U.S. Bancorp trades at $51.84 and has moved in lockstep with the market. Its shares have returned 5.1% over the last six months while the S&P 500 has gained 3.1%.
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Why Is U.S. Bancorp Not Exciting?
We're swiping left on U.S. Bancorp for now. Here are three reasons why USB doesn't excite us and a stock we'd rather own.
1. Net Interest Income Points to Soft Demand
While bank generate revenue from multiple sources, investors view net interest income as a cornerstone - its predictable, recurring characteristics stand in sharp contrast to the volatility of one-time fees.
U.S. Bancorp’s net interest income has grown at a 5.4% annualized rate over the last five years, much worse than the broader banking industry. Its growth was driven by an increase in its outstanding loans as its net interest margin, which represents how much a bank earns in relation to its outstanding loan book, was flat throughout that period.
2. Low Net Interest Margin Reveals Weak Loan Book Profitability
Net interest margin (NIM) represents how much a bank earns in relation to its outstanding loans. It's one of the most important metrics to track because it shows how a bank's loans are performing and whether it has the ability to command higher premiums for its services.
Over the past two years, we can see that U.S. Bancorp’s net interest margin averaged a weak 2.7%. This metric is well below other banks, signaling its loans aren’t very profitable.
3. Growing TBVPS Reflects Strong Asset Base
For banks, tangible book value per share (TBVPS) is a crucial metric that measures the actual value of shareholders’ equity, stripping out goodwill and other intangible assets that may not be recoverable in a worst-case scenario.
Although U.S. Bancorp’s TBVPS increased by a meager 3.1% annually over the last five years, the good news is that its growth has recently accelerated as TBVPS grew at an impressive 15% annual clip over the past two years (from $21.37 to $28.29 per share).
Final Judgment
U.S. Bancorp isn’t a terrible business, but it doesn’t pass our quality test. That said, the stock currently trades at 1.3× forward P/B (or $51.84 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're fairly confident there are better investments elsewhere. We’d recommend looking at the most dominant software business in the world.
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