US Bancorp ( USB - Get Report) has remained one of the strongest banks throughout the financial crisis, although it is easily overlooked among its large-cap counterparts. Minneapolis-based US Bancorp, the parent company to U.S. Bank, is the sixth largest commercial bank by assets $264 billion. While it might not be as recognizable as larger rivals like Bank of America ( BAC - Get Report), Citigroup ( WFC - Get Report) and Wells Fargo ( WFC - Get Report), it signaled its strength last week by becoming among the first of the big banks to repay the government's $6.6 billion investment made last year through the Troubled Asset Relief Program. With a franchise spanning much of the housing-ravished Midwest and western parts of the country, US Bancorp was ripe to be leveled by the housing downturn and credit crisis that took down Washington Mutual and Wachovia. But the combination of the company's conservative underwriting standards and diverse mix of businesses -- including a heavy reliance on fee revenue -- proved to fortify US Bancorp over the past two years. US Bancorp was one of 10 banks that government stress tests last month determined did not have to raise additional capital. But in preparation to pay back the TARP funds, it was one of many banks that took advantage of the lenient equity markets last month to raise $2.5 billion from the sale of common stock and issue $1 billion in unsecured senior notes. "
Think about how important it is in the last year or two to be able to go and approach a customer, a corporate customer or a small business customer or a consumer and be able to say to them we represent one of America's strongest banks," Chairman and CEO Richard Davis said at a recent investor presentation.
"We have been competitive on every level of pricing," Davis added during the May 13 presentation. "Our service quality has continued to move up to some of the top in class. If you pass the stress test, that helps a lot and ... the last act of moving forward unfettered, giving back the TARP money, is a final opportunity to really enjoy a flight to quality." As the financial crisis intensified, customers and investors flocked to safer names like US Bancorp, observers say. Famed investor
Warren Buffet is one of them. His investment company Berkshire Hathaway ( BRK.A), a long-time holder of the stock, increased its stake to about 69 million shares, or 3.64% of the company, last month. US Bancorp is one of the "high-quality names" that investors should consider once the asset quality problems begin to subside, according to Oppenheimer analyst Chris Kotowski. The company's footprint, "while covering an enormous area geographically, still covers only a relatively small footprint in terms of population, but within these markets it almost always has a No. 1 or No. 2 market position," Kotowski wrote in a May 4 coverage initiation note. Additionally, other than Wells Fargo, US Bancorp sports one of the best profitability ratios of any major banking company due to its "overwhelmingly customer-based balance sheet" and generates better margins at "vastly better" efficiency ratios, he wrote. "We believe this is possible as a result of good market share and good management that has recognized that banking is a game of repeatable singles and doubles rather than episodic home runs," he wrote.
US Bancorp's major business lines include consumer and small business banking, wealth management, wholesale banking, primarily for middle-market businesses and merchant processing and credit card payment services to consumers and businesses. Fox-Pitt Kelton Cochran Caronia Waller analyst Andrew Marquardt says US Bancorp's ability to stand out from other troubled institutions by continuing to produce profit, generate capital and not be distracted with crisis management over the last two years has placed it in good position. "
They haven't been plagued by other issues ... massive writedowns, having these unique CDOs and subprime and areas that have really been problematic," Marquardt says. "They haven't had big unexpected charges. They've basically stuck to their knitting in terms of core relationship banking." Unlike most regional banks, US Bancorp also has what many call a "hidden gem" in its payments processing business. Like Fifth Third ( FITB - Get Report), which sold a majority stake of its payments business to raise capital, US Bancorp's business could be monetized in a worst case scenario at a substantial value. "While the payments business includes credit card operations, it would be a mistake to view it as simply a credit card business," Kotowski wrote. "Some 62% of the payments revenues are tied to corporate payment systems (corporate travel cards and the like) and merchant processing services, which have minimal credit risk associated with them. We view this business as one of those 'hidden assets' that over time will allow US Bancorp to grow more rapidly with less risk and greater profitability."
Similar to JPMorgan Chase ( JPM - Get Report), a company that has such a premier stature starts with top management. Davis, 51, is still relatively new to the top job at the company, but observers have been pleased with his performance so far. Davis became the company's CEO in 2006 and chairman in 2007, but has been employed by US Bancorp through its predecessors since 1993. Davis replaced longtime CEO Jerry Grundhofer, now a director at Citi and rumored to be a possible replacement to Citigroup CEO Vikram Pandit. Grundhofer, who recruited Davis to come work for him at the bank, then-known as Star Banc Corp., retired after leading US Bancorp and its predecessors since 1993. Marquardt says Davis' sharp vision and good communication with the investment community with a clear and concise company strategy is what makes him likeable. "He is extremely bright. He's got a great vision. He has been at the company forever. He has done a very good job of communicating with the investment community with keeping a very clear and concrete strategy over the years," Marquardt says. Davis favors "low capital intensive, high-margin businesses," such as asset management and payments processing. But whereas once US Bancorp was known for its efficiency and risk adversity, despite being a busy acquirer (the bank itself culminating from the tie-up of five former "super regional" banks), Davis is now focusing on growing the company organically through internal revenue generation. "For those of you who have followed this bank for a long time, you have always known us particularly good at expense control and risk prudence. And those things we have not lost," Davis said during the presentation. "But you have not known us in the years past as a real revenue company ...
focused on growing the overall size of the company through organic success. And now you should start to see us that way."
The company formed in 2007 what it calls the "Enterprise Revenue Office," to foster additional revenue-generating ideas internally. Davis said in May that the company was "well ahead" of its plan to add at least $750 million in additional revenue by 2011. The company also has a goal of being the best in customer service now that the leader -- Washington Mutual -- has been acquired by JPMorgan Chase. "We think it is time to reach up, ring the bell and be America's best large bank service provider," Davis said. Despite the shift in strategy away from M&A, the company is still opportunistic. US Bancorp's strong capital position has allowed it to be an acquirer of several troubled institutions. With the help of the Federal Deposit Insurance Corp., the company in November purchased the deposits and some assets of both Downey Financial, of Newport Beach, Calif., and PFF Bancorp, headquartered in Rancho Cucamonga, Calif. US Bancorp also acquired First Bank of Idaho through a federally assisted deal last month. "We will look with the FDIC at opportunities every single Friday and we will decide whether or not a small one makes sense. ...
If nothing else comes along that's fine with me. We don't need to grow this company through M&A of any necessary sort. Organic is fine with me," Davis said.