Can U.S. Bancorp (NYSE:USB) Do Better In 2016?

  1. Loans jump 4.2% in 2015.
  2. Fee income accounts for 45% of revenue.
  3. Net interest income spikes 2%.

Despite a tough economic environment, U.S. Bancorp (NYSE:USB) managed to register solid performance in 2015. Revenue and earnings climbed to new highs and the company reported improvements across its various business segments. The strong 2015 was marked by 4.2% increase in loans in 4Q2015 and 6.9% spike in deposits.

Because the focus is on 2016 and beyond, the important question at this point is whether U.S. Bancorp can maintain the momentum in 2016. What impact can the gains achieved in 2015 have on 2016 results and what else is the company doing to drive gains in 2016 and beyond?

Improvement in assets

U.S. Bancorp (NYSE:USB) reported an impressive improvement in asset portfolio. The bank exited 2015 with total assets worth more than $421.9 billion, compared to $402.5 billion at the end of the previous year. U.S. Bancorp’s asset portfolio has been improving since at least 2012 as the chart below depicts.


Because of its commitment to high-quality loans, U.S. Bancorp exited 2015 with loan delinquency rate of 0.78%, marking a 20% improvement from the previous year.

Better times ahead?

During the 4Q2015 and fiscal 2015 earnings call, U.S. Bancorp’s CEO, Richard Davis, provided the management’s outlook for the future. For the most part, Davis sounded positive about 2016, particularly highlighting how the management team was committed to continue driving operating efficiency. U.S. Bancorp targets to maintain efficiency ratio in the low 50s. The bank’s efficiency ratio of 54.5% in 2015 was the best among its peers.Improvement in efficiency played in important role in the record earnings posted in 4Q2015.

Davis hinted that U.S. Bancorp wants to build on the gains made in 2015 to make 2016 even much better.

Potential growth drivers

The management of U.S. Bancorp has identified multiple growth drivers in 2016 and beyond. For the most part, these growth drivers build on the gains made in 2015.

Digital investment

U.S. Bancorp (NYSE:USB) is investing on mobile technology as part of the efforts to modernize its operations and prepare it for the future opportunities. In the consumer banking market, providers are competing on reaching customers anywhere they are. For U.S. Bancorp, investment in mobile technology should help support its payments agenda, which is expected to fuel fee income.

Expansion efforts

U.S. Bancorp is working to expand in a number of ways. For example, the company is seeking to fuel revenue growth through expansion of its corporate banking operation. Additionally, it is looking to grow its consumer banking arm. U.S. Bancorp is also seeking expansion into Europe. These efforts should contribute to topline growth in the long run.

Fidelity card deal

U.S. Bancorp and Visa Inc (NYSE:V) edged out Bank of America Corp (NYSE:BAC) and American Express Company (NYSE:AXP) from Fidelity’s co-branded cards business. The win of Fidelity card business presents multiple opportunities for U.S. Bancorp to improve revenue and profit. For example, the bank stands to benefit from a large base of affluent customers that it can monetize in many other ways to drive growth in several of its other segments. Fidelity boasts about 24 million customers and U.S. Bancorp will be the exclusive issuer of Fidelity cards.

The Fidelity deal also opens a huge fee income opportunity for U.S. Bancorp, which should help the company continue driving its overall topline improvement even in the face of low interest rates.

Fee income:U.S. Bancorp’s fee income was 45% of operating revenue in 4Q, driven in part by fees from investment management and fees related to card business. There is more room for U.S. Bancorp to improve its fee income. That can be seen from the company’s increasing attention in trust/investment management and payments market. The company is investing in mobile technology and that should also help support its payments business.

Net interest income: U.S. Bancorp reported net interest income of $2.8 billion in 4Q2015, marking a 2% increase from a year earlier. The net interest margin in the quarter also improved 2bps to 3.06%. With strategies as maintaining of low deposit pricing and improving loan portfolio, U.S. Bancorp’s net interest margin should improve or at least remain stable even in the face of low interest rates.

What about exposure to energy sector?

Investors are clearly worried the impact of the collapsing crude oil price on the lenders such as U.S. Bancorp (NYSE:USB). Some of the largest U.S. banks have already warned about more energy loans going bad and many of them are reacting to the pressure by boosting their reserves. Where does U.S. Bancorp stand relative to the crude price decay and its aftermath on energy loans?

First, the management of U.S. Bancorp appears to be confident about the bank’s ability to cope with energy loan defaults. For example, the bank’s management recently said that preparations were already in place to deal with loan problems coming from the energy sector even if oil prices were to drop below $30 a barrel.

Second, the fact that only 1.2% of U.S. Bancorp’s loans are linked to energy means that the bank has little exposure to the problem sector. You get the impression that U.S. Bancorp is better positioned to weather the energy storm than even the larger U.S. banks if level of exposure to the oil and gas industry is any guide.

This is how the larger banks are exposed to the energy risk:

Bank of America (BAC): At least 2.4% of BAC’s loans are exposed to the energy sector and the bank is already preparing to deal with $700 million in losses related to bad loans in the oil and gas industry over the next nine quarters if prices remain $30s level.

Citigroup Inc (NYSE:C): The bank has 3.3% of its loans linked to the energy sector. Citigroup recently said its estimated $600 million credit cost for 1H2016 could double if crude oil prices sink to $25.

Goldman Sachs Group Inc (NYSE:GS): The bank’s energy exposure is 2.1% of total loans. GS is watching developments in the oil sector closely and hopes to find ways to mitigate adverse impact on its loans if a push comes to a shove.

JPMorgan Chase & Co. (NYSE:JPM): The largest U.S. bank by assets has 1.6% of its loans exposed to the now radioactive energy sector. The bank is building build its reserve to cope with challenges that may come its way courtesy of crude price collapse.

U.S. Bancorp’s capital return

U.S. Bancorp (NYSE:USB) returns value to shareholders through a combination of dividends and buybacks. The company has committed to return between 60% and 80% of annual earnings to shareholders over the long-term. In 2015 U.S. Bancorp returned 72% of the year’s earnings to shareholders. With improving financial flexibility as highlighted by various positive indicators, you get the impression that U.S. Bancorp might want to push its 2016 capital return to the higher end of the target.

Bottom line

There are multiple indications that U.S. Bancorp (NYSE:USB) has what it takes to improve or at least maintain its growth momentum in 2016.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Neha Gupta

Neha Gupta has been in the financial space for over six years now. Gupta earned her MBA degree from Symbiosis Centre of Distance Learning in 2009 and her passion for finance led her to pursue Chartered Financial Analyst (CFA) course. She has successfully completed Level II of her CFA. She is a veteran in article writing, which is depicted in her numerous pieces published on SeekingAlpha, Nextiphonenews, InsiderMonkey, MarketWatch, and Techinsider. Her crisp and eloquent writing finds its best place in Researchcows, where emphasis is given on developing rich content for various websites, products, business plans, trainings, and book writing.

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