U.S. Bancorp: Strong Growth Despite Harsh Market Conditions
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U.S. Bancorp (NYSE: USB) is poised to end the week up overall. It has had a few ups and downs over the past 30 days, but the overwhelming trend is up. You can tell by looking at the low volumes its stock is trading at, that many shareholders believe holding on to its stock should bring good returns. Based on its performance this year, I have to agree.
At a time when European banks are under intense scrutiny due to poor investments and the possibility of huge losses and bailouts, US banks are in a good position. Warren Buffett tends to agree. Learning from mistakes of the financial crisis in 2008, US banks have deleveraged very quickly and increased their liquidity in the process. U.S. Bancorp for example saw its stock bottom out just below $9. Today, its stock price is around $32. Confidence among investors is coming slowly, but it is much deserved.
Also helping U.S. Bancorp is its public relations. Likely, you have heard much about Wall Street and banking in the news over the past two years, and most of it was not pleasant. What you probably heard little of was U.S. Bancorp’s name among the headlines. Much to its chagrin, many of the larger banks such as Bank of America (NYSE: BAC) and Wells Fargo (NYSE: WFC) took a majority of the heat.
However, this week, at the University of California – Davis, U.S. Bancorp is being sued for shutting down a branch that was constantly being protested by students. The University of California – Davis is suing U.S. Bancorp for breaching its contract by shutting down the branch office. The Regents claim that U.S. Bancorp could not have expected the school to infringe on its students First Amendment rights and shut down these protests.
On the other side, U.S. Bancorp states that its employees and customers could not enter or exit the building safely causing the branch to close. I expect its image to actually be elevated if this case becomes public. It can only benefit from the public seeing a large bank actually put its customers first.
On the financial side, U.S. Bancorp received much attention from analysts as of late. Being that its market share moved from fifth to third in the industry, it has earned this attention. Much of this attention is due in large part to its ability to generate cash more efficiently than its competitors. Buffett has noted this on numerous occasions.
In fact, compared with the recession, its revenues are up 40%, propelling it to a Composite Rating of 95, which is the highest in its class.
One way U.S. Bancorp is generating cash is through rooftop solar panels. In fact, many banks are in this market now, as solar panels are viewed as an investment with stable returns between 7% and 13%. Additionally, only customers and businesses with very solid credit are given the money for solar panels, so there is little worry of default. With only top notch borrowers, analysts believe that these will eventually be bundled like mortgages and sold as securities.
Since most analysts believe banks will be cleared of bad mortgages by 2014 and will be on the prowl for new sources of revenue. Solar projects, with higher lending standards and less risk, could be the easy money the industry is after.
The unfortunate news is that with the economy dragging along and with a continued risk of a European crisis, the consensus on U.S. Bancorp is a hold or a short-term buy. Since US banks have direct exposure to Europe, any crisis big or small is going to affect profitability. Additionally, the very low interest rate environment is hurting profitability as well. With interest rates remaining effectively at 0%, banks have to look for new sources of revenue. In this case, a short term buy tells us that analysts believe U.S. Bancorp is in a good position for revenue growth, but have reservations about the economy.
Other banks are in a similar position as U.S. Bancorp, but the difference lies in ability to generate revenue. Wells Fargo has innovated in much the same way as U.S. Bancorp, and has seen its stock rise accordingly.
First, it announced that it is partnering in the NeighborhoodLIFT program in Florida that helps to stabilize the housing market by connecting unsold homes with potential homebuyers. By giving grants to homeowners for down payments, NeighborhoodLIFT helps potential homeowners affected by stricter lending to purchase their home. The hope is that making it easier for potential homeowners to purchase unsold homes will clear much of the inventory of these homes and stabilize the abysmal housing market.
Second, Wells Fargo just partnered with the University of California – Davis by giving a $500,000 grant to its Energy Efficiency Center. The grant aims to help get energy efficiency technology to the market faster. As mentioned, banks are investing in solar panels because of high returns, and energy efficiency technology is no different. I imagine that Wells Fargo will invest in this technology as soon as it hits the market.
On the low end of the competition is Bank of America, who recently dropped to fourth in market share. Adding to its public relations problems, demonstrators are planning on protesting its annual shareholder meeting. It seems Bank of America cannot catch a break. However, since other banks are beginning to flourish, I would say it is Bank of America’s own fault and mismanagement. Speaking of mismanagement, just recently another US Bancorp competitor, JP Morgan Chase reported a loss of $2 billion. Investigations have already begun and the banking giant will have a lot of questions to answer in the coming weeks.
Overall, I would say that U.S. Bancorp has positioned itself very well since the crash. It has deleveraged nicely and is finding new sources of revenue that appear to carry less risk. With its growth increasing even with the constraints of low interest rate and fears about a European crisis, I am optimistic about the long term growth of this stock. If you are watching U.S. Bancorp also keep an eye on Europe. If this crisis passes, I would recommend taking a share in the company.
BobbyFisher has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.