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Morningstar | Steady Results for U.S. Bancorp, Still Looking for Loan and Noninterest Income Growth

Wide-moat U.S. Bancorp reported decent second-quarter results that fit well within our expectations. We are increasing our fair value estimate slightly, to $54 per share from $53, which values the bank at 12.4 times our 2019 diluted earnings per share estimate and 2.6 times tangible book value at the end of the quarter. While growth again appeared lackluster (a theme from last quarter), other key metrics continued to show steady gains. Return on average common tangible equity improved to 19.8%, a 600-basis-point improvement over last quarter, and the return on average assets improved to 1.54% from 1.5% last quarter. One of the issues, if you can call it that, we see with U.S. Bancorp is that it was already one of the most well-run banks we cover, so while other banks are improving and playing catch-up operationally, U.S. Bancorp  has less room for improvement because it was already so optimized to start. This may make the bank look like it is making fewer gains comparatively, but overall the bank is still improving returns and maintaining its industry leading ROE’s. U.S. Bancorp is in the middle of a period of increased technology investment, and we expect this to pay off over the longer term and like that the bank is the largest of our regional bank coverage, which we believe will help as scale and national presence matter more over the long term.

Loan growth had a similar theme as the previous quarter, with slower growth, and the bank continued to roll off certain portfolios and play conservatively in the CRE space (which we can appreciate). Credit quality remained stable as all key measures of quality and cost remained range-bound, a situation likely to persist for the remainder of 2018. Net interest margins were steady quarter over quarter, as increases in funding costs and changes in funding mix balanced out gains in increasing asset yields. It is not surprising to us that time deposits are the fastest growing portion of the deposit base and that some of the gains in NIMs we have seen are beginning to dissipate. Noninterest income growth remained fairly weak on a year-over-year comparison, as mortgage business fees continue to lag and as we still await a pick-up in merchant acquirer fees. As corporate activity picks up following tax reform and merchant acquiring gathers more steam following a slower 2017, we expect this to increase in the latter half of 2018. Finally, expenses were well controlled--up 3.4% year over year--and we expect solid operating leverage for 2018 and for at least several years following 2018, as well.

U.S. Bancorp increased its quarterly dividend to $0.37 following the latest round of stress tests. Because the bank is above the $250 billion asset threshold, it will not see as much relief from the stress test as some of its counterparts, but we would still expect steady share repurchases of over 10 million shares per quarter and steady growth for the dividend from here. Given the bank's already more efficient common equity Tier 1 ratio levels, we also only see average gains for ROE's coming from reducing capital.

For a more in-depth take on capital returns in the banking industry and the effects of changing stress-test regulations, please see our special report, "New Regulatory Proposals Will Change Stress Test Landscape," published on July 8.