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On Dec 1, 2022, U.S. Bancorp (USB - Free Report) completed the acquisition of MUFG Union Bank. Hence, the fourth-quarter and full-year 2022 results include one month of results from the buyout.

USB’s fourth-quarter 2022 earnings per share (excluding merger and integration-related charges) of $1.20 handily beat the Zacks Consensus Estimate of 1.11 per share. In the prior-year quarter, the company reported earnings of $1.07 per share.

Results benefited from an increase in net interest income (NII), which was supported by higher interest rates and loan growth. However, a decline in non-interest income (largely on lower mortgage banking income) and higher expenses were the headwinds. Also, the company’s credit quality deteriorated in the reported quarter.

Net income (GAAP basis) was $925 million, down 44.7% from the prior-year quarter.

In 2022, earnings per share (excluding notable items) of $4.45 surpassed the consensus estimate of $4.35. Net income (GAAP basis) was $5.83 billion, down 26.6%.
 

Revenues Improve, Costs Rise

Total net revenues in the quarter were $6.37 billion, up 12% year over year. The top line missed the Zacks Consensus Estimate of $6.66 billion.

In 2022, total net revenues grew 6.5% to $24.3 billion. The top line, however, lagged the consensus estimate of $24.5 billion.

The tax-equivalent NII totaled $4.32 billion, jumping 37.3% from the prior-year quarter. The increase was primarily driven by rising interest rates on earning assets and strong loan growth, partially offset by deposit pricing and funding mix.

Net interest margin (NIM) of 3.01% increased 61 basis points mainly due to the impacts of higher rates on earning assets, partially offset by deposit pricing and short-term borrowing costs.

Non-interest income decreased by 19.4% to $2.04 billion. The decline was primarily due to a fall in mortgage banking revenues and service charges.

Non-interest expenses, including merger and integration charges, climbed 14.4% to $4.04 billion.

The efficiency ratio was 63.3%, higher than the year-ago quarter’s 60.4%. A rise in the ratio indicates a deterioration in profitability.

Average total loans improved 6.8% sequentially to $359.8 billion. Average total deposits increased by 5.5% to $481.8 billion.
 

Credit Quality Worsens

Net charge-offs were $578 million, up from $132 million in the year-ago quarter. Total allowance for credit losses was $7.4 billion, up 20.3%. The provision for credit losses in the reported quarter was $1.19 billion against a benefit of $13 million in the prior-year quarter.

U.S. Bancorp’s non-performing assets (NPAs) were $1.02 billion and included $329 million acquired from MUFG Union Bank. In the fourth quarter of 2021, NPAs were $878 million.
 

Capital Position Weakens

The Tier 1 capital ratio was 9.8% as of Dec 31, 2022, down from 11.6% in the prior-year quarter. The Tier 1-capital-to-risk-weighted assets ratio was 8.1% as of Dec 31, 2022, down from 9.6%.

Common Equity Tier 1 capital ratio under the Basel III standardized approach was 8.4% as of Dec 31, 2022, down from 10% reported in the year-ago quarter.

The tangible common equity to tangible assets ratio was 4.5%, down from the prior-year quarter’s 6.8%.
 

Our Take

U.S. Bancorp’s solid business model and diverse revenue streams are likely to keep aiding its financials. The company’s strong loan and deposit balances are positive. However, persistently rising expenses and higher provisions might weigh on its bottom line in the near term.

U.S. Bancorp Price, Consensus, and EPS Surprise

U.S. Bancorp price-consensus-eps-surprise-chart | U.S. Bancorp Quote

U.S. Bancorp currently carries a Zacks Rank #3 (Hold). 

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