U.S. Bancorp (NYSE:USB) experienced a significant decline in its stock, dropping 6.6% following its Q4 earnings report, which did not meet investor expectations. The bank reported net income nearly doubling year-over-year to $1.67 billion, while adjusted earnings per share stood at $1.07.
U.S. Bancorp’s stock drops 6.6% after Q4 earnings report
Although revenue increased by 3.7% and noninterest income rose by 8.1%, primarily driven by gains in trust and investment management fees, higher funding costs and a declining net interest margin of 2.71% raised concerns among investors.
One key issue highlighted is the growth in expenses. Noninterest costs rose 2.5% from the previous quarter to $4.31 billion. Despite the bank’s efforts to enhance operational efficiency, challenges such as lease impairments and strategic spending are affecting profitability. The provision for credit losses also escalated by 9.4% year-over-year, indicating ongoing difficulties in commercial real estate and credit card loans.
Despite the unfavorable market response, U.S. Bancorp’s management remains optimistic. CEO Andy Cecere emphasized the bank’s strong capital position with a CET1 ratio of 10.6% and expressed confidence in achieving “industry-leading returns on tangible common equity.” He underscored potential growth in wealth management and payment services as key areas for future gains.
CFO John Stern noted during the conference call that the bank’s average deposits rose by 0.7% on a linked-quarter basis to $512 billion and mentioned stabilization in the percentage of noninterest-bearing deposits. He projected total revenue growth for the current year to be between 3% and 5% compared to 2024.
On Thursday, U.S. Bancorp shares were down 4% in intraday trading. CEO Cecere acknowledged the existing uncertainty surrounding the macroeconomic environment, including persistent inflation and regulatory challenges, while stating that the bank has effectively managed these changes and successfully executed its strategic objectives.
During a question-and-answer session with analysts, Stern highlighted solid growth in fee-based income and anticipated a mid-single-digit growth in this area moving forward. He addressed headwinds in specific sectors, including prepaid cards and cash servicing, asserting that these challenges are expected to ease in 2024.
Stern also expressed positive sentiment around ongoing momentum in payments and strategic initiatives, mentioning strong growth in treasury management and capital markets. Looking ahead, he indicated modest expectations for loan and deposit growth for the full year 2025.
A hidden factor contributing to the stock’s decline may be growing investor concerns over its exposure to commercial real estate (CRE) loans. While not explicitly highlighted in the earnings report, the provision for credit losses, which rose 9.4% year-over-year, signals potential vulnerability in this sector. With rising interest rates and mounting pressures in the CRE market, especially in office spaces, investors may fear future loan defaults, further eroding confidence in the bank’s stability.
In discussing technology and digital initiatives, CEO Cecere remarked that the interconnectedness of banking and payments has never been more crucial. He emphasized the importance of offering integrated services enhanced by a robust technology platform to improve capital efficiency and focus on fee generation.
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Featured image credit: The Bancorp, Inc.
