Business Strategy and Outlook
U.S. Bancorp is one of the strongest and best-run regional banks we cover. Few domestic competitors can match its operating efficiency, and for the past 15 years the bank has consistently posted returns on equity well above peers and its own cost of equity. U.S. Bancorp’s exposure to moaty nonbank businesses and its consistently excellent core banking operations make us like the company’s positioning for the future. If we were to have a complaint, it would be that the bank was already on top of its game years ago, making it difficult for the firm to further optimize efficiency and returns, while peers seem to be gradually “catching up” over time.
U.S. Bancorp has an attractive mix of fee-generating businesses, including payments, corporate trust, investment management, and mortgage banking. The payments and trust businesses tend to be highly efficient and scalable due to relatively fixed cost structures. Barriers to entry tend to be high as the initial investment and scale necessary to compete are prohibitive, although competition within payments has heated up in the last several years as software and technology offerings are increasingly important.
Financial Strength
The company’s balance sheet is sound, its capital investment decisions are exemplary, and its capital return strategy is appropriate. U.S. Bancorp is currently above management’s targeted common equity Tier 1 ratio of 8.5%-9%, with a ratio of 10% as of the fourth quarter of 2021, and we view the current goal as appropriate. Bancorp has avoided investing capital in value destroying products, such as GFC era MBS, while simultaneously pursuing value-adding acquisitions and organic growth. Over the last decade plus, U.S. Bancorp has generally maintained its position as the highest returning, most efficient franchise.
On an EPS basis, wide-moat-rated U.S. Bancorp reported OK fourth-quarter earnings of $1.07 per share, roughly in line with the FactSet consensus of $1.10 and ahead of our estimate of $1.01. However, the trends for the bank’s payment-related fees were not the strongest. The beat was largely attributable to additional reserve releases, which is not a core earnings driver. On the other hand, payment fees, where U.S. Bancorp is more exposed as a percentage of revenue than any other bank we cover, were down across the board sequentially.
Bulls Say’s
- Strong fee revenue in moaty businesses, such as payments, helps insulate U.S. Bancorp from a flatter yield curve environment and drive higher returns on equity.
- The bank’s upcoming acquisition of MUFG Union Bank should provide additional revenue growth, expense synergies, and value for shareholders.
- As payments-related balances and fees come back in 2022, it should provide another earnings growth lever for U.S. Bancorp.
Company Profile
As a diversified financial-services provider, U.S. Bancorp is one of the nation’s largest regional banks, with branches in well over 20 states, primarily in the Western and Midwestern United States. The bank offers many services, including retail banking, commercial banking, trust and wealth services, credit cards, mortgages, and other payments capabilities.
(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
