US Bancorp Is the Best Big Bank That Everyone Should Be Talking About

NEW YORK (TheStreet) -- US Bancorp (USB) is a major banking institution that flies under most radar screens.

That's hard to figure out when the news is full of reports about the fines, penalties, rejected capital plans, improper accounting and all manner of sundry mismanagement episodes involving the top U.S. banking centers.

Wells Fargo (WFC) is Warren Buffett's largest position, so that well-run business gets its fair share of coverage. But US Bancorp? Nearly nada.

USB is the fifth-largest bank in the United States. The business model is remarkably pedestrian. The bank takes in customer deposits, makes community mortgages and loans, and collects fees for routine banking services. The M.O. is "Main Street," not "Wall Street."

Quietly, USB common shares represent Buffett's and Berkshire Hathaway's (BRK.B) eighth-largest position at about $3.25 billion. What's more, the quarterly 13-F disclosure statements indicate that in each successive period the position has grown.

Buffett's not alone. TheStreet's Jim Cramer owns USB in his charitable portfolio, Action Alerts PLUS. I own some as well.

US Bancorp by the Numbers

By some measures, US Bancorp is the best-run, most efficient outfit of the mega-bank lot. Here are two slides comparing USB with other major-banking peers. The first slide highlights return-on-equity and return-on-assets, two typical measures of how effectively management handles capital:

Courtesy of Wells Fargo

Next, we see how our bank stands out when gauged by efficiency ratio, or non-interest expense as a function of total revenue. This demonstrates how well management controls costs:

Courtesy of Wells Fargo

Please note these slides did not come from a US Bancorp presentation. They both were taken from the 2014 Wells Fargo Investor Day presentation materials. Even Wells' senior leadership must acknowledge USB's perch atop these metrics.

US Bancorp just quietly goes about its business. This bank paid its TARP money back upon its first opportunity. It has had each successive capital program left uncontested by Federal regulators. Dividends have risen 460% from 20 cents a share in 2010 to an annualized 92 cents today.

Whereas many banking competitors are lifting quarterly earnings via significant release of loan loss reserves, US Bancorp has done little of that. Indeed, that's because USB never had much problem with bad loans to begin with. Underwriting standard remained remarkably tight even prior to the financial crisis.

Stock Valuation

Currently, USB shares appear just a bit below fair value. At its Tuesday close of $41.74, shares are up 3.3% for the year to date and close to 18% for the past 52 weeks.

Financial sector stocks tend to shine most brightly during the early phase of the economic business cycle. US Bancorp stock ran up smartly over the past few years, rising some 62% over the past four years. There's likely some gas left in the tank, though.

Historically, bank stocks perform acceptably during the mid-cycle economic phase, particularly at such time long interest rates move up. Over the past 10 years, USB has logged about 14x normalized average P/E. The current trailing 12-month P/E is about on mark.

Therefore, while the historic data indicate investors may not expect much multiple expansion, the Wall Street analyst consensus forecasts U.S. Bancorp will grow earnings per share approximately 6%. Premising a steady multiple and adding the expected dividend yield suggests a total return of about 8.5%. The current price-to-book ratio is 2.0. This figure is likewise aligned with USB's long-term P/B ratio.

At the time of publication the author was long USB and USB-H preferred shares.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

>>Read more: Bank of America Tries to Bounce Back From $4B Capital Blunder

Please do you own careful due diligence before making any investment. This article is not a recommendation to buy or sell and stock.

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