U.S. Bancorp (NYSE:USB) has been on investors’ radars since the global economic downturn for its ability to churn out profits quarter after quarter even as the bank sticks to its strategy of complete focus on providing traditional banking services. It hence comes as no surprise that U.S. Bancorp topped the list of banks compiled by Bloomberg ranking them by their risk-adjusted return over the last two years. U.S. Bancorp did better than all the 23 other banks that constitute the benchmark KBW Bank Index – including the likes ofJPMorgan Chase (NYSE:JPM), Wells Fargo (NYSE:WFC), Bank of America (NYSE:BAC) and Citigroup (NYSE:C).
We maintain a $34 price estimate for U.S. Bancorp’s stock, about 10% higher than its current market price.
Back To Basics: The Value Is In The Simplicity
The chart above represents the various businesses that drive revenues for U.S. Bancorp, along with how much they contribute to the bank’s total share value based on our analysis. The bank makes money by sticking to the basics of banking; loans, deposits and cards. Time and again the bank has defended its no-frills retail banking approach, with the bank’s CEO Richard Davis often calling his business model – which refrains from any investment banking or insurance services – ‘boring.’
Steady Growth, Low Risk, High Returns
The strategy has clearly paid off for the bank which has grown large over recent years – a time when competitors have been plagued by huge losses and piling litigation charges. The bank’s aggressive growth strategy has seen it complete a series of acquisitions, with a large number of them being failed banks (see U.S. Bancorp’s Appetite for Failed Banks Shows its Strength). U.S. Bancorp has acquired 14 different failed banks from the FDIC since late 2008 – something which speaks volumes about the bank’s dependence on its deposit-backed lending policy.
And this in turn has kept returns high despite contributing little to the bank’s overall risks. Even the record low interest rates prevalent have not quite dented U.S. Bancorp’s top-line figures.
In comparison, the country’s two biggest banks JPMorgan and Bank of America rank at the bottom of Bloomberg’s risk-adjusted returns list for banks. Both these banks have had a lot of things going against them since 2008 – starting from huge losses to their mortgage portfolio, dozens of mortgage-related lawsuits and increased regulation on investment banking activities to name a few.
Looks like the big banks can learn a lesson or two from the humble U.S. Bancorp.