When it comes to banks, leverage and stability don't often go together. This is the reason it's so surprising that U.S. Bancorp (NYSE:USB), indisputably one of the nation's safest and best-run banks, is also one of the most levered.
To be fair, I'm not referring to the typical definition of leverage. When most investors discuss the concept, they do so in one of two contexts. With respect to companies and stocks generally, it's in relation to the debt-to-equity ratio, which, as its name suggests, measures how much a company has borrowed to finance its operations versus the proportion financed by equity.
With respect to banks, meanwhile, most conversations about leverage revolve around a handful of regulatory definitions that address how prepared a particular bank is for the next crisis. That is, does the lender at issue have enough capital to absorb losses in the event of a severe economic downturn?
For our purposes, this means that general and certain regulatory concepts of leverage often include preferred stock and retained earnings -- the former of which is layered on top of common capital while the latter is produced therefrom. Thus, to get a slightly purer sense of the -- for lack of a better term -- economic leverage employed by a bank, it's insightful to exclude these components entirely.
At least by this measure, in turn, U.S. Bancorp is the most leveraged big bank in America. As you can see in the chart above, by isolating its common stock and paid-in capital and then comparing that to its total asset base, U.S. Bancorp is leveraged by a factor of 44 to 1. By contrast, the nation's other 15 largest banks sport an average multiple of 17.5.
What does this mean? Far from suggesting that U.S. Bancorp is the riskiest big bank, this shows that U.S. Bancorp's original capital has yielded a company that's more than twice the size of its competitors on a relative basis. Each dollar paid to U.S. Bancorp in exchange for stock is now supporting $44 in assets. By contrast, each dollar invested directly in, say, BB&T translates into only $18 in assets.
Put another way, had Bank of America (NYSE:BAC) acted as a similarly responsible steward of its paid-in capital, then its balance sheet would have upward of $6.8 trillion in assets on it today, or more than three times its current size.
The takeaway here is simple if not patently obvious: A dollar invested in a great bank goes a lot further over the long run than one invested in a mediocre one.
Big banking's little $20.8 trillion secret
There's a brand-new company that's revolutionizing banking and is poised to kill the hated traditional brick-and-mortar banks. That's bad for them but great for investors. And amazingly, despite its rapid growth, this company is still flying under the radar of Wall Street. To learn about this company, click here to access our new special free report.
John Maxfield owns shares of Bank of America. The Motley Fool recommends and owns shares of Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.