I'd understand if your appetite for another U.S. bank stock recommendation is low. "Queasy" may even sum up your feeling. After all, it was only a month ago that I recommended Bank of America Corp. in this space, and it subsequently slumped more than 20 per cent, before a slight rebound in the past two days.
Snicker if you must, but I'm going to venture down that treacherous road one more time. Because there are safer, stronger bets to be made buying U.S. banks – namely, U.S. Bancorp , which offers some of the best profits in the industry at a price comparable with its peers.
Like most of the country's financial institutions, it's trading closer to its 52-week low than its high. Investors who believe there's an eventual recovery in the sector may find that it's led by U.S. Bancorp.
The Minneapolis-based "super-regional" bank is one of the country's 10 biggest, but, with $321-billion (U.S.) in assets, it falls far short of the trillion-dollar size of names such as Bank of America and JPMorgan Chase & Co. Assembled from pieces in Milwaukee, Cincinnati and Portland, Ore., U.S. Bancorp's footprint stretches from the Midwestern to the western United States, with little to speak of on the country's east coast.
The boring Midwestern work ethic – and a relatively smaller home mortgage operation – seem to have served it well over the past few years. The bank remained profitable every quarter of the downturn, avoiding the massive charge-offs that sent peers into the red.
It's better than average in credit quality among big banks, as measured by non-performing loans and assets. It leads the industry in keeping expenses low, with an "efficiency ratio" – non-interest costs divided by revenue – of about 50 cents on the dollar. (Many big-bank peers are flailing about in the 60 to 70 range, according to Standard & Poor's CapitalIQ data service.)
On top of it all, U.S. Bancorp is showing revenue gains to be envied. Nomura Equity Research analyst Brian Foran, who has a "buy" rating and $29 price target on the shares (the stock closed at $24.36 Monday), notes that U.S. Bancorp was the only one of 18 American banks he follows to show a gain in loan volume and an increase in the average yields on its loans in the first quarter. In the second quarter, U.S. Bancorp's $4.7-billion in revenue exceeded estimates.
"Bank analysts don't get to see revenue beats very often, so it is nice when they come," Mr. Foran says.
Low expenses and leading revenue gains equal … yes, you got it: Above-average profits. U.S. Bancorp's 14.2-per-cent return on common equity over the past 12 months leads the big consumer banks, and its 1.3-per-cent return on assets tops all but credit-card-heavy Capital One Financial.
The bank used its strength to buy 13 small, troubled banks in its existing markets, but otherwise hasn't been doing transformative deals or entering new lines of business. The company engages in consumer and business banking, wealth management and a payment-processing operation.
"The company likes its existing business mix and has no intention to enter the insurance or investment banking business," says analyst Moshe Orenbuch of Credit Suisse, who has an "outperform" rating and a $32 target price, nearly 50 per cent higher than current levels.
Ah, but what about the price? On a price-to-tangible-book-value basis, U.S. Bancorp trades at 2.25, expensive when no other big U.S. consumer bank trades above two and many are priced at a discount to book.
"Investors sometimes get hung up" on the number, Mr. Foran says, but the price makes sense because U.S. Bancorp "generates structurally higher returns."
And, on a price-to-earnings basis, U.S. Bancorp's multiple of nine makes it cheaper than a handful of "super-regional" peers.
Marty Mosby of Guggenheim Securities LLC, another analyst with a "buy" rating (his target price is $29), says that "in an atmosphere of risk avoidance and heightened anxiety, we view U.S. Bancorp as a quality bank that could be a safer haven" for investors in large-capitalization banks.