Rough seas for even the best of banks

Placing a value on US Bancorp depends a lot on the future of the banking sector.

By Jim J. Jubak Oct 21, 2011 7:25PM
This is about as good as it gets in U.S. banking these days. Which is to say, not great.

But US Bancorp (USB) continues to show that it’s more than ready to take advantage of the turn when it comes.

On Oct. 19, before the New York market opened, US Bancorp reported third-quarter earnings of 64 cents a share. That was 2 cents a share above the Wall Street consensus.

Revenue grew by 4.5% from the third quarter of 2010, and unlike the big New York banks, US Bancorp also showed sequential revenue growth as well. Revenue was up 2.2% from the second quarter of 2011. At $4.8 billion, it was comfortably above the $4.71 billion expected by Wall Street.

The fundamentals of the bank’s business remained very solid:
  • Provisions for credit losses dropped by $475 million.
  • Net interest income (what the bank earns on the difference between what it pays for the funds it needs and what it charges on the loans it makes) grew by 5.9% year-to-year.
  • Non-interest income (the fees for payments, service charges, commercial products, and trust management) edged up by 2.9%.
  • Average loan growth rose by 4.5% (excluding acquisitions) year-to-year. This may not sound like much of a growth rate, but it's the highest growth rate for loans I’ve seen from a bank this earnings season.
  • Average total deposits grew 13.2% (again, excluding acquisitions) year-to-year.
  • What’s called average low-cost deposits grew by 23%. These are deposits in accounts such as non-interest bearing checking accounts that don’t pay much interest. They’re a key bank strength these days, when many banks are forced to raise capital rather than borrow funds in the short-term markets.
  • Charge-offs on bad debt was lower than expected, at $669 million (instead of $750 million) and down 10.4% from the second quarter. Nonperforming assets were just 1.6% of loans.
  • Tier 1 core capital was 10.8% at the end of the quarter.
Two things concern me. First, there was a drop in net interest margin of 0.26 percentage points from the last quarter. A falling net interest margin is what you’d expect from current Federal Reserve policy designed to hold down long-term interest rates, but it’s still not good for earnings at any bank.

And while non-interest income climbed, it fell short of the growth I’d expect from US Bancorp under normal banking conditions.

But then these aren’t normal times for banks, are they?

How you value US Bancorp depends on how long you think it is before U.S. banking gets back to something like normal. I think that’s further down the road than I thought when I set a $35 target price for the stock in July.

I’d now put a $33 12-month target price on the shares. The stock also currently pays a 1.7% dividend.

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 US Bancorp as of the end of June. 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. 

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