Right now is a harrowing time to be buying stocks, given the market's rapid ascent over the past few years. But if you were so inclined to do so, there is one bank stock in particular that's worth considering: U.S. Bancorp (NYSE:USB).
U.S. Bancorp is the nation's fifth largest commercial bank. Headquartered in Minneapolis, it has a reputation of being one of the best-run banks in the country.
There are any number of metrics one could cite in support of U.S. Bancorp's sterling reputation. But the one that cuts to the heart of the matter is its profitability. Over the past 12 months, it has generated a 14% return on equity, according to YCharts.com. That ranks U.S. Bancorp first on the KBW Bank Index, which tracks shares of two dozen blue-chip bank stocks.
U.S. Bancorp has also long been one of the most efficient banks in the United States. Its efficiency ratio in the third quarter was 54.3%. This means that it spends just over half of its net revenue on operating expenses. Most banks, particularly given the inhospitable operating environment right now, are lucky to dip below 60%, as Bank of America (NYSE:BAC) recently did for the first time since the financial crisis.
This gives U.S. Bancorp an important advantage. Because it's so efficient, it doesn't have to cut corners in other aspects of its business in order to generate a double-digit return on equity, which is what sophisticated investors expect from a bank its size. Its efficiency also empowers U.S. Bancorp to compete more aggressively for the most creditworthy borrowers, enabling it to take market share from less efficient competitors.
It's for this reason that U.S. Bancorp doesn't sacrifice safety in exchange for profitability. It was one of few big banks to make it through the 2008 crisis without a single quarterly loss. And it has spent the years since then doubling down on investments in fee-based businesses, such as its payments business, that don't expose the bank to credit risk.
On top of this, while U.S. Bancorp's stock may seem pricey when compared to other bank stocks -- which is what one would expect given its profitability -- its shares are far from excessively overvalued. They trade for 16.3 times its trailing-12-month earnings. The average stock on the S&P 500 trades for 24.3 times earnings.
U.S. Bancorp recently promoted a new CEO, after its former CEO (and current chairman) Richard Davis retired at the bank's annual meeting in April of this year. Its new CEO, Andrew Cecere, has worked side by side with Davis since they became colleagues 17 years ago. It was Davis and Cecere, in fact, that led the negotiations on opposite sides of the table for the merger in 2000 that created the U.S. Bancorp of today.
Cecere isn't known to be as gregarious as Davis, but he's reputed to be an exceptional banker who's left-brained approach to the profession positions him perfectly to lead U.S. Bancorp into an increasingly digitized future.
In short, while value investors may chafe at the thought of buying one of the most expensive bank stocks in the market, it's important to appreciate that banks are like sushi: You get what you pay for.