U.S. Bancorp Shows Scaled Banking Can Be A Good Business

Jul.18.12 | About: U.S. Bancorp (USB)

With the many problems of Goldman Sachs (NYSE:GS), JPMorgan Chase (NYSE:JPM) and Bank of America (NYSE:BAC), all of which are trading at a fraction of their book value, you might think banking is a bad business to be in.

You would be wrong.

Banking is a great business, if you don't go to the dog track with customers' money. Even scaled banking. For proof, look at U.S. Bancorp (NYSE:USB). It has a book value per share of $17.38, up almost 50% from 2009. Its current price is $33.11.

USB hasn't sold at anything close to book since the bottom of the financial crisis, in 2009. That's when its CEO says he was "forced" to take TARP money, which was repaid within a few months.

Instead, USB engages in banking. Its second-quarter earnings narrowly beat the Street -- 71 cents per share -- thanks to fewer bad loans. Even its CEO admits the bank is "boring."

But boring is good. The Minnesota-based holding company operates in all areas of retail and commercial banking, and it's now the seventh largest credit card issuer. Its securities business is mainly in that area called "wealth management," tracking the conservative investments of high earners, rather than doing deals or betting its own money. It loans that money for less than it pays to acquire that money.

USB is now back at the level it was at during 2007, at the height of the last boom. It's paying a 19.5-cent dividend, which is a 2.35% yield. At its current price it sports a P/E of 12.72 -- high for the banking sector, but not excessive when compared with companies in other businesses. And this growth cycle has barely begun. Most of the banks now leading the pack in this market are fairly small, ones that couldn't play the games that big banks did in the 2000s. CEO Richard Davis, almost alone among his peers, simply refused to play.

Given a choice between investing in Jamie Dimon or USB's Davis, I opt for Davis. You should too.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.