US Bancorp shines in the quarter

The stock closed up more than 1% Tuesday after the bank reported strong quarterly earnings.

By Jim J. Jubak Apr 17, 2012 4:09PM
Image: bank ATM (© Image Source/Corbis/Corbis)Now that's what strong bank earnings look like.

Tuesday morning, U.S. Bancorp (USB) reported earnings of 67 cents a share (or 70 cents a share including releases from loan-loss reserves.) Wall Street analysts had been projecting earnings of 64 cents a share. (U.S. Bancorp is a member of my Jubak's Picks portfolio.)

Other banks have beaten estimates so far this quarter but none have shown quite the strength across all key metrics as U.S. Bancorp. Average loan growth came to 6.4% year-to-year as commercial loans rose by 17.3%. Residential mortgages rose 19% from the first quarter of 2011. Average deposits increased by $5 billion or 11% year-to-year.

Credit quality continued to improve, with non-performing assets falling 6% from the fourth quarter of 2011. That was a slowdown in the rate of improvement, since non-performing assets fell by 15% in the fourth quarter from the third, but that's only logical since credit quality has already shown so much improvement. Net charge-offs came to $571 million for the quarter, a drop of 8% from the fourth quarter of 2011. U.S. Bancorp released $90 million from its loan loss reserves and in the company's conference call management told analysts to expect that reserve releases will continue to show a slower pace in 2012.

The bank's Tier 1 common equity ratio using the Basel III rules is now 8.4%, well above the 7% minimum. Return on equity climbed to 16%. The bank raised its quarterly dividend to 19.5 cents a share after the Federal Reserve's stress test from a prior 12.5 cents.

The items that I'd been worried about going into the quarter turned out not to be a problem. Net interest margin came in flat with the fourth quarter -- I'd been worried about a decline. Operating expenses were also flat from the forth quarter.

The stock isn't especially cheap now -- compared to other bank stocks you're paying a premium for the bank's premium performance -- but the shares are still selling at just 10.9 times projected 2012 earnings per share. Since U.S. Bancorp continues to gain market share, and since the shares pay a 2.5% yield, I think this still a stock worth holding. As of Tuesday, I'm raising my target price to $37 a share by October 2012 from the previous of $35 a share.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. The fund did own shares of U.S. Bancorp as of the end of December. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. 

Tags: USB


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