Over the last month, U.S. Bancorp's (USB 1.85%) stock has sold off by about 24%, along with the rest of the banking sector, which has been rocked by the collapse of SVB Financial and Signature Bank and broader concerns about potential contagion.
There are certainly reasons to have some worries about the bank. At the end of 2022, U.S. Bancorp was sitting on about $10.9 billion of unrealized losses in its held-to-maturity bond portfolio. If the bank ever had to sell these bonds to cover deposit outflows, it would wipe out a significant amount of U.S. Bancorp's nearly $29.8 billion tangible common equity.
However, I consider this situation quite unlikely. I believe U.S. Bancorp has a broad and diverse deposit base, many attractive business lines, and a history of generating consistently strong earnings, which will allow the bank to weather the challenging environment in the banking sector successfully.
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A broader, more diversified deposit base
Though SVB Financial's collapse is barely a month old, it has already been widely dissected. One major reason the bank failed is that it had many uninsured deposits concentrated among tech and early-stage companies that all pulled their deposits when they got worried that the bank might go down.
But U.S. Bancorp has a much wider, more diverse deposit base in a number of regards. Here's a breakdown of its main business lines and how much in deposits each had at the end of 2022:
- Corporate/commercial bank: $154.6 billion
- Consumer/business banking: $200.2 billion
- Wealth management/investment services: $98.2 billion
- Payment services: $3.6 billion
- Treasury/corporate support: $5.8 billion
As you can see, there is great deposit diversity between corporate/commercial, consumer/business banking, and wealth management/investment services. Additionally, U.S. Bancorp operates across a wide geography, with more than 2,000 branches in 26 states across the U.S. The bank is also lending to -- and therefore, likely banking -- a wide range of industries. Its five largest are real-estate-related, financial institutions, healthcare, automotive, and personal, professional, and commercial services. Others include media, food and beverage, tech, capital goods, retail transportation, and energy.
Now, roughly 49% of U.S. Bancorp's deposits are uninsured. That might sound like a big number, but it's pretty common among large regional banks. These banks do lots of business with corporations and other commercial businesses that, of course, have more than $250,000 stored at the bank. Still, more than $184 billion of the bank's deposits are sitting in accounts with less than $250,000 and, therefore, are insured by the Federal Deposit Insurance Corporation.
Not just a lockbox
When many people think about banks, they really just see them as digital filing cabinets to keep their money safe. And for many people, banks do serve this purpose. But banks also build out services, so companies use them for other reasons, too. In recent years, U.S. Bancorp has invested heavily in its technology and payment systems, which are attractive to many kinds of customers.
U.S. Bancorp's payment services division provides consumer and business debit and credit cards; corporate, government, and purchasing card services; and merchant processing. This segment has also become quite material for the company, often contributing nearly a quarter of the bank's profits and adding a great stream of revenue, aside from just classic spread income on loans and deposits.
U.S. Bancorp also sees a greater opportunity to better serve its business banking clients, as well as real-time payment capabilities, of which the bank has been at the forefront. Real-time payments have been slow to catch on, but U.S. Bancorp has seen rapid growth in real-time transactions since 2020.
The bank also provides its business banking customers with a special dashboard called Talech to help small businesses manage accounts receivables and other operational tasks. Roughly 29% of U.S. Bancorp's business banking clients use one of U.S. Bancorp's payments products, while close to 49% of the bank's payments customers also use a business banking product, so there is a good opportunity for cross-selling.
The idea is that customers are using U.S. Bancorp for reasons other than just keeping deposits safe, and the bank plans to become even more valuable to its clients. The products and services U.S. Bancorp provides are a big reason many businesses choose the bank.
A history of excellence
It's always a good idea to look at how banks have fared over a longer period and during stressful periods. Since 2000, U.S. Bancorp has generated an average annual return on equity of 16.57%, with its lowest in this 23-year history being 9.35%.
That's not only superb but also very consistent through several market crashes and the Great Recession. A big reason for this is the bank's conservative approach to loan underwriting, which keeps losses manageable even in tough times. While investors are nervous about commercial real estate (office space, in particular), I do believe the bank has a strong track record to work off of.
Given the bank's diverse deposit base, the value it brings to its business and commercial clients, and its strong history of profitability and sound credit quality, I believe U.S. Bancorp is well positioned to navigate the difficult environment and come out stronger on the other side.
