EUR 850.00 For Business Accounts Only

Morningstar | U.S. Bancorp: Steady Earnings in 3Q, Pick Ups in Commercial Activity and Merchant Acquiring Positive

Wide-moat U.S. Bancorp reported solid third-quarter results that fit well within our expectations. We are maintaining our fair value estimate of $54 per share, which values the bank at 12.4 times our 2019 diluted earnings per share estimate and 2.5 times tangible book value at the end of the quarter. While lackluster growth has been a theme from the last several quarters, we did see some positive signs this quarter. Average loans were up a full percentage point compared with second quarter, better than any other quarter this year. Net interest income also saw stronger gains, up 1.7% compared with the second quarter. Expenses also remained well controlled, as did credit costs. The return on average common tangible equity improved slightly, to 19.9% from 19.8% last quarter. The return on average assets improved to 1.58% from 1.54% last quarter.

Overall, U.S. Bancorp continues to maintain its industry-leading returns on tangible equity, however, we note that the bank is likely reaching its full potential here. There is still some room for capital efficiencies, as the bank had a common equity Tier 1 ratio of 9% during the quarter, compared with management’s goal of 8.5%. U.S. Bancorp is also in the middle of a period of increased technology investment, so there are likely still some efficiency gains to be had as well as some benefit still remaining from asset growth and rising interest rates. However, credit costs are at cyclical lows, and we would expect a normalizing credit environment to eat up much of the future gains we see for U.S. Bancorp and for the industry in general. Even so, we believe U.S. Bancorp’s consistently strong performance justifies its current valuation.

Loan growth finally began to pick up, and we appreciated management’s comments on a pickup in capital expenditures among commercial clients. Overall, with strong GDP growth and a pickup in investment, we would expect banks to benefit. We also appreciated continued comments about playing conservatively in the CRE space. We have heard comments like this from several of the banks under our coverage, particularly around CRE lending. Credit quality remained pristine, a situation likely to persist for the remainder of 2018. Net interest margins were up slightly, just 2 basis points quarter over quarter, as increases in funding costs and changes in funding mix balanced out gains in increasing asset yields. We expect there is still some room for net interest margin expansion for the bank over the next couple years. Noninterest income growth was decent, at just over 3% year over year. The merchant acquiring business is finally gathering more steam following a slower 2017 and first half of 2018. Finally, expenses were well controlled--up just 1.5% year over year--and we continue to expect solid operating leverage for 2018 and for at least several years following 2018, as well.