Minneapolis-based U.S. Bancorp reported better than expected second quarter earnings on Wednesday before the market opened. USB’s Q2 adjusted EPS of $1.12, was ahead of the $1.10 consensus, fell from $1.16 in the prior quarter and increased from $1.09 in the year-ago period. The lagged effect of higher rates hit net interest income which slipped to $4.45B from $4.67B in the previous quarter and rose from $3.46B a year ago, a 28% jump in quarterly net interest income (NII). US Bancorp shares reversed earlier losses and surged 4.6% as the market opened.
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 Q2 2023Earnings
Q2 2023 earnings release at 7 a.m. ET; conference call at 8:30 a.m. ET
Highlights
- U.S. Bancorp’s Q2 adjusted EPS of $1.12, vs. $1.10 consensus, fell from $1.16 prior quarter and increased from $1.09 in the year-ago period.
- Provision for credit losses rose to $821M from $427M in Q2 and from $311M in Q2 2022.
- Net charge-off ratio increased to 0.67% in Q2 2023 compared with 0.39% in the prior quarter and 0.20% a year earlier.
- Net interest income on a taxable equivalent basis slipped to $4.45B from $4.67B in the previous quarter and rose from $3.46B a year ago.
- Net interest margin of 2.90% vs. 3.10% in Q1 and 2.59% in Q2 2022.
- Adjusted noninterest income of $2.75B rose from $2.51B in the prior quarter and from $2.55B a year ago.
Higher rates increase margins
USB benefited from rising interest rates and increased loan activity; the bank saw net interest income rise 20.6%. However it was down with the higher rates catching up on margins.
- Net interest income on a taxable equivalent basis slipped to $4.45B from $4.67B in the previous quarter and rose from $3.46B a year ago.
- Net interest margin of 2.90% vs. 3.10% in Q1 and 2.59% in Q2 2022.
“Our lower net interest margin this quarter reflects both higher levels of cash given debt ceiling concerns as well as higher deposit costs due to the rate environment,” said Chairman, President, and CEO Andy Cecere. “Credit quality remains strong, however we continued to strengthen our balance sheet by increasing our loan loss reserve reflecting prudent credit risk management.”
The brighter outlook for bank profits coincided 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.
ighter bank lending will be compounded by a pullback in “private Credit” and other non-bank lenders. This is particularly problematic for earnings and loan quality for small and mid-sized banks that have operated so aggressively in real estate finance over recent years. Office buildings are an obvious trouble spot, but commercial real estate in general is vulnerable. Cracks are appearing in the booming nationwide apartment marketplace, and there are indications of waning institutional interest in residential housing.
However, there is a price for this, the clearest is the housing market which with the collapse in affordability through higher rates and inflation has dropped off dramatically ion activity. For banks this means the fee income from home lending has fallen right off.
Rising rates have also had another big impact for Banks, and Central banks alike, the higher rates have seen huge losses on the bond paper they hold. When interest rates go up, bond prices go down, meaning there are significant unrealized losses at current prices. JPM in Q1 2023 took an $868 million loss on the sale of investment securities whose values have plunged with rising rates.
Outlook
The bank issued 2023 net interest income guidance that fell short of consensus.
- 2023 net interest income, on taxable equivalent basis, is expected to be $17.5B-$18.0B vs. Visible Alpha consensus of $18.1B.
- The company projects adjusted noninterest expense of ~$17.0B.
- The bank now expects 2023 adjusted revenue of $28.0B-$29.0B, including purchase accounting accretion of ~$330M, compared with the consensus of $28.8B. In its previous guidance,
- U.S. Bancorp expected total revenue of $28.5B-$30.5B, including purchase accounting accretion of ~$350M.
- U.S. Bancorp’s (USB) outlook for Q3 projects total adjusted revenue of $6.9B-$7.1B vs. $7.24B consensus
- Sees net interest income of $4.28B-$4.4B, vs. Visible Alpha estimate of $4.51B.
- Adjusted noninterest expense is expected to be ~$4.3B, about the same as in Q2.
Source: USB
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