U.S. Bancorp (USB), which is the fifth biggest bank in the United States, ranked by deposits has reported an increase of 28% in profit in the first quarter which was better than the consensus estimate because of increased revenues and reduced credit losses.
Net income was $1.34 billion ($.67 per share) as compared to $1.05 billion or $.52 per share in the same quarter of the previous year. The consensus estimate for earnings per share was $.64 a share. Revenues grew by just over 9% to $4.93 billion as revenues from mortgage banking group by more than 100% from $199 million in the same quarter in the previous year to $452 million. The provisions for bad loans at $481 million dropped 36% year on year and net charges for credit losses dropped from the $805 million in the previous year to $571 million. Total loans grew by over 6% to $210.2 billion with growth in both commercial loans and residential mortgages.
This represented a solid performance from the bank which has not shown a single quarterly loss under the guidance of its present CEO Richard Davis. There was growth in both interest and non-interest income helped by the boost in the mortgage banking business. One of the major problems for banks in recent times has been to show top line growth in the context of the historically rock bottom interest rates.
U.S. Bancorp has countered reduced margins with strong growth in its loan book and this has shown in the performance for the quarter. Apart from the strong loan growth, the other good news has been the improvement in credit quality and the fall for provisions for loan losses has also gone to boost the bottom line. There is also been a significant decrease in the non-performing assets related to commercial and commercial real estate loans. Taken as a whole, banking sector has reported some pretty mixed results and you just have to look at Citigroup (C) port JPMorgan Chase (JPM) to see the stark contrast to U.S. Bancorp. After U.S. Bancorp's success in meeting the stress tests carried out by the Fed, the bank has raised its annual dividend by 56%.
I would regard these results as a tribute to the disciplined operating strategy and approach to new lending which shows the quality of management. Nor has the bank succumbed to the temptation of paying fancy prices for dodgy acquisitions which has haunted other major banks like Bank of America (BAC) and Wachovia which has now being acquired by Wells Fargo (WFC). The bank has demonstrated its ability to cope with the changed environment for the banking business. I considered it is significant that the first quarter results have been clean with no complicated accounting issues or other question marks. The net interest margin of 3.6% is acceptable though marginally less than Wells Fargo.
Let me now move on to consider the investment potential of U.S. Bancorp stock. U.S. Bancorp is a well diversified provider of financial services in the Western and Northern parts of the United States with over 3000 offices, 60,000 people and a total of $340 billion in assets. It has a reliable source of core long-term funding in the form of low-cost deposits raised from the communities where it is established. The profitable business segments in which it operates include wholesale and commercial real estate as well as services to consumers and small businesses. U.S. Bancorp has clearly been very successful in its chosen lines of business and the business diversity provides it with some protection against a downturn especially if the US economy continues to recover. It also provides a reasonable dividend yield of around 2.4% for income investors. Over the next decade, it intends to return capital to its stockholders in the range of 60% to 80% by way of dividends and share buybacks.
I would consider the bank to be well-placed in terms of capital adequacy and it is already compliant with Basel III while a number of its competitors are still scrambling. To my mind, one of the major strengths of U.S. Bancorp is that it does not indulge in proprietary trading but sticks to its core customer business. This means that you are unlikely to see anything like the derivatives trading disaster at JPMorgan Chase and the proposed Volcker Rule should have no impact on either operations or profitability. Because of the nature of the composition of the assets and liabilities on its balance sheet, the bank is also well placed to cope with any kind of interest rate regime including the present low rate environment.
For me, the strongest argument in favor of investing in U.S. Bancorp stock has been the bank's performance of the last five years. In a period of disastrous uncertainty for the banking industry as a whole, US Bancorp has performed solidly and consistently managing to show profitable growth even in the worst periods with solid increases in operating cash flow which owns both the efficiency of the business operations and the strength of the bank.
If I were contemplating investing in any banking stocks, important considerations would be the quality of the management, the reliability and sustainability of the earnings and dividends and its position in its chosen markets. U.S. Bancorp meets all my criteria. It has a reasonable claim to be one of the best managed banks in America. Its operations may be regional but its market capitalization and strength in its chosen markets enables it to be considered on level terms with its larger counterparts. And if you rule out JPMorgan Chase because of the size of its positions in derivatives, in addition to US Bancorp, the other stock that merits consideration is Wells Fargo.
I would rate US Bancorp as a buy when you consider the dividend yield of over 2% and the company's proven capability to cope with adverse circumstances. As the US economy continues to rebound, the fortunes of the banking sector should do likewise and you may well see capital appreciation in addition to dividend growth. US Bancorp is currently trading around $30. Based on my analysis above, I think the stock will climb slowly into the $35 range later this year. While I don't expect any major gains, I do think this stock will produce solid, steady gains for many quarters to come.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.