U.S. Bancorp Acquiring BofA Unit - Analyst Blog

In an effort to expand its corporate trust business, U.S. Bancorp's (USB) lead bank, U.S. Bank, has entered into an agreement to acquire Bank of America Corp.'s (BAC) U.S and Europe-based securitization trust administration businesses. The deal involves a cash purchase price of up to $35 million and would add revenues of more than $100 million.

The deal, which is expected to close next month, is subject to regulatory approval and would require the third quarter of 2011 for integration. It is expected to be accretive to U.S. Bancorp's earnings post conversion in 2012. The company anticipates incurring one-time merger expenses of approximately $40 million to $45 million. The deal is expected to have a minimal impact on Tier 1 common ratio.

Deal Benefits

The deal offers U.S. Bancorp an opportunity to strengthen its market position within the U.S. structured finance trust business and compliments its current market position in the U.S. corporate and municipal trust business. It solidifies the company's positions in collateralized debt obligations and commercial and residential mortgage-backed securitizations.

Moreover, the deal provides the bank with a prospect of expanding its presence in the European market with offices in Ireland and London, England. The deal is a strategic fit for BofA as well, which is shrinking its non-core businesses to better align its focus on the banking business.

The deal would enable U.S. Bank Corporate Trust Services to acquire around 2,153 active securitization and related transactions, over 2.4 million residential mortgage files and 84,000 commercial files and $1.1 trillion in assets under administration. It would also add over $10 billion of deposits to U.S. Bank.

Third Quarter Results

U.S. Bancorpreported third quarter 2010 earnings attributable to common shareholders of $871 million or 45 cents per share, two cents ahead of the Zacks Consensus Estimate of 43 cents. The results also compare favorably with the prior quarter's earnings of $862 million or 45 cents per share and the prior-year quarter's earnings of $583 million or 30 cents per share.

The improvement in U.S. Bancorp's earnings primarily stemmed from a strong growth in revenues, reflecting the business growth initiatives taken by the company, including acquisitions. Credit metrics also showed improvements.

Our Take

We expect U.S. Bancorp to post growth in core earnings and benefit from its diversified revenue base and strategic acquisitions. The company is one of the biggest retail banks in the U.S. and is one of the nation's top 10 banks. It has weathered the economic downturn relatively well and was one of the first few companies to repay the TARP bailout money. The sequential improvement in the credit quality was impressive.

Nevertheless, we believe that the regulatory issues would continue to pose as headwinds for both top and bottom lines of U.S. Bancorp. Additionally, the protracted economic recovery and a substantially competitive landscape challenge the company.

U.S. Bancorp shares are maintaining a Zacks #3 Rank, which translates into a short-term ‘Hold' recommendation. We have a long-term “Neutral” recommendation on the stock.

 
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