We have reiterated our Neutral recommendation on U.S. Bancorp (USB). The reaffirmation follows a detailed analysis of the company fundamentals following first quarter 2011 earnings, along with an analysis of the current economic environment, its strengths, opportunities and weaknesses.
U.S. Bancorp’s first quarter 2011 earnings of 52 cents per share outpaced the Zacks Consensus Estimate of 49 cents. The quarter’s earnings included a $46 million (2 cents per share impact) gain related to the acquisition of First Community Bank of New Mexico in a transaction with the Federal Deposit Insurance Corporation.
U.S. Bancorp continued to post an improvement in credit. Provision for credit losses decreased both sequentially and year over year, with net charge-offs revealing a declining trend. With the recovery in economy, we expect this trend to continue in the upcoming quarters.
The company also posted a growth in revenue, which, however, narrowly missed the Zacks Consensus Estimate. The positives were partially offset by an increase in expenses.
U.S. Bancorp has weathered the financial crisis well and remains well positioned to benefit from its diverse business model. The company stands to benefit from a gain in market share through both organic growth and strategic acquisitions.
Going forward, we expect the purchase of First Community Bank and Bank of America’s U.S. and European-based securitization trust administration businesses to be accretive to the company’s earnings.
U.S. Bancorp has a disciplined approach to capital management. The dividend increase and stock buyback following Fed’s approval after the completion of stress tests to assess the bank’s financial position will boost investors’ confidence. Other Wall Street banks that have similarly received approval from the Fed for dividend increase and share buyback in March include JPMorgan Chase & Co. (JPM) and PNC Financial Services Group Inc. (PNC).
Yet, regulatory issues and top-line headwinds continue to restrict robust development at U.S. Bancorp. Given the current interest rate environment, the tepid economic recovery and security purchases, net interest margin is expected to remain tempered. Mortgage repurchase activity is also likely to remain slightly elevated over the next few quarters.
Hence, the positive and negative seem balanced for the stock and the Neutral recommendation is retained. Additionally, shares of U.S. Bancorp currently retain the Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.
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