U.S. Bancorp (USB) may be the Rodney Dangerfield of the Big Four US banks. It "don't get no respect." That is a bit of a head scratcher, because it seems to have done a lot of things right. At the end of 2012, U.S. Bancorp was ranked the seventh largest bank in the United States by assets. U.S. Bancorp's branches are mostly concentrated in the Midwest and the Western areas of the U.S
Last year, their loan and deposit growth was equivalent to that of their peers, and they had good quality of credit in their portfolio of consumer loans.
This year they are reporting deposit growth of 7.3%. This compares to Wells Fargo (WFC) at 6.36% growth. Deposits have always been the cheapest source of funds for a bank. So aggressive growth allows the bank to realize greater lending yield than banks that are heavily dependent on the credit markets or the Fed.
Loan growth looks good too. The average loan growth was 5.8%, compared to Wells Fargo's 3.84%. This is while some banks are actually seeing shrinkage in their average loan balance. SunTrust Banks Inc (STI)., for example, reported a decline in their loan balances of one percent.
One area where both Wells and USB had the same results was in net interest margins; 3.48% was what both banks reported for their results. Again, SunTrust lagged with 3.33%. This is the rate that is calculated when you subtract the cost to borrow money versus the rate it is lent out at.
Credit quality was also not a problem for USB. Non-performing loans were tagged at 1.35% of the entire portfolio. What really catches the eye is the rate of decline in non-performers. They decreased by 34.71 percent. Wells Fargo had the highest in their peer group, with the non-performing loan percentage of 2.44%. Additionally, the slowest rate of decrease in the group is also at 7.21%.
Now, these numbers must be looked at further. Although USB has good aggregate numbers for deposit growth, what kinds of business for USB are actually growing the fastest? Its non-interest bearing deposits. These kinds of deposits grew 4.4% for USB out of their 7.3% overall deposit growth. Non-interest bearing deposits (such as checking with no interest) are usually the segment that will grow fastest for a bank. Indeed, checking accounts are very "sticky" for a bank. Checking account users usually maintain longer banking relationships. Also, checking accounts are more profitable in general than other products like savings and money market accounts, because they see a lot more of rotation of funds via wires, ach, atm fees, etc. If the growth in checking accounts slows, it may adversely affect USB's net interest margin. This would also adversely affect the available earnings growth of USB.
The bank is one of the largest providers of Visa (V) and purchasing card services for the US. Its wholly owned subsidiary, Elavon, provides merchant processing services within the U.S. as well as in Canada and parts of Europe.
U.S. Bancorp also has significant presence in the prepaid card market. It is sticking its toes into the mobile payments sector in its role as one of the top banks involved in the VISA Digital Wallet program. The division executed $55.56 billion in credit card transactions, $49.75 billion of corporate payments and about 3 billion merchant transactions in 2012 to earn fees and non-interest income from business as well as retail customers.
Prepaid cards are expected to enhance the non-interest revenues for U.S. Bancorp. Rather interestingly, this segment of the market is not covered under the upcoming regulations on banks that will limit charges on credit and debit card services.
Mobile payment solutions could also boost the company's revenues, as there is potential to earn higher revenues from these niche services.
USB's options recently established a new 90-day record for traded call and put contracts. A total of 11,420 put and 9,201 call contracts were traded raising a 1.24 put/call ratio on shares of USB. Put/Call ratio is often used to measure investment sentiment, and the ratio can serve as a predictor of investor behavior. Heavier put trading can indicate that traders expect a move downward on the banks shares.
USB shows no hesitation in trying to recover losses it has incurred in its business as trustee for other investors. It is suing Citigroup, Inc. (C) and Bank of America (BAC) in connection with the sale of securities that were allegedly backed by low-quality mortgages. These mortgage backed securities [MBS] were worth $1.08 billion. U.S. Bank incurred losses of over $354 million. A forensic review of the 1,604 of the mortgages underlying the 2007 investment showed that approximately 79% of the loans became delinquent.
U.S. Bank has accused Citi of violating the contract with the buyers of the securities. U.S. Bank is seeking compensation for the damages, though no amount has been specified. Moreover, it seeks to obtain an order requiring Citi to repurchase the faulty loans.
Mortgage backed securities were the ground zero of the 2008 financial meltdown. USB served as trustee for some of them, and is therefore vulnerable to investor claims directed at it. It may be forced to take the hit on damages to investors if the suits are unsuccessful at gaining resolve from Citi and BoA. Despite the potential damage from this they are currently making almost $5.5 billion dollars a year, and as the overall economy improves along with the expected uptick in mortgage rates, USB stands to benefit with the rest of the banking sector.