We are upgrading our recommendation on U.S. Bancorp (USB) to Outperform from Neutral based on its solid fundamentals in the midst of a challenging economic environment.
U.S. Bancorp reported fourth-quarter 2011 earnings of 69 cents per share. Excluding the gain from a litigation settlement and expense accrual related to mortgage servicing matters, the company reported earnings of 64 cents per share. Earnings surpassed the Zacks Consensus Estimate of 63 cents per share.
The better-than-expected results at U.S. Bancorp were driven by growth in revenue, which was supported by increases in both net interest income and fee-based revenue, and reduced credit costs. These positives were partially offset by an increase in non-interest expenses.
With a wide range of product offerings, U.S. Bancorp remains well-positioned for organic growth. Its strong retail banking franchise and leadership in payment processing should continue to create growth opportunities ahead. Moreover, the company is also focused on expanding its business through acquisitions. It has a well-balanced business model, with non-interest revenue representing nearly half of its total revenue.
Moreover, U.S. Bancorp’s improving credit quality and solid capital levels appear impressive. Though sluggish economic recovery, low interest rate environment and regulatory issues remain concerns, we believe that the company’s loan growth is encouragingand we expect the company to raise dividend payouts and share buybacks following the stress test results.
Notably, besides U.S. Bancorp, major U.S. banks such as Bank of America Corp. (BAC), Citigroup Inc. (C), JPMorgan Chase & Co. (JPM) and Wells Fargo & Company (WFC) have already submitted their capital plans for the stress test and are awaiting results. They need to demonstrate adequate capital to address potential losses over the next two years under several stressful scenarios.
U.S. Bancorp currently retains its Zacks #3 Rank, which translates into a short-term Hold rating.
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