Update U.S. Bancorp (USB)

04/17/2012 3:53 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Now that’s what strong bank earnings look like.

This morning before the open in New York U.S. Bancorp (USB) reported earnings of 67 cents a share (or 70 cents a share including releases from loan-loss reserves.) Wall Street analysts had been projecting earnings of 64 cents a share. (U.S. Bancorp is a member of my Jubak’s Picks portfolio http://jubakpicks.com/ )

Other banks have beaten estimates so far this quarter but none have shown quite the strength across all key metrics as U.S. Bancorp. Average loan growth came to 6.4% year-to-year as commercial loans rose by 17.3%. Residential mortgages rose 19% from the first quarter of 2011. Average deposits increased by $5 billion or 11% year-to-year.

Credit quality continued to improve with non-performing assets falling 6% from the fourth quarter of 2011. That was a slowdown in the rate of improvement since non-performing assets fell by 15% in the fourth quarter from the third, but that’s only logical since credit quality has already shown so much improvement. Net charge-offs came to $571 million for the quarter, a drop of 8% from the fourth quarter of 2011. U.S. Bancorp released $90 million from its loan loss reserves and in the company’s conference call management told analysts to expect that reserve releases will continue to show a slower pace in 2012.

The bank’s Tier 1 common equity ratio using the Basel III rules is now 8.4%, well above the 7% minimum. Return on equity climbed to 16%. The bank raised its quarterly dividend to 19.5 cents a share after the Federal Reserve’s stress test from a prior 12.5 cents.

The items that I’d been worried about going into the quarter turned out not to be a problem. Net interest margin came in flat with the fourth quarter—I’d been worried about a decline. Operating expenses were also flat from the forth quarter.

The stock isn’t especially cheap now—compared to other bank stocks you’re paying a premium for the bank’s premium performance—but the shares are still selling at just 10.9 times projected 2012 earnings per share. Since U.S. Bancorp continues to gain market share, and since the shares pay a 2.5% yield, I think this still a stock worth holding. As of today, April 17, I’m raising my I’d target price to $37 a share by October 20121 from the previous of $35 a share.

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 U.S. Bancorp as of the end of December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

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