Morningstar

U.S. Bancorp Earnings: Strong Net Interest Margin Expansion and Fee Income Growth

We plan to raise our fair value estimate of U.S. Bancorp stock.

The exterior of an US Bank store.
Jeremy Moeller via Getty
Securities in This Article
U.S. Bancorp
(USB)

Key Morningstar Metrics for U.S. Bancorp

What We Thought of U.S. Bancorp’s Earnings

U.S. Bancorp USB reported strong third-quarter results, as solid revenue growth and expense control helped grow net income by 17% annually to $2 billion, with earnings per share increasing 18% to $1.22. The results translated into a strong return on tangible common equity ratio of 18.6%.

Why it matters: Net interest margin expanded by 9 basis points sequentially to 2.75%, benefiting the repositioning of lower-yielding securities and divestiture of some loan portfolios in the prior quarter. NIM expansion fueled the 4% quarter-over-quarter growth in net interest income.

  • NIM faced pressure from its lower-yielding securities and higher funding costs in the past several quarters.
  • More rate cuts from the Federal Reserve in the short term will help the bank reduce funding costs, as a material portion of its interest-bearing deposits are related to its corporate trust business. This type of interest-bearing commercial deposit has a higher beta, which means it will reprice lower much faster than retail interest-bearing deposit as the federal-funds rate is cut.

The bottom line: As we incorporate the latest results and updated guidance, we expect to increase our fair value estimate for wide-moat-rated U.S. Bancorp by low single digits. We continue to view shares as undervalued after the contemplated change in our fair value estimate.

  • U.S. Bancorp is making progress toward its medium-term target. With an 18.6% return on tangible common equity and a 57.2% efficiency ratio, the bank hit the high-teens return on tangible common equity and mid- to high-50s efficiency ratio targets in the third quarter.
  • More progress in growing its payment fee income from technology-led initiatives and expense discipline should continue to support its improvement in operating efficiencies and return profile.

Key stats: We are also glad that the bank’s fee income increased by 9.5% from a year ago, with expenses flat year over year.

Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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