The three major universal banks -- JPMorgan Chase (NYSE: JPM), Bank of America (NYSE: BAC) and Citigroup (NYSE: C) -- all beat earnings estimates for the first quarter. However, financial markets activities have been driving profits at these firms, not traditional commercial banking. In that regard, it's interesting to take a look at US Bancorp's (NYSE: USB) earnings since it's the largest pure-play commercial bank to report first-quarter earnings.
The light at the end of the tunnel
At $0.34 a share in diluted earnings, US Bancorp was exactly on par with analysts' expectations. Credit loss provisions (reserves set aside to cover future loan losses) of $1.31 billion were at approximately the same level as a year ago and down slightly from the prior quarter ($1.39 billion). Net charge-offs (loans that are considered unrecoverable) also remained ostensibly constant with respect to the fourth quarter of 2009 ($1.14 billion vs. $1.11 billion). These numbers suggest the firm is indeed nearing "the inflection in credit quality" CEO Richard Davis referred to in the earnings release.
As we are exiting the credit crisis, here's how US Bancorp shares stack up against its peers:
|
Company |
P/E (Estimated 2010 EPS) |
P/E (Estimated 2012 EPS) |
|---|---|---|
|
BB&T (NYSE: BBT) |
23.3 |
10.9 |
|
Citigroup |
26.1 |
10.4 |
|
PNC Financial (NYSE: PNC) |
16.7 |
9.9 |
|
US Bancorp |
17.1 |
9.7 |
|
Wells Fargo (NYSE: WFC) |
17.2 |
8.6 |
|
JPMorgan Chase |
14.2 |
7.8 |
|
Bank of America |
19.2 |
6.5 |
Source: Capital IQ, a division of Standard & Poor's.
There's not much between them
The first observation is that all banks look relatively expensive on the basis of this year's expected earnings. It's more useful to look at price-to-earnings multiples based on estimated earnings-per-share for 2012, which are a better reflection of true earnings power (although the range of possible outcomes around 2012 estimates is necessarily wider). On that basis, US Bancorp looks attractive, but there isn't much to distinguish it from two other well-run organizations: Wells Fargo and BB&T.
(While JPMorgan Chase and Bank of America look quite a bit cheaper, I think they, along with Citi, deserve a discounted multiple. The reason: These behemoths' profitability have the greatest exposure to regulatory risk.)
Getting back to those high bank dividend yields
The other thing to look out for over the coming years is a growing dividend yield. By my estimates, US Bancorp could pay out $1.43 per share in dividends in 2012 against just $0.29 per share this year. Even assuming the shares rise by 20% between now and mid-2012, that payout would equal a 4.3% dividend yield.
