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Making Bank With U.S. Bancorp (USB), Wells Fargo & Co (WFC), Comerica Incorporated (CMA) & First Republic Bank (FRC)?

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U.S. BancorpI had thought that U.S. Bancorp (NYSE:USB)’s impressive run over the past few years would finally come to an end with the close of 2012. Well, I was wrong, and in some ways its first quarter income, while lacking (barely) the double digit growth to which we had become accustomed, was as impressive as any.

For the first quarter, U.S. Bancorp (NYSE:USB) reported profits of $1.43 billion, or $0.73 per share, up nine percent from the first quarter of 2012. The earnings were a sector-leading 1.65% of assets, and U.S. Bank reported an efficiency ratio of 50.7%–the strongest among all large U.S. banks.

How did U.S. Bancorp (NYSE:USB) do it? This bank does not have the investment banking presence of its larger peers. It makes money the way old fashioned banks do – by borrowing money cheaply and lending it out more expensively. But this bank is not immune to macroeconomic trends, and like with most banks, it has struggled to maintain its interest rate margin, which fell in the first quarter to 3.48%, down twelve basis points from the first quarter of 2012 and down seven basis points just from the previous quarter. But what U.S. Bancorp (NYSE:USB) has been better at than its peers is growing its loan portfolio. Led by a 14% jump in commercial loans and a 19% jump in residential mortgage loans, the loan portfolio grew by over $12 billion, or by six percent from the first quarter of 2012.

Combine that increasing loan balance, stringent cost controls (expenses were down by 3.5% from the first quarter of 2012), and a reserve provision in the quarter that was $78 million less than the first  quarter of 2012, and that is how a bank like U.S. Bank can raise earnings.

The downside is that unless there is even more aggressive loan growth, I don’t see how U.S. Bancorp (NYSE:USB) can continue moving forward at anything close to a double digit pace. It is not realistic to expect further reductions in loan loss reserves; the mortgage market is past its prime, and there seems little more “fat” on the expense side that can be trimmed. U.S. Bank has uber-investor Warren Buffett as a major shareholder, but at this time, there simply is not enough upside for me.

Of course, Buffett’s favorite bank for decades has been Wells Fargo & Co (NYSE:WFC), which has had quite a run the past few years, mainly due to its utter domination of the nation’s mortgage market during this era of historically low interest rates. In fact, lately Wells Fargo & Co (NYSE:WFC) has become Buffett’s single largest equity stake. The attraction is obvious, as Wells Fargo has long been the most profitable, and the least newsworthy, of the nation’s trillion dollar asset banks.

Wells Fargo & Co (NYSE:WFC) did nothing to disappoint in the first quarter of 2013. Earnings came to $4.93 billion, or $0.93 per share, a 23% jump from the first quarter of 2012. This provided a 1.49% return on assets.  The earnings easily beat quarterly estimates as well, which were for $0.88 per share. Remarkably, the earnings were achieved in a slowing mortgage market, as Wells Fargo wrote $109 billion in such loans in the quarter, down from $129 billion a year ago.

So, where did the profits come from? Most of the improvement came as a result of a $200 million provision reversal, along with an additional $660 million lower provision in the quarter versus a year ago. The balance was almost exclusively on the non-interest expense side, where drops in  FDIC charges and equipment costs, among other items, led to overall non-interest expenses declining by about $600 million, or 5% from the first quarter of 2012. This led to the bank’s efficiency ratio falling 180 basis points to 58.3 since the first quarter of 2012.

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