U.S. Bancorp Very Likely To Complement Organic Loan Growth With A Big-Ticket Acquisition In 2019

by Trefis Team
U.S. Bancorp
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U.S. Bancorp (NYSE: USB) has historically had a penchant for acquiring smaller banks to consolidate as well as to grow its presence in the U.S. The OCC’s consent order against it in 2015 forced the regional banking giant to stick to an organic growth strategy over the last few years. However, as we have pointed out on several occasions in the past, the bank’s conservative capital return policy over recent years was largely aimed at ensuring that the bank has sufficient cash reserves to make strategic acquisitions once the consent order was lifted. With the OCC terminating the consent order last December, and given the ongoing consolidation in the U.S. banking industry, it is only a matter of time before U.S. Bancorp announces a significant bank acquisition.

Per Trefis estimates, U.S. Bancorp stock is worth $53, which is slightly higher than the current market price. Our price estimate is based on a P/E multiple of 13.1x and an EPS estimate of $4.27 for FY 2019. We have summarized our full-year expectations for U.S. Bancorp in our interactive dashboard How Did U.S. Bancorp Fare In Q1 2019, And What Can We Expect In 2019? You can modify any of our key drivers to gauge the impact of changes on its valuation. In addition, you will find more Trefis data for Financial Services companies here.

A Quick Look At U.S. Bancorp’s Revenue Sources

U.S. Bancorp reported $22.5 billion in Total Revenues in FY 2018. This included 5 revenue streams.

  • Wholesale Banking: $3.8 billion in FY 2018 (17% of Total Revenues) – This represents the revenues for U.S. Bancorp from providing commercial products and services as well as treasury management services to its corporate clients
  • Consumer Banking: $8.5 billion in FY 2018 (37% of Total Revenues) – It encompasses community banking, metropolitan banking, indirect lending and mortgage banking operations.
  • Wealth Management: $2.9 billion in FY 2018 (13% of Total Revenues) – This division includes U.S. Bancorp’s asset management, investment, retirement and brokerage services.
  • Card & Payment Services: $6.0 billion in FY 2018 (27% of Total Revenues) – It represents the revenues from providing credit card services and merchant payment services for corporate and retail clients.
  • Treasury & Corporate Support: $1.3 billion in FY 2018 (6% of Total Revenues) – It includes the bank’s investment portfolios, funding, capital management and interest-rate risk management operations which provide support to its other operating divisions.

Key Revenue Drivers

  • Average Credit Card Loans: In Q1 2019, Net Interest Income for the Card and Payment Services segment increased by 1.8% y-o-y driven by growth in Average Credit Card Loans and loan fees, partially offset by lower loan spread due to the interest rate hike. Average Credit Card loans have seen steady growth over years (CAGR 2015-2018: 7%) and are likely to follow the same trend in subsequent quarters. We expect card loans to grow 5% in 2019.
  • Net Interest Margin (NIM) on Consumer Loans: Rising interest rates, higher reinvestment rates on maturing securities and a better loan portfolio mix have driven strong gains in U.S. Bancorp’s Net Interest Margin figure over recent years. While the Fed is likely to maintain interest rates at current levels over the rest of the year, we expect an improving loan portfolio mix to help the Net Interest Margin for consumer loans increase by 4 basis points in 2019.
  • Average Commercial Loans: It is the main driver of Net Interest Income in Wholesale Banking. In Q1 2019, Average Commercial Loans grew by 4.6% y-o-y. We expect the same trend to continue in subsequent quarters leading to a 3% growth in Average Commercial Loans in 2019.

U.S. Bancorp’s Outlook For Full Year 2019

  • U.S. Bancorp is expected to report $23.3 billion in Total Revenues for 2019, which is 4% more as compared to 2018.
  • It is likely to witness growth across its business segments, with Consumer Banking contributing the most followed by Card & Payment Services. Consumer Banking revenues are expected to increase by 3% y-o-y due to growth in Net Interest Income and Mortgage fees.
  • Wealth Management revenues are expected to grow 5% y-o-y thanks to a 4% increase in Assets under Management (AuM) and a 9% increase in Average Loans Outstanding for the division.
  • Total Expenses are expected to rise to $14.5 billion due to higher credit loss provisions and an increase in Technology Investments. This coupled with a higher effective tax rate compared to 2018 will lead to a slight reduction in Net Income for the year.
  • Despite its conservative capital return strategy over recent years, U.S. Bancorp has repurchased shares worth billions of dollars each year. This is likely to continue in 2019 too – in turn helping the EPS figure reach $4.27.
  • EPS of $4.27 coupled with our forward P/E multiple of 13.1x represents a price estimate of $56.
  • However, the bank’s stock presents a sizable upside potential, given the likelihood that it will acquire a mid-sized regional bank which complements its existing branch footprint in the U.S.

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