U.S. Bancorp (USB: Charts, News, Offers) reported earnings on April 19, and while its numbers were merely adequate, there were encouraging signs that the company, once considered one of the best bets on the ailing financial sector during the global financial crisis of 2008-2009, was slowly but surely on the path to returning to “business as usual.” The Minneapolis, Minnesota-based financial services holding company, better known in America as U.S. Bank, is the fifth largest commercial bank in the United States with $311 billion in assets, and the sixth largest based on deposits, with $204 billion in deposits as of the end of March 2011. U.S. Bank currently operates in 25 states, with 3,069 offices and 5,310 ATMs, serving 15.8 million customers. The bank has a workforce of 60,000 operating its regional banking, national wholesale and trust services. When the financial crisis began, many analysts initially believed that U.S. Bank would be able to weather the storm without being bailed out – however, in November 2008 the bank received $6.6 billion in TARP funds in the form of preferred stock and related warrants. It was able to redeem the stock in July 2009, which repaid its TARP funds earlier than most of its industry peers. To meet these demands, the bank cut its dividend for the first time in 75 years.
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Financial industry heavyweights have currently been posting large decreases in loan loss reserves, signifying decreasing risk, and U.S. Bancorp has been no exception. The amount of net charge-offs, or loans the bank does not expect to be able to collect on, decreased by 29% to $805 million from $1.14 billion last quarter. Despite this increase, the bank only translated $50 million to earnings – the rest was absorbed by its banking business. This was expected by analysts, who had forecast 49 cents per share, which U.S. Bancorp handily beat at 52 cents per share, an increase from the 34 cents it posted the previous quarter. Loans increased by a slim 0.7% from the previous quarter, which matches the historical industry average. While this increase seems insignificant, it is more positive than the Barclay’s projection of a loss of 3% in loans across the savings and loans sector.
The bank has also increased its interest income to $2.51 billion, from $2.4 billion a year ago, and increased its revenue by 4.6% from $4.32 to $4.52 billion – which soundly beats the 5.2% revenue loss Wells Fargo (WFC : Charts, News, Offers)posted and the precipitous 15.9% loss at Bank of America (BAC: Charts, News, Offers). U.S. Bancorp shareholders should watch interest rates closely. If interest rates increase, then demand for loan products will decrease while payments on savings accounts will increase, thus affecting the bank’s net interest income. The bank has traditionally earned up to 68% of its income from net interest income, which may take a hit if the Fed raises interest rates in order to counteract the rampant inflation brought on by two rounds of Quantitative Easing. Analysts expect lending to increase in the second half of 2011, as oil prices ease off and the housing market gets back on track, while should boost U.S. Bancorp, which is currently leading the pack.
The bank has also announced that it plans to issue $750 million in 2.25% notes on March 13, 2012, and these bonds were given the highest credit rating (AAA) by credit rating agency Fitch, which signifies strong market confidence in the bank. Shares of USB, like most of the financial sector, trade at a low forward P/E of 9.75 and a PEG ratio of 1.25, and pays a 13 cent quarterly dividend. For patient investors looking to diversify into the financial sector while avoiding the “Villains of TARP”, U.S. Bancorp may be a sound investment which could return to the $30s by the end of the year.
Other News About USB
US Bancorp net income surges 55 percent
U.S. Bank’s earnings improves.
Analyst Ups USB Rating, Cuts Huntington
USB gets upgraded.
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
