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Investment Overview for U.S. Bancorp (NYSE:USB)
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Below are key drivers of U.S. Bancorp's value that present opportunities for upside or downside to the current Trefis price estimate for U.S. Bancorp:
Credit Card and Payments Division
- Credit Card Transaction Volume: We expect that credit card transaction volume, which represents the total transactions handled by U.S. Bancorp on its cards, will increase from $55.6 billion in 2012 to almost $70 billion by the end of our forecast period, growing at 3% per annum. However if the balance outstanding grows faster at 8% per annum over this period there could be a 5% upside to the ${trefisprice}. Conversely, if the credit card loan portfolio stagnates, there could be a 3% downside to our price estimate.
- Merchant Transactions: Our forecast for the number of merchant transactions assumes that the number will show a gradual growth of 3% per annum. In case the transactions grow at 8% there could be a 5% upside to the ${trefisprice}. On the downside, a decline in the number of transactions as seen in 2009 could reduce our price estimate. If the forecast declines by 3% annually, there could be a 4% downside to our estimate.
Covered Loans and Other Assets
- Net Interest Margin on Investment Securities:The interest margin on investment securities has declined over the last couple of years from 2.8% in 2007 to under 2% in 2012. In the future, we expect the interest margin to remain around 2.2%. However if the interest margins increase to 3% over the forecast period, there could be a 5% upside to the ${trefisprice}. In case the interest margins decline further to 1.5%, there could be a 5% downside to our estimate.
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U.S. Bancorp is a financial services company that offers lending and depository services, cash management, foreign exchange, trust and investment management services. In addition it also offers credit card, merchant and ATM processing, mortgage banking, insurance, brokerage and leasing services to its customers. At the end of 2012, U.S. Bancorp was ranked the seventh largest bank in the United States by assets.
U.S. Bancorp's branches are mostly concentrated in the Midwest and the Western areas of the U.S. The bank offers financial products and services for corporates, small businesses, governments, financial institutions, private and business clients in the U.S.
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Credit Cards Payment Division
The Credit Cards, Debit Cards and Payment Division is the biggest source of value for U.S. Bancorp. The bank is one of the largest providers of Visa corporate and purchasing card services. Its wholly owned subsidiary, Elavon provides merchant processing services within the U.S. as well as in Canada and in parts of Europe. However the non-U.S. operations of the company are not very significant.
U.S. Bancorp also has significant presence in the prepaid card market and is also one of the front runners in the mobile payments sector as one of the top banks involved in the VISA Digital Wallet program. The division executed $55.56 billion in credit card transactions, $49.75 billion of corporate payments and about 3 billion merchant transactions in 2012 to earn fees and non-interest income from its business as well as retail customers.
Covered Loans and Other Assets
This refers to the covered loans, investment securities and other assets that U.S. Bancorp holds. As of December 31st, 2011 the division had $11 billion in covered loans, $75 billion in investment securities, $8 billion in loans for sale and $10 billion of other earning assets.
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Rise in Prime Loan Interest rates will benefit US Bancorp
As a result of the economic recession, the U.S. government has decreased the prime loan interest rate from high levels of around 8.25% in 2006-2007 to 3.25% since December 2008. As a result of uncertain economic conditions remain uncertain, the prime rates are expected to remain low for quite sometime.
However, with interest rates eventually expected to rise back to historical levels, U.S. Bancorp's revenues will be positively impacted.
Increasing adoption of prepaid cards and mobile payment solutions
Governments and private employers are increasingly turning to prepaid cards as a cost effective method of distributing welfare and employee benefits. Prepaid cards are being used by 40 of the 50 states in the U.S. and U.S. Bancorp provides prepaid card services to 16 of these states.
Prepaid cards are expected to enhance the non-interest revenues for U.S. Bancorp as this segment of the market is not covered under the upcoming regulations on banks that seek to limit charges on credit and debit card services.
Mobile payment solutions could also boost the company's revenues as there is a potential to earn higher revenues from these niche services.
High deposit and loan growth
U.S. Bancorp has reported the highest growth rate in deposits received as well as in loans outstanding compared to its peers over recent years. The increase in deposits has largely been seen in low cost deposits, that is leading to higher net interest margins for the bank. Higher deposits and loans will also translate into increased non-interest income.
Trefis Forecast Rationale for Merchant Transactions
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This represents the number of merchant transactions processed by U.S. Bancorp in a given year.
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${forecast} have shown stable growth over the last few years after declining by 17% in 2007 to 2.48 billion transactions. In 2008, the number of transactions increased by 5% to 2.60 billion transactions and grew by 4.8% in 2009 to 2.73 billion. In 2010 the rate of growth increased by 9.2% as the number of transactions increased to 2.98 billion, before a slowdown in the economy pushed this figure lower to 2.88 billion in 2011.
We expect the number of transactions to increase gradually over the Trefis forecast period.
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- U.S. Bancorp's expansion plans.
- U.S. Bancorp has plans to expand aggressively organically as well as inorganically over the next few years.
- The merchant payment division of U.S. Bancorp is looking to expand in Europe where it is experiencing double digit growth. It also expects growth in Latin America where the company will start JV operations in Brazil.
- U.S. Bancorp can offer premium products
- As the bank continues to offer products and services to corporate clients, it can refine its offering to meet the needs of customers to boost its fees.
Back to Company OverviewHow Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on:
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