On Sep 28, 2015, we issued an updated research report on U.S. Bancorp USB. Shares of this major regional bank have recorded a negative year-to-date return of 8.2%. Further, inconsistent revenue growth and rising expenses remain undermining factors.
Rising costs remain a concern for U.S. Bancorp. Notably, the company’s noninterest expenses recorded a CAGR of 2.6% over the last four years (2011-2014) with the trend continuing in the first-half of 2015 as well. Moreover, the pressure is expected to build up as the company continues to invest in a technology platform owing to its business initiatives.
Notably, pension expense is expected to increase by around $100 million in 2015 from the prior year, which equates to $25 million each quarter. Management also noted that if there is no rise in rates, achieving positive operating leverage will be difficult.
Net interest margin (NIM) is under pressure and mainly reflects lower reinvestment rates on investment securities and growth in the investment portfolio at lower average rates, partly offset by lower funding costs. Though the company is likely to experience growth in loans in the upcoming quarters, we believe that given the current low interest-rate environment, NIM is likely to remain under pressure in the near term, thereby affecting overall revenues.
Among others, absence of a credible improvement in the mortgage market, litigation issues and the prevailing stringent regulatory landscape are also expected to be headwinds.
Analysts’ bearish stance was also reflected in EPS estimates movement. The Zacks Consensus Estimate over the past 30 days remained stable at $3.22 for 2015, while it moved down by a penny to $3.49 per share for 2016. Hence, U.S. Bancorp currently carries a Zacks Rank #4 (Sell).
Key Picks from the Sector
Some better-ranked finance stocks worth considering include SunTrust Banks, Inc. STI, Middleburg Financial Corporation MBRG and Wells Fargo & Company WFC, all carrying a Zacks Rank #2 (Buy).
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