U.S. Bancorp’s stock (NYSE: USB) has lost roughly 8% YTD as compared to the 14% drop in the S&P500 index over the same period. Further, at its current price of $52 per share, it is trading 18% below its fair value of $63 – Trefis’ estimate for U.S. Bancorp’s valuation. The bank posted better than expected results in the first quarter, with total revenues of $5.6 billion – slightly below the year-ago period. Its payment services revenues grew 5% y-o-y, followed by a 9% rise in the wealth management & investment services division. However, the growth was almost offset by a 5% y-o-y drop in consumer and business banking revenues. While the overall net interest income of the firm grew 4% y-o-y, non-interest revenues were only marginally above the year-ago level. The NII benefited from higher outstanding loan balances and an increase in noninterest-bearing deposits. USB’s profitability took a hit in the quarter – adjusted net income decreased 33% y-o-y to $1.5 billion. This was because of an unfavorable increase in the provisions for credit losses from -$827 million to $112 million. Notably, the provisions were raised to counter an upturn in credit risk due to supply chain concerns, high inflation, and the Russia-Ukraine conflict.
The bank’s total revenues decreased 2% y-o-y to $22.7 billion in 2021. It was mainly due to a 3% decline in the NII driven by a lower interest rate environment and a drop in outstanding loan balance. Markedly, the NII contributes around 55% of the total revenues. Further, non-interest revenues suffered a 2% y-o-y drop, primarily due to a 34% decrease in mortgage banking revenues. Despite a meager growth in the top line, the firm managed to report a 65% y-o-y jump in the adjusted net income to $7.6 billion. This was due to a favorable decrease in the provisions for credit losses.
The central banks across the world have started to hike the benchmark interest rates, to manage the record-high inflation. Notably, the Federal Reserve has increased the interest rates twice in 2022 – first by 0.25% and then by 0.50%. Moreover, rates are likely to improve over the coming months, benefiting the NII of U.S. Bancorp. Altogether, U.S. Bancorp revenues are forecast to touch $25.2 billion in FY2022. Additionally, USB’s adjusted net income margin is expected to normalize at around 25%, leading to an adjusted net income of $6.4 billion. This coupled with an annual EPS of $4.35 and a P/E multiple of just above 14x will lead to the valuation of $63.
|S&P 500 Return||-1%||-14%||83%|
|Trefis Multi-Strategy Portfolio||0%||-19%||219%|
 Month-to-date and year-to-date as of 6/2/2022
 Cumulative total returns since the end of 2016