Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

4 Things to Expect From U.S. Bancorp in 2021

By Bram Berkowitz - Jan 11, 2021 at 9:17AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

After a year in which its stock declined more than some of the broader bank indexes, U.S. Bancorp could be a strong stock in 2021.

Long known as one of the best-run regional banks in the country, the $540 billion asset U.S. Bancorp ( USB 1.79% ) struggled like the rest of the banking sector in 2020 as the bank worked through the ongoing coronavirus pandemic. U.S. Bancorp saw its stock price decline roughly 21% in 2020, as it dealt with higher credit costs related to potential loan losses resulting from the economic environment. But with the new year now underway, let's see what's in store for the bank in 2021.

1. Better profitability

This should not really come as a surprise, but U.S. Bancorp -- as with almost all banks -- should be more profitable in 2021 than 2020, as coronavirus vaccines are rolled out and the economy hopefully begins running at a more normal pace. The improved profits at U.S. Bancorp should really be a function of lower credit costs, because ideally U.S. Bancorp will not have to reserve significant amounts of additional capital for future potential loan losses in 2021.

The exterior of a U.S. Bank branch

Image source: U.S. Bank

The bank will also not likely realize all of the losses it is currently planning for. At the end of the third quarter of 2020, U.S. Bancorp had set aside enough capital to cover losses on roughly 2.61% of its total loan book. But that number is based on a base case of unemployment rising to 9.1% at the end of 2020, and declining to 7.8% by the end of 2021.

This scenario is very unlikely to happen when you consider that unemployment in the U.S. in November was 6.7%. While unemployment could rise from this level during the winter, banks have also not been factoring in additional stimulus programs into their models. We already know that a second $900 billion stimulus bill has been passed and is in the process of being implemented. And with the Democrats taking control of Congress, President-elect Joe Biden has said there very well could be more stimulus on the way. Both the $900 billion stimulus bill and any other future stimulus are likely to mitigate loan losses at banks. If losses don't materialize like U.S. Bancorp is currently projecting for, the bank could release reserves back onto its income statement, boosting earnings.

2. Share repurchases

After the Federal Reserve lifted its ban on stock buybacks following its recent round of stress testing, U.S. Bancorp announced that it would conduct a $3 billion share repurchase program in 2021, which will help boost earnings per share in 2021. I am sure shareholders are pleased to see repurchases starting up again, and if the economic outlook continues to brighten as the year progresses, perhaps U.S. Bancorp will increase its share repurchase authorization.

In 2019, U.S. Bancorp purchased 81 million shares of its common stock for an average price of $55.88 per share, making the aggregate share repurchase amount roughly $4.5 billion. Prior to the coronavirus pandemic, U.S. Bancorp had approved a share repurchase program of roughly $5.5 billion from July 1, 2019 through June 30, 2020.

3. Continued branch consolidation

In the middle of 2019, U.S. Bancorp embarked on an ambitious branch transformation program that would result in the bank closing 10% to 15% of its branches in its network by early 2021. In is third-quarter earnings call, management revealed that it had successfully closed 10% of its branch network. But instead of just going for the remaining 5% left in the initiative, management said it would close an additional 15% of branches by early 2021, mainly because of the acceleration of digital trends seen during the pandemic.

Notably, total digital active customers as of Aug. 31, 2020 were up 4% year over year, while digital transactions and loan sales were up 9% and 18%, respectively, over the same time frame. The additional branch closures will result in $150 million cost savings, some of which will begin to materialize in the first quarter of this year. This will help bring down non-interest expenses in 2021, a very important line item to watch in this low-rate environment. Management has also said some of those savings from the branch closures will be reinvested into digital capabilities.

4. Outperforming the sector 

I think there is a very good chance we could see U.S. Bancorp outperform the sector in 2021. With a 21% drop in 2020, the bank actually underperformed both the KBW large bank index and KRE regional bank index in 2020. But U.S. Bancorp has long been considered one of the sector's strongest-performing banks, returning solid returns for investors year after year. Additionally, credit quality is still strong -- the bank has plenty of capital to absorb expected and unexpected loan losses, and hopefully can get expenses down to pre-COVID levels as pandemic-related expenses run off and branch closures and investments in technology result in annual cost savings.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

U.S. Bancorp Stock Quote
U.S. Bancorp
USB
$57.90 (1.79%) $1.02

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

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
633%
 
S&P 500 Returns
140%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/07/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.