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Better Buy: Bank of America vs. US Bancorp

By Brent Nyitray, CFA – Sep 23, 2020 at 7:09AM

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The global behemoth might be better suited to the current environment.

The COVID-19 crisis has been downright awful for the entire financial sector. Banks have been sold based on fears of rising consumer and corporate delinquencies. The big provisions for loan losses have been taken, but so far we haven't seen the big writedowns of assets. The banking sector could become a buy if those writedowns don't happen, which would be a function of how fast the economy recovers and the state of COVID. That said, if you were to dip a toe into the sector, which type of bank would perform better: Bank of America, the massive global bank, or US Bancorp, the smaller, more traditional bank? 

Pillars and hundred dollar bills

Image source: Getty Images.

Bank of America

Bank of America is the epitome of the global bank, with investment banking operations as well as traditional banking. In the past, Bank of America would have been called a money center bank. It serves the biggest U.S. corporations, and has a global presence and massive trading operations. While Bank of America's roots were in plain vanilla commercial banking, it was one of the first commercial banks to build business lines into traditional investment banking lines.

Bank of America's exposure to the global economy and its investment banking business make it a bit more suited for the current strained economic environment. With interest rates at rock bottom, the investment banking business will thrive on new debt issuance as well as merger activity. Volatility in the stock and bond markets will also help trading revenue.

US Bancorp

If Bank of America was considered a money center bank, US Bancorp would have been called a super-regional bank. It largely stuck to its roots as a traditional commercial bank, which takes deposits and makes loans. US Bancorp will be more leveraged to the U.S. consumer and more reliant traditional products like auto loans, commercial loans, and mortgages.

In terms of valuation, US Bancorp has a higher dividend yield and a slightly lower price-to-earnings (P/E) ratio. Bank of America has a lower price/book ratio and better expected growth in earnings per share (EPS). 

  Market Cap ($B) Price / Book Ratio Dividend Yield Price / Earnings Ratio  2020-2021 EPS growth
US Bancorp (USB 1.79%) 54 1.17 4.7% 11.1 12%
Bank of America (BAC 2.30%) 207 0.86 2.9% 11.5 34%

Source: Company filings; data as of Sept. 22.

Year to date, both stocks have struggled along with the financial sector. That said, Bank of America has slightly outperformed the SPDR S&P Bank ETF, while US Bancorp has slightly underperformed it.

BAC Chart

BAC data by YCharts

Warren Buffett's Berkshire Hathaway invests in both banks. That said, Buffett has sold off some of his holdings in US Bancorp, while building his position in Bank of America. The fact that he holds both is a vote of confidence; clearly both are high-quality banks. That said, the fact that he is buying one and paring his position in the other is significant.

Which is a better buy?

Overall, it is hard to go wrong with either bank. Income investors may find US Bancorp's higher dividend yield to be more appealing, while growth investors might be more interested in Bank of America's superior growth. In my opinion, the investment banking business should be robust going forward, as corporations will be taking advantage of rock-bottom interest rates to refinance bond issues. The mortgage banking business will also be strong going forward, and both banks are huge players in that space. Overall, I would have to give the nod to Bank of America given its similar earnings multiple and superior growth.

Does that mean I would be a big investor in the banking sector right now? That would depend on how the COVID-19 pandemic progresses and the economy recovers. Investors might want to wait for clarity on those issues before buying the sector. 

Brent Nyitray, CFA has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares) and short January 2021 $200 puts on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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Stocks Mentioned

Bank of America Stock Quote
Bank of America
$37.63 (2.30%) $0.85
U.s. Bancorp Stock Quote
U.s. Bancorp
$45.39 (1.79%) $0.80
Berkshire Hathaway Stock Quote
Berkshire Hathaway
$480,280.00 (0.93%) $4,437.00
Berkshire Hathaway Stock Quote
Berkshire Hathaway
$318.60 (1.10%) $3.47
SPDR KBW Bank Stock Quote
$49.52 (1.81%) $0.88

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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