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Can U.S. Bancorp (USB)’s Strengths Offset These Two Concerns?

It’s hard to question this bank, but investors need to watch two issues

With U.S. Bank reporting peer leading deposit and loan growth, and very impressive margins and credit quality, you might think that everything is going great. For the most part that’s true, but the first issue with the bank is their deposit growth isn’t quite as impressive as you would first think.

Ideally a bank would grow its non-interest bearing deposits (aka. checking with no interest) accounts the fastest. However, there is a trend among multiple banks where their savings and money market account deposits are outpacing overall deposit growth. The problem this presents is savings and money market accounts are less profitable, and less sticky than checking accounts.

Among their peer group, U.S. Bank exhibited this issue with non-interest bearing deposits growing 4.4% versus 7.3% overall deposit growth. Wells Fargo also seems to have this issue, with 54.51% of their total deposits represented by money market and savings accounts. Though SunTrust reported lower deposit growth, they outperformed U.S. Bank by growing non-interest bearing accounts by 5%. The one exception to this problem was found with BB&T, which reported 24.2% growth in non-interest bearing accounts versus 4.7% overall deposit growth. If this trend continues, U.S. Bank’s net interest margin could suffer, and earnings growth would be more difficult.

The second issue is investors have bid U.S. Bank’s stock up to a price that looks overvalued relative to their peers at least relative to the bank’s book value. Considering that SunTrust is underperforming their peers, it makes some sense that the stock sells for about a 17% discount to book value. BB&T is doing very well, and I would argue that the bank’s 18.5% premium to book value isn’t enough based on where Wells Fargo and U.S. Bank are trading.

While Wells Fargo trades for a nearly 39% premium to book value, U.S. Bank trades for a premium of more than 83%. Both companies are doing well, but as we saw, BB&T is outperforming both companies in a few areas, and comes very close in others. The problem I have is, at an 83% premium, U.S. Bank is valued much more highly than its peers. Considering both BB&T and Wells Fargo’s yields of over 3% beat U.S. Bank’s yield of about 2.3%, this is yet another reason to believe investors should carefully consider the stock’s current price.

The bottom line is, U.S. Bank is a great bank, but the stock price might be unsustainable. I would consider the shares if they pulled back, but at current prices, I wouldn’t suggest investors aggressively add to their positions.

The article Can This Bank’s Strengths Offset These Two Concerns? originally appeared on Fool.com.

Chad Henage owns shares of BB&T.; The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Wells Fargo. Chad is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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