U.S. Bancorp Earnings: Slight Drop in Revenue Outlook, but Capital Build Should Remain on Track

U.S. Bancorp Stock at a Glance

• Current Morningstar Fair Value Estimate: $58.00
• Stock Star Rating: 5 Stars
• Uncertainty Rating: Medium
• Economic Moat Rating: Wide

U.S. Bancorp Earnings Update

Wide-moat rated U.S. Bancorp USB 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.

The bank’s full-year revenue guidance dropped by $500 million (a 2% drop), which was driven entirely by a decrease in the net interest income outlook. If anything, we think the drop in NII is likely a bit higher than the expected revenue drop, implying the fee outlook strengthened slightly. We think these results support our thesis that the largest banks will not face dramatic disruption to their deposit bases, and while some incremental pressure on revenue is likely, it will be manageable.

As we adjust our forecasts for slightly lower revenue and the need to build capital in anticipation of becoming a Category II bank, we expect our fair value estimate of $58 will fall by a low-single-digit percentage, and we still view shares as materially undervalued.

Aside from a drop in the revenue outlook, the main topic of the call concerned the bank’s transition to a Category II bank. We think there is a lot of confusion around this transition, and it is a complex topic. We would emphasize that the bank has a realistic path toward growing into the capital needs of a Category II bank by the fourth quarter of 2024, when the transition would likely occur.

We will admit, we do not expect the bank to be increasing its balance sheet aggressively during this time and to be pursuing share buybacks or aggressive dividend increases. However, we think it’s very unlikely a capital raise will be needed.