U.S. Bancorp Sidesteps Shrinking Interest Margins To Report Strong Q3 Results

Since early 2012, investors have repeatedly expressed their concern over the steady decline in net interest margin figures for U.S. Bancorp (NYSE:USB) – a phenomenon that has dragged down results for all commercial banks over the last couple of years. With no improvement expected in this regard until the Federal Reserve hikes benchmark interest rates next year, it is only over recent quarters that investors have stopped focusing too much on this metric – choosing instead to gauge how well a bank is poised to gain once interest rates rise. This is largely why U.S. Bancorp’s share price increased last week after the bank released better-than-expected performance figures for the third quarter on Wednesday, October 22. ^[1] The bank’s net interest margin has fallen for eight consecutive quarters now to an all-time low of 3.16%, but the regional banking giant has done well to refocus its efforts on other revenue sources while ensuring that it maintains its reliable, risk-averse business model.

We maintain a $44 price estimate for U.S. Bancorp’s stock, which is about 10% ahead of the current market price.

See our complete analysis for U.S. Bancorp

Net Interest Margins An Industry Concern, Not Bank-Specific Issue

U.S. Bancorp’s business model, due to its reliance on traditional banking operations, is very sensitive to interest rates. This is why the biggest concern among investors about its performance over recent quarters has been the sequential decline in its net interest margin (NIM). Due to the extended low interest-rate environment, safe investment options with reasonably high rates of return have been difficult to come by, which has squeezed margins.

The table below summarizes U.S. Bancorp’s reported net NIM figures for each quarter since early 2012:

As seen here, the bank’s NIM fell from 3.60% to 3.35% between Q1 2012 and Q3 2014. In fact, the figure was almost 3.7% at the beginning of 2011 – indicating a reduction of almost 55 basis points (0.55%) over the last 15 quarters. This has been due to lower interest income from variable sources, a steady growth in interest-bearing customer deposits and also because of actions undertaken by the bank to ensure regulatory liquidity requirements.

With the Fed indicating that it will raise interest rates once key economic metrics show a complete recovery from the downturn of 2008, such a move is expected around mid-2015. You can understand the partial impact of changes to net interest margins on the bank’s total value through the chart below, which represents U.S. Bancorp’s NIM on its investment securities.

Wealth Management, Securities Services To Deliver Future Value

One of the highlights of U.S. Bancorp’s performance figures over the last few quarters has been the marked growth in its trust and investment management fees. The bank reported more than $300 million in revenues from its Wealth Management and Securities Services Business (which includes its private banking, financial advisory services, investment management, retail brokerage services, insurance, trust, custody and fund servicing units) for the first time in Q1 2014 – and this figure grew to $315 million in Q3 2014. This represents a 12.5% jump compared to the same quarter last year. While the size of U.S. Bancorp’s assets under management has grown steadily over the years, the fact that it is looking for acquisition opportunities to grow its corporate trust business in Europe points to a faster growth in the asset base in the near future. ^[2]

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1. U.S. Bancorp Reports $1.5 Billion of Net Income for the Third Quarter 2014, U.S. Bancorp Press Releases, Oct 22 2014 [↩]
2. U.S. Bancorp Results Meet Expectations, The Wall Street Journal, Oct 22 2014 [↩]