US Bancorp on Track for Growth in 2013
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US Bancorp (NYSE: USB) has had a difficult few years, but 2012 is looking much better. Low-cost, "no-frills" core deposits from the communities in which it serves fund the company. 38 hedge funds report US Bancorp positions on their 13Fs. In addition, money wiz Warren Buffet’s own Berkshire Hathaway had at least $1.9 billion invested in the company as of late 2011. These investors like US Bancorp's strategic decisions, which have paid off lately. US Bancorp posted encouraging growth details in its fourth quarter 2011 report with record level earnings and loan and deposit growth. US Bancorp is even expanding and improving its credit quality, increasing investments and growing to scale. More specifically, the company stepped out of the private student loans game. In my view, the company dodged a bullet especially compared to other competitors, including Bank of America, JP Morgan Chase (NYSE: JPM) and Citigroup (NYSE: C). In fact, 15 of the 19 largest banks in the US passed the Fed’s stress test in March with satisfactory capital buffers; but Citigroup, failed, along with Ally Financial and Suntrust (NYSE: STI). Bank of America passed the test, but was unable to buy back stock or raise dividends like JP Morgan Chase, US Bancorp and Wells Fargo.
The company also boasts a strong investment portfolio, spending $32.7 billion on investment activities in 2011, up almost 50% from the $16.4 billion it invested in 2010. Altogether, the company is in a very strong position, enabling it to engage in a stock buyback. The company currently has a share repurchase option authorization valid through May of 2013. It has already bought back 22 million shares over the last year and nearly 16 million in the first quarter of 2012 alone. Its buyback practices have generated capital returns targeted at 60-80%.
The company’s strong positioning is due in part to tough decision-making. One of the decisions that I believe has put the company in a stronger position is its choice to pull out of the private student loans market, as is competitor JP Morgan Chase, which had the foresight to see the 2008 credit bubble for what it was and pull out early. This foresight could surely save US Bancorp from more bad news. Even though its market share in the private student loans business is less then 1.5%, ceasing its private student loan services will increase its liquidity. Although the official reason the company is ceasing its service is that the “private student loan market is continuing to decline,” it serves to reason that liquidity is an issue for both banks. The demand for student loans is insatiable. With 46% of Americans aged 18-24 without work, college is hugely attractive. However, loaning to millions of students can cause liquidity problems for banks, and with an estimated $270 billion in student loans over 30 days delinquent, it doesn’t seem to be a solid investment.
Citi's woes are in no small part due to its student loan division, which is an on-going operation. It did sell off $2.5 billion of its portfolio to Discover last fall. And while Suntrust is certainly improving its non-performing loan ratio (now 3.4%), overall the student loan default rates rose from 7% to 8.8% in the latest full fiscal year. Both Citi's and Suntrust's student loan portfolios are balanced and diverse, and thus I do anticipate that national default rates will apply to them. As a result, margins could take a hit. In contrast, US Bancorp does not participate in the student loan market and would not feel the brunt of higher non-performance rates.
US Bancorp is also committed to creating positive and sustainable customer relations in a variety of ways, which is certain to increase business and, eventually, profits. The company is creating educational partnerships with schools in the 25 states in which US Bancorp has branches. In conjunction with the American Bankers Association Education Foundation, the bank will sponsor Teach Children to Save Day, a campaign aimed at helping children understand the value of saving money. Employees of the company will volunteer their time to share their life and banking experiences with children in an effort to instill lessons such as the value of money and the importance of saving. The decision comes after the launch of Financial Genius, a financial literacy program for young people and adults.
In addition, the company is trying to become a leader in mobile banking, launching an iPhone application that helps customers find branches and ATMs easily on the go. The Find Us+ application gives users the ability to take a picture of the street they are on. From there, the application will find the closest bank branches and ATMs and display detailed access information to augment users’ real world and virtual experience of the bank. Information given includes directions using the iPhone GPS system and color-coded indications of the status of the bank (open or closed). US Bancorp has also included digital watermarks on its annual and corporate citizenship reports to create a more engaging reading experience for mobile readers.
US Bancorp is poised to continue its upward trajectory. Its strong financial position, with proof in its ability to buy back stock and purchase loans, makes it a great investment option for shareholders who are not keen on taking big financial risks, especially with the economy just getting on its feet after several shaky years.
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