U.S. Bank's Great Qualities
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Big regional bank U.S. Bancorp (NYSE: USB) presented recently at the annual Deutsche Bank Securities' 2012 Global Financial Services Investor Conference. The presentation, delivered by Andy Cecere, Vice Chairman and Chief Financial Officer of the bank, gave glaring proof of what an efficient, profitable institution U.S. Bank is, and is likely to continue to be.
While most consider U.S. Bank, at $341 billion in assets, the nation's largest regional bank, U.S. Bancorp has long had an international platform in payment processing. As of the first quarter, its fee based payment processing business footprint included all of North America, Brazil, and much of Western Europe. It does trust services and wholesale banking in all fifty states and its retail bank operates primarily in the western half of the country.
U.S. Bancorp had committed a few years back to diversify itself from being a bank where fee income drove revenues and earnings, to one more diversified and reliant upon interest rate margin. Fee income in 2007 represented 52% of revenues, and that has fallen to 45% of revenue in the first quarter of 2012. Of course, the Durbin Amendment limited check card interchange fees, and other regulation limiting overdraft fees, caused some of that reduction.
In the presentation, Cecere compared U.S. Bancorp to what it regards as its peer banks. This group includes most of the largest banks in the country, including Bank of America (BAC), Citigroup (C), Wells Fargo (NYSE: WFC), JP Morgan Chase (JPM), PNC Financial (PNC), BB&T Bank (BBT), SunTrust (STI), Fifth Third (FITB), KeyBank (KEY)and Regions (RF). Some of these banks are among the most profitable, and some are among the most troubled in the country, but they, along with U.S. Bank, are the eleven largest commercial banks in the country.
Looking at its peer banks as a single group, the key return on assets was 0.96%. U.S. Bancorp led the way with a return on assets of 1.60% in the first quarter. My next focus for any bank is always its efficiency ratio. The ten peer banks averaged 66.6%. U.S. Bancorp again had the best efficiency ratio among all eleven banks in the first quarter at 51.9%. And the presentation also focused on U.S. Bancorp's peer leading return on equity. This one can be a bit misleading, as banks have been under pressure to increase their equity, and such increases only make earning a return upon that much more difficult. U.S. Bancorp is not at all short on shareholders' equity or other capitalization ratios, and managed in the first quarter of 2012 to earn a 16.2% return, far outdistancing its peers' average of 9.6%.
Revenue has risen consistently since U.S. Bancorp posted just over $14 billion in 2007. In 2011, revenues were $19.1 billion. Since U.S. Bancorp consistently has had industry leading efficiency, much of that revenue flows straight to the bottom line. Profit hit bottom in 2009 at $2.24 billion. Profits climbed last year to a company record $4.87 billion. First quarter 2012 profits did not disappoint. Earnings in the period of $1.34 billion, or $0.67 per share, represented a 28% jump from the first quarter of 2011. Unlike many large banks that have strengthened their balance sheet and capital ratios by shrinking, in the first quarter of 2012 U.S. Bancorp increased its mortgage loans outstanding by 19%, and commercial loans outstanding by 20%. Overall, U.S Bancorp has averaged about 6% annual loan growth over the past several years. It has also averaged about 14% annual deposit growth. Deposits now exceed the assets in the loan portfolio, ensuring an inexpensive source of funding for further loan growth.
Due to underwriting, U.S. Bancorp never experienced the volume of loan losses that most of its peer banks suffered relative to their sizes. But still, U.S. Bancorp shares in the improvements in overall credit conditions of virtually all banks. Its change in net charge offs turned positive in the second quarter of 2010, and remained positive through the first quarter of 2012. Similarly, its change in non-performing assets also turned from a negative to a plus in the second quarter of 2010. However, due to aggressive loan growth, there is little more than can be saved in the overall credit provision requirements.
U.S. Bank has targeted a capital plan of dividends and share repurchases of 60% to 80% of earnings. In the first quarter of 2012, 66% of earnings were returned to shareholders. The balance, of course, is reinvested into the business. U.S. Bank already exceeds pending Basel III requirements with an 8.4% ratio, the strongest of the big banks.
The issue for U.S. Bank now, as I see it, is whether it can wring ever more profits from its highly efficient business. As long as it can continue to grow its loan portfolio, the answer is "yes." There is no better choice in the financial sector for conservative investors, and with its 5 year PEG at 1.08, it is no worse than fairly priced at present.
Any bank will look rather pedestrian when compared to US Bank. But overall, the second most profitable of large banks in this country is Wells Fargo. It is far larger than U.S. Bank with about $1.3 trillion in assets. Earnings in its first quarter of just over $4 billion, or $0.75 per share, represented a 1.31% return on assets. Its efficiency ratio has been hovering right around 60% in recent quarters, and true to form it was 60.1% in the first quarter. But maybe the best news about Wells Fargo is that the stock had fallen about 14% in May, driving the ratios so that the 5 year PEG stands at 0.81. The first quarter 2012 earnings report also represented the ninth consecutive quarter of earnings growth for the company.
Wells Fargo gave a thorough self-report at its May 22 investors conference, which I will be writing about separately. Rest assured, while not quite at the stability levels of U.S. Bank, investors will do well with Wells Fargo, particularly at today's entry point.
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