US Bancorp Is Whistling Through the Graveyard

US Bancorp (USB) released their results on the same day as Citigroup (C). Everyone knew the Citigroup news would be tough to swallow and would dominate the financial news. So lets take a look at some of the finer points that US Bancorp has put out.

U.S. Bancorp Chairman, President and Chief Executive Officer Richard K. Davis indicated in his remarks that "During 2007, we returned 111 percent of earnings to shareholders in the form of dividends and share buybacks." This coming from the head of a financial institution.

Investors who are receiving 111% of earnings need to scrutinize the arithmetic and financial engineering implications. The phrase sounds good at first, but when you think about it is this really good that you are taking more out of the pot than is being earned? Eventually this will come back to haunt you.

He went on to say:

Our Company’s credit quality remains sound. Both net charge-offs and nonperforming assets increased during the fourth quarter, but the growth was moderate and as expected. We will not be immune to the current stress in the residential real estate markets and mortgage-related industries, but given the Company’s overall credit risk profile, increases in net charge-offs and nonperforming assets in the coming year will be manageable.

While no one is putting this company into the problem category of some other high profile disasters you need to take the comment with a grain of salt. When you are returning 111% of earnings in a deteriorating environment, the loan loss provisions need to be scrutinized carefully.

The loan loss provisions and write offs are climbing exponentially.This is not the environment to come to shareholders and make the case for returns of 111% of earnings, however that was achieved.

Comments

[eponymousLTC:]

considering their stock isn't in a free-fall like the rest of the financial market, I'd say they must be doing *something* right...this article could use some hard facts to back it up other than "111%".

2008 Jan 16 08:05 AM

[Reinko:]

Well eponymousLTC, want something more substantial?

Go to the Federal Reserve website Flow of Funds sheet, here is the link:

www.federalreserve.gov...

Go to the one last column (total debt domestic US financial sector) and read the Q2 and Q3 numbers:

2007 Q2 = 14855.0
2007 Q3 = 15435.3 billions of dollars

So the entire US financial sector pick up 580.3 billion US dollars in just one quarter... In the first 3 quarters the financial sector picked up a staggering 934.9 billion and if Q4 is in line with Q3 we are looking at 1.5 trillion US$ in the financial secor only.

Needless to say that 1.5 trillion is far beyond total profits of the US financial sector (although I do not have an exact number on that, yet it is very hard to imagine that it is beyond).

So as a whole the US financial sector has so called 'Ponzi status' that means that they need to borrow more just to pay the interest on the outstanding loans:

2007 Q3 = 15435.3 billion so at an interest rate of 5% they need a rough 600 billion a year just for the interest payments.

Compare this with the little billions that come from China and the Mid East and arrive at the conclusion that the Wall Street traders are standing lightyears from reality with their rallies on those small billions 'save our banks' news.

2008 Jan 16 03:15 PM

[GreedIsGood:]

This blog has no substance. I love it how everyone is worried about the bank stocks cutting their dividends...then you have USB that increases their dividends and this guy is critical. I guess you can't please everyone. 111% return to shareholders is a very good thing. Remember, a large portion of that 111% comes in the form of share buybacks. Obviously, that is a signal that senior management believes they are undervalued. Doesn't that give you more comfort than other bank stocks?

I also love how he questions the loan loss provision and says it needs to be scrutinized. OK, fine...go ahead and analyze it and tell us if you are concerned. USB has a strong credit culture. Very little subprime exposure. I wouldn't try to lump them in with the Citis, Wamus or Countrywides.

To Reinko: Good stuff, but what does that have to do with USB?

2008 Jan 16 05:07 PM

[manohmanoh:]

Reinko: do you think there were any additions to their assets .... and do you think maybe they are holding loans that are paying them an interest rate higher than they are paying out. I am certainly not blind to NPL and the recent troubles (how could I be), but let's not go to the other extreme, as you seem to be, and simply cut off the 2nd half of the balance sheet that has assets, questionable though SOME may be.

2008 Jan 16 09:19 PM

[User 141537:]

Totally agree with GreedisGood. The author comes to such an unjustified conclusion - why exactly is it bad to return 111% (other than an idiot reason that no else is doing it and the market is bad). List out intelligent reasons! There are always outperforming companies in down markets. It's like saying short GS because they are paying bonuses this year!

2008 Jan 17 10:51 PM

[Syl:]

I plan to stick with USB regardless of the supposed pay off of 111%

2008 Feb 04 07:55 PM