U.S. Bancorp Expands Wholesale Business; Stops Student Loans

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U.S. Bancorp (NYSE:USB) has recently been fine-tuning its business model to ensure a profitable run in the times to come. Notably, the bank has steadily grown its wholesale banking division in order to provide its clients with services and products which it ceased to offer since 2003 when it spun off Piper Jaffray (NYSE:PJC). [1] The bank has also decided to do away with private student loan offerings in view of the high default rates and increased federal oversight on these loans. [2]

We maintain a $31 price estimate for U.S. Bancorp’s stock, which is in-line with the current market price.

See our complete analysis for U.S. Bancorp

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Headache of Student Loans To Get Worse In The Future

This is the reason why U.S. Bancorp has decided to do away with student loans altogether. Student loans have historically resulted in a high level of charge-off for the bank. And to make things worse, the U.S. Consumer Financial Protection Bureau (CFPB) will henceforth keep a close eye on student loans. [2]

Student loans constitute just about 2% of U.S. Bancorp’s total loan portfolio, amounting to around $4.7 billion at the end of 2011. We include student loans as part of the bank’s retail loans in our analysis. The discontinuation of student loans, which form just over 7% of the retail loans, would essentially mean slower growth in total retail loans in the coming years. Hopefully, the recovery in provisions linked to retail loans from this decision will help compensate for the loss of income to a good extent.

Another Investment Bank In The Making?

Actually not, because U.S. Bancorp seems to be content with its traditional banking-focused approach for now. The bank insists that the products and services it offers under its wholesale banking unit are merely to address the needs of its clients. But with the products ready in hand, the bank has also been able to lure new clients. It, however, admittedly wants to steer clear of the path of investment banking.

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Notes:
  1. US Bancorp grows wholesale business, Business Journals, Apr 6 2012 []
  2. U.S. Bank drops student loans, Business Journals, Apr 6 2012 [] []