U.S. Bancorp: Your Portfolio Deserves Better

| About: U.S. Bancorp (USB)
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U.S. Bancorp (NYSE:USB) operates in the West and Midwest, and is the largest regional bank in the nation. Like competitors such as JPMorgan Chase (NYSE:JPM) and Wells Fargo (NYSE:WFC), U.S. Bancorp's mortgage loan business showed a big improvement. The bank generated $519 million in mortgage banking revenues, which was a 112% increase from revenues of $245 million in the third quarter of $2011. The increase in its mortgage business pushed U.S. Bancorp ahead of two big national banks, Bank of America (NYSE:BAC) and Citigroup (NYSE:C), to become the country's third-largest mortgage originator earlier this year.

The bank benefited from low interest rates which gave homeowners the incentive to refinance their existing mortgages. The bank's CEO, Richard K. Davis, said that the stronger earnings, "included continued strong mortgage-banking activity, which contributed to our growth in fee income, residential real estate loans and loans held for sale." Overall, the banks commercial loan business was strong, and in the third quarter, its new lending activity totaled $66.6 billion; its total loans increased by 7.3%. Richard K. Davis noted that, "solid new lending activity outside of mortgage also helped to grow our balance sheet, particularly in commercial loans, which grew on average by 21.9% year-over-year."

On October 17th, U.S. Bancorp reported third quarter earnings. The bank reported revenues of $5.1 billion which was an 8.5% increase from revenues of $4.7 billion in the third quarter of 2011. Net income was $1.47 billion which was a 15.7% increase from net income of $1.27 billion in the third quarter of 2011. EPS came in at $0.74 which was a 15.6% increase from EPS in the third quarter of 2011. Reuter had consensus analyst estimates of $5.13 billion for revenues and $0.74 for EPS.

Another plus for the bank, is that its bad loan losses have decreased. The bank's third quarter loan loss provision was $488 million which was down by 6.3% from the $519 million it reported in the third quarter of 2011. Total net charge-offs were $538 million in the third quarter versus $669 million a year earlier and $520 million in the prior quarter. The bad news for the bank is that its net interest margins shrank to 3.59% from 3.65% in the third quarter of 2011.

Recent news on U.S. Bancorp

On October 18th, U.S. Bancorp was upgraded to Positive from Neutral at Susquehanna. The company's earnings report yesterday showed strong loan growth as well as strong non-interest deposit growth - hopefully taking some pressure off slimming net interest margin.

On October 17th, U.S. Bancorp reported a profit of $1.47 billion, or 74 cents a share, versus $1.27 billion, or 64 cents a share, a year earlier. Revenue increased 8% to $5.18 billion. Average total loans at the bank increased 7.3% in the latest period amid growth in average total commercial loans and growth in average commercial and commercial real estate commitments. Average deposits climbed 11% over the quarter.

Credit-loss provisions totaled $488 million in the latest quarter, compared with $519 million a year earlier and $470 million in the second quarter. Total net charge-offs were $538 million in the quarter versus $669 million a year earlier and $520 million in the prior quarter. The bank's net-interest margin, essentially the profit margin in the lending business was 3.59% versus 3.65% a year ago.

On September 26th, it was reported that some U.S. Bancorp and PNC Financial Services customers were having trouble accessing the banks' websites. There have been allegations that someone (or a group) has repeatedly attacked bank websites, but it is not clear if they were launched by the state, groups working on behalf of the government, or "patriotic" citizens.

On September 18th, U.S. Bancorp declared a quarterly dividend of $0.195 per share. The $0.195 dividend works out to $0.78 on an annual basis, and it will be payable on October 15, 2012 to shareholders of record at the close of business on September 28, 2012.

On September 10th, we learned that Wells Fargo and U.S. Bancorp are best positioned to return capital to shareholders through buybacks in 2012-13, according to Credit Suisse.


It seems clear to me, and apparently to investors in general, that U.S. Bancorp is a well-run organization. After all, the stock price has increased by 33.8% over the last 52 weeks. I also think that with Ben Bernanke's recent QE3 announcement and with record low interest rates that the bank's mortgage loan business will thrive. But, I hesitate to recommend buying U.S. Bancorp stock, because other banks such as JPMorgan and Wells Fargo will also benefit from low interest rates and increasing mortgage originations, and they look like better investments.

JPMorgan's PE ratio 8.98/price to book ratio 0.86 and Wells Fargo's PE ratio 9.46/price to book ratio 1.27 are currently selling at a cheaper price than U.S. Bancorp whose valuations (PE ratio 12.18/price to book ratio 1.91) are higher. In addition, their quarterly year-over-year earnings growth exceeded U.S. Bancorp's. JPMorgan's quarterly earnings growth was 42.3% and Wells Fargo's was 21.8%. U.S. Bancorp's quarterly earnings growth was 15.8%.

I think that stocks in the banking sector will move higher, and that best of breed banking companies such as U.S. Bancorp, JPMorgan, and Wells Fargo will benefit. If I were to pick the bank stock that I think will perform best over the next twelve months, I would pick JPMorgan.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.