A Big Bank With Big Profits

Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I tend to keep up with a lot of banks, having worked in the field for over ten years they are actually easier to understand than many people make them out to be. This is why it's strange that US Bank (NYSE: USB) has stayed off my radar until recently. Here is one of the largest banks in the country and I haven't been keeping up with it. Looking at the company's earnings release, I'm sorry I didn't take notice of the company sooner. That being said, now that I've read up a little on the bank, I can safely say it should be probably number one or number two on investors lists when it comes to financial institutions.

US Bank doesn't make the cut as the best big bank as long as BB&T (NYSE: BBT) is around, as BB&T is outperforming the company by many measures, but the bank's results are very impressive. Though some would say that trying to read a big bank's financials is like trying to decipher another language, US Bank has avoided a lot of the “exciting” trades that have gotten other institutions into trouble. The bank is focused on the traditional banking business of attracting deposits and making loans. There are larger banks like Bank of America (NYSE: BAC) and Citigroup (NYSE: C) that probably wish they just stuck to this part of the business over the last few years. These two mega-banks each have huge pieces of their businesses that cause losses, and it will probably be years before their balance sheets are really cleaned up. Traditional banking really comes down to doing three things well, attracting deposits, making loans, and managing credit quality. For investors, one of the key measures of the health of a bank is their ability to grow loans and deposits. You can see below that US Bank holds its own compared to its competition: 

<table> <tbody> <tr> <td> <p><strong>Name</strong></p> </td> <td> <p><strong>Loan Growth</strong></p> </td> <td> <p><strong>Deposit Growth</strong></p> </td> </tr> <tr> <td> <p>Bank of America</p> </td> <td> <p>Down 4%</p> </td> <td> <p>Up 2%</p> </td> </tr> <tr> <td> <p>BB&T</p> </td> <td> <p>Up 8.5%</p> </td> <td> <p>Up 11.9%</p> </td> </tr> <tr> <td> <p>Citigroup</p> </td> <td> <p>Up 2%</p> </td> <td> <p>Up 9%</p> </td> </tr> <tr> <td> <p>US Bank</p> </td> <td> <p>Up 7.3%</p> </td> <td> <p>Up 11.1% </p> </td> </tr> </tbody> </table>

US Bank ranks second among these peer banks when it comes to overall performance in both categories, with only BB&T showing faster growth in both areas. Strong loan and deposit growth led to an increase of 8% in revenue and EPS increased by 15.63%. Looking at the breakdown of where the bank got its loan and deposit growth from gives us a clue to how the company can improve in the future.

The strength of US Bank in the recent quarter was in its commercial lending division. The bank showed an increase in commercial loans of 21.9%, and commercial mortgages increased 5.9%. When you consider the tough lending environment, and businesses unwillingness to take on debt, these results speak for themselves. The bank showed good, if not great, results in its residential lending as well. US Bank increased residential mortgage lending by 20.4%, credit card loans increased 3.1%, but home equity lending was down by 6.4%. With some other banks showing 50% or 70% increases in mortgage lending, and double-digit increases in home equity loans, this points to one opportunity that US Bank could capitalize on. Even after the Great Recession, there are still millions of homeowners that have equity, good credit, and stable income. I know this from personal experience as I did millions of dollars in home equity and mortgage lending at the one branch I used to manage. US Bank needs to identify the cross-sell opportunities between their mortgage originations and home equity lenders. With mortgage production up 20% and home equity lending down, this points to a disconnect between the mortgage lenders and the local branch lenders. This is definitely something US Bank can take advantage of, and sharing information between the two divisions makes good sense. A second place that US Bank can improve is their deposit gathering.

US Bank showed impressive deposit growth with an overall growth rate of 11.1% as we saw, but its composition of deposits is where the bank can improve. US Bank grew non-interest bearing deposits by 16.2%, which is excellent because this is the cheapest source of funds for a bank. However, the bank saw a 6.9% increase in savings accounts, and a 23.19% increase in CDs. Most banks are allowing CD balances to run off or they are seeing slow growth. With a 23.19% increase in this type of deposit, it's possible that US Bank needs to reprice its CD offerings to avoid such huge growth in this higher cost type of funding. You can see this as a potential issue since US Bank's net interest margin is 3.59%. While this is significantly better than either Bank of America or Citigroup, which both have margins under 3%, it doesn't compare well to BB&T's margin of 3.94%. If US Bank continues to attract deposits into checking and savings accounts, the bank can afford to grow CDs at a slower pace, and at lower rates. This would improve the bank's net interest margin and improve profits. Aside from these two areas of potential improvement, I believe US Bank is probably the second best big bank in the country.

I've made the argument in the past that BB&T is the best big bank, but I would put US Bank right behind my perennial favorite. US Bank pays a good yield at 2.29%, and is expected to grow at a respectable 9.16% rate over the next few years. Investors are aware of the bank's quality as shares sell for a slight premium at about 12 times projected profits. The bank has taken a slightly unusual stance in commenting on what percentage of profits they would like to return to shareholders. Specifically, they would like to meet their, “goal of returning 60-80% of the capital they generate back to shareholders.” This means investors can expect as the bank grows, so will their dividend and share buybacks. I made the mistake of overlooking US Bank before, but not anymore. Investors looking for exposure to the banking sector would do well to consider this big bank generating big profits.

Dig Deeper

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