Trailing The Broader Index By 24%, Is U.S. Bancorp Stock Ready To Rebound?

+0.65%
Upside
41.22
Market
41.49
Trefis
USB: U.S. Bank logo
USB
U.S. Bank

U.S. Bancorp’s stock (NYSE: USB) has gained approximately 1% YTD as compared to the 25% rise in the S&P500 index over the same period. Further, it is currently trading at $44 per share, which is 6% above its fair value of $41 – Trefis’ estimate for U.S. Bancorp’s valuation.

Amid the current financial backdrop, USB stock has seen little change, moving slightly from levels of $45 in early January 2021 to around $45 now, vs. an increase of about 25% for the S&P 500 over this roughly 3-year period. Notably, USB stock has underperformed the broader market in each of the last 3 years. Returns for the stock were 21% in 2021, -22% in 2022, and 1% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 25% in 2023 (YTD) – indicating that USB underperformed the S&P in 2021, 2022, and 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Financials sector including JPM, V, and MA, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could USB face a similar situation as it did in 2021, 2022, and 2023 and underperform the S&P over the next 12 months – or will it see a strong jump?

The bank posted mixed results in the third quarter of 2023, with earnings beating the estimates but revenues missing expectations. It reported total revenues of $7 billion – up 11% y-o-y, primarily driven by an 11% growth in the net interest income (NII) and a 12% rise in the noninterest revenues. The NII mainly benefited from higher interest rates and the MUFG Union Bank (MUB) acquisition. Similarly, noninterest income was up due to improvements in commercial products, mortgage banking, payment services, and trust & investment management revenues. On the cost front, noninterest expenses as a % of revenues witnessed an unfavorable increase in the quarter, coupled with a 42% jump in the provision for credit losses. It resulted in an 18% decrease in the adjusted net income to $1.4 billion.

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The bank’s total revenues grew 19% y-o-y to $21.4 billion in the first nine months of FY 2023. It was mainly driven by a 24% increase in the wealth, corporate, commercial & institutional banking segments, followed by a 29% gain in consumer & business banking, and a 6% rise in the payment services units. However, the positive impact was somewhat offset by a 9% decline in the treasury & corporate services division. Notably, the NII increased 27% y-o-y, contributing 63% to the top line. That said, the impact of positive revenue growth was more than offset by higher noninterest expense and the provisions figure. Overall, the adjusted net income decreased 8% y-o-y to $4.3 billion.

Moving forward, we expect the same trend to continue in the fourth quarter. Altogether, U.S. Bancorp’s revenues are estimated to touch $28.5 billion in FY2023. Additionally, USB’s annual EPS is likely to remain around $4.44. This coupled with a P/E multiple of just above 9x will lead to a valuation of $41.

 Returns Dec 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
 USB Return 15% 1% -14%
 S&P 500 Return 5% 25% 114%
 Trefis Reinforced Value Portfolio 9% 40% 619%

[1] Month-to-date and year-to-date as of 12/28/2023
[2] Cumulative total returns since the end of 2016

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