I believe the higher expenses was one of the reasons that caused the 2% decline in net interest income, which was below expectations. In the "too big to fail era," any time bank expenses rise it becomes a big deal, especially with stricter federal regulation ensuring banks are able to meet their capital requirements. In this case, I don't believe this is a situation where U.S. Bancorp management is getting careless.
I'm not going to make excuses for the bank's miss of 3 cents on expenses. But given that U.S. Bancorp still maintained a solid efficiency ratio of 52%, which is better than Wells Fargo's 57% and JPMorgan's 59%, I wouldn't get carried away. The lower the number, the stronger the bank is perceived to be. So, here too, U.S. Bancorp is demonstrating that it just might be safer than two of the better names on the market.
Besides, given how competitive this sector has become, I don't see a scenario where U.S. Bancorp management could have grown average loans by more than 5% without having made some investments. Plus, the fact the bank still managed to meet expectations in net interest margin should negate any near-term worries about its capital-use efficiency.
All told, it was not great a quarter, but it was solid enough to affirm that management has strong focus on the bank's direction. Plus, I don't believe there were any breathtaking performances from within this sector, anyways -- even from the "big four." For U.S. Bancorp, l believe there will be more growth opportunities ahead. The question is to what extent management is willing to go to produce the level of growth that investors crave.
I'm not going to assume that growth will be free, which means expenses are likely to rise. For now I will say that I like the progress that U.S. Bancorp has made. With the bank's strong reputation for return on equity, which currently stands at 14%, these shares still look cheap. Until something changes, I'm going to stick with my price target of $40, which I originally set in April.
At the time of publication, the author held no position in any of the stocks mentioned
This article was written by an independent contributor, separate from TheStreet's regular news coverage.