U.S. Bancorp Earnings: Capital Build Process and Capital Levels Are Fine, as Expected

U.S. Bancorp Stock at a Glance

• Fair Value Estimate: $53.00
• Morningstar Rating: 5 stars
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: Wide

U.S. Bancorp Earnings Update

U.S. Bancorp USB reported what we consider another average quarter. However, we believe its 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 around 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 the capital story would play out.

In the second quarter, the bank improved its reported common equity Tier 1 ratio by 60 basis points, to 9.1% from 8.5% (ahead of what we expected), as it accelerated certain moves to optimize risk-weighted assets. While accumulated other comprehensive income moved against the bank in the quarter, its estimated 25% decline by the end of 2024 was better than we projected. Further, for the first time, management was willing to explicitly express confidence in hitting certain all-in CET1 levels, including a range of 8.5%-9%, well above the current minimum regulatory requirement of 7%. We find this expectation to be realistic, especially given management’s target for another potential 50 basis points in RWA optimization by the end of 2024.

We believe current results support our thesis that the bank will meet its capital requirements through the course of regular operations. We are still waiting on imminent regulatory changes which could increase the bank’s regulatory burden, but as we model multiple scenarios, we see it meeting these changes without raising capital.

As we incorporate the latest results and slightly lower our forecast for net interest income, we do not expect a material change to our $53 fair value estimate. We continue to view the shares as materially undervalued.