U.S. Bancorp Company
VALUATION HIGHLIGHTS
- Wholesale Banking & Wealth Management constitutes 61% of the Trefis price estimate for U.S. Bancorp's stock.
- Consumer Banking constitutes 23% of the Trefis price estimate for U.S. Bancorp's stock.
- Card & Payment Services constitute 16% of the Trefis price estimate for U.S. Bancorp's stock.
WHAT HAS CHANGED?Latest Earning
In Q4 2023, U.S Bancorp reported Total Revenues (before provision for credit losses) of $6.76 billion, 6% more than the year-ago period - primarily due to a 28% increase in the non-interest income.
Note- On December 1, 2022, USB acquired MUB's core regional banking franchise from Mitsubishi UFJ Financial Group.
U.S. Bancorp has a sizable loan portfolio of consumer and commercial loans. Further, the wholesale & wealth management, cards and payments, and consumer banking segments together generated around 95% of the bank revenues in 2023, which implies that the bank is heavily dependent on the three segments. Overall, the company posted total revenues of $28.01 billion in FY2023.
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 6-7% annually. In case the transactions grow at 10%, there could be a 2% upside to the Trefis price estimate for U.S. Bancorp's stock. On the downside, a decline in the number of transactions by 3% could reduce our price estimate by 2%.
Wholesale Banking
- Net Interest Margin on Wholesale Loans: The interest margin on wholesale loans improved from 3.09% in 2017 to 3.13% in 2018 due to subsequent rate hikes. The margin reduced in 2020 due to the Covid-19 crisis and was around 2.71% in 2022. Going forward, we expect the figure to improve over the forecast period.
BUSINESS SUMMARY
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, and 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 $133 billion worth of card transactions, $84 billion worth of corporate payments, and 7.36 billion merchant transactions in 2022 to earn fees and non-interest income from its corporate as well as retail customers.
Wholesale Banking
This refers to U.S. Bancorp's commercial banking and treasury services operations. At the end of 2022, the division had about $128 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 2022).
KEY TRENDS
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) in 2020. The prime rate remained at this level for almost 2 years, before a series of rate hikes by the Fed in 2022.
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.
