U.S. Bancorp outperforms many bigger banks

A major Treasure Valley employer, the company is doing well financially, and investors have taken note.

BLOOMBERG NEWSJanuary 24, 2014 

When Brian Moynihan was asked at a November panel discussion who could steal his customers, Bank of America’s chief executive officer looked to the man seated on his right.

“Richard,” he said, nodding to U.S. Bancorp CEO Richard Davis, drawing laughter from the bankers and regulators in the New York ballroom. Then it was William Demchak’s turn to answer. “Yeah, I’d say Richard,” said Demchak, the head of PNC Financial Services Group.

Under Davis, U.S. Bancorp has increased market share in more than a dozen business lines since 2007. The nation’s largest regional lender and the second-largest bank in the Treasure Valley based on deposits beat the four biggest U.S. banks in key gauges of management prowess for most of 2013, including return on equity, return on assets and cost controls. On Wednesday it reported a fourth-quarter profit that beat analysts’ estimates as credit losses narrowed, cushioning a decline in revenue.

By stock-market valuation, Davis has already outdone his larger rivals with shares that trade at about 3.3 times tangible book value, more than any of its peers. That’s raised doubt about how much higher it can go: Fewer than half of the 39 analysts following U.S. Bancorp rate it a buy, and Atlantic Equities LLP’s Richard Staite has the equivalent of a sell with a price target lower than the current level.

U.S. Bancorp has outpaced peers as bankers’ attention has shifted from credit-crisis fallout to the nation’s improving economy. One area of focus for analysts is mortgage revenue, which slid from the third quarter as lenders grappled with rising interest rates.

Davis, 55, has never posted an annual loss during his seven-year tenure as CEO of the Minneapolis-based firm. He’s done it while eschewing investment banking and riskier assets to concentrate on retail customers and the corporate trust business. He’s also avoided the worst of the mounting legal costs that plague larger peers. With regulators pressing banks to become simpler and safer, U.S. Bancorp is being held up by investors and analysts as a model for how lenders should be run.

“We need more U.S. Bancorps,” said David Ellison, a money manager for 30 years who runs the Hennessy Large Cap Financial Fund, which has beaten two-thirds of its peers for the past five years. “We’re in a significant period of flux in the industry that is unprecedented in my lifetime. So I want to own the better management.”

Davis has been able to concentrate on growth while competitors were consumed with “resolving legacy issues,” analysts at Goldman Sachs Group Inc. said in a Dec. 3 report with a buy rating. Legal expenses and claims over shoddy mortgages have cost the six biggest lenders more than $114 billion since 2007, and probes and new regulations like the Volcker Rule have put pressure on revenue.

The advantage might erode as larger rivals put those costs to rest.

U.S. Bancorp’s shares have climbed 21 percent since Davis became CEO in December 2006, compared with a 39 percent drop in the 24-company KBW Bank Index. The stock didn’t fall as sharply during 2008’s credit crisis and is the only one in the index to post four straight annual gains through 2013. Still, U.S. Bancorp’s 26 percent advance last year was the index’s fourth-worst performance. Some rivals were rebounding from deeper troughs after the crisis.

“They are not going to be the flashiest company, they are not going to be the fastest-growing company, but they are going to be one of the most consistent companies,” said Tom Brown, CEO at Second Curve Capital LLC, a New York hedge fund that invests in banks and counts Davis as an adviser.

U.S. Bancorp has added market share since 2007 in fund services, credit cards, mortgage origination, deposits, commercial and industrial loans and commercial real estate loans, the firm said in a Dec. 11 presentation.

The bank has more than 62,000 employees, including about 1,380 in Idaho, of whom 420 are in the Treasure Valley. With 21 percent of the Valley’s market — up from 19 percent a year earlier — the bank is second only to Wells Fargo, which has 24.5 percent of local deposits.

In an interview, Davis said his firm’s competitive advantage is its ability to increase market share while avoiding new risks. “Our competitors are looking at their balance sheet, but we are focused on fees, trust, payments,” he said.

The company has steered clear of subprime mortgages and shunned proprietary trading. It abandoned the student-loan business in 2012 out of fear that politicians would make bankers forgive student debts.

“I did it because, for my shareholders, I feel that it’s the next moral hazard coming our way,” Davis told a Boise Metro Chamber of Commerce audience last March.

While Bank of America and Citigroup Inc. are closing offices, U.S. Bancorp added 94 branches to its network of more than 3,000 with a Chicago acquisition last month. Deposits have jumped 88 percent since 2008, compared with an average 69 percent for the four largest banks, and assets rose 46 percent to $360.7 billion, compared with 39 percent increase for the Big Four.

“We are still boring,” Davis said, using his buzzword for relying on conventional banking. “Boring means we won’t get in and out of stuff we don’t know.”

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