Where Is U.S. Bancorp Stock Headed?

+37.48%
Upside
42.94
Market
59.03
Trefis
USB: U.S. Bank logo
USB
U.S. Bank

U.S. Bancorp’s stock (NYSE: USB) has lost roughly 27% YTD as compared to the 21% drop in the S&P500 index over the same period. Further, at its current price of $41 per share, it is trading 30% below its fair value of $59 – Trefis’ estimate for U.S. Bancorp’s valuationThe bank surpassed the consensus estimates in the second quarter of 2022, with revenues increasing by 4% y-o-y to $5.98 billion (excluding taxable-equivalent adjustment). It was driven by a 7% growth in both the payments services and corporate & commercial banking units, followed by a 26% rise in the wealth management & investment services division. The segments benefited from growth in net interest income due to higher average loans and improvement in interest rates. Further, corporate payments products, merchant processing services, and trust & investment management fees increased in the quarter. On the flip side, the consumer banking division reported a decrease of 7% y-o-y due to lower noninterest revenues. On the cost front, the provisions for credit losses increased from -$170 million to $311 million, which coupled with higher expenses as a % of revenues, led to a 24% y-o-y drop in the adjusted net income to $1.46 billion.

The bank’s total revenues grew 3% y-o-y to $11.6 billion in the first half of 2022. It was mainly due to a 7% rise in the net interest income driven by the recovery in interest rates and a higher outstanding loan balance. However, it was partially offset by a marginal decrease in noninterest income. Further, the noninterest expenses and provisions for credit losses saw an unfavorable increase over the first two quarters. It resulted in a 28% y-o-y drop in the adjusted net income to $2.9 billion.

The Federal Reserve has raised the benchmark interest rates five times, to manage the record-high inflation levels. This has benefited the net interest margin of lenders like U.S. Bancorp. We expect the same trend to continue over the subsequent quarters. Notably, the consensus estimates for Q3 revenues and earnings are $6.24 billion and $1.17 respectively. Overall, U.S. Bancorp’s revenues are forecast to touch $24.6 billion in FY2022. Additionally, USB’s adjusted net income margin is expected to normalize around 26%, leading to an adjusted net income of $6.4 billion. This coupled with an annual EPS of $4.30 and a P/E multiple of just below 14x will lead to a valuation of $59.

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 Returns Oct 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
 USB Return 2% -27% -20%
 S&P 500 Return 4% -21% 67%
 Trefis Multi-Strategy Portfolio 7% -22% 211%
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[1] Month-to-date and year-to-date as of 10/7/2022
[2] Cumulative total returns since the end of 2016

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