U.S. Bancorp (USB) — a conservative Top Pick for 2021 — is one of the country’s largest banks, with a focus on business and consumer lending as well as payment services and wealth management, states Bruce Kaser, editor of Cabot Undervalued Stocks Advisor.

Unlike its larger peers, it has essentially no investment banking or trading operations. Like many banks, U.S. Bancorp is out of favor, as investors worry about a potential surge in credit losses due to the pandemic.

Its third-quarter non-performing assets were 30% larger than a year ago and credit problems may increase further should federal income support and stimulus funding be removed.

Further weighing on shares is the profit-draining low interest rate environment, particularly as the Fed’s guidance points to low rates for a long time.

However, U.S. Bancorp is one of the best-run banks in the country. Long known for conservative lending, its non-performing assets are only 0.41% of its total assets, lower than most peers and only modestly higher than a year ago.

The bank has set aside reserves for bad loans equal to 2.61% of total loans — a remarkably high amount and equal to 6.3x its non-performing assets. Unlike the prior cycle, home mortgage lending today is a source of strength.

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U.S. Bancorp’s capital ratio remains robust, particularly given its sizable credit reserves. Importantly, the bank maintains a tight cost control culture. A new $3 billion share buyback program will start this month.

We see little further profit pressure from low interest rates. Any increase in rates could boost profits. USB shares trade at a reasonable 12.1x estimated 2022 earnings and offer a rock-solid 3.4% dividend yield.

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