Analyst Note| Eric Compton, CFA |
Wide-moat rated U.S. Bancorp reported decent third-quarter earnings, beating the FactSet consensus EPS estimate of $1.15, with reported earnings of $1.30 per share. This equates to a return on tangible common equity of 20%. We didn’t find anything too surprising, with many of the trends we’ve seen with peers occurring for USB, including better fees and provisioning than we had been anticipating, with some increase in expenses due to better revenue performance. If there was one item that might have looked worse to us on the surface, it was weaker commercial loan growth. However, once PPP declines are normalized, average commercial loans actually grew nearly 2% sequentially. Credit quality remains good as nonperforming assets declined from last quarter by around 11%. The bank also reported a record low net charge-off ratio of 0.2%, a 5-basis-point decline from the second quarter. U.S. Bancorp continued to release reserves during the period, decreasing the allowance for credit losses by $310 million in the third quarter. Management predicts net charge-offs will remain lower than normal, eventually returning to an average of 45 to 50 basis points by end of 2022. We we think most of the reserve releases are past us for U.S. Bancorp. With net interest income also being essentially in line with our expectations, we are maintaining our fair value estimate for the bank at $60 per share. U.S. Bancorp remains on track to close its acquisition of Union Bank some time in the second quarter of 2022. As a reminder, $4 of our fair value estimate is derived from the value we expect this acquisition to bring to the bank.