Company Reports

Along with first-quarter results, U.S. Bancorp lowered both its 2024 net interest income and expense guidance, but this doesn’t change our long-term outlook for the wide-moat company, so we are maintaining our $53 fair value estimate and assess that shares are undervalued. The company reported net income to common shareholders of $1.2 billion, or $0.78 per diluted share, on $6.7 billion of net revenue. Excluding notable items such as $155 million of integration costs and an additional $110 million FDIC special assessment charge, diluted earnings per share would have been $0.90.

U.S. Bancorp is the largest non-GSIB in the U.S. and has been one of the most profitable regional banks we cover. Few domestic competitors can match its operating efficiency and returns on equity over the past 15 years. While the bank has performed admirably, if we were to have a complaint, it would be that the bank has had a hard time further optimizing efficiency and returns while some peers seem to be gradually "catching up" over time.

Our thesis on the U.S. banks following the Silicon Bank fallout was that all of the banks we covered, except for First Republic (which we downgraded to a $3 fair value estimate on March 20, 2023, and a $0 fair value on April 27, 2023), would be able to weather the storm. We believed that banks in trouble were in uniquely risky positions. We believe this thesis has largely held up, and sorting through banks based on their unique risk profiles remains necessary and valuable. To the extent that the market is selling off all banks because of what has happened to NYCB, we think there could be opportunities once again while acknowledging the significant time horizon risk (how long does it take for the banks to prove to the market they are fine) and the choppy waters that could occur in the meantime (we expect more commercial real estate related loan losses in the future).

Wide-moat-rated U.S. Bancorp reported decent fourth-quarter and full-year results. For the year, the company reported net income to common shareholders of $5.05 billion, or $3.27 per diluted share. In the fourth quarter, net income to common shareholders was $766, or $0.49 per diluted share. If notable items are excluded from the fourth quarter, such as a $734 million FDIC special assessment, adjusted earnings per share would be $0.99. We don’t anticipate making a material change to our $52 fair value estimate for U.S. Bancorp and assess shares as moderately undervalued.

U.S. Bancorp is the largest non-GSIB in the U.S. and has been one of the most profitable regional banks we cover. Few domestic competitors can match its operating efficiency and returns on equity over the past 15 years. While the bank has performed admirably, if we were to have a complaint, it would be that the bank has had a hard time further optimizing efficiency and returns while some peers seem to be gradually "catching up" over time.

Wide-moat-rated U.S. Bancorp reported what we consider to be another average quarter. Third-quarter earnings per share of $0.91 was a slight miss versus the FactSet consensus estimate of $0.96 but was ahead of our own expectations due to lower provisioning. Net interest income, or NII, for the quarter was within 1% of our expectations, while fees and expenses were essentially in line. Deposit costs ran a little higher than we projected, although assuming we are getting to the end of the current rate cycle, we would expect funding movements to slow down.

U.S. Bancorp is the largest non-GSIB in the U.S. and has been one of the most profitable regional banks we cover. Few domestic competitors can match its operating efficiency and returns on equity over the past 15 years. While the bank has performed admirably, if we were to have a complaint, it would be that the bank has had a hard time further optimizing efficiency and returns while some peers seem to be gradually "catching up" over time.

Wide-moat-rated U.S. Bancorp reported what we consider to be another average quarter. However, we believe the shares have been materially undervalued, and when they are as cheap as they have been, sometimes it only takes an average quarter to encourage some rerating by the market. We think the market is most excited about management’s increased specificity and guidance with regard to the capital build process. Our thesis has been that capital levels would be fine, but while the math worked from our perspective, the market remained hesitant. We thought a key catalyst would be simply proving that the capital story would play out.

The Federal Reserve has released the results of its annual stress tests. Our key takeaway is that the banking system remains well capitalized, and stress capital buffers, or SCBs, are likely to be declining for nearly half of the banks we cover who participated in the test this year. This will bring some capital relief to some key names under our coverage, including JPMorgan, Bank of America, M&T Bank, Goldman Sachs, and Morgan Stanley. Whether or not management teams will actually lower their internal common equity Tier 1 targets is another story. As they await other potential regulatory changes, we expect most would choose to err on the side of holding more capital rather than less. Even so, we would view these banks as the big winners from this year’s stress tests as results are set to give these banks more buffer space for now.

U.S. Bancorp is the largest non-GSIB in the U.S. and has been one of the most profitable regional banks we cover. Few domestic competitors can match its operating efficiency and returns on equity over the past 15 years. While the bank has performed admirably, if we were to have a complaint, it would be that the bank has had a hard time further optimizing efficiency and returns while some peers seem to be gradually "catching up" over time.

