U.S. Bancorp Earnings: Net Interest Margin Expands in a Solid Quarter

Key Morningstar Metrics for U.S. Bancorp

What We Thought of U.S. Bancorp’s Earnings

U.S. Bancorp USB reported solid third-quarter results, with net interest income growth and net interest margin expansion from a quarter ago. Net income to common shareholders was $1.6 billion, or $1.03 per diluted share. The results translate into a return on tangible common equity of 17.9%, in line with the bank’s medium-term target of the high teens. We don’t anticipate materially changing our fair value estimate of $53 per share, which we assess as slightly undervalued.

Net interest income was $4.1 billion, a 2.8% increase from last quarter. Net interest margin was 2.74%, an expansion of 7 basis points from the previous quarter. The net interest margin expansion was driven by a lower cost of funding and some asset repricing. The rates paid on interest-bearing deposits decreased by 4 basis points from a quarter ago. Loan growth was tepid, with average loans decreasing 0.2% sequentially, and the bank reduced some high-cost deposits. We expect the bank to see more declines in funding costs as the Federal Reserve cuts rates further. The management team now expects 2024 net interest income to come in at the high end of the previous guidance range of $16.1 billion-$16.4 billion, which implies a stable fourth quarter compared with the third.

Adjusted expenses declined 1% from a year ago, and the bank delivered positive operating leverage of 30 basis points. The updated 2024 guidance implies the bank should see more than 100 basis points of positive operating leverage in the fourth quarter. There’s no official 2025 guidance yet, but management indicated continued positive operating leverage. Expense control is one of our key investment theses on the bank. Its third-quarter efficiency ratio of 60.2% is still materially worse than its medium-term target of the mid-to-high 50s.