Banks have generally been a good investment over the past year or so, as they benefited from rising interest rates. While there are macroeconomic concerns for banks as we move through 2023, they generally remain a good place to invest your money.
Banks have been one of the best-performing industries within the financial sector year to date and outperformed the S&P 500. One of the big banks that has beaten the market this year is US Bancorp (USB 1.56%), the holding company for US Bank. It was up about 8% year to date through February. Let's take a look to see if this stock is worth a closer look.
An acquisition adds scale for US Bancorp
US Bank is the fifth-largest bank in the country, with about $585 billion in assets under management as of Dec. 31.
It posted solid fourth-quarter revenue, which accounted for much of its bump so far this year. Like many banks, net revenue was up. For US Bancorp, it jumped to $6.4 billion, up 12% year over year in the fourth quarter, mainly due to a spike in interest income. Net interest income gained 37% year over year, primarily because of rising interest rates and a 19% increase in total loans. As a result, the net interest margin climbed to 3.01%, up sharply from 2.4% a year ago. In addition, the bank saw an 11% year-over-year increase in deposits in the quarter, including deposits from the acquisition of MUFG Union Bank.
On the bottom line, however, net income was down about 45% year over year to $930 million. This was largely because the bank had to set aside $1.2 billion in provision for credit losses, up from a $13 million reserve a year ago. Higher provision for credit losses reflects the bank's view that the economy is entering a more challenging environment.
But earnings overall were highly impacted by US Bancorp's acquisition of MUFG Union Bank, which closed in the fourth quarter. Earnings took a $952 million hit, or -$0.63 per diluted common share, due to notable items associated with the acquisition, including balance sheet optimization, merger and integration-related charges, and provision for credit losses.
While the acquisition was a drag on earnings this quarter, it should provide a boost for US Bancorp this year and beyond. It added 1 million consumer, 700 commercial, and 190,000 business customers throughout the West Coast, but primarily in California, where it significantly grew the bank's market share. CEO Andy Cecere expects the acquisition to be 8% to 9% accretive to 2023 earnings due to the scale and cost synergies it brings, but also because of its attractive deposit franchise.
A solid buy
That last point about MUFG Union Bank's deposit franchise should help US Bancorp navigate this period of high interest rates. While last year banks benefited from higher interest rates because they could charge higher rates on loans, this year, banks are forced to raise the interest they pay out in deposits to remain competitive and keep customers from leaving for greener pastures. Of course, the more a bank pays out in interest, the more it cuts into its interest income.
As Cecere said in the fourth-quarter earnings call, MUFG Union's low-cost consumer deposit franchise will support continued loan growth and margins. "The margin is increasing principally because of the value of the low cost deposits that Union Bank brings on ... $85 billion of principally consumer low cost, stable deposits in this environment is very valuable in driving up that margin on a quarterly basis," he said.
As Cecere alludes to, the bank anticipates the net interest margin (NIM) to increase five to 10 basis points in 2023 from an already high level, which is a good number in this environment.
Overall, US Bancorp has a fair valuation, with a price-to-earnings ratio of 12.9, solid credit quality, and a good dividend. The consensus analyst estimate is a price target of $54 per share, which would be a 15% increase over current levels.
With the earnings power brought in from the acquisition, and a favorable interest rate climate, US Bancorp looks like a solid buy -- and in this volatile environment, solid is good.
