Is U.S. Bancorp’s Stock Fairly Priced?

U.S. Bancorp (NYSE:USB) stock has rallied nearly 35% since the beginning of 2019 thanks to the bank’s better-than-expected performance in each of the last three quarters. However, global macroeconomic headwinds surrounding Brexit and the U.S.-China trade deal coupled with the recent rate cuts by Federal Reserve are likely to impact the banks’ growth potential in the near term. Trefis details the key components of U.S. Bancorp’s valuation in an interactive dashboard, along with our forecast for full-year 2019, and estimate the fair value of U.S. Bancorp’s stock to be $57 per share – roughly 5% below the current market price.

In Q3 2019, U.S Bancorp’s Total Revenues grew 4% y-o-y to $5.9 billion, driven by a 5% y-o-y increase in consumer banking segment coupled with a 4% growth in card & payment services and a 14% jump in treasury & corporate support, partially offset by a 2% y-o-y decrease in wholesale banking. However, Net Interest Margin declined 11 bps sequentially due to the impacts of Fed rate cut, changes in deposit and funding mix, and higher cash balance resulting in a slight drop in net interest income. We expect the Net Interest Margin figure to remain under pressure in the coming months, although growth in the loan portfolio should partially mitigate the impact on the top line.

We can break down the U.S. Bancorp’s stock price estimate into 4 factors:

Stock Price = (Total revenue x Net income margin / No. of shares outstanding) x P/E Ratio

U.S. Bancorp’s Revenues Are Expected To Cross $22.9 Billion In 2019 – An Increase Of $419 Million

• U.S. Bancorp is expected to report $22.9 billion in Total Revenues for 2019, which is 2% more than the figure for the previous year.
• This growth would be driven by 3% increase in Consumer Banking revenues and a similar growth in card and payment services, partially offset by a slight reduction in revenues for the Wholesale Banking segment.
• This increase in Consumer Banking segment would be driven by growth in Net Interest Income and Mortgage fees. Further, Deposit service charges and other consumer banking revenues are also expected to report a slight growth in 2019.
• Notably, Wealth Management is expected to grow 1% y-o-y and cross $2.9 billion in 2019.

Details about how trends in U.S. Bancorp’s revenues compare with peers Bank of America, Citigroup and Wells Fargo are available in our interactive dashboard.

This Coupled With Slight Improvement In Operating Margin Would Boost The Net Income Figure

• Although U.S. Bancorp is expected to have a net income of $6.9 billion in 2019 – an increase of 1% on a year-on year basis – net income margin is expected to reduce from 30.1% in 2018 to 29.9% in 2019.
• This growth in net income would be driven by slight improvement in operating margin and higher revenues, partially offset by a 2% increase in expenses and higher effective tax rate.

And Lends Support To A $57 Price Estimate For U.S. Bancorp’s Shares

• U.S. Bancorp has regularly invested in share repurchases to boost shareholder returns. Its share repurchase is likely to touch $2.9 billion for full-year 2019.
• Lower outstanding shares coupled with higher Net Income should help the bank report an EPS figure of $4.34 in 2019.
• Using a 13.1x P/E Multiple on expected 2019 EPS of $4.34, this works out to our price estimate of $57 For U.S. Bancorp’s Stock.

Details about how U.S. Bancorp’s P/E multiple compares with peers Bank of America, Citigroup and Wells Fargo is available in our interactive dashboard.

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