Seeking Alpha
Profile| Send Message| ()  

The earnings season has arrived, and already a few of the regional U.S. banks have posted their performances for the third quarter of the current year. Regional banks across the country reported growth in their mortgage banking revenues; however, loan and lending growth remained slow during the third quarter of the current year. U.S. Bancorp (USB) and M&T Bank Corp. (MTB) are the two banks we have identified that have benefited from improved U.S. housing markets and growth in their loans portfolios. We believe the banks have strength in their balance sheets to gain market shares in the coming quarters. Therefore, we recommend our investors to long the stocks.

U.S. Bancorp:

U.S. Bancorp mostly met consensus mean analyst estimates when it reported the performance of its third quarter on October 17. The reported EPS for the third quarter of $0.72 per diluted common share were in line with mean expectations of the analysts covering the stock. The reported revenue of $5.2 billion was also in line with expectations. The bottom line showed significant improvement of 15.8% over the same quarter of the previous year and 4.2% when compared with the linked quarter.

Much of the improvement in results when compared with prior periods was a result of growth in fee-based income. Revenue from mortgage banking surged two folds from a year ago, translating into growth in fee-based income for the bank. The results were also supported by solid lending activates unrelated to mortgages. The bank reported year-over-year growth of 21.9% in commercial loans, which is better than many of its peers. Driven by growth in commercial loans and commercial real estate commitments, the bank was also able to increase its loans portfolio by 7.3%, while the deposit base increased 11%. Despite the ultra low interest rate environment and the flattening of the yield curve as a result of several initiatives by the Fed, U.S. Bancorp was able to increase its net interest margin to 3.59% in the third quarter of the current year. In contrast, most of the banks reported falling net interest margins at the end of the third quarter. As a result, the net interest income of $2.78 billion surged by 2.6% sequentially.

Given the strength in the bank's balance sheet and strong loan growth, we believe, going forward, the bank will continue to gain a market share in the coming quarters. The bank is also well positioned to benefit from the acceleration in home refinancing, as a result of the ultra low interest rate and the third round of quantitative easing.

M&T Bank Corp:

M&T Bank Corp. reported better-than-expected results for the third quarter of the current year. The bank reported earnings per share of $1.85 against consensus mean expectations of $2.17 per share. Revenue of $1.1 billion remained in line with expectations. The third-quarter bottom line of $293 million surged 60% compared with the bottom line of the same quarter of the previous year.

Much of the improvement was associated with growth in non-interest income and expansion of net interest margin, supported by lower operating expenses. The results for the most recent quarter were also helped by improvement in the U.S. housing markets, which lead to higher mortgage related revenue.

Net interest income for the bank improved largely on an increase in average interest-yielding assets and expansion in net interest margin from 3.74% in the linked quarter to 3.77% in the third quarter of the current year. Like USB, MTB was also able to expand its commercial loans portfolio by 10% from a year ago to $16.7 billion, while the total loans portfolio also grew 10% over the same time period.

Revenue related to mortgage banking grew by 3-fold from a year ago to $106.8 million. This surge in revenue related to mortgage banking was a major contributor in the 21% year-over-year growth in revenue from fee-based sources for the bank.

During the third quarter, the bank was able to manage its operating expenses efficiently. Total operating expenses of $616 million for the third quarter plunged 7% from a year ago. While employees and compensation-related expense declined 1%, expenses related to printing postage and supplies dropped 22% YoY. Expenses of $23.8 million related to FDIC assessments declined 11% over the same time period.

Going forward, we believe the bank's growing loans portfolio and its strategic acquisition will benefit the top line in the foreseeable future. MTB acquired in August Hudson City Bancorp (HCBK), which will enhance its presence in eastern U.S. Despite the fact that MTB has a footprint in the region through its commercial lending segment, the acquisition will provide the bank to expand its retail business in the eastern region.

Valuations:

The stock of U.S. Bancorp trades at a 90% premium to its book value, while the stock of MTB trades at a 45% premium to its book value.

Source: 2 U.S Banks To Buy On Improving Net Interest Margin Despite Ultra-Low Interest Rate Environment