The Federal Reserve released its review of what went wrong with supervision and regulation of Silicon Valley Bank. There are still no official new regulatory proposals, but this is the first official clue about where the regulators are heading. Our thesis was that regulations were going to change but that they would be manageable changes phased in over a period of several years. This is why we do not think capital raises are likely for the banks under our coverage. We think this is a key point because prices currently seem to be implying permanently impaired profitability or capital raises for multiple banks under our coverage. We think this is too harsh.

Wide-moat-rated U.S. Bancorp reported what we see as average results. The bank’s deposit base and funding costs are tracking roughly as would have been expected even before the Silicon Valley Bank implosion, although the bank’s through-the-cycle deposit beta estimate of 40% is just above what we were previously projecting (39%). A sequential deposit decline of 4% and a shift into interest-bearing deposits, which now account for 75% of the deposit base, still fit well within our previous expectations of a 5% drop for the year and interest-bearing deposits growing to 77% of deposits.

As we look at the U.S. banks, we believe the sector is currently undervalued. However, in an effort to help investors focus their efforts, we are highlighting Comerica, U.S. Bancorp, and Citigroup—each has its own risk/reward setup.

We have updated our fair value estimates for a number of regional banks in our coverage (M&T Bank: $179 to $163, Fifth Third Bancorp: $42 to $38, Regions Financial: $21 to $19, KeyCorp: $24 to $21, Huntington: $17 to $15, Comerica: $86 to $79 , Zions: $66 to $58, Cullen/Frost: $133 to $124 ). We did this based on an expectation of increased funding costs, some pressure on deposit bases (in other words, deposit outflows), and potentially lower securities yields in the future due to potential changes in bank regulations (which would likely force banks to hold more short-term treasuries instead of their current preference for mortgage-backed securities).

We are increasing our Morningstar Uncertainty Rating on our U.S. regional banking coverage (excluding U.S. Bancorp and PNC Financial Services) to High from Medium, to reflect the increased uncertainty associated with predicting what the deposit base, funding costs, and regulatory costs will look like in the future. We’re leaving the Uncertainty Ratings on the largest banks unchanged, as we believe they are less likely to experience deposit base volatility.

With the U.S. banking system coming under heightened liquidity pressure, we had speculated that the Federal Reserve might step in and provide some sort of solution. There was a lot of speculation about what mechanism/s could be used, and one of our favorites was simply allowing banks to exchange their underwater securities, at par, with the Fed. This has the benefit of taking away any concerns about being forced to sell these securities at fair value and therefore taking a hit to capital while also exposing the U.S. taxpayer to minimal risk of loss, as most securities held by the banks are either agency-backed MBS or Treasuries.

Bank stocks sold off meaningfully on March 9 as Silicon Valley Bank announced that it would have to take a number of “strategic actions,” including selling off its entire available-for-sale securities portfolio (incurring a $1.8 billion aftertax loss, or roughly 15% of the bank’s tangible common equity as of Dec. 31, 2022), announcing it is seeking to raise $2.25 billion in additional capital, and increasing its use of “term borrowings” (essentially higher-cost but more stable funding). Aside from crypto-related meltdowns, this is one of the first banks we’ve seen that has really suffered a liquidity crunch that has forced it to restructure the balance sheet and realize losses on its securities portfolios.

U.S. Bancorp is the largest non-GSIB in the U.S. and has been one of the most profitable regional banks we cover. Few domestic competitors can match its operating efficiency and returns on equity over the past 15 years. While the bank has performed admirably, if we were to have a complaint, it would be that the bank has had a hard time further optimizing efficiency and returns while some peers seem to be gradually "catching up" over time.

Wide-moat-rated U.S. Bancorp reported fourth-quarter adjusted earnings per share of $1.20, beating the FactSet consensus estimate of $1.12. Our own estimate was also $1.12. Adjusted revenues for USB (excluding Union Bank) were $6.47 billion, just a bit below consensus of $6.62 billion and in line with our own estimate of $6.46 billion. We wouldn't read too much into results versus consensus this quarter, as the bank just closed its acquisition of Union Bank on Dec. 1, and there is always a lot of noise during the middle of an acquisition. Instead, getting a feel for 2023 guidance was going to be more useful.

U.S. Bancorp is one of the strongest and best-run regional banks we cover. Few domestic competitors can match its operating efficiency, and for the past 15 years the bank has consistently posted returns on equity well above peers and its own cost of equity. U.S. Bancorp’s diversified fee revenue and its consistently excellent core banking operations make us like the company's positioning for the future. If we were to have a complaint, it would be that the bank was already on top of its game years ago, making it difficult for the firm to further optimize efficiency and returns, while peers seem to be gradually "catching up" over time.