U.S. Bancorp Stock Is Undervalued

U.S. Bancorp’s stock (NYSE: USB) has lost approximately 14% YTD as compared to the 4% rise in the S&P500 index over the same period. Further, the recent volatility in the stock price (down 20% over the last ten days) was due to the turmoil in the banking sector. Notably, the collapse of the Silicon Valley Bank (SVB), Signature Bank, and the Credit Suisse crisis has made investors cautious about banking stocks. Overall, USB is trading at the current price of $38 per share, which is 32% below its fair value of $55 – Trefis’ estimate for U.S. Bancorp’s valuation.

The bank posted mixed results in the fourth quarter of 2022, with earnings beating the estimates but revenues missing the mark. It reported total revenues of $6.4 billion – up 12% y-o-y, primarily driven by a 37% jump in the net interest income (NII), partially offset by a 19% decline in the non-interest revenues. While the NII benefited from the improvement in interest rates and higher outstanding loan balances, the non-interest income suffered due to a 65% decrease in mortgage banking revenues. On the cost front, the provisions for credit losses witnessed an unfavorable build-up in the quarter from -$13 million to $1.19 billion. It led to a 45% drop in the adjusted net income to $925 million, despite positive growth in revenues.

The bank’s total revenues grew 7% y-o-y to $24.3 billion in FY 2022. It was due to a 15% rise in corporate & commercial banking, a 30% increase in wealth management & investment services, and a 5% growth in the payment services divisions. However, the growth was somewhat offset by a 21% decrease in the treasury and corporate support, and a marginal drop in the consumer & business banking segments. Notably, the NII increased 18% y-o-y, contributing 61% of the top line. That said, the provisions for credit losses rose from -$1.17 billion to $1.98 billion in the year. It resulted in an adjusted net income of $5.8 billion – down 27% y-o-y.

Moving forward, U.S. Bancorp’s revenues are forecast to touch $29.2 billion in FY2023. Additionally, USB’s adjusted net income margin is expected to see a slight improvement in the year, leading to an adjusted net income of $6.99 billion. This coupled with an annual EPS of $4.83 and a P/E multiple of just below 12x will lead to a valuation of $55.

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[1] Month-to-date and year-to-date as of 3/22/2023
[2] Cumulative total returns since the end of 2016

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