Most people who follow bank stocks know that U.S. Bancorp (NYSE:USB) is one of the nation's best-run banks. To demonstrate why this is the case, you needn't look any further than the growth in its book value per share over the past two decades, which is illustrated in the following chart:
U.S. Bancorp's book value per share has increased by an industry-leading 2,453% since 1995. Only Capital One, a monoline credit card company that transformed into a full-fledged regional bank over the past 20 years, can claim a similarly rapid ascent, with an increase of 2,263% over the same period.
The nation's biggest banks have all seen their book values per share rise by much smaller margins. Wells Fargo and Bank of America lead the way among too-big-to-fail firms with increases of 656% and 498%, respectively. JPMorgan Chase comes in third with total growth of 232%. And Citigroup brings up the rear, with only a 3% increase after adjusting for inflation.
This matters because a bank's share price, which plays a central role in total shareholder return, is predicated in large part on its book value per share. This is obvious when you consider that bank stock valuations are expressed as a multiple of book value. In U.S. Bancorp's case, for instance, its shares trade for 1.84 "times book." Holding all else equal, in turn, a bank with a higher book value per share will have a higher share price, and vice versa.
How has U.S. Bancorp been able to accomplish this? The answer is twofold. First, it keeps its expenses low. In the latest quarter, only 53.2% of its revenue was consumed by operating expenses. Most other banks struggle to get this figure, known as the efficiency ratio, below 60%. The net result is that a larger share of U.S. Bancorp's net revenue falls to the bottom line.
Second, by sidestepping the most toxic subprime mortgages in the lead-up to the financial crisis, U.S. Bancorp was able to avoid the massive losses that eroded the capital of many of its competitors. In fact, among the major banks, it was the only one that generated a double-digit annual return on equity before, during, and after the crisis. That says a lot about a bank, as the objective isn't to maximize profitability at a single point in time, but rather to do so through all stages of the credit cycle.
In short, if you're looking for a bank stock to serve as an anchor in your portfolio, you could do a lot worse than U.S. Bancorp.