[Updated 12/17/2020] U.S. Bancorp Update
We believe that U.S. Bancorp stock (NYSE: USB) has an upside potential of 21% in the near term once the low-interest-rate environment and loan repayment capability of its customers improves. USB trades at $45 currently and has lost 24% in value year-to-date – 17% behind its pre-Covid high in February. Also, USB stock has gained 56% from the low of $29 seen in March 2020, after the multi-billion dollar stimulus package announced by the U.S. government, which has helped the stock market recover to a large extent. The stock is lagging the broader markets (S&P 500 is up about 65% since the March lows), as investors are cautious about the impact of lower interest rates and higher loan default risk on the Bank’s top line.
U.S. Bancorp outperformed the consensus estimates in its recently released Q3 results. It reported total revenues of $6 billion – 2% more than the year-ago period, The bank has a sizable loan portfolio of consumer and commercial loans and derives around 80% of its revenues from the three segments together – wholesale banking, cards & payments, and consumer banking. The bank has suffered due to the Covid-19 crisis, as it has distressed industrial and economic activity across the globe, negatively affecting interest rates. Further, uncertain economic conditions have affected the loan repayment capability of customers, increasing the risk of loan defaults. The bank almost tripled its provision for credit losses in order to compensate for that risk – up from $1.1 billion on 30th September 2019 to $3.4 billion by Q3 2020. However, we expect the situation to improve in the coming months, driven by a recovery in demand and gradual improvement in economic conditions. Further, the bank is expected to restart its share repurchase program next year, which is likely to provide a boost to its stock price. Despite the rally in U.S. Bancorp stock since late March, we believe that the stock has some more room for growth in the near future provided there is no sudden uptick in the Covid-19 cases leading to further lockdown restrictions. Our conclusion is based on our detailed analysis of U.S. Bancorp’s stock performance during the current crisis with that during the 2008 recession in an interactive dashboard analysis.
[Updated 10/13/2020] U.S Bancorp Stock Has 35% Upside
We believe that U.S. Bancorp’s stock (NYSE: USB) has a strong upside potential of 35% in 1-2 years when the loan repayment capacity of its banking customers improves and the stock goes back to post-Covid levels. USB trades at $39 currently and it has lost 32% in value year-to-date. It traded at a pre-Covid high of $53 in February and is 27% below that level now. Also, USB stock has gained 39% from the low of $28 seen in March 2020, after the multi-billion dollar stimulus package announced by the U.S. government helped stock prices recover, to some extent. That said, the stock is lagging the broader markets (S&P 500 is up 55%), as investors are overly cautious about the possibility of loan defaults on the bank’s consumer and wholesale loan portfolio. However, the company has increased its provisions for credit losses to take account of the loan default risk and all banks are expected to resume share buyback programs in FY 2021. Despite some improvement in USB stock since late March, we believe that the stock still has room to grow in the near future. Our conclusion is based on our detailed analysis of U.S. Bancorp’s stock performance during the current crisis with that during the 2008 recession in an interactive dashboard analysis.
2020 Coronavirus Crisis
- 12/12/2019: Coronavirus cases first reported in China
- 1/31/2020: WHO declares a global health emergency.
- 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
- 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
- From 3/24/2020: S&P 500 recovers 55% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.
In contrast, here’s how USB and the broader market performed during the 2007/2008 crisis.
Timeline of 2007-08 Crisis
- 10/1/2007: Approximate pre-crisis peak in the S&P 500 index
- 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
- 3/1/2009: Approximate bottoming out of the S&P 500 index
- 1/1/2010: Initial recovery to levels before the accelerated decline (around 9/1/2008)
U.S. Bancorp vs S&P 500 Performance Over 2007-08 Financial Crisis
USB stock declined from levels of around $24 in October 2007 (the pre-crisis peak) to roughly $11 in March 2009 (as the markets bottomed out), implying that the stock lost as much as 54% of its value from its approximate pre-crisis peak. This marked a slightly higher drop than the broader S&P, which fell by about 51%.
However, USB recovered strongly post the 2008 crisis to about $18 in early 2010 – rising by 59% between March 2009 and January 2010. In comparison, the S&P bounced back by about 48% over the same period.
U.S. Bancorp’s Fundamentals in Recent Years Look Strong
U.S. Bancorp revenues saw a growth of 41% from $12.4 billion in 2015 to $17.5 billion in 2019, mainly driven by growth in consumer banking and wealth management business. Further, the company’s net income improved from $5.6 billion to $6.6 billion, resulting in a strong EPS growth from $3.18 in 2015 to $4.16 in 2019. While the company’s Q2 2020 revenues were slightly higher than the year-ago period, the EPS figure for the quarter decreased from $1.09 in Q2 2019 to $0.41 in Q2 2020 due to a sharp increase in provision for credit losses.
Phases of Covid-19 crisis:
- Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
- Late-March 2020 onward: Social distancing measures + lockdowns
- April 2020: Fed stimulus suppresses near-term survival anxiety
- May-June 2020: Recovery of demand, with the gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
- July-October 2020: Poor Q2 results and lukewarm Q3 expectations, but continued improvement in demand, a decline in the number of new cases, and progress with vaccine development buoy market sentiment
Keeping in mind the trajectory over 2009-10 and because of the improvement in U.S. Bancorp’s stock since late March, this suggests a potential recovery to around $53 (37% upside) once economic conditions begin to show signs of improving. This marks a full recovery to the $53 level U.S. Bancorp’s stock was at before the coronavirus outbreak gained global momentum.
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