Balanced Risk-Reward for U.S. Bancorp - Analyst Blog

On Mar 11, 2014, we issued an updated research report on U.S. Bancorp USB. This regional bank recently reported impressive fourth-quarter 2013 results.

Results were aided by lower non-interest expenses, increased loan and deposit balances and reduced provision for credit losses, partially offset by a declining top line. Though the company shows stability in its fundamentals, we remain cautious due to the current economic uncertainty across the industry.

U.S. Bancorp reported fourth-quarter 2013 earnings of 76 cents per share, beating the Zacks Consensus Estimate by 1.33%. Net income was up 2.5% year over year to $1.5 billion.

The company exhibited a decent performance in 2013 as evident from its earnings history. In 2013, the company posted in-line earnings in 3 quarters while a positive earnings surprise in the final quarter.

U.S. Bancorp has made a number of strategic bank acquisitions in the past years, which have opened new markets to it. Moreover, it continued to invest in businesses throughout 2013. Recently, the company purchased Chicago branch franchise owned by RBS Citizens Financial Group, a subsidiary of The Royal Bank of Scotland Group plc. RBS. The deal is expected to aid U.S. Bancorp to overcome the financial complexities in its internal rate of return and enhance earnings per share.

We view U.S. Bancorp as a sound asset for yield-seeking investors. Reflecting U.S. Bancorp's capital strength during the year, the company was able to return 71% of its earnings to shareholders, within the range of its long-term goal of returning 60–80%. Such a shareholder-friendly approach inspires investors' confidence in the stock.

Despite strong fundamentals, we believe there are certain issues that may create pressure on the company's financials in the near term. These include absence of credible improvement in the mortgage market, declining net interest margin due to low interest rate environment and the prevailing stringent regulatory landscape.

Further, the Zacks Consensus Estimate over the past 60 days declined around 1% to $3.17 per share for 2014. Also, for 2015 it dipped about 1% to $3.43 per share, over the same time frame.

U.S. Bancorp currently carries a Zacks Rank #3 (Hold).

Key Picks from the Sector

Some better ranked major regional banks include Fifth Third Bancorp FITB and The PNC Financial Services Group, Inc. PNC. Both stocks carry a Zacks Rank #2 (Buy).