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

When I came across U.S. Bancorp (NYSE:USB) last year, I couldn’t believe that I had been ignoring one of the best big banks in the country. The company’s loan and deposit growth matched up well to any of their peers, and their credit quality was good. I’ve kept up with the company through their earnings reports, and there are two concerns that have me worried for the stock’s future.

U.S. Bancorp (NYSE:USB)It’s hard to argue with this type of performance

U.S. Bancorp (NYSE:USB) has turned in admirable growth in deposits and loans, and has managed their credit quality well also. In a timeframe where what you hear most about the economy is “uncertainty,” there is nothing uncertain about the bank’s direction.

Deposits and loans are still the lifeblood of any bank, and by these two measures, U.S. Bancorp (NYSE:USB) is beating their competition. When it comes to deposit growth, their peer Wells Fargo & Co (NYSE:WFC) reported 6.36% growth, which was strong relative to other banks like BB&T Corporation (NYSE:BBT) at 4.7%, and SunTrust Banks, Inc. (NYSE:STI) at 1%. That being said, U.S. Bancorp (NYSE:USB) outshined them all by reporting deposit growth of 7.3%. Attracting deposits gives the bank a cheaper source of funds than borrowing to make loans.

Speaking of loans, U.S. Bancorp (NYSE:USB) reported average loan growth of 5.8%, which was just slightly better than BB&T’s loan growth of 5.3%. Wells Fargo & Co (NYSE:WFC) turned in respectable loan growth of 3.84%, whereas SunTrust Banks, Inc. (NYSE:STI) saw its loan balances decline by about 1%. As you can see, U.S. Bancorp (NYSE:USB) is anything but a one trick pony.

The bank’s balance of strong deposit and loan growth also allowed them to report a net interest margin that tied for second among their peers. BB&T Corporation (NYSE:BBT)’s net interest margin led the way at 3.78%, whereas Wells Fargo and (NYSE:WFC) U.S. Bank both reported margins of 3.48%. SunTrust again lagged its peers with a net interest margin of 3.33%.

Another way that U.S. Bank performed very well was in reference to their credit quality. The company’s non-performing loans represented 1.35% of the portfolio, but what was impressive was the rate of decline in non-performers. U.S. Bank’s non-performing loans decreased by 34.71%, which was second only to BB&T with a 37% decrease.

It’s true that SunTrust reported a 45% decline in non-performers, but the comparison isn’t quite fair, because SunTrust sold its Coca-Cola investment to help retire some of these problem assets. In contrast to the rest, Wells Fargo reported not only the highest non-performing loan percentage at 2.44%, but also the slowest decrease in these assets at 7.21%.

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

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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