Income Seekers: Look to U.S. Bancorp
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
U.S. Bancorp (NYSE: USB) is the best run regional bank in the country. It has efficiency and profitability ratios that most any bank would envy, and as much as I think that it has gotten about as profitable for its size as it can, it recently reported yet another quarter of double digit income growth and improved profitability ratios. Not only that, it is even a socially responsible company! Frankly, it is not all that easy to find something not to like about how this, the fifth largest commercial bank in the country by assets, runs its business.
In the second quarter of 2012, U.S. Bank reported profits of $1.415 billion, or $0.71 per share. This represented an 18% advance since last year's second quarter. The bank's return on assets in the quarter was 1.67%, compared to 1.54% a year earlier, and the efficiency ratio of 51.1% is a slight improvement from the already impressive 51.6%. How does this bank manage to put up numbers like these? Well, it sure is not from shrinking its balance sheet as some of our nation's largest and struggling banks, such as Citigroup (NYSE: C) and Bank of America (NYSE: BAC) have done. As of June 30, 2012, U.S. Bank held over $353 billion in assets, up over 10% from the $320 billion reported one year earlier.
Loans outstanding grew by $16 billion, or 8%, to $216 billion. Despite a 23 basis point drop in the yield of the loan portfolio to 4.97%, interest revenue increased by $109 million, to $3.29 billion. Interest costs also fell, by $102 million, leaving net interest income at $2.66 billion, up about 7% from the year earlier. On the non-interest income side, mortgage fee income more than doubled from last year, to $490 million. On the back of that increase, noninterest revenue rose by 10%. Overall revenue in the quarter of $5.07 billion was up 8.1% from last year's second quarter $4.69 billion. That is how one grows a bank.
Non-interest expense rose 7%, to $2.6 billion. Add in the fact that the provision for credit losses fell by 17%, or $102 million from last year's second quarter, and buy back some shares, and that equals the stunning profit growth US Bank saw in the second quarter. That 7% increase might seem troubling, yet reality tells us it does cost money to achieve the $67 billion in new loans approved during the quarter. And that 51.1% efficiency rate speaks for itself.
U.S. Banks' capital levels already exceed anticipated Basel III standards, with a level of 7.9% at the end of the second quarter. Credit quality has never been as much an issue the past few years for U.S. Bank as for most of its competitors. But it still is seeing improvement in its credit profiles. Net charge offs in the second quarter were a tiny 1.04% of total loans in the second quarter, down 59 basis points from the second quarter of 2011. Non-performing assets were 1.11%, also down a stunning 66 basis points. Many large banks are still dealing with charge off rates two and even three times as high as U.S. Bank's, a testament to its historical underwriting strength.
U.S. Bank announced earlier this year its intent to return 60% - 80% of its profits annually to shareholders in the forms of dividends and share buybacks. Through June 30th, U.S. Bank's dividend and share repurchase amounts have in fact summed to 62% of earnings.
The issue for U.S. Bank is, other than balance sheet growth, it is hard to envision continued further growth in its productivity and efficiency ratios. With loan growth, also will come the need to establish new reserves, and the days of falling provisions for reserves may well be coming to an end. Also, U.S. Bank stock is already up 24% since the first of this year, and up some 60% since August, 2011. It has a five year PEG of 1.35, well above most financial companies. Still, the recent profit report does have analysts scrambling to raise 2012 full year estimates, which I believe may well approach $3 per share this year. There is no limit to growth, all it takes is a desire and leadership, and U.S. Bancorp has plenty of both.
What I would like to compare U.S. Bank with its peers is on the outstanding loan growth of the bank. As mentioned, U.S. Bank's loan portfolio ended the second quarter up 8% from the year earlier. Bank of America's loan portfolio shrunk by $50 million, or 6% on a year over year basis ending with the second quarter of 2012. JPMorgan Chase (JPM) loan portfolio grew 5.8%, and Citigroup's shrunk by 1% over the same period. The only large banks to show real loan growth are PNC Financial (PNC), though that really was due to its large acquisition of over 400 branches in the Royal Bank of Canada (RY) deal, and Wells Fargo (NYSE: WFC), which has a similar view of the world as U.S. Bank that growth is the best way to deal with narrowing interest spreads and increasing regulation. Wells Fargo ended the second quarter with a loan portfolio up $24 billion from the year earlier. “Core loans” for Wells Fargo actually grew much faster, by $42 billion, or nearly 7% from the year earlier.
The whole idea of banks downsizing toward success is so absurd on its fact as to be laughable. At best it brings short term relief, but at the cost of longer term profitability. Late last decade, virtually all banks, with the support of the Federal Reserve, or course, over reserved for loan losses. Many banks, including U.S. Bank, have steadily been releasing down provisions for loan losses. Thank goodness that there still are a few large banks that are not afraid to support economic growth.
U.S. Bancorp is a fine corporate citizen, and an excellent example of what a commercial bank can and should be. Oh, like all banks it gets into trouble from time to time, but you will not see multi-billion dollar foibles from this institution. This is an ideal holding for income seeking individuals seeking a relative safe haven in the financial sector.
StockCroc1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America, Citigroup Inc , and Wells Fargo & Company and has the following options: short APR 2012 $21.00 puts on Wells Fargo & Company, short APR 2012 $29.00 calls on Wells Fargo & Company, 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.