U.S. Bancorp Shows How It's Done

By Ryan C. Fuhrmann | April 23, 2012 AAA

U.S. Bancorp (NYSE:USB), which qualifies as a super-regional bank in the United States, reported impressive first quarter results earlier in the week. Its shareholder returns and recovery from the depths of the credit crisis should serve as an example to investors and other financial institutions. Going forward, there is also room for further improvement in shareholder returns.

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First Quarter Recap
Net interest income, or the difference between what U.S. Bancorp earned on the loans it makes and the interest it pays on deposits and related cost of funds, rose 7.4% to $2.6 billion. Provisions for credit losses dropped sharply, decreasing 36.3% to $481 million and meant that net interest income after subtracting out these provisions jumped nearly 27% to $2.2 billion. Noninterest income, which stems from fees earned on credit cards, ATM transactions and deposit service charges, advanced 11.3% to $2.2 billion, to account for the other half of the top line.

Higher noninterest expense and income tax expense didn't really dent net income growth, which came in at 26.8% and grew to $1.3 billion, or 67 cents per diluted share. Of this, U.S. Bancorp paid out 19.5 cents in quarterly dividends. It recently raised its annual dividend to 78 cents per share.

SEE: Understanding The Income Statement

Outlook and Valuation
For the full year, analysts currently project revenue growth of 3.3% and total revenues of nearly $20 billion. They expect earnings of $2.68 per share, which, based off the current stock price of $31.4 per share, means a forward P/E of 10.45.

The Bottom Line
U.S. Bancorp's return on equity for the quarter was 16.2% and about as high as investors are going to find in the banking industry. Regional peers such as PNC Financial (NYSE:PNC), BB&T Corp (NYSE:BBT), Frost Bank (NYSE:CFR) and Comerica (NYSE:CMA), closed out last year with ROEs only in the single digits, albeit most were in the high single digits.

The flip side is that the bank trades at close to twice book value, which is about as high as can be found in the industry. However, the bank is being valued based off its earnings growth prospects, which, again, are among the strongest in the industry. There is also potential for dividend increases. Prior to the credit crisis, the bank paid out just over 53% of earnings as dividends. This suggests a payout as high as $1.37 per share, or an annual dividend rate of 4.4%, based on the current share price.

SEE: 5 Must-Have Metrics For Value Investors

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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

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