U.S. Bancorp (USB 0.32%) appears to have come through the short-term banking crisis that occurred earlier this year reasonably well and with minimal fallout. In fact, thanks largely to an acquisition, the company's average deposit base grew at a time when many peers were seeing customer outflows.
But just because U.S. Bancorp escaped the pain doesn't necessarily mean it is the best option for investors seeking to add a bank stock to their portfolios.
2023 has not been a great year so far for banks
From a business perspective, U.S. Bancorp started 2023 on a strong note. It had just completed an acquisition of a California bank, materially increasing its exposure to that state. Year over year, the bank ended the first quarter with deposits up a lofty 12.4%. Notably, management highlighted that "The first quarter 2023 industry disruption contributed to the decrease in legacy Company deposits but was not meaningful to the overall balance sheet or deposit composition." In other words, even as customers at other banks were running for cover (thanks to high-profile bank failures in the regional banking space), U.S. Bancorp held its own.
And yet traders didn't spare the stock. As the chart above shows, U.S. Bancorp shares fell a painful 18.5% so far this year. That's actually not so bad, given that SPDR S&P Regional Banking ETF lost 26% of its value over the same period. But U.S. Bancorp still lagged larger banks, with SPDR S&P Bank ETF down a bit less, with a loss of 16% or so.
If you pull out to three years, however, U.S. Bancorp's stock performance doesn't compare quite as well. Over that span, the stock is down roughly 2%. But regional banks, on average, are up 21% while the larger banks are up 27%.
Part of that weakness is likely related to the fact that U.S. Bancorp's return on assets performance hasn't been as strong as some of its competitors. Also, it has a fairly modest Tier 1 capital ratio of 8.5%, down from 9.8% a year ago. This ratio gives an indication of how well a bank can handle adversity. The highest ratio in North America belongs to Canada's Toronto Dominion Bank (TD 0.46%), which operates a regional bank in the United States, at 15.3%.
USB Return on Assets data by YCharts
There is a trade-off with U.S. Bancorp
Investors need to consider some trade-offs when they look at U.S. Bancorp. For example, its 5.5% dividend yield is fairly attractive relative to the SPDR S&P Bank ETF's 3.5% average and SPDR S&P Regional Banking ETF's 3.8%. U.S. Bancorp's dividend has been increased each year for 13 years with the last increase in mid-2022. More conservative income investors might want to wait to make a final call until the third-quarter dividend is announced, as that is the quarter in which dividends have historically been increased.
Meanwhile, with the recent acquisition, U.S. Bancorp is still growing its business. That is taking shape from a position of relative strength, with solid deposit results. And it should help the bank improve financial performance once the integration process is complete. Notably, the bank expects its Tier 1 ratio to rise from current levels. If you can stomach some uncertainty, the high yield might be worth the risk.
And yet, there are other choices in the banking sector. For example, TD Bank has a large footprint in Canada, where it is one of the largest players, and in the United States, where it is still growing its business. It offers investors a generous dividend yield of 4.6% and appears well-positioned to weather any industry upheaval that may come, given its lofty Tier 1 ratio. The stock has held up much better than U.S. Bancorp's, as the graph below highlights.
Bank of Nova Scotia (BNS 0.71%), meanwhile, has little exposure to the U.S. market, which resulted in it performing relatively well so far this year compared to other banks. Its Canadian core business is augmented by expansion efforts in South America. The very end of the graph above shows that investors are well aware of its differentiated market positioning. Meanwhile, it has a huge 6.6% yield. Its Tier 1 capital ratio is 12.8%. Its stock has also performed much better over the past three years.
U.S. Bancorp is not bad, but not great
If you are looking for banking exposure, U.S. Bancorp isn't necessarily a bad call, but it doesn't stand out as a top performer in recent years. It should survive the current banking headwinds and continue to grow, but there are other options that dividend investors might want to consider with similar yields and, perhaps, better industry positions.
