U.S. Bancorp Earnings: Company Expects Relatively Stable Net Interest Income In 2024
Lower interest rates helped boost equity. We believe U.S. Bancorp’s stock is undervalued.
Key Morningstar Metrics for U.S. Bancorp
- Fair Value Estimate: $52.00
- Morningstar Rating: 4 stars
- Morningstar Economic Moat Rating: Wide
- Morningstar Uncertainty Rating: Medium
What We Thought of U.S. Bancorp’s Earnings
U.S. Bancorp USB reported decent fourth-quarter and full-year results. For 2023, the company reported net income to common shareholders of $5.05 billion, or $3.27 per diluted share. In the fourth quarter, net income to common shareholders was $766, or $0.49 per diluted share. If notable items are excluded from the quarter, such as a $734 million FDIC special assessment, then adjusted earnings per share would be $0.99. We don’t anticipate making a material change to our $52 fair value estimate, and assess shares as moderately undervalued.
Recent trends in the banking industry were evident in the results. Net interest income on a taxable equivalent basis sequentially decreased to $4.1 billion from $4.3 billion as average interest-earning assets decreased 2% to $594 billion and the net interest margin compressed 3 basis points to 2.78%. This compression came from funding costs increasing, as noninterest-bearing deposits decreased to $91 billion from $98 billion. Management believes the net interest income for the fourth quarter is a good run rate for 2024. Given market expectations for a decline of 75 basis points or more in the federal-funds rate, we believe this is a fair result.
Nonperforming assets increased to $698 million, or 0.4% of loans and other real estate, from $569 million, or 0.35%, in the third quarter. We continue to see the slight deterioration in credit metrics across the banking industry as a normalization from the abnormally low levels of the previous several years. Commercial real estate loans backed by offices could sour at a higher rate than in other cycles, but U.S. Bancorp and other banks have largely already provisioned for this asset class.
One positive for capital at U.S. Bancorp and other banks comes from lower interest rates. The company received about a $2 billion boost to equity as unrealized losses on fixed-income securities decreased.
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