U.S. Bancorp Will Ride Higher on Positive Earnings
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U.S. Bancorp (NYSE: USB), which has been the nation's premier large bank by most profitability and efficiency measures in recent years, put up another stellar quarter in the first three months of 2012. The Minneapolis based bank is the country's fifth largest by assets with about $340 billion. In the first quarter, the company posted earnings of $1.34 billion, or $0.67 per share. This was a 28% jump from the first quarter of 2011, and also beat analysts' estimates of earnings of $0.64 per share.
Like virtually all banks, U.S. Bank benefited greatly the past two years by steeply declining loan loss provisions. We are now approaching the point where it simply is impossible to sharply reduce the provision any further, and though U.S. Bank's provision for loan losses in the first quarter of 2012 of $481 million was $270 million less than the year ago quarter's provision, that was the narrowest such gap in years.
The story with U.S. Bank is revenues. U.S. Bank's loan portfolio, highlighted by 20% growth in the commercial loan and a 19% rise in the mortgage loan portfolios, grew by a total 6.4%, or $13 billion, from the first quarter of 2011 to the first quarter of 2012. Interest costs fell as short term rates continue to be suppressed by the Federal Reserve, allowing net interest income to increase 7.3% on a year over basis. Non-interest income increased 11.3%, highlighted by a more than doubling of mortgage fees. I note that U.S. Bank suffered with debit card income and overdraft charges just like other retail banks, but still had double digit non interest growth. Non-interest expense, much of it tied into compensation to help drive the whopping increase in mortgage fees, also increased by 10.5%. The sum of all these charges and gains was a return on assets of 1.60, a peer leading 51.9% efficiency ratio, and a continued conclusion that U.S. Bank is the most profitable large bank in the country.
If there have been two strategies that have led to the unparalleled success in recent years for U.S. Bank, it is first, intelligent acquisitions, and second, stern underwriting. Most banks that have struggled in recent years have done so due to ill-timed acquisitions. Wachovia bought First Union, Southtrust, and Golden West at the wrong times, and paid for that with a near bankruptcy and take over, for instance. U.S. Bank has acquired numerous smaller banks in recent years, including well known banks such as Downey Financial, Bank East, and nearly a dozen other banks, nearly all of which with FDIC assistance such as loss sharing agreements. None of these were earth shattering, but they have allowed U.S. Bank to grow its loans and balance sheet without undue risk. Second, U.S. Bank simply did not have the degree of sloppy, poorly documented loans that other large mortgage lenders have had. It never had to write down or write off the sorts of assets that most large banks did. Its earnings ratios did dip during the recession, but that is all. The year 2009 was its worst year this century, and in that year U.S. Bank still earned a 0.80% return on assets.
The best is yet to come for U.S. Bank. Its net interest margin for the quarter matched the preceding quarter at 3.60%. I am hopeful this signals a bottoming out of its long term net yield margin decline. U.S. Bank's impeccable balance across its various businesses and tight expense controls all but guarantee continued high returns. U.S. Bank recently increased its dividend by 56% for a competitive yield of 2.5%, and announced a $100 million share buyback. Better news yet, is even under stringent Basel III guidelines, U.S. Bank has an 8.4% measure, the highest I have seen. With a price to earnings ratio of a modest 12.7, and a 5 year PEG of 1.07, this stock is suitable for nearly all investors.
Two major trust banks also reported earnings today, State Street (NYSE: STT) and Northern Trust (NASDAQ: NTRS). As trust banks, the bulk of their revenues and income is due to fees for custodial and management services, as opposed to interest rate margins. State Street is among the nation's oldest and largest banks, with over $215 billion in assets, but just two branch outlets. It reported first quarter earnings of $410 million, or $0.84 per share. This represented a decline from $0.88 per share a year ago, and missed analysts' projections of $0.87 per share. Revenues advanced a little over 3% compared to the year ago quarter, but expenses, primarily compensation related, advanced some 7%. State Street does have an ongoing expense reduction plan in place to deal with the cost side of the equation. The revenue side would benefit greatly by an increase in the steepness of the interest rate curve.
State Street is among the best capitalized large banks in the country, and pays a reasonable 2.2% yield. Its growth is unlikely to excite anyone, but as for a safe and conservative financial play, it fits the bill well.
Northern Trust is not the pure trust bank that State Street is. It is actually a sort of hybrid of trust bank and private bank catering to upper income individuals. It reported earnings in the first quarter of 2012 of $161 million, or $0.66 per share, and matched analysts' expectations. This represented a 7% hike from the first quarter of 2011, and was occasioned by a nearly $70 million, or 7.5% jump in revenues to $965 million due to acquired accounts under management. About one third of Northern Trust's profits typically come from more traditional banking activities, and loan revenue also rose by 9%. In all, it was a terrific performance for the bank. Even though it is trading today with a price to earnings ratio of about 18, the 5 year PEG rate is 0.99. I believe Northern Trust is a quality long term play for growth and income in the financial sector.
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