Twin City residents this week should look on the bright side: While their beloved Twins were drubbed in the divisional playoffs by the New York Yankees, they have a world-class banking franchise in
U.S. Bancorp was the sixth-largest bank holding company in the country as of June 30, with $266 billion in total assets. Since the S&P 500 Financials index bottomed on March 6, the Minneapolis-based company's shares have more than doubled.
That return trails those of the big four holding companies, including
Bank of America
, whose shares have more than tripled. However, among the largest 10 banks, U.S. Bancorp is among only three to post profits each quarter for the year ended June 30, along with
Bank of New York Mellon
The stock closed Monday at $23.02 and looked relatively expensive compared to peers, trading at 1.9 times book value and 3.4 times tangible book, according to
. Only two of the 10 largest holding companies were trading at higher tangible book value multiples:
at 4.7 and Bank of New York Mellon at 4.4.
U.S. Bancorp is set to report third-quarter earnings on Oct. 21.
analyst Andrew Marquardt said deteriorating credit quality in the company's commercial real estate holdings could expose the company to "late-cycle credit losses after competitor losses may have peaked." He expects the company's earnings to fall to 20 cents a share from 32 cents a year earlier. He lowered his estimate to factor in credit quality concerns.
The numbers for U.S. Bancorp's mortgage origination business look strong, with total one-to-four family mortgage originations and purchases of $15.9 billion for the second quarter, up from $12.9 billion in the first quarter and $8.4 billion for the second quarter of 2008, according to Federal Reserve filings. Strong growth in both retail and wholesale origination volume (with the fourth-quarter acquisition of the failed Downey Savings making a major contribution) bodes well for earnings when the housing market eventually recovers.
Through the second quarter, U.S. Bancorp's asset quality held up compared to other large regional banks, with nonperforming assets comprising 2.3% of total assets, up from 1% a year earlier. The annualized ratio of net charge-offs to average loans was 1.7% for the second quarter, and the bank's loan loss reserves stayed ahead of that pace, covering 2.3% of total loans as of June 30.
In June, U.S. Bancorp repaid the Treasury the $6.6 billion the company received last November through the Troubled Assets Relief Program, or TARP. After raising $2.7 billion in common equity during the second quarter, U.S. Bancorp's tier 1 leverage ratio of tangible common equity to tangible assets was 5% as of June 30, up from 4.6% a year earlier, according to SNL Financial. Looking at regulatory capital ratios, the tier 1 leverage ratio was 8.4% and the total risk-based capital ratio was 13% as of June 30, up from 8% and 12.5% a year earlier, despite growth in the balance sheet and declining asset quality.
So are U.S. Bancorp shares safe? Yes, although short-term investors should tread carefully. The stock's relatively high price and the broader market's run-up could cause the shares to drop in the coming months.
For long-term investors, the company's valuations are less of a concern. U.S. Bancorp's strong capital, growing deposit base and solid credit quality make the shares an excellent five-year play, especially if the bank boosts its earnings and restores its dividend.
-- Reported by Philip van Doorn in Jupiter, Fla
Philip W. van Doorn joined TheStreet.com Ratings., Inc., in February 2007. He is the senior analyst responsible for assigning financial strength ratings to banks and savings and loan institutions. He also comments on industry and regulatory trends. Mr. van Doorn has fifteen years experience, having served as a loan operations officer at Riverside National Bank in Fort Pierce, Florida, and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a Bachelor of Science in business administration from Long Island University.