Wednesday, July 22, 2009

Is U.S. Bancorp going to earn itself out of trouble?

It is not surprising to see U.S. Bancorp, or in fact, any other bank facing losses due to defaults, foreclosures, late payments, and so on. During the first quarter of 2009, investors feared that the U.S. Government was going to nationalize the banks. Since this did not happen, many banks, including U.S. Bancorp, saw their stock prices appreciate significantly.

The problems that banks face are far from being over, but can U.S. Bancorp survive and earn itself out of trouble? Before answering this question, let’s talk about banking in general.

The Banking Industry

Banks are in the business of selling a commodity product called money. Like other businesses, banks buy their raw materials for one price and resell them for a higher price. Banks mainly get their money from depositors who open a checking or savings account. People might not think of it this way, but by depositing money in the bank, the general public is simply lending money to the banks. Banks might pay 1 percent to depositors and lend it to consumers or businesses for 6 percent.

Banks are highly leveraged institutions: for every $100 in assets, $90 is borrowed from depositors or other lenders and only $10 is in the form of equity. Being leveraged so much makes banks vulnerable to economic downturns. Because of very thin margins, one bad loan may wipe out the profits of several good loans. A poorly managed bank can destroy shareholders’ wealth quickly. This was perfectly demonstrated by Citigroup, Inc.

U.S. Bancorp

Investors might throw all the banks in the same category, and say that they are all the same. Would they say that all restaurants are the same? Probably not. Each bank is a different company following a distinctive business model.

U.S. Bancorp has a reputation of being one of the most conservative banks in the industry. The bank was not involved in loaning money to the risky borrowers that other banks loaned. Instead, it followed strict underwriting criteria that kept it from getting into problems that other banks now face. But even though it was more conservative, it saw an increase in delinquencies, foreclosures, and write-offs. As unemployment kept getting worse, even the best borrowers defaulted.

Another important point that makes U.S. Bancorp different from other banks is the diversified nature of its business. The company operates in four separate business segments: consumer banking, wholesale banking, payment services, and wealth management & securities services. Consumer and wholesale banking contributed 60 percent of revenue. Payment services, and wealth management & securities services, contributed 27 percent and 13 percent, respectively. This diversification is important to point out that the non-banking segments can be used to offset losses from banking operations.


U.S. Bancorp has a high probability of earning itself out of their problems, and therefore, forcing its stock price to trade much higher in three to five years (notice the time frame is not three to five months). As people lost a significant amount of money in the stock market in 2008, many sold their holdings and converted them into cash. Because of this flight to quality, most banks, especially strong ones like U.S Bancorp or Wells Fargo, saw significant increases in deposits. As mentioned before, money is a raw material to banks and deposits are the way to get it. As more people are hoarding cash, banks are able to get this raw material more cheaply. Later, they can lend it out at much higher rates. In addition, as other banks facing more severe problems are not able to lend, U.S. Bancorp can cherry-pick borrowers and still charge enough to make good returns.

Some investors might argue losses are still going up and U.S. Bancorp is not even close to being on its way up. While this is true, the losses are mainly from loans made in the past. Nonperforming loans will finally get written off, meaning they will be taken off the balance sheet, and the collateral will be taken and sold off by the bank. It is just a matter of time before losses start trending down because the new loans are underwritten with even more care than ever before. Despite all the losses, the bank is still profitable. It just generates less profit than before.
The reason why the stock is trading at around $19 is because the majority of investors are not able to sleep at night knowing that the price could decline. Most mutual funds or hedge funds are afraid to acquire the stock because it is unlikely to show short-term gains which could lead to losing clients.
The stock is cheap because there is short-term uncertainty. Once the uncertainty is gone, the $19 price tag will be history.

Disclosure: I, or persons whose accounts I manage, own shares of U.S. Bancorp at the time of this posting.

1 comment:

  1. Otr 214427
    Work from home theory is fast gaining popularity because of the freedom and flexibility that comes with it. Since one is not bound by fixed working hours, they can schedule their work at the time when they feel most productive and convenient to them. Women & Men benefit a lot from this concept of work since they can balance their home and work perfectly. People mostly find that in this situation, their productivity is higher and stress levels lower. Those who like isolation and a tranquil work environment also tend to prefer this way of working. Today, with the kind of communication networks available, millions of people worldwide are considering this option.

    Women & Men who want to be independent but cannot afford to leave their responsibilities at home aside will benefit a lot from this concept of work. It makes it easier to maintain a healthy balance between home and work. The family doesn't get neglected and you can get your work done too. You can thus effectively juggle home responsibilities with your career. Working from home is definitely a viable option but it also needs a lot of hard work and discipline. You have to make a time schedule for yourself and stick to it. There will be a time frame of course for any job you take up and you have to fulfill that project within that time frame.

    There are many things that can be done working from home. A few of them is listed below that will give you a general idea about the benefits of this concept.

    This is the most common and highly preferred job that Women & Men like doing. Since in today's competitive world both the parents have to work they need a secure place to leave behind their children who will take care of them and parents can also relax without being worried all the time. In this job you don't require any degree or qualifications. You only have to know how to take care of children. Parents are happy to pay handsome salary and you can also earn a lot without putting too much of an effort.

    For those who have a garden or an open space at your disposal and are also interested in gardening can go for this method of earning money. If given proper time and efforts nursery business can flourish very well and you will earn handsomely. But just as all jobs establishing it will be a bit difficult but the end results are outstanding.

    Freelance can be in different wings. Either you can be a freelance reporter or a freelance photographer. You can also do designing or be in the advertising field doing project on your own. Being independent and working independently will depend on your field of work and the availability of its worth in the market. If you like doing jewellery designing you can do that at home totally independently. You can also work on freelancing as a marketing executive working from home. know more, email us on and we will send you information on how you can actually work as a marketing freelancer.

    Internet related work
    This is a very vast field and here sky is the limit. All you need is a computer and Internet facility. Whatever field you are into work at home is perfect match in the software field. You can match your time according to your convenience and complete whatever projects you get. To learn more about how to work from home, contact us today on workfromhome.otr214427@gmail.comand our team will get you started on some excellent work from home projects.

    Diet food
    Since now a days Women & Men are more conscious of the food that they eat hence they prefer to have homemade low cal food and if you can start supplying low cal food to various offices then it will be a very good source of income and not too much of efforts. You can hire a few ladies who will help you out and this can be a good business.

    Thus think over this concept and go ahead. Otr 214427