A US Bank You Can Really Bank On
03/26/2010 4:15 pm EST
I’m taking US Bancorp (NYSE: USB) off Jim’s Watch List and adding it to the Jubak’s Picks portfolio today, March 26. Unfortunately, the stock is up roughly 18% since I added it to the Watch List, climbing from $22.01 on December 15, 2009 to around $26 on March 26.
But with this one, I haven’t been waiting so much for a pullback in the stock’s price as for convincing evidence that the turn in what has been a rising tide at banks of writeoffs and reserves for delinquent and bad debt is only a quarter or two distant—not way off in 2011. (Buying US Bancorp also increases my exposure to the US stock market, which I think will outperform the rest of the world’s markets over the next few months. See this recent post.)
I saw signs of that turn in bank earnings reports for the fourth quarter and in credit trend reports for January. The numbers showed that banks that had maintained decent credit quality controls even as peers granted loans to anyone who had a pulse were seeing either actual improvement in the delinquency rates or increases in that rate drop significantly.
Friday’s report out of Fitch Ratings on February trends in credit card debt pushed me to this buy. For the credit card market as a whole in the month, credit card charge-offs dropped and delinquency rates continued to improve.
Measured by Fitch’s 60-day delinquency index, late payments fell another 0.06 percentage points to 4.44%. Charge-offs on prime-rate credit cards dropped 0.1 percentage points to 11.27%. The drop would have been larger, except that some banks—Citigroup (NYSE: C), for example—continue to see rising charge-off rates even as other banks show improvement.
Why are charge-off and delinquency rates—and the turn in these rates—so important? Well, think what happens to a bank’s earnings when the bank stops increasing reserves for future losses out of current earnings: You’ll see a big spike in earnings as these deductions shrink on the bank’s income statement. That’s the turn I’m looking for and that, for some banks, I think is only a quarter or two away. For the turn to arrive, the US economy doesn’t have to get stunningly better. It just has to stabilize.
Why US Bancorp? The bank had one of the industry’s best returns on equity before the financial crisis, and I think a return to the days of 20% return on equity is certainly possible in the not-too-distant future. During the crisis, the bank has remained committed to its goal of increasing its reach and it has been one of the FDIC’s (Federal Deposit Insurance Corp.) best customers for the assets of troubled banks.
In the first quarter of 2010, for example, the bank closed its deal with BB&T (NYSE: BBT) to buy the Nevada branches of the failed Colonial Bancgroup. Also in common with most big banks, US Bancorp has relatively little exposure to the commercial mortgage problem that still hangs over the country’s smaller community banks.
As of March 26, I’m adding these shares of Jubak’s Picks with a target price of $31 a share by September 2010. This Buy reduces the cash position in Jubak’s Picks to about 12% of the portfolio.