US Bancorp Sees the Light

The three major universal banks -- JPMorgan Chase (NYSE: JPM  ) , Bank of America (NYSE: BAC  ) and Citigroup (NYSE: C  ) -- all beat earnings estimates for the first quarter. However, financial markets activities have been driving profits at these firms, not traditional commercial banking. In that regard, it's interesting to take a look at US Bancorp's (NYSE: USB  ) earnings since it's the largest pure-play commercial bank to report first-quarter earnings.

The light at the end of the tunnel
At $0.34 a share in diluted earnings, US Bancorp was exactly on par with analysts' expectations. Credit loss provisions (reserves set aside to cover future loan losses) of $1.31 billion were at approximately the same level as a year ago and down slightly from the prior quarter ($1.39 billion). Net charge-offs (loans that are considered unrecoverable) also remained ostensibly constant with respect to the fourth quarter of 2009 ($1.14 billion vs. $1.11 billion). These numbers suggest the firm is indeed nearing "the inflection in credit quality" CEO Richard Davis referred to in the earnings release.

As we are exiting the credit crisis, here's how US Bancorp shares stack up against its peers:

Company

P/E (Estimated 2010 EPS)

P/E (Estimated 2012 EPS)

BB&T (NYSE: BBT  )

23.3

10.9

Citigroup

26.1

10.4

PNC Financial (NYSE: PNC  )

16.7

9.9

US Bancorp

17.1

9.7

Wells Fargo (NYSE: WFC  )

17.2

8.6

JPMorgan Chase

14.2

7.8

Bank of America

19.2

6.5

Source: Capital IQ, a division of Standard & Poor's.

There's not much between them
The first observation is that all banks look relatively expensive on the basis of this year's expected earnings. It's more useful to look at price-to-earnings multiples based on estimated earnings-per-share for 2012, which are a better reflection of true earnings power (although the range of possible outcomes around 2012 estimates is necessarily wider). On that basis, US Bancorp looks attractive, but there isn't much to distinguish it from two other well-run organizations: Wells Fargo and BB&T.

(While JPMorgan Chase and Bank of America look quite a bit cheaper, I think they, along with Citi, deserve a discounted multiple. The reason: These behemoths' profitability have the greatest exposure to regulatory risk.)

Getting back to those high bank dividend yields
The other thing to look out for over the coming years is a growing dividend yield. By my estimates, US Bancorp could pay out $1.43 per share in dividends in 2012 against just $0.29 per share this year. Even assuming the shares rise by 20% between now and mid-2012, that payout would equal a 4.3% dividend yield.

Current Federal Reserve policy is creating tangible risks in U.S. stock and bond markets -- but there are alternatives for your money. Tim Hanson highlights the top markets right now.

Fool contributor Alex Dumortier has no beneficial interest in any of the stocks mentioned in this article. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (0) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1158551, ~/Articles/ArticleHandler.aspx, 10/22/2014 9:56:54 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Apple's next smart device (warning, it may shock you

Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Advertisement