U.S. Bancorp (USB 2.56%) is the fifth-largest U.S.-based commercial bank by assets, and it is widely considered to be one of the best-run banks in the nation. In fact, the company is one of Warren Buffett's major bank stock holdings.
In its third-quarter earnings report, U.S. Bancorp not only lived up to expectations, but continued to show investors why it has such a strong reputation. As its profitability and efficiency show, the bank is truly in a class by itself.
Image source: Getty Images. (Note: Image does not necessarily depict a U.S. Bancorp branch.)
The top and bottom line met expectations
U.S. Bancorp's top and bottom line numbers weren't too exciting. The bank's earnings of $0.88 per share matched analysts' expectations, and its revenue of $5.61 billion surpassed expectations, but just slightly. Earnings grew by nearly 5% year-over-year, and revenue grew by 4%.
Additionally, the bank's growth was impressive in many key areas of the business. Net interest income grew 8.3% year-over-year due to a combination of 3% higher loan balances and net interest margins that grew by 12 basis points (0.12%) over the past year. And while U.S. Bancorp has historically had relatively small loan losses compared with peers, the bank's non-performing assets dropped by an impressive 25% from last year, and by 7.3% from the second quarter.
In a nutshell, the bank produced solid results with few surprises.
U.S. Bancorp is now in a class all by itself
U.S. Bancorp is well-known for being a highly profitable and efficient banking operation. The bank's return on assets (ROA) and return on equity (ROE) profitability metrics came in at 1.38% and 13.6%, respectively. The industry benchmarks are 1% and 10%, respectively.
In addition, the bank's efficiency ratio is 54.3% (lower is better), which is one of the best among brick-and-mortar banks.
As far as the five largest U.S. banks go, U.S. Bancorp has consistently been the most profitable and efficient, while Wells Fargo has been a close second. However, the fallout from Wells Fargo's fake-accounts scandal has depressed the bank's profitability and has left U.S. Bancorp in a class by itself when it comes to big-bank profitability and efficiency.
|
Company |
3Q17 ROA |
3Q17 ROE |
3Q17 Efficiency Ratio |
|---|---|---|---|
|
U.S. Bancorp |
1.38% |
13.6% |
54.3% |
|
Wells Fargo |
0.94% |
9.06% |
65.5% |
|
Bank of America |
0.98% |
8.1% |
60% |
|
JPMorgan Chase |
1.04% |
11% |
56.5% |
|
Citigroup |
0.87% |
7.3% |
56% |
Data source: Company financials and author's own calculations.
In fact, in this year's Federal Reserve banking "stress tests," U.S. Bancorp was one of a select few that was actually projected to make money in a hypothetical deep recession.
A few things to keep an eye on
To be fair, U.S. Bancorp's earnings report wasn't 100% excellent. For one thing, noninterest income dropped by about 1% year-over-year, mainly due to a drop in mortgage banking revenue.
Also, while the loan portfolio increased by 3% year-over-year, this was the slowest annual growth rate of the past five quarters. The same can be said for the 5.2% growth in deposits. None of these things should necessarily be taken as a sign of trouble, but they are certainly worth noting.
A solid quarter shows why U.S. Bancorp is the best big bank in the business
With a rock-solid loan portfolio, lean and profitable operation, and solid growth, U.S. Bancorp is one of the best-run banks in the United States and could be worth a look for investors who want financial-sector exposure.
It's worth mentioning that U.S. Bancorp isn't cheap. In fact, on a price-to-book basis, it's significantly more expensive than the rest of the five largest U.S. banks. However, when it comes to U.S. Bancorp's quality as a bank and as a long-term investment, you get what you pay for.
