Can U.S. Bancorp Deliver 10–15% Returns Over 5 Years?

Key Concepts

• US Bancorp (USB): A large regional bank in the US, considered a "too big to fail" or systemically important financial institution.
• Fee Income: Revenue generated from services other than lending, such as credit card fees and investment management fees.
• Credit Loss Provision: An amount set aside by a bank to cover potential losses from loans that may not be repaid.
• Systemically Important Financial Institution (SIFI): A financial institution whose failure could have a significant negative impact on the broader financial system.
• Return on Assets (ROA): A profitability ratio that measures how efficiently a company is using its assets to generate profit.
• Net Interest Margin (NIM): The difference between the interest income generated by a bank and the interest it pays out to depositors and lenders.
• Efficiency Ratio: A measure of a bank's operational efficiency, calculated as non-interest expenses divided by total revenue.
• Operating Leverage: The extent to which a company's costs are fixed rather than variable.
• Price to Book Value (P/B Ratio): A valuation metric that compares a company's market capitalization to its book value.
• Dividend Yield: The annual dividend payment per share divided by the stock's current share price.
• Regulatory Environment: The set of rules and regulations that govern the banking industry.
• Interest Rates: The cost of borrowing money or the return on lending money.
• Deposit Costs: The interest a bank pays to its depositors.
• Fixed Loans: Loans where the interest rate remains the same for the entire loan term.
• Regional Banking Drama: Refers to the instability and concerns that affected regional banks in 2023.

US Bancorp Scorecard: A Deep Dive

This summary details the evaluation of US Bancorp (USB) by Motley Fool's Anand Chokkavelu, Lou Whiteman, and Matt Frankel, using a 1-10 rating system across several categories.

Industry and Competition

• Overall Rating: Both Lou Whiteman and Matt Frankel awarded US Bancorp an 8 out of 10.
• Key Strengths:
  • Historically, US Bank is recognized as one of the best-run and most financially sound banks globally.
  • It was the only one among the top 10 US financial institutions to remain profitable throughout the entire financial crisis.
  • Despite being a regional bank, it is classified as a "too big to fail" or systemically important financial institution (SIFI), placing it in a unique position.
  • 40% of its revenues are derived from fee income, which is considered a positive attribute. This includes revenue from credit card fees and investment management fees.
• Points of Interest/Caution:
  • US Bank's decision to raise its credit loss provision in the third quarter was noted as an interesting point, contrasting with the actions of other large banks.
• Expert Commentary:
  • Matt Frankel highlighted that US Bank has earned a reputation for being exceptionally well-managed. He described banking as a simple business of buying and selling money with minimal friction, and US Bank excels at this.
  • Lou Whiteman praised the bank's product mix, its non-New York focus, and the balance between retail and commercial operations at scale, including a significant mortgage business. He characterized the bank as conservative and getting things right, justifying the solid 8 rating.

Management

• Overall Rating: Lou Whiteman gave a 7 out of 10, while Matt Frankel gave an 8 out of 10.
• Key Points:
  • The rating is influenced by the new CEO, Gunjan Kedia, who took over in April.
  • Kedia previously served as the bank's president and has been with US Bank since 2016. She also held leadership roles at other institutions like State Street.
  • There is confidence that Kedia is the right choice, given US Bank's history of selecting strong leaders.
• Expert Commentary:
  • Matt Frankel stated that his rating might change in a year or two, acknowledging the newness of the CEO. He expressed confidence in Kedia, noting her prior experience helping banks with best practices, indicating a deep understanding of the industry.
  • Lou Whiteman echoed Matt's sentiment about Kedia being new, hence the 7 rating. He emphasized that Kedia's predecessor had a four-decade tenure, and she replaced Richard Davis, who was instrumental in building the bank. The bank's practice of internal hiring and strong leadership lineage ("great bloodlines") is seen as a positive. Kedia is given the benefit of the doubt but needs time to prove herself.

Financials

• Overall Rating: Lou Whiteman rated it an 8 out of 10, and Matt Frankel gave a 7 out of 10.
• Key Strengths:
  • US Bank is a highly profitable institution.
  • Its return on assets (ROA) is significantly above the industry average.
  • The net interest margin (NIM) shows improvement.
  • The bank demonstrates great credit quality.
  • The efficiency ratio improved by 400 basis points in the last two years.
• Areas for Consideration:
  • Growth is relatively slow compared to other banks on their radar.
  • Deposits were roughly flat year-over-year, and loans grew by only about 1%.
  • The presence of a significant number of commercial loans on the balance sheet is viewed as a potential red flag by Matt Frankel.
• Expert Commentary:
  • Lou Whiteman argued that the slow growth in the current economy is precisely why he rates it an 8, seeing it as a sign of a well-run and cautious bank. He noted that US Bank is forecasting 200 basis points of operating leverage and improvement driven by its fee income momentum.
  • Matt Frankel acknowledged the bank's strength as a fee producer and its non-lending-based income. However, he deducted points because investors have to pay a price over book value and the dividend yield is sub-4%. While a sub-4% yield is good in banking, it's not exceptionally high. He concluded that despite these points, there's a lot to like, calling it a "boring but good" solid operator.

Valuation

• Expected Stock Performance (Next 5 Years):
  • Lou Whiteman: 10-15% annual return, potentially towards the upper edge of 15% when factoring in the dividend. He considers it a "market beater from here," though not a "rocket ship."
  • Matt Frankel: 10-15% annual return, expecting it to be a "market perform over the long run, but a market beater over the next five years."
• Safety:
  • Lou Whiteman: 7 out of 10. He acknowledges that banking has inherent risks but emphasizes US Bank's lack of drama and consistent performance, making it a strong "sleep at night" stock.
  • Matt Frankel: 6 out of 10. He believes the banking sector is entering a generally strong environment with a more regulatory-friendly landscape and declining interest rates that should help with deposit costs. He notes that a good portion of their loans are fixed. However, he cautions that banking is at the mercy of the economy, and unforeseen events can impact stock prices, as seen in 2023 when the regional banking drama affected even fundamentally sound banks like US Bank. The five-year outlook involves significant uncertainty.

Overall Score and Conclusion

• Combined Score: US Bancorp received a strong overall score of 7.4 out of 10.
• Comparison to Other Banks:
  • For larger banks, Matt Frankel prefers Bank of America as a top pick.
  • Lou Whiteman prefers Truist.
• Final Thoughts: The evaluation highlights US Bancorp as a well-managed, financially sound, and stable institution with a strong fee income component. While its growth is slower and its valuation might not be as cheap as some other options, its operational excellence and historical resilience make it a compelling investment, particularly for those seeking a less volatile banking stock. The new CEO's tenure is a key factor to watch.

Next Steps

• A new Motley Fool Scoreboard is released every market day at 7:00 PM Eastern.
• The next segment will focus on a much smaller regional bank, Bank OZK.