than-expected net interest income. The bank’s guidance for NII is expected to be revised higher as JPM is said to have been more disciplined than others on deploying cash, and now has the opportunity to extend duration at higher rates. The firm also upgraded Bank of New York Mellon (BNY) shares to a buy rating ahead of earnings because of the bank’s relatively lower exposure to loan losses and strong return outlook.

Morgan Stanley in a note warned that inflation plus QT is a recipe for volatility. “Throw in rapidly rising, higher for longer rates and higher capital requirements and you get an accelerating credit cycle” With defense seen as the best offense in the current backdrop, MS recommends leaning into M&T Bank (NYSE:MTB), Regions Financial (RF), Wells Fargo (WFC), and First Republic Bank (FRC).


Source: USB

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