3 Reasons Why U.S. Bancorp Stock Is Worth Every Bit Of the Premium Price

Source: Company

Among the consumer bank franchises, US Bancorp (NYSE: USB  ) really stands out. As a regional bank with quite an extensive branch network and a large deposit base, US Bancorp is set to serve local customers across the Midwestern and Western states.

The bank consistently achieves attractive deposit and loan growth rates, reports double-digit returns on common equity and runs a tight ship in terms of cost controls, all of which add to the appealing value proposition of US Bancorp.

With total assets of $371 billion, US Bancorp is currently ranked as the ninth largest bank in the United States by the Federal Reserve.The bank also has $261 billion in deposits under its belt which is about twice as much as the deposits of BB&T. 

US Bancorp serves nearly 18 million customers and has an extensive branch footprint reaching a number of 3,083 as of the end of the first quarter 2014.

1. Core business strength
Loan and deposit growth are like oil for an engine: It keeps banking operations smooth and healthy and stimulates the local economy: Everybody wins.

US Bancorp has consistently grown its loan and deposit base by respectable growth rates over the last five quarters. Residential mortgages have been an extraordinary growth driver for US Bancorp's loan business over the last year, with average loan balances oftentimes growing by double-digit percentages year-over-year.

Source: US Bancorp Q1 2014 Investor Presentation

2. Improving underlying asset quality
This is a trend we have already seen with a lot of banks in the sector and it is not necessarily a distinguishing characteristic of US Bancorp.

Even though improving credit quality is an industrywide theme relieving earnings, it is worth mentioning, that US Bancorp's net-charge offs have stayed extraordinarily low and way below 1% in relation to average loans.

In addition, US Bancorp's nonperforming assets have been trending downward over the last five quarters and have declined a healthy 12% year-over-year to $1.8 billion. Improving asset quality and lower net charg-offs immediately translate into higher earnings for US Bancorp going forward.

Source: US Bancorp Q1 2014 Investor Presentation

3. Strong performance metrics
There are a variety of performance metrics that allow investors to gauge the relative profitability of a bank. While investors have a lot of metrics to choose from, the return on common equity/assets and a bank's efficiency ratio are usually the prime choices in order to determine how efficiently a bank runs its operations.

In terms of both metrics, US Bancorp does well, so say the least.

Source: US Bancorp Q1 2014 Investor Presentation

Even though US Bancorp's return on average common equity (ROCE) has been falling lately due to slightly lower net revenues and higher noninterest expenses, its first quarter ROCE still stood at an impressive 14.6%.

Another metric worth a look is the return on average assets.

Due to a bank's large asset base, the return on average assets usually is much smaller than equity-related return metrics and often is not higher than 1% for banks with sufficiently large balance sheets. 

In any case, a return on average assets in the neighborhood of 1.6% for the most recent quarter is actually quite an accomplishment and indicates that US Bancorp is a really profitable banking franchise.

Yet another metric worth considering when determining the profitability of a bank relates to a bank's efficiency ratio. The more profitable a bank is, the tighter its cost controls are and the lower its efficiency ratio.

In the first quarter 2014, US Bancorp reported an efficiency ratio of 52.9% down from 54.9% in the previous quarter highlighting a solid grip on its cost base.

The Foolish Bottom Line
US Bancorp is an interesting bank and has a lot going for itself. The bank posts healthy loan and deposit growth, faces improving credit quality trends and remains hugely profitable.

Outperforming banks like US Bancorp are likely to benefit from ongoing investor demand and indeed make an interesting long-term value proposition.

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Kingkarn Amjaroen

Kingkarn Amjaroen is a financial analyst taking an interest in the basic materials, retail and financial sector.

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8/28/2015 4:01 PM
USB $42.59 Up +0.01 +0.02%
US Bancorp CAPS Rating: ****