US Bancorp Stock Offers Stability In The Banking Space

  • US Bancorp second quarter earnings were impressive in my opinion. Net income may have been flat but this was achieved on lower margins even as the balance sheet grew.
  • This bank doesn't have the same regulatory requirements as the big banks in the US. Essentially its a big regional bank and this gives it an advantage as to where to grow its business.
  • Its efficiency ratio is one of the best in the sector which means more cash drops to the bottom line (for consistent share buybacks and dividend pay-outs). This is why it has a loyal shareholder base.

U.S. Bancorp (NYSE:USB) reached $46 a share in July but has since tumbled back down to around $41 a share. The majority of bank stocks were up in 2015 by mid year but Chinese volatility, European stagnation and also a 100+ point drop in US equity markets in August all prompted the Federal Reserve to maintain interest rates at zero for the foreseeable future.

USB stock chart

Source: US Bancorp stock price data by

US Bancorp's Q2 earnings were mixed with net interest margin dropping to 3.03% from 3.27% in the year ago quarter. Nevertheless, investors shouldn't overlook that this bank has the highest "NIM" metric among any of the major banks and this metric will only increase once interest rates start to finally rise in the US. This bank also has the highest loan to deposit ratio in this sector (89.5%). Loan growth is an imperative metric in the banking space which US Bancorp has achieved in the past few quarters. Furthermore, when you couple its loan growth with its excellent record in terms of charge-offs, this bank still looks very attractive at these levels. Let's discuss.

Firstly, the main reason why net income was basically flat ($1.48 billion) year on year in Q2 2015 was because as mentioned above its "NIM" metric fell to 3.03%. Its "NIM" was 3.27% in Q2 of 2014, but the bank still managed to keep income from this segment flat at $2.7 billion. Operating on lower margins, the bank was still able to grow its balance sheet over the past 12 months. Its cash balance grew over $5 billion to almost $18 billion and its deposits grew to almost $300 billion (8.9% YoY) with loans at $246 billion. What investors need to remember here is that although the bank is less profitable at the moment because of its huge deposit base, I see this situation being temporary. Deposit holders may show up as liabilities on the balance sheet at the moment but once interest rates rise, I'm betting majority of this money will get moved into different products within the bank. Analysts sometimes forget that the "cost of switching" banks is both time consuming and troublesome for customers which is why I believe US Bancorp will convert many existing deposit base customers to its more profitable products going forward. Therefore, when the next earnings are reported in October, expect net income levels and net interest margin levels to be again falling year on year . However, watch the balance sheet.  With retail spending rising in the US, expect good loan and deposit growth, which over time will impact the share price favorably.

Secondly, this regional bank can't compete with the major banks in the US, like Wells Fargo (NYSE:WFC) and JP Morgan Chase (NYSE:JPM), but I see this as an advantage. Being a regional bank currently operating in 25 states, the bank can pick and choose where it wants to do business. Some areas in the US have not recovered as fast as others since the great recession (SouthEast) but other areas have recovered well (west) and that is where US Bancorp is prominent. Also this bank isn't subject to the strict regulations that the big banks are. This gives the bank more leeway with its customers which over time strengthens customer relationships. Furthermore, we can see this in action with its consistent declining charge-offs. Customer relationships are very important and even though smaller branches and online banking is the future, regional banks will still take their share of the market because many customers demand face to face banking.

In the banking space, one of the most important metrics that analysts go by is the effiency ratio which basically is the percent of net revenue consumed by operating expenses. Most banks have an effiency ratio of 60%, but US bancorp is closer to 50%. This means more revenue can drop to the bottom line which should be bullish for future earnings (see chart)
For income investors, it is very unlikely that a bank stock can consistently return increasing amounts of capital to shareholders, if the respective bank stock has an increasing efficiency ratio. US Bancorp doesn't have this problem with 76% of its net income currently being paid back to shareholders in the form of dividends and share buybacks. The company's present dividend yield is 2.48% and although regulators in this space limit dividend payout to 30% of net income, I don't foresee the bank stalling the growth of its dividend.

Furthermore, the bank repurchased 14 million shares in the second quarter of this year which shows the bank's commitment to its shareholders. Share buybacks reduce the amount of outstanding shares over time which make existing shareholder's stakes more valuable by aiding earnings growth.

When a bank ups its capex spend substantially, which US Bancorp could do because of the cash-flow it generates, profits are always affected in the short term, which would definitely alienate some shareholders. This essentially is why this bank has turned out as it has. It concentrates on responsible risk management and in doing so, it does its business well by churning out profits every year.You will never see explosive growth with US Bancorp but as a dependable anchor in the banking space, there are few others who can match it. Therefore if you believe the US equity markets look a little top-heavy at the moment but still want some of your portfolio allocated to finance, then US Bancorp stock would be a good option.

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  • I do not have any business relationship with the companies mentioned in this post.
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