U.S. Bancorp Withstands Mortgage Industry Headwinds To Report Record Results In Q3

by Trefis Team
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U.S. Bancorp
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U.S. Bancorp (NYSE:USB) reported total quarterly revenues in excess of $5.5 billion for the first time ever in Q3 2017 thanks to a jump in its interest income from the Fed’s rate hike process. While this helped the largest regional bank in the U.S. mitigate the impact of weak mortgage activity levels on its top line, the bank’s cost discipline and risk-averse lending policies ensured that the gains reached the bottom line – helping net income rise to a record level.

U.S. Bancorp’s business model does not promise huge returns, but it delivers steady growth with a low risk profile. We believe that this cautious approach to lending is what has resulted in the bank’s loan portfolio growing by less than 3% y-o-y – below the industry growth figure of 3.5% for the same period. But a key driver of value for U.S. Bancorp is its demonstrated ability to make strategic acquisitions to add to its banking capabilities. In fact, this is the primary reason why the bank’s shares have traded at nearly twice their book value (currently ~$26) since early 2012. Keeping this in mind, we maintain a $55 price estimate for U.S. Bancorp’s stock, which is slightly ahead of its current market price.

See our complete analysis for U.S. Bancorp

The table above summarizes the factors that aided U.S. Bancorp’s pre-tax profit figure for Q3 2017 compared to the figures in Q3 2016 and Q2 2017. As evident from the table, the single biggest factor behind the upbeat revenues for the period was the sizable jump in interest revenues. While a bulk of the growth in interest income was due to an improvement in the net interest margin (NIM) figure from 2.98% in Q3 2016 and 3.04% in Q2 2017 to 3.10% in Q3 2017, a notable growth in the bank’s total interest-earnings assets also helped.

Unlike its larger rivals, U.S. Bancorp’s business model relies entirely on traditional banking operations. Because of this, the bank is very sensitive to interest rate changes. While this worked against the bank over 2013-15, the Fed’s ongoing rate hike will unlock sizable value for U.S. Bancorp going forward, as it reaps the benefits of a strong loan book built patiently over the years. 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.

The bank continued to face headwinds in its cornerstone mortgage industry, though, as mortgage origination as well as servicing fees remained depressed for the third consecutive quarter. U.S. Bancorp was one of the few banks in the country that increased its focus on the mortgage industry after the economic downturn of 2008, and the overall slowdown in the industry since 2013 has had a notable impact on profitability. The table below summarizes the factors that affected U.S. Bancorp’s mortgage-related fees for the quarter compared to Q3 2016 and Q2 2017.

As seen here, an increase in U.S. Bancorp’s mortgage servicing portfolio could not mitigate the impact of weak originations and continued fee pressure. While the reason behind lower origination volumes is the increase in mortgage rates, we believe that origination volumes are bound to increase going forward as people looking to buy new homes will prefer to do so earlier rather than later given a positive outlook for interest rates.

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