CORRECTION: When calculating the price-to-tangible-book-value ratio (P/TBV), the author accidentally used U.S. Bancorp's market value per share at the end of the third quarter instead of the bank's tangible book value per share. When U.S. Bancorp's correct tangible book value per share of $23.91 is used to calculate the P/TBV at current prices, the bank actually has a P/TBV of 187%. That's still below the bank's five-year average over 200%, but higher than its peer group. (Dec. 15, 2020)
U.S. Bancorp (USB 1.76%) has long been one of Warren Buffett's favorite stocks. Banks have been hit hard this year, and Buffett's company, Berkshire Hathaway, has trimmed its positions in most of its bank stocks -- but not U.S. Bancorp, which made up 2.6% of Berkshire's equity portfolio in the third quarter. Berkshire owns just under 10% of the Minneapolis-based bank's outstanding shares.
It looks like Buffett is on to something. The nation's fifth-largest bank has not only maintained its status as a top performer this year, but its stock looks undervalued, too. Here's why.
Where U.S. Bancorp stands out
U.S Bancorp is a $540 billion asset bank, so while it certainly competes with the megabanks, its more direct competitors are other large regional and super regional banks. Here is where U.S. Bancorp traded compared to its peer group at recent prices. (Note: While Truist Financial is a peer, I left it off this list because it only completed its merger a year ago.)
|Bank||Price/Tangible Book Value|
|Citizens Financial Group (CFG 1.54%)||107%|
|Fifth Third Bancorp (FITB 1.43%)||117%|
|KeyCorp (KEY 1.14%)||118%|
|Regions Financial (RF 1.10%)||139%|
|M&T Bank Corp (MTB -0.10%)||158%|
|PNC Financial Services Group (PNC 0.64%)||160%|
Not only was U.S. Bancorp trading right in the middle of its peer group at 124% of tangible book value, but it was also trading below the average of this group, which is about 132% of tangible book value. Despite the middling valuation, U.S. Bancorp really belongs at or close to the top of this group.
I examined 11 key metrics that bank investors value, ranging from net income to return on tangible common equity to net charge-offs to the bank's capital position, and found that U.S. Bancorp finished close to the top in most categories. The analysis looked at metrics over the first nine months of 2020 whenever possible.
Of these seven banks, U.S. Bancorp came out on top in nonperforming loans, which are loans the borrower has not made any payments on for at least 90 days. Nonperforming loans can be a good indicator of future charge-offs (debt unlikely to be collected), which is a good representation of total writedowns facing a bank. At the end of the third quarter, total nonperforming loans at U.S. Bancorp only made up 0.53% of total loans. The next best bank came in at 0.80%.
This is a good category to lead in, especially when U.S. Bancorp had also set aside some of the most money in its peer group for potential loan losses. At the end of the third quarter, U.S. Bancorp had reserved enough to cover losses on 2.41% of its total loan book. That wasn't the highest in its peer group, but still very conservative considering its solid credit quality. Additionally, loans on active payment relief due to the coronavirus have also stabilized significantly and settled at only 2% of total loans at the end of the third quarter, another positive sign.
The rest of the story
After performing very well among its peer groups on credit, U.S. Bancorp performed the second-best in several other categories, including year-over-year pre-provision net revenue growth, return on assets, return on tangible common equity, and efficiency ratio. No other company in the peer group had more second-place finishes in the 11 categories examined.
U.S. Bancorp did, however, perform the worst in non-interest-bearing deposits. Deposits that don't require interest payments play a big part in keeping banks' deposit costs down. They represent strong deposit relationships that are unlikely to leave at the first sign of rising rates, and they're a big driver of a strong deposit franchise, which banks need to fund loans and keep their margins up. At the end of the third quarter, U.S. Bancorp had about $114 billion in non-interest-bearing deposits, representing about 27.7% of total deposits. That's not bad, but almost every other bank in the peer group had 30% or more, with Regions Financial taking the cake at 42% of its deposit base in non-interest-bearing deposits.
Buffett is definitely on to something
U.S. Bancorp has always been a strong bank, so even trading around 124% of tangible book value, it looks like it has considerable upside. Even now, the bank's stock is still down about 24% from where it started the year. The KBW NASDAQ Bank Index, a measure of large bank performance, is only down about 16% year to date. Given that U.S. Bancorp has kept its performance metrics strong amid a pandemic and recession, I don't see any reason why the bank can't at the very least return to its pre-pandemic levels in the near future.