U.S. Bancorp is typically one of the more expensive bank stocks in the market, trading for a higher price-to-book multiple than any of the other large U.S. banks for most of the past several years. Then the COVID-19 pandemic hit, and not only has the financial sector been one of the worst-performing parts of the stock market, but U.S. Bancorp in particular has been a major laggard. In 2020, the overall financial sector has declined by about 21%, but U.S. Bancorp is 41% lower than where it started the year. That's a big performance gap.
Here's why U.S. Bancorp has been such a poor performer, why it's historically been so expensive, and why patient long-term investors should seriously consider adding it to their portfolio at the current depressed price.
Image source: Getty Images.
Why U.S. Bancorp is down by more than 40% this year
As I already mentioned, U.S. Bancorp was one of the hardest-hit major U.S. banks as the coronavirus pandemic worsened. As of Aug. 21, the stock is still down by nearly 41% year to date, dramatically underperforming the return of the Financial Select Sector ETF (XLF -0.73%), a good barometer of the overall financial sector.
The reason has less to do with the bank's business itself than it does the type of bank it is. Specifically, U.S. Bancorp is purely a commercial bank. Unlike many other big banks, which operate large investment banking operations, U.S. Bancorp functions mainly like a traditional savings and loan. It makes virtually all of its money from taking in deposits and lending money.
The problem is that during turbulent times, investment banking actually performs better. Market volatility lifts trading revenue, and companies are more active in the debt markets, just to name a couple examples. In fact, investment banking giant Goldman Sachs (GS -0.87%) reported its second-highest revenue ever in the second quarter.
Meanwhile, commercial banking has the potential to get hit hard in bad times. Double-digit unemployment could lead to millions of consumers unable to pay their debts, which could result in billions in losses for banks. And U.S. Bancorp doesn't have an investment arm to help offset this risk.
That's why the bank's stock has performed so poorly. U.S. Bancorp has spent most of the past five years trading for nearly double its book value. Now, that's been cut to a price-to-book ratio of about 1.1. The last time U.S. Bancorp traded this cheaply was for a brief period during the financial crisis.
An incredible institution in good times and bad
Obviously, it's too early to know the full effects of the COVID-19 pandemic on the U.S. economy and on the banking industry specifically. But what we do know is that U.S. Bancorp has a history of top-notch efficiency and profitability in both good times and bad.
Using some pre-COVID numbers, take a look at profitability and efficiency numbers for 2019 compared with some of its big-bank peers.
|
Company |
Return on Equity (ROE) |
Return on Assets (ROA) |
Efficiency Ratio |
|---|---|---|---|
|
U.S. Bancorp (USB -1.06%) |
14.1% |
1.45% |
55.8% |
|
Bank of America (BAC -0.47%) |
10.6% |
1.14% |
60% |
|
JPMorgan Chase (JPM -0.81%) |
15% |
1.33% |
56.6% |
|
Wells Fargo (WFC -0.91%) |
10.2% |
1.02% |
68.4% |
Data source: Company financials.
U.S. Bancorp isn't No. 1 in every single category (but there's no shame in being slightly behind JPMorgan Chase in ROE). But it has a long and established history of being near the top -- take a look at U.S. Bancorp's historic ROE and ROA (the purple lines) in the chart below:
USB Return on Equity data by YCharts.
On the topic of bad times, while we don't yet know the full effects of the pandemic, it's worth mentioning that U.S. Bancorp's earnings never turned negative during the '08-'09 financial crisis. How many other major U.S. banks can say the same?
Bargain prices like this don't come along often in U.S. Bancorp
U.S. Bancorp has a strong history of responsible lending and efficient operations, which has made it one of the most profitable banks in the United States year after year. While 2020 likely won't be kind to U.S. Bancorp's bottom line, the fact remains that this is still an incredible financial institution. And right now, you can buy it for a big discount.
