Over the past six months, U.S. Bancorp’s shares (currently trading at $44.67) have posted a disappointing 8.9% loss while the S&P 500 was flat. This may have investors wondering how to approach the situation.
Is there a buying opportunity in U.S. Bancorp, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is U.S. Bancorp Not Exciting?
Even though the stock has become cheaper, we're cautious about U.S. Bancorp. Here are three reasons why we avoid USB and a stock we'd rather own.
1. Net Interest Income Points to Soft Demand
While banks generate revenue from multiple sources, investors view net interest income as the cornerstone - its predictable, recurring characteristics stand in sharp contrast to the volatility of non-interest income.
U.S. Bancorp’s net interest income has grown at a 6.7% annualized rate over the last four years, slightly worse than the broader bank industry. Its growth was driven by both an increase in its outstanding loans and net interest margin, which represents how much a bank earns in relation to its outstanding loan book.
2. Low Net Interest Margin Reveals Weak Loan Book Profitability
Revenue is a fine reference point for banks, but net interest income and margin are better indicators of business quality for banks because they’re balance sheet-driven businesses that leverage their assets to generate profits.
Over the past two years, we can see that U.S. Bancorp’s net interest margin averaged a weak 2.8%, indicating the company has weak loan book economics.
3. TBVPS Growth Demonstrates Strong Asset Foundation
We consider tangible book value per share (TBVPS) the most important metric to track for banks. TBVPS represents the real, liquid net worth per share of a bank, excluding intangible assets that have debatable value upon liquidation.
Although U.S. Bancorp’s TBVPS increased by a meager 1.3% annually over the last five years, the good news is that its growth has recently accelerated as TBVPS grew at a decent 11.7% annual clip over the past two years (from $19.87 to $24.78 per share).
Final Judgment
U.S. Bancorp’s business quality ultimately falls short of our standards. After the recent drawdown, the stock trades at 1.2× forward P/B (or $44.67 per share). Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We're pretty confident there are superior stocks to buy right now. We’d suggest looking at the Amazon and PayPal of Latin America.
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