U.S. Bancorp Has Decent Q1 Despite Interest Income Headwinds

-2.31%
Downside
42.47
Market
41.49
Trefis
USB: U.S. Bank logo
USB
U.S. Bank

The first quarter of 2015 was largely a mixed period for U.S. Bancorp (NYSE:USB), as the country’s largest regional bank struggled to mitigate the negative impact of shrinking interest margins on its results for the period. [1] The bank marginally missed investor expectations when it reported its performance figures for Q1 on Wednesday, April 15, with the issue of lower interest revenues that has been plaguing commercial banks for the last couple of years being the primary culprit. The elevated employee-related costs that are normally associated with the first quarter of the year only made things worse, as did lukewarm performances from the commercial banking, asset management and payment systems units. Notably, U.S. Bancorp’s results mirror those of its larger rival Wells Fargo (NYSE:WFC) – indicating that these results are driven by macro-level factors which individual banks have little control over.

All things considered, U.S. Bancorp’s business model remains sound. It does not promise huge returns, but the low-risk, steady growth promise it delivers provides comfort to investors. We maintain a $46 price estimate for U.S. Bancorp’s stock, which is about 10% ahead of the current market price.

See our complete analysis for U.S. Bancorp

Relevant Articles
  1. Trailing The Broader Index By 24%, Is U.S. Bancorp Stock Ready To Rebound?
  2. What To Expect From U.S. Bancorp Stock?
  3. U.S. Bancorp Stock Is Undervalued
  4. What To Expect From U.S. Bancorp Stock?
  5. Where Is U.S. Bancorp Stock Headed?
  6. Is U.S. Bancorp Stock Attractive At The Current Levels?

U.S. Bancorp’s Net Interest Margin Woes Aren’t Going Away In The Near Future

U.S. Bancorp’s business model, due to its reliance on traditional banking operations, is very sensitive to interest rates. This is why the biggest concern among investors about its performance over recent quarters has been the sequential decline in its net interest margin (NIM). Due to the extended low interest-rate environment, safe investment options with reasonably high rates of return have been difficult to come by, which has squeezed margins.

The table below summarizes U.S. Bancorp’s reported net NIM figures for each quarter since early 2009:

Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013 Q1 2014 Q1 2015
3.59% 3.90% 3.69% 3.60% 3.48% 3.35% 3.08%

As seen here, the bank’s NIM fell from 3.90% to 3.08% between Q1 2010 and Q1 2015, with a large part of this decline witnessed since late 2012. This has been due to lower interest income from variable sources, a steady growth in interest-bearing customer deposits and also because of actions undertaken by the bank to ensure regulatory liquidity requirements. To put the impact of falling interest margins in perspective – if U.S. Bancorp’s net interest margin for Q1 2015 was 3.90%, then it would have reported a net interest income around $3.5 billion instead of the $2.7 billion it actually reported. As the NIM figure will only begin improving after the Fed hikes the benchmark interest rates in the second half of the year, we expect the declining trend to continue for at least two more quarters.

You can understand the partial impact of falling net interest margins on the bank’s total value by making changes to the chart below, which represents U.S. Bancorp’s NIM on credit card loans.

Steady Loan Growth A Major Source Of Strength

U.S. Bancorp reported $245 billion in total loans at the end of Q1 2015 – a 3% improvement over the figure a year ago. While the loan portfolio has shrunk slightly compared to the previous quarter, this is largely due to the seasonal nature of the business as many people use bonuses and tax refunds received in the first quarter to reduce their loan burdend. The rapid growth in the bank’s commercial lending portfolio is particularly impressive, as it has swelled to almost $83 billion now from $74 billion a year ago – a 12% jump year-on-year. As most bank loans employ a floating interest rate, the rapidly growing loan base positions U.S. Bancorp for huge potential gains once the interest rate environment improves in the future.

See More at TrefisView Interactive Institutional Research (Powered by Trefis)

Notes:
  1. U.S. Bancorp Reports First Quarter 2015 Earnings, U.S. Bancorp Press Releases, Apr 15 2015 []