U.S. Bancorp is one of the largest regional banks in the country.
Luke Sharrett/Bloomberg
Shares of U.S. Bancorp have returned about 1% this year, trailing the Invesco KBW Bank exchange-traded fund’s return by about one percentage point. That’s nothing to write home about.
Still, Michael Liss, senior portfolio manager at American Century Investments, isn’t put off. He ascribes the large regional bank’s lackluster performance to it being less dependent on rising interest rates than many other banks are.
“We are not looking for the bank that has the most leverage to interest rates because when interest rates go the other way, that bank [stock] will get creamed,” says Liss, who holds U.S. Bancorp (ticker: USB) in several portfolios, including the firm’s equity-income and value funds.
He characterizes the Minneapolis-based company as “the highest-quality super-regional large bank out there.”
Conventional wisdom holds that banks benefit from rising interest rates. That’s because what they earn on their assets, notably loans, should go up faster than what they pay on their liabilities, including deposits. The spread—or net interest income—should widen.
Yet while U.S. Bancorp will benefit when the Federal Reserve begins to raise short-term interest rates in the near future—its net-interest income totaled nearly $3.2 billion in the fourth quarter—it also had a big contribution from noninterest income, including fees. Business lines such as credit cards, card processing for merchants, wealth management, and trust banking chipped in about $2.5 billion.
“They have a very diversified revenue stream,” says Liss. That’s “so important because when there’s a downturn, this bank’s earnings usually hold up better relative to most banks out there.”
With assets totaling $573 billion as of Dec. 31, U.S. Bancorp isn’t as big as, say, JPMorgan Chase (JPM) at $3.7 trillion recently. But Liss notes that U.S. Bancorp is one of the largest regional banks in the country with plenty of scale and the resources to make a big investment in technology—including digital banking.
He also points to what he considers to be a conservative loan underwriting culture and strong capital levels as reasons for holding the stock. Credit quality remains good, as evidenced by a net charge-off ratio of 0.23% in 2021, down from 0.58% the previous year.
A sweetener for investors is that the shares were recently yielding 3.3%. Last year the company declared dividends totaling $1.76 a share on earnings of $5.10 a share—a reasonable payout ratio of about 35%.
“They are not stretching to pay that by any means,” says Liss.
Another positive sign to Liss is that the company’s average total loans grew by 2% in the fourth quarter compared with the previous three months. He expects that to pick up as the economy continues to reopen following the pandemic.
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Underwriting more loans isn’t the only avenue for growth. Another is mergers and acquisitions.
U.S. Bancorp is planning to acquire MUFG Union Bank’s core regional banking franchise in a stock and cash deal expected to cost about $8 billion, according to U.S. Bancorp.
At $56.53 recently, the stock changed hands at around 13 times the consensus FactSet 2022 earnings estimate of $4.36 a share—neither cheap nor expensive, as Liss views it.
He thinks the stock should offer a return of about 10% over the next 12 to 24 months, dividends included.
That’s not all that exciting but “It offers a better risk-reward relative to a lot of other options,” Liss says.
Write to Lawrence C. Strauss at lawrence.strauss@barrons.com
Source: barrons.com
