As U.S. Bancorp (NYSE:USB) has long had a winning formula for both its banking and non-bank operations, it's no great surprise that the company continues to report very solid financials. Although its stock does not seem to offer the same upside as other names, USB looks like one of the more dependable names in the large bank universe.
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A Second Quarter Where Most Surprises Were Welcome
USB's bottom line performance was quite close to expectations (just slightly ahead), and there was little to nitpick.
Operating revenue rose about 3% from the first quarter, with pre-provision revenue up about 5%. Net interest income rose 1% and the bank saw only a very modest decline (two basis points) in net interest margin (3.58%). Fee income was up nicely (6%), with a pretty good performance in cards and merchant processing and a very good performance in mortgage banking. Although expenses were a little higher than expected, USB is doing a good job of controlling it and some of the overage was likely due to the greater lending activity.
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Speaking of lending, the bank saw a 3% sequential increase in non-covered loans, with an even stronger growth in C&I and residential mortgages. Compared to other banks like Wells Fargo (NYSE:WFC) and Commerce Bancshares (Nasdaq:CBSH) it is doing pretty well with its lending expansion and this bodes well for future net interest income and profits.
Credit quality continues to improve, and the net charge-off ratio was actually slightly below what USB's management believes is likely to be long-term trough levels. Not only is the company's credit quality looking better, but USB also diverged from peers Wells Fargo, PNC (NYSE:PNC) and SunTrust (NYSE:STI) in that it does not expect much increase in near-term mortgage repurchase requests.
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How Will the Company Grow?
These are still difficult times for the banks. Compared to most developed economies, the U.S. is over-banked and the Fed's efforts to keep rates low are making it difficult for banks to profitably expand lending.
USB is almost certain to stick to a formula that has worked so well for so long. I wouldn't be surprised to see incremental deals for in payment technology/processing (net income rose 23% in this quarter), for example. When it comes to wealth and asset management, I'm not sure where the company will go - USB seems on board with the basic premise that there's money to be made there, but the company's negative experience with Piper Jaffray (NYSE:PJC) will likely influence its future decisions.
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The Bottom Line
There was really nothing in this quarter's report that leads me to change my basic views on U.S. Bancorp. While there are no doubt investors who want nothing to do with banks, I would argue that U.S. Bancorp has a lower risk profile than most. Assuming that U.S. Bancorp can post a mid-to-high teens return on equity on a long-term basis, these shares ought to trade in the low $40s. That's not great potential when compared to Citigroup (NYSE:C) or PNC, but it's not a bad return for more conservative investors looking for a long-term holding that is less likely than average to deliver embarrassing surprises that put the CEO in front of a Congressional panel.
At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.