We are downgrading our recommendation on
U.S. Bancorp
(
USB
) to Neutral from Outperform based on a stretched operating
environment which is likely to temper its growth momentum in the
quarters ahead.
While U.S. Bancorp has a solid franchise and diverse revenue
stream, we believe that a tepid economic recovery, regulatory
issues along with the expected continued low interest rate
environment are projected to limit the stock's upside potential in
the upcoming quarters.
A sluggish economy that adversely affected consumer and business
spending has impacted a number of fee-based categories of U.S.
Bancorp over the last several quarters. Though we expect the
fee-based category to improve over time with a step-up in the
economy, we think that the progress will be tardy with the economy
recovering sluggishly.
U.S. Bancorp is expected to experience a growth in loans in
2012. But given the company's cash position and the current low
interest rate environment, which is anticipated to continue in the
next several quarters, we foresee net interest margins being under
pressure going forward.
Moreover, as a result of the latest regulatory reform, we expect
the company to be subject to both top- and bottom-line headwinds.
Stricter capital requirements are also likely limit the company's
flexibility with respect to business investments.
Yet, U.S. Bancorp has weathered the financial crisis well and
remains one of the most profitable large-cap banks in the industry.
In April, U.S. Bancorp reported first-quarter 2012 earnings of 67
cents per share, beating the Zacks Consensus Estimate by 3 cents.
Results were driven by year-over-year growth in revenue, supported
by increases in net interest income as well as fee-based revenue,
and reduced credit costs.
U.S. Bancorp's strong retail banking franchise and leadership in
payment processing should continue to create growth opportunities.
The company is also focused on expanding its business through
acquisitions.
U.S. Bancorp has a disciplined approach to capital management
and capital redeployment remains a top priority. The stress test
clearance along with the capital redeployment plans justifies the
company's solid capital position.
After receiving the approval from the Federal Reserve, the
company has hiked its dividend by 56% and announced a 100
million-share repurchase authorization. Such shareholder-friendly
approach inspires investors' confidence in the stock.
Moreover, U.S. Bancorp is experiencing improvement in its credit
quality with a drop in nonperforming assets, charge-offs and
provisions for loan losses.
Therefore, the risk-reward profile of U.S. Bancorp seems
somewhat balanced and we have assigned a Neutral recommendation on
the stock. Additionally, U.S. Bancorp shares currently retain the
Zacks #3 Rank, which translates to a short-term Hold rating. One of
its closest peers,
Wells Fargo & Company
(
WFC
) also retains a Zacks #3 Rank.
US BANCORP (USB): Free Stock Analysis Report
WELLS FARGO-NEW (WFC): Free Stock Analysis
Report
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