The Best Investment in Banking
Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The subprime crisis taught the world about how dangerous greed could be. Bankers made mistakes, and the level of apathy was shocking. An example to this was JP Morgan's (NYSE: JPM) recent trading loss of $5.8 billion which occurred due to the careless and casual attitude of a couple of traders. It’s due to these recent happenings that investors are reluctant to investing in the banking sector, but a message to the hurt and poor, all banks are not the same and all financial institutions are not over-aggressive.
US Bancorp (NYSE: USB), the fifth largest bank in the US by assets has recently been upgraded by S&P to outperform and the credit issuer rating of the company has also been upgraded by a notch. Going by the traditional way, the bank’s core focus is on increasing the deposits giving out safe loans. It is due to this reason that Bancorp wasn’t much affected by the crash of 2008, and to support the claim, the stock is nearly 50% up since 2009. Another similar conservative bank is Wells Fargo (NYSE: WFC), which also was not impacted much during the crisis year as compared to the peers JP Morgan Chase and Citigroup (NYSE: C). An addition to US Bancorp’s case would be its little or no exposure to Europe, and this is one of the reasons why the bank was able to post healthy quarterly earnings.
In the recent quarterly results US Bancorp. Posted a 3.5% increase in its sales with an 8.1% increase in the total revenue. The net interest income saw a 6.6% increase and the bank deposits showed a 10.5% upside. These numbers indicate that the bank is growing the traditional way. Banking is a business which is profitable only is people have faith in its operations and trust the management. The increase in the bank deposit, in a period of low interest rate environment, suggests that more people are now beginning to prefer US Bancorp with their money.
Additionally US Bancorp’s commercial real estate loans saw a 3% increase from the same quarter last year and the bank believes that unlike its peers, taking huge risks in order to grow, are unnecessary. This is one of the reasons why US Bancorp is not involved in the investment banking business. The EPS stood at $0.71 which beat the market estimates and it is one the back of this solid performance that analysts have increased both of their quarterly and annual EPS estimates.
On comparing the financial metrics of the four banks, we can see that US Bancorp has the second lowest debt/equity ratio, behind Wells Fargo. The bank is not highly leveraged unlike JP Morgan and Citigroup. Additionally US Bancorp has the highest net profit margin and ROE amongst its peers. These metrics suggest that US Bancorp believes in quality investments with as less debt as possible. JP Morgan and Citigroup on the contrary, seem to be more focused on their revenues.
On taking a look at the stock performance of the four banks, we can see that US Bancorp has outperformed its peers over the last year.
Also if we look at the second chart, US Bancorp comes out to be the only bank that has given positive stock returns over the last 5 years.
Overall, US Bancorp looks like a stable investment. The bank witnessed growth in nearly all its business operations. The low debt/equity is what catches the eye. The bank's stock has outperformed its peers, highlighting the robust business model of US Bancorp compared to its competitors. The numbers look great and it is due these reasons that US Bancorp is rated as a solid long term buy.
PiyushArora has no positions in the stocks mentioned above. The Motley Fool owns shares of Citigroup Inc , JPMorgan Chase & Co., and Wells Fargo & Company and has the following options: short OCT 2012 $33.00 puts on Wells Fargo & Company and short OCT 2012 $36.00 calls on Wells Fargo & Company. Motley Fool newsletter services recommend Wells Fargo & Company. 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.