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

Wide-moat-rated U.S. Bancorp USB 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.

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 during the quarter. While accumulated other comprehensive income moved against the bank in the quarter, the estimated 25% decline in AOCI by the end of 2024 was better than what we were projecting. Further, management for the first time 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 upcoming regulatory changes, which could increase the regulatory burden for U.S. Bancorp, but as we model multiple scenarios, we see the bank meeting these changes without raising capital.

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