U.S. Bancorp’s (USB) high efficiency and consistently strong performance make it a buy in my book.
Parent of U.S. Bank National Association, the nation’s fifth-largest bank, USB’s price-to-book ratio is over 2, a ratio I like to see close to 1 or below for banks, but its price-to-earnings ratio of 14.5 makes it appear more reasonable.
USB is currently trading at its 12-month consensus stock price, implying that all future growth has already been built into the stock price.
Loan growth in 2014 looks on track to come in at about 7%, similar to 2013, but I anticipate continued net interest margin pressure, partially offset by an increase in non-interest revenue, producing positive year-over-year net revenue for 2014.
Next year looks better for USB, when increasing economic growth and a rising yield curve should generate positive improvements in net interest margin and continued decreasing net chargeoffs.
US Bank – Operations Breakdown
US Bancorp, a $391 billion bank holding company based in Minneapolis, has five primary lines of business: wholesale banking and commercial real estate (22% of profits), consumer and small business banking (24% of profits), wealth management and securities services (3% of profits), payment services (21% of profits) and treasury and corporate support (30% of profits).
Over the trailing 12-month period, USB generated more than 45% of its revenue from non-interest income, insulating the company from the effects of a flatter yield curve.
US Bank – Profitability
Over the trailing 12 months, US Bank has a return on assets of 1.5%, an impressive number for a bank and places it at the top of its comparable peer group. Its return on equity is over 13%, far exceeding a stock peer group that often struggles to exceed 10%.
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USB has been facing continued headwinds to reinvest its assets into the same- or higher-paying assets as yields on loans and securities have continued to fall faster than funding costs. This has resulted in sequential quarter declines in net interest rate margins from 3.3% in the second quarter to 3.2% in the third quarter.
Year-to-date, US Bank has a net interest margin of 3.3%, which exceeds its peer group average over the same period of 3.2%.
US Bank’s YTD efficiency ratio is below 50%, a key indicator of financial strength for any financial institution and well below an industry average of over 60% that has been trending up recently, most likely due to increased regulatory overhead costs.
US Bank’s credit quality has remained strong with net charge-offs declining 3.7% in the third quarter, nonperforming assets decreasing 6.2% and an allowance for credit losses to period end loans of 1.8% as of Sept. 30.
Bottom Line
US Bank has a 2.2% dividend yield with a 30% payout ratio. For those considering a purchase of USB stock, the stock has risen with the S&P 500 over the past several months as investors have rewarded USB stock for its earnings growth and other positive factors driving it close to its 52-week high, but I think its worth the price.
USB Stock is a long-term buy for an efficient bank with a diversified portfolio of businesses and improving asset quality.
As of this writing, Kenneth Fick did not hold a position in any of the aforementioned securities. Write him at kfick@piercethefog.com or follow him on his blog at www.piercethefog.com.
