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

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.

To maintain profit growth, Wells Fargo & Co (NYSE:WFC) must continue expanding its loan portfolio, especially on the commercial side, as well as continue to improve its “cross sell” from its already outstanding 6.1 accounts per customer. I do not look for 20% plus profit growth to continue, but do expect near double digit growth profit growth over the next several years, and with Wells Fargo & Co (NYSE:WFC)’s continuing stock buyback plan and generous 3.2% dividend yield, I believe this bank is a winner for income-oriented investors.

The ranks of large banks headquartered west of the Mississippi is thin indeed.  The only other such bank with over $50 billion in assets and majority U.S ownership is Dallas-based Comerica Incorporated (NYSE:CMA) . In the first quarter Comerica Incorporated (NYSE:CMA) posted earnings of $134 million, or $0.70 per share, up about three percent from the same period of 2012. This bank has significant exposure in Florida and Michigan, two states still suffering economically relative to the rest of the country. Comerica Incorporated (NYSE:CMA)’s loan portfolio increased about one percent over the course of the year, led by a $600 million, or two percent, growth in commercial loans. But this was not enough to compensate for Comerica’s dismal net interest margin, which stood at 2.88%, down 31 basis points from a year earlier. But non-interest expenses fell $11 million over the course of the year, and the provision for loan losses fell another $6 million, or 27% from the year before.

Comerica Incorporated (NYSE:CMA)’s 0.85% return on assets shows that it has a long ways to go to catch up with its larger peers. Writing loans providing a wider interest rate spread would be high on my agenda. Until Comerica Incorporated (NYSE:CMA) shows signs of substantially widening that interest rate spread, I would look elsewhere.

To discuss another western bank, one must dip below the $50 billion asset threshold. San Francisco’s First Republic Bank (NYSE:FRC) is a roughly $35 billion bank that has performed strongly the past few years, and it continued to do so in the first quarter. Earnings came to $122 million, or $0.85 per share, an improvement of 34% from the first quarter of 2012, and well above the $0.73 per share that analysts had expected. The bank had a return on assets of 1.42%, and was helped along by an efficiency ratio of 53.3%. Most of this bank’s earnings increase had to do with non-interest revenue gains in investment advice and on the sale of loans. Certainly not all of that is sustainable, and in fact analysts are not looking for any growth in First Republic’s earnings in 2014 after what is likely to be a very strong 2013. I would like to see more sustainable revenue growth before committing funds to this company.


Even with Warren Buffett as a major shareholder, there simply is not enough upside for me to recommend U.S. Bank to investors. I urge investors to pass on U.S. Bank at this time. Wells Fargo’s expected double digit profit growth over the next several years, along with its continuing stock buyback plan and generous 3.2% dividend yield, do make it an attractive buy for income investors. Investors should avoid Comerica until it shows signs of substantially widening that interest rate spread. Meanwhile, investors should look for more sustainable revenue growth before buying First Republic Bank (NYSE:FRC).

The article Can These 4 Large Western Banks Make You Money? originally appeared on and is written by Bill Edson.

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