U.S. Bancorp Is Still Underappreciated

TheStreet.com

NEW YORK (TheStreet) -- Shares of U.S. Bancorp are still having a hard time gaining any sort of momentum following the bank's first-quarter earnings report. Although the stock has been up lately, shares have barely moved since January.

U.S. Bancorp has been a consistent performer in the financial sector for a number of years but the bank is taken for granted because it's not JPMorgan Chase or Wells Fargo . It doesn't have to be. Investors should appreciate U.S. Bancorp has not had the struggles of Bank of America and Citigroup .

The only "mistake" U.S. Bancorp has committed is lacking flair. When it comes to the metrics that should really matter -- operating margin, earnings per share and return on equity -- there are very few banks that can match USB's performance.

But can it continue?

Although the first-quarter results didn't overwhelm, including a 1% decline in operating revenue, relative to expectations, the performance wasn't all that bad. Besides, after having taking time to dissect earnings reports from some of the more prominent banks mentioned above, growth has been lacking across the board.

At USB, operating revenue fell 1% year over year and 5% sequentially. Although this is not entirely a surprise, the company posted strong growth in the previous January quarter of 5%, so some air was let out of USB's sails. Fee income was softer than expected, down 4% year over year and 7% sequentially. While U.S. Bancorp is not alone in these struggles, making a case for respect is hard when you're not showing much differentiation.


However, when keeping up with the same performance criteria, USB actually bested solid performers JPMorgan and Wells Fargo in some key areas. For instance, USB posted a 1% increase in net interest income (NII), while also posting strong results in average earnings assets.

By contrast, JPMorgan's net interest income declined 6% year over year and 2% sequentially due to margin erosion. Although USB's net interest margin (NIM) also declined by 12 basis points, this was almost half of JPMorgan's decline. Along similar lines, Wells Fargo's NIM declined 33 basis points from last year, which lead to a 3% year-over-year decline in net interest income.

Granted, the first-quarter report wasn't USB's best performance. However, it's hard to get too discouraged given the subpar performance within the sector. Plus, it was also encouraging USB's management figured out ways to lower expenses, which helped offset the sub-par showing in fees. This is while at the same time negating the double-digit declines in mortgage banking.

Management's ability to lower expenses and in particular, establishing a fiscal focus, is important to note here. Given how heavily scrutinized banks have been by the Fed in terms of regulations to prevent "too big to fail" scenarios, USB's efficiency ratio actually shrunk below 51%.

By contrast, Wells Fargo's efficiency ratio is slightly above 57%, while JPMorgan's is just below 60. The lower the number, the stronger the bank is perceived to be. So, here, too, U.S. Bancorp is demonstrating that it just might be safer than two of the better names in the sector.


What's more, USB's impressive expense control, which contributed to a lower-than-expected loan loss provision, resulted in a 1% increase in pre-provision net revenue (PPNR). Even though PPNR arrived down 4% sequentially, it matched Wells Fargo's performance on the upside, while also outperforming on the downside -- losing 4% sequentially versus Wells Fargo's 7%.

With all of these factors at place, U.S. Bancorp seems underappreciated. The question, though, is to what extent management can invigorate growth to get investors excited about these shares. With the stock trading at $32 per share, this bank is certainly one of the best value plays in the financial sector, if not in the entire market.

While USB is not as large as some of the bigger banks on the market, investors should realize that it is second to none in terms of return on equity. With improved operating revenue and profit growth, these shares can reach $40 in the next six to 12 months.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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