The overall stock market has had quite a roller-coaster ride in 2020, but even after the recent drop fueled by surging COVID-19 cases, the S&P 500 is still higher by approximately 2.5% for the year as of Oct. 29.
Unfortunately for bank investors, the financial sector has been one of the weakest parts of the market during the pandemic, with the Financial Sector SPDR (XLF 0.11%) down by 24% year to date. And U.S. Bancorp (USB 0.93%) -- historically one of the strongest names in the sector -- has fared even worse, with a 36% plunge from where it started the year.
Image source: Getty Images.
Why has U.S. Bancorp performed so poorly?
The short explanation is that banks are getting hit in two different ways by the pandemic. Interest rates are at record lows, which creates a terrible profitability environment for lenders. And elevated unemployment is typically accompanied by a surge in loan losses for banks as consumers start having trouble paying their debts.
For banks that also have investment-banking activities (such as underwriting, trading, and merger and acquisition advisory), the current environment isn't all bad. These things actually tend to do better in turbulent markets, so bank stocks that also have investment-banking businesses have held up decently. But U.S. Bancorp is purely a commercial bank -- in other words, it essentially functions as a traditional savings and loan, and that's why it's getting hit harder than its peers.
Recent results look strong
To be perfectly clear, although its share price has fallen by 36% so far this year, U.S. Bancorp remains a very profitable institution. Between the second and third quarters, the bank generated $1.40 in earnings per share -- not quite as strong as in the pre-pandemic days, but still an impressive profit (and more than enough to cover its dividend).
For reference, here's how U.S. Bancorp's third-quarter numbers compare with JPMorgan Chase and Bank of America, which are generally considered to be some of the most rock-solid big banks, as well as Wells Fargo, the only other big bank that's essentially a pure commercial bank.
|
Metric |
U.S. Bancorp |
JPMorgan Chase |
Bank of America |
Wells Fargo |
|---|---|---|---|---|
|
Return on Equity (ROE) |
12.8% |
15% |
7.2% |
4.2% |
|
Return on Assets (ROA) |
1.17% |
1.14% |
0.71% |
0.42% |
|
Net Charge-Off Ratio (annualized) |
0.66% |
0.99% (consumer banking) |
0.82% (consumer banking) |
0.29% |
|
3Q20 Revenue Growth (year-over-year) |
0.7% |
(0.3%) |
(11%) |
(14.1%) |
Data source: Company earnings reports. Parenthesis indicate negative numbers.
As you can see, even though the pandemic is ongoing and U.S. Bancorp doesn't have the same surge of investment-banking revenue like some of its peers (particularly JPMorgan Chase), its business results are still quite impressive.
A cheap valuation for a well-run institution
It's important not to lose sight of the fact that U.S. Bancorp has a long and successful track record of responsible risk management, efficient operations, and best-in-class profitability. And the fact that its third-quarter numbers rebounded so strongly is certainly an encouraging sign.
For most of the past decade, U.S. Bancorp has traded for a valuation in the range of 1.6 to 2.2 times book value, a premium valuation, but one that has been well-justified by the bank's performance. Now at just 1.2 times book value, U.S. Bancorp could be an excellent bargain for long-term investors who have the patience to ride out the near-term volatility as the COVID-19 pandemic continues to play out.
