US Bancorp Shares Up Nearly 25% In The Past Year; Argus Upgrades, Barclays Harps On Operating Leverage

Meanwhile, reviewing the second-quarter results, Barclays said the company needs improved second half to achieve positive operating leverage goal.

Argus noted that the shares of USB has gained about 25 percent in the past year compared to the 14-percent gain for the broader market.

Q2 Print

Analyst Stephen Biggar of Argus noted that the company reported second-quarter earnings per share that were ahead of estimates, with average loans rising 3.7 percent and net interest margin widening, reaching a high point over the past five quarters.

Barclays' Jason Goldberg indicated that a penny earnings beat was masterminded by a lower-than-expected tax rate, with most other metrics coming in line with forecasts.

Among the businesses, Argus noted that commercial lending has been healthy despite intense competition. The firm sees moderation in lending growth in 2017, with overall loan growth of 4 percent in 2017 and 5 percent in 2018.

However, the firm expects net interest margin to expand due to Federal Reserve's interest rate normalization. Although the firm expects one more interest rate hike in late 2017, it is of the view margins would improve in 2018 due to the three rate hikes affected since December 2016.

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Operating Leverage Not Guaranteed In 2017

Notwithstanding peer-leading operating metrics, Barclays cautioned that they were at the low-end of its targets and operating leverage remained negative. Reflecting increased personnel and tech costs related to regulatory compliance, the firm indicated that the first-half efficiency ratio is at the high end of its historical range.

As USB nears the end of the build-out of these programs, Barclays expects the company to be relieved of some expense pressure. The firm thinks higher rates and better loan growth would help improve operating leverage, although it said operating leverage is not a given for the full year 2017.

Barclays raised its 2017 earnings per share estimate by $0.05 to $3.45, citing the earnings beat and expectations for better-controlled expenses in the second half. The firm maintains its 2018 earnings per share estimate at $3.80.

Argus believes the company deserves to trade at a premium valuation on price/book and price/earnings, given its above-peer-average return on equity, return on assets and efficiency metrics and earnings consistency.

Argus Upgrades

As such, Argus upgraded shares of USB from Hold to Buy, with a price target of $57.

"Our upgrade reflects greater confidence in the margin expansion story from higher interest rates and expectations for continued good loan growth in the company's service territory," the firm reasoned.

Barclays has an Overweight rating and $60 price target for the shares of USB.