Never a flashy bank even in the heights of the boom times, U.S. Bancorp (USB) is a pretty good example of what basic "blocking and tackling" can achieve in regional banking. Fourth quarter results were by no means flawless, but U.S. Bancorp continues to perform exceptionally well and may well be one of the best banks in the country today. Better still, widespread investor pessimism on banks has kept a lid on these shares.
A So-So End To The Year
Although U.S. Bancorp had a decent close to the year, it wasn't any kind of blowout. Adjusted earnings of $0.64 just barely beat the consensus, though U.S. Bancorp hasn't had to rely on the large reserve releases of so-called money center banks like JPMorgan (JPM) or Citigroup (C).
Core operating revenue rose 3% from the year-ago period, but fell 1% from the third quarter. Net interest income was up a decent enough 2%, as a 3% increase in earnings assets offset a slight sequential erosion in net interest margin. Although U.S. Bancorp's net interest margin is hardly embarrassing, Wells Fargo (WFC) did show a little more pop.
Fee income was a disappointment (down 4%), as USB saw lower earnings in cards and mortgage banking - a little curious given the results at JPMorgan and Wells Fargo, respectively. Expenses were also a bit high (up 4%) and this is definitely not very USB-like. Together, these two disappointments are largely responsible for the not-so-impressive pre-provision operating result. It should be noted, though, that higher expenses is a theme that is repeating across the sector (including JPM, Citi, Wells Fargo, and PNC.
Good News Elsewhere
U.S. Bancorp came out of the credit crunch with a solid balance sheet and management is putting it to work. Loans rose 3% on an adjusted basis, with commercial loans up a strong 6% (echoing similar trends at JPMorgan, Wells Fargo, PNC, and M&T Bank (MTB). While lending is expanding, credit ratios are improving. The NPA ratio fell nicely (down 28bp), as did the net charge-off ratio (down 14bp).
U.S. Bancorp continues to leverage its good branch coverage and is driving some incremental deposit share gain in most of its major markets. USB is also doing reasonably well with its trust/asset management business, while trends in payment processing are a little soft.
What To Do With Its Capital?
It sounds as though U.S. Bancorp management is intending to distribute more capital to shareholders in 2012. Given the alternative options, that's probably not a bad move. USB really cannot do more bank deals without explicit government cooperation and there is arguably not much the company should look to do to expand its fee businesses - organic growth seems more prudent in the payment services space, insurance would be a move into the unknown, and past forays into investment banking and asset management have been disappointing.
The Bottom Line
U.S. Bancorp runs an attractive core banking franchise, augmented with solid fee-for-service businesses like corporate treasury services and merchant payment processing. It also runs a relatively more stable basis that doesn't have the dramatic ups and downs that go with heavy involvement in investment banking/trading or foreign lending.
U.S. Bancorp looks well on its way to gaining back a mid-teens return on equity. Although it is true that the banking industry has changed a great deal in the last few years and the industry is not likely to grow as it did, that doesn't mean that U.S. Bancorp cannot post above-average growth by exploiting the weak and ineffective.
If a mid-to-high teens ROE is indeed achievable, that suggests EPS growth in the 10-12% range over the next five years. That's a pretty hefty target for a bank of USB's size, but the current valuation assumes almost no improvement at all from today's levels, and that suggests these shares are still worth considering.