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Consumer Banking constitutes 35% of the Trefis price estimate for U.S. Bancorp's stock.
Wholesale Banking constitutes 26% of the Trefis price estimate for U.S. Bancorp's stock.
Wealth Management constitutes 21% of the Trefis price estimate for U.S. Bancorp's stock.
WHAT HAS CHANGED?
In Q3 2021, U.S Bancorp reported Total Revenues of $5.86 billion – marginally less than the year-ago period. The wholesale banking revenues dropped by 13% y-o-y followed by a 2% drop in consumer banking. However, the negative effect was offset by a 3% y-o-y jump in the payment services unit. Further, the bank reduced its provisions for credit losses from $635 million in Q3 2020 to -$163 million in the quarter.
Impact of coronavirus outbreak
U.S Bancorp has a sizable loan portfolio of consumer and commercial loans. Further, the wholesale, cards and payments, and consumer banking segments together generated around 81% of the bank revenues in 2019, which implies that the bank is heavily dependent on the three segments.On the other hand, we businesses have suffered losses in 2020 due to the combined effect of lower consumer demand, supply chain disruption, and global economic slowdown. This impacted the loan repayment capacity of USB's customers, exposing the bank to the possibility of sizable losses. However, the bank has seen some improvement in its total Assets under Management and deposits over the recent quarters.
While the company's results for each of the four quarters in 2020 showed some positive growth, its top-line has posted slight negative growth in the first three quarters of FY2021. We expect the same trend to continue in Q4 FY2021 results as well.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
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:
Card & Payments Services
Merchant Transactions: Our forecast for the number of merchant transactions assumes that the number will show a gradual growth of 3% annually. In case the transactions grow at 8%, there could be a 3% upside to the Trefis price estimate for U.S. Bancorp's stock. On the downside, a decline in the number of transactions, as seen in 2011, could reduce our price estimate. If the forecast declines by 3% annually, there could be a 2% downside to our estimate.
Net Interest Margin on Wholesale Loans:The interest margin on wholesale loans declined from a peak level of 3.64% in 2011 to just 2.35% in 2015 as a result of the low-interest rate environment. As the Fed began its rate hike process, the figure increased to 2.43% in 2016. It further improved in 2017 to 3.09% and then to 3.13% in 2018 due to subsequent rate hikes. Going forward, we expect the figure to slightly decrease in 2019, before reporting a slight improvement over the forecast period. Further, a faster-than-expected increase to 3.5% by the end of the period could represent a 3% upside to the Trefis price estimate for U.S. Bancorp's stock.
U.S. Bancorp is a financial services company that offers lending and depository services, cash management, foreign exchange, trust, and investment management services. Additionally, it offers credit card, merchant and ATM processing, mortgage banking, insurance, brokerage, and leasing services to its customers. U.S. Bancorp is 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.
SOURCES OF VALUE
Credit Cards Payment Division
The Credit Cards, Debit Cards and Payment Division is a major 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 parts of Europe. However, the non-U.S. operations of the company are not very significant.U.S. Bancorp also has a 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 almost $97 billion worth of card transactions, $67 billion worth of corporate payments, and 5.71 billion merchant transactions in 2018 to earn fees and non-interest income from its corporate as well as retail customers.
This refers to U.S. Bancorp's commercial banking and treasury services operations. At the end of 2018, the division had about $94 billion in outstanding loans. The division's key characteristics are the low-risk profile of loans handed out (evidenced by low loan provision figures) and high operating margins (operating expenses were around 41.8% of revenues in 2018).
Rise in prime lending rates will benefit U.S. Bancorp
As a result of the economic downturn, the U.S. government decreased the prime loan interest rate (the interest rate that commercial banks charge their most credit-worthy customers) from levels of around 8.25% in late 2007 to 3.25% in 2008. The prime rate remained at this level for more than seven years, before a series of rate hikes by the Fed brought this figure to 4.75% at the end of 2019. However, the rates were slashed back to the 2008 level of 3.25% in May 2020, due to Covid-19 crisis. That said, As economic conditions improve, interest rates will eventually return to historical levels, at which point 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. U.S. Bancorp provides prepaid card services to 100 government programs in 31 U.S. 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, which is leading to higher net interest margins for the bank. Higher deposits and loans will also translate into increased non-interest income going forward.
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