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Update U.S. Bancorp (USB)
10/21/2011 3:01 pm EST
On October 19, before the New York market opened, U.S. Bancorp (USB) reported third quarter earnings of 64 cents a share. That was 2 cents a share above the Wall Street consensus.
Revenue grew by 4.5% from the third quarter of 2010 and, unlike the big New York banks, U.S. Bancorp also showed sequential revenue growth as well with revenue up 2.2% from the second quarter of 2011. Revenue of $4.8 billon was comfortably above the $4.71 billion expected by Wall Street.
The fundamentals of the bank’s business remained very solid. Provisions for credit losses dropped by $475 million, net interest income (what the bank earns on the difference between what it pays for the funds it needs and what it charges on the loans it makes) grew by 5.9% year-to-year. Non-interest income (the fees for payments, service charges, commercial products, and trust management) edged up by 2.9%. Average loan growth rose by 4.5% (excluding acquisitions) year-to-year. (Which may not sound like much of a growth rate but which is the highest growth rate for loans that I’ve seen from a bank this earnings season.) Average total deposits grew 13.2% (again excluding acquisitions) year-to-year. (What’s called average low-cost deposits grew by 23%. These are deposits in accounts such as non-interest bearing checking accounts that don’t pay much interest They’re a key bank strength these days when many banks are forced to raise capital rather than borrow funds in the short-term markets.)
Charge-offs on bad debt was lower than expected at $669 million (instead of $750 million) and down 10.4% from the second quarter. Nonperforming assets were just 1.6% of loans.
Tier 1 core capital was 10.8% at the end of the quarter.
Two things concern me. First, there was a drop in net interest margin of 0.26 percentage points from the last quarter. A falling net interest margins is what you’d expect from current Federal Reserve policy designed to hold down long-term interest rates, but it’s still not good for earnings at any bank. And while non-interest income climbed 1.2% that fell short of the growth I’d expect from U.S. Bancorp under normal banking conditions.
But then these aren’t normal times for banks, are they?
How you value U.S. Bancorp depends on how long you think it is before U.S. banking gets back to something like normal. I think that’s further down the road than when I set a $35 target price o the stock in July. I’d now put a $33 12-month target price on the shares. The stock current pays a 1.7% dividend.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of US Bancorp as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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