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Will Lower Revenues Hurt U.S. Bancorp (USB) Q1 Earnings?

U.S. Bancorp USB is scheduled to report first-quarter 2016 results on Apr 20, before the opening bell.

The Minnesota-based banking giant’s fourth-quarter 2015 earnings were in line with the Zacks Consensus Estimate as well as the prior-year quarter figure. Growth in average loans and deposits along with top-line expansion drove organic growth. However, increase in expenses and provisions were on the downside.

U.S. Bancorp recorded an average positive surprise of 0.32% for the trailing four quarters. Will the company manage to outpace estimates this earnings season?

Factors to Influence Q1 Results

Overall, the banking industry has experienced a number of headwinds during the first quarter including heightened market volatility, decline in commodity prices, weak emerging markets, restricted business and consumer spending, rate hike uncertainty and tumbling energy prices.

Though banks might fail to keep the tradition of rallying into a new rate hike cycle this time around, their performance may not be as bad as it was during the drawn-out low-rate environment. Rising interest rates will not only lift banks’ bottom lines through spread expansion, but will also help them earn incrementally from the money they need to keep at the Fed.

Further, supportive macroeconomic elements will minimize default rates on loans. Banks will also see increased demand for mortgage loans, car loans and other consumer loans with improving economic conditions.

Despite the rise in loan demand, the top line will continue to remain under pressure due to the impact of the still low rate environment on net interest income. For first-quarter 2016, management expects loan growth in the range of 1–1.5% and net interest margin to remain stable.

With the change in the interest rate environment, banks will also see stepped-up mortgage activity. However, one should not expect a transformation overnight, as it will take some time for the rates to return to their pre-recession levels.

Non-interest income will likely be hit by a slump in trading revenues, as ambiguity over several global and domestic issues kept investors away from the markets. Though trading activities picked up slightly in March, it failed to offset the declines recorded in the first two months of the quarter. Notably, management expects fee revenues to be seasonally lower on a sequential basis in first-quarter 2016.

Further, management anticipates efficiency ratio to trend downward and remain in the low 50% range, going forward, driven by prudent expense management while continuing to invest in businesses. However, management expects a rise in non-interest expense in the first quarter owing to some one-time expenses associated with the Fidelity card deal.

Given the mix and overall quality of the company’s portfolio, total nonperforming assets and net charge-offs are expected to remain relatively stable in the first quarter of 2016, while reserves are anticipated to increase considering loan growth. Given an uncertain outlook for commodity prices in the near term and the potential continued decline in energy prices, the company is likely to witness stress within its energy and metals-related loan portfolios in 2016.

Activities of U.S. Bancorp during the quarter were inadequate to win analysts’ confidence. As a result, the Zacks Consensus Estimate for the quarter remained unchanged at 76 cents per share over the last seven days.

Earnings Whispers

Our proven model does not conclusively show that U.S. Bancorp is likely to beat the Zacks Consensus Estimate in the first quarter. This is because a stock needs to have both a positive http://www.zacks.com/earnings/earnings-surprise-predictions/">Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold) for this to happen. Unfortunately, this is not the case here as elaborated below.

Zacks ESP:  Earnings ESP for U.S. Bancorp is -1.32%. This is because the Most Accurate estimate of 75 cents lags the Zacks Consensus Estimate by a penny.

Zacks Rank: Though U.S. Bancorp’s Zacks Rank #3 increases the predictive power of ESP, we also need to have a positive ESP to be confident of an earnings surprise.

Stocks That Warrant a Look

Here are some stocks you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Banc of California, Inc. BANC has an earnings ESP of +12.50% and carries a Zacks Rank #1. It is scheduled to report first-quarter results on May 4.

The earnings ESP for PrivateBancorp, Inc. PVTB is +1.75% and it carries a Zacks Rank #3. The company is expected to release first-quarter results on Apr 21.

Simmons First National Corporation SFNC has an earnings ESP of +1.30% and carries a Zacks Rank #3. It is slated to report first-quarter results on Apr 21.

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US BANCORP (USB): Free Stock Analysis Report
 
PRIVATEBANCORP (PVTB): Free Stock Analysis Report
 
SIMMONS FIRST A (SFNC): Free Stock Analysis Report
 
BANC OF CA INC (BANC): Free Stock Analysis Report
 
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