Is U.S. Bancorp The New Poster Child For The U.S. Banking Industry After Wells Fargo’s Fall From Grace?

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U.S. Bancorp (NYSE: USB) and Wells Fargo (NYSE: WFC) are the seventh-largest and third-largest bank in the United States by assets, respectively. Both the banks have near-identical business models that offer services like consumer banking, credit & debit cards, wholesale banking and asset & wealth management services to retail customers, corporates, small businesses, governments as well as financial institutions. Their business model faces stiff challenges and competition from offerings by competitors including JPMorgan, Bank of America, Citigroup and Capital One.

Trefis compares trends in key operating metrics for U.S Bancorp vs Wells Fargo over the last 4 years, along with our forecast for 2019 in an interactive dashboard, and finds that U.S. Bancorp runs a more profitable business despite being much smaller in size than Wells Fargo. While Wells Fargo has suffered over recent years due to the Fed’s growth restriction, U.S. Bancorp has done extremely well to focus its efforts on key regions instead of opting for a pan-U.S. presence.

Trefis estimates U.S Bancorp’s valuation to be $57 per share (marginally higher than the current market price) after incorporating changes based on latest U.S Bancorp’s earnings. Additionally, you can see more Trefis data for financial companies here.

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U.S. Bancorp’s revenues are almost one-fourth Wells Fargo’s revenues

  • U.S. Bancorp reported total revenues of $22.5 billion in 2018, which was 74% less than the total revenue figure of $86.4 billion for Wells Fargo.
  • Both banks are heavily dependent on Consumer & Community Banking segment, as it has contributed nearly 50% of the total revenues over the last 4 years.
  • Although Wells Fargo’s revenues have struggled over recent years, U.S. Bancorp has grown at an average annual rate of 4%.
  • We expect Wells Fargo to report a decline of 3% y-o-y in 2019 due to continued impact of the Fed’s growth restriction coupled with a softer interest rate environment, whereas U.S. Bancorp revenues would show slight growth.

Although U.S. Bancorp’s consumer & community banking revenues are one-fourth of Wells Fargo’s figure, it has grown at an average annual rate of 7% over the last 4 years.

  • Wells Fargo’s segment revenues have suffered in the recent years due to decline in total consumer banking loans.
  • Notably, Wells Fargo is the market leader in Residential Mortgage loans with reported figure of $321 billion in 2018. This was roughly 5-times the figure for U.S. Bancorp.

Wells Fargo’s Commercial Lending revenues are 7 times the figure for U.S. Bancorp

  • This is also evident from the U.S. Bancorp’s total commercial loans of $94 billion in 2018, which was less than a quarter of the figure of $446 billion for Wells Fargo
  • Wells Fargo’s Wholesale Banking operations also include Investment Banking, Trading and Insurance services which are not offered by U.S. Bancorp.

Wells Fargo’s asset & wealth management revenues were $16.4 billion in 2018, which was 5.7x times the asset & wealth management revenues for U.S. Bancorp

  • Fees income constitutes majority of the asset & wealth management segment revenues for both the banks. However, its revenue share has decreased over the last 4 years due to an increase in the net interest income figure.
  • The scale of the segment operations is more evident from U.S Bancorp’s total AuM of $165 billion in 2018, which is roughly a quarter of Wells Fargo’s figure of $637 billion.

Although operating margins of both the banks have shown similar trend over the last 4 years, U.S. Bancorp is clearly more efficient

  • U.S. Bancorp has maintained a healthy operating margin of more than 30% over the last 4 years. The same is true for Wells Fargo.
  • Operating margins for both banks have historically decreased over 2015-2017, before increasing in 2018. However, U.S. Bancorp has reported a higher figure for each year than its peer.

Other Key Operating Metrics

  • Wells Fargo has a wider branch banking presence across the globe, which is the main reason behind its higher employee count. It reported 258.7K employees in 2018 which was 253% higher than U.S Bancorp’s figure.
  • Although USB is much smaller than WFC, the difference in revenue per employee is not that significant. U.S Bancorp’s revenue per employee was $307K in 2018, which was just 8% less than its competitor.
  • Notably, Compensation per employee figures for both the banks have increased over the last three years.
  • Wells Fargo has higher compensation cost as compared to U.S Bancorp. It reported per employee compensation of $108.6K in 2018, which was 29% higher than the figure for U.S. Bancorp.

Additionally, detailed comparison of metrics like CET1 capital ratio, asset turnover ratio and return on assets for U.S. Bancorp vs Wells Fargo is available in our detailed interactive dashboard.

Conclusion

  • Although U.S Bancorp is a much smaller bank compared to Wells Fargo, its operations are more efficient than its peer.
  • U.S Bancorp has significantly lower revenues and small head count as compared to Wells Fargo. However, its revenue per employee figure is quite close to that of its peer.
  • U.S Bancorp has a higher asset turnover ratio and a better return on assets than that of its peer. However, Wells Fargo has reported a higher CET1 capital ratio over the last 4 years.
  • Further, it has a lower compensation per employee figure which implies better operational efficiency.

Per Trefis, U.S. Bancorp’s Revenues (shows key revenue components) are expected to cross $22.9 billion in 2019 – leading to an EPS of $4.28 for the year. This EPS figure coupled with a P/E multiple of 13.3x, works out to a price estimate of $57 for U.S Bancorp’s stock (shows cash and valuation analysis), which is marginally higher than the current market price.

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