U.S. Bancorp Rises 12% in 3 Months: More Upside Left?

U.S. Bancorp's USB shares have gained 12% in the past three months, outperforming the industry's growth of 5.1% and the S&P 500's rise of 5.8%. USB is currently trading just 1% off its 52-week high of $45.88 hit on Jul 30. 

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The company's inorganic growth move and strong balance sheet will support its financials in the long term.

Analyst Estimates: Over the past seven days, the Zacks Consensus Estimate for earnings per share of $3.89 and $4.23 has remained unchanged for 2024 and 2025, respectively. Although the metrics indicate a decline of 9.74% in 2024, it will rebound and grow 8.7% in 2025.

Now let's discuss some key factors that could provide further impetus to USB stock.

Inorganic Expansion to Drive Growth: U.S. Bancorp has made several strategic acquisitions in the last few years, which have opened up new markets for the company while fortifying its existing markets.

In August 2024, USB's lead banking division, U.S. Bank, prolonged its focus on the healthcare industry with the acquisition of Salucro Healthcare Solutions LLC. The buyout was completed on Aug 21, 2024. In the same month, U.S. Bank entered into a strategic partnership with Edward Jones. The collaboration is intended to offer comprehensive banking and credit card solutions to Edward Jones clients.

In 2022, U.S. Bancorp completed the acquisition of MUFG Union Bank's core regional banking franchise, expanding its branch network and enjoying greater access to digital banking tools. In 2023, cost synergies of $900 million were realized from this merger.

Overall, these strategic acquisitions and partnerships are likely to bolster U.S. Bancorp's market position, diversify its revenue streams and drive long-term growth.

Fed's Rate Cut Decision to Aid Financial: The Fed chairman, Jerome Powell, signaled that the central bank will start cutting interest rates beginning September. This is a positive development for banks, including USB, reeling under high funding cost pressure. At present, interest rates are at a 23-year high of 5.25-5.5% and acting like a double-edged sword for the banks. While high rates have led to a significant jump in NII, they have driven up funding costs, thus squeezing banks' margins.

U.S. Bancorp's NII witnessed a four-year compound annual growth rate (CAGR) of 7.5% through 2019-2023. The metric witnessed a decline in the first half of 2024 due to rising funding costs. Also, net interest margin witnessed a downward trend in the first half of 2024.

As the Fed begins rate cuts, it will likely lead the funding costs to stabilize, thus supporting USB's NII. Also, lower interest rates are expected to encourage consumers and businesses to borrow. Such increased loan activity can result in larger profitability for U.S. Bancorp as it can earn more interest on these loans.

Strong Balance Sheet Position: U.S. Bancorp has a strong balance sheet. As of Jun 30, 2024, the company had a long-term debt of $52.72 billion. Cash and due from banks was $65.83 billion as of the same date, reflecting a strong liquidity position.

It enjoys long-term investment-grade credit ratings of A, A+, and A3 from Standard & Poor's, Fitch, and Moody's, respectively. This renders U.S. Bancorp's favorable access to debt at attractive rates. Hence, with a record of impressive earnings strength and decent cash levels, it carries low credit risk and has a lesser likelihood of defaulting interest and debt repayments if the economic situation worsens.

Strong Capital Position: U.S. Bancorp's focus on maintaining a strong capital position will support its capital distribution activities. As of Jun 30, 2024, the company's capital ratios remain at a decent level, with a Common Equity Tier 1 ratio and a total risk-based capital ratio of 10.3% and 14%, respectively.

In June 2024, USB announced its plan to increase dividends by 2% to 50 cents per share, effective in the fourth quarter of 2024. The company increased its dividend four times in the past five years. Currently, its payout ratio is 50% of earnings.

Through stable dividend payouts, the company will boost investor's confidence in the stock.

Few Concerns Prevail

Mounting Expenses: Rising costs remain a concern for U.S. Bancorp. The company's non-interest expenses saw a CAGR of 10% over the last four years (2019-2023). This primarily stemmed from higher merger and integration charges, compensation and employee benefits, net occupancy and equipment expenses, as well as technology and communications expenditures. Although non-interest expenses declined in the first half of 2024, any further rise in technology-led initiatives will likely elevate the company's cost base, which is likely to hinder bottom-line growth.

Lack of Loan Portfolio Diversification: A significant part of U.S. Bancorp's loan portfolio — 49.8% as of Jun 30, 2024 — comprises total commercial loans (commercial and commercial real estate lending). The current rapidly changing macroeconomic backdrop may put some strain on commercial lending. Also, in case of any economic downturn, the asset quality of the credit category might deteriorate.

Parting Thoughts

U.S. Bancorp's inorganic expansion efforts, robust balance sheet and strong capital position are likely to bolster its financials. Also, the Fed's recent announcement of rate cuts starting this September will further support UBS' growth trajectory. However, the rising expense base and lack of diversification in its loan portfolio remain significant concerns.

Thus, investors should not rush to buy this Zacks Rank #3 (Hold) stock. Rather, they can wait for a better entry point.

Stocks Worth Considering

Some better-ranked finance stocks are JPMorgan Chase & Co. JPM and State Street Corporation STT.

JPMorgan's current-year earnings estimates have been revised marginally upward in the past 30 days. JPM currently carries a Zacks Rank #2 (Buy).

The consensus estimate for State Street Corporation's current-year earnings has also been revised marginally upward over the past 30 days. STT currently carries a Zacks Rank #2.

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