U.S. Bancorp’s Davis Bores Into Top Rank: Riskless Return
U.S. Bancorp’s Richard Davis likes to rev up investors by telling them his bank is boring.
Davis, chief executive officer of the fifth-largest U.S. bank by deposits, shuns investment banking and insurance. The result: U.S. Bancorp produced the best risk-adjusted return in the past two years of all 24 banks in the KBW Bank Index, the BLOOMBERG RISKLESS RETURN RANKING shows. Investment banks including JPMorgan Chase & Co. (JPM), which last month announced a $2 billion trading loss, Citigroup Inc. and Bank of America Corp. (BAC) ranked near the bottom.
Davis, 54 and CEO since 2006, tells investors he intends to run a “classic” bank that takes deposits and makes loans, a business model that helped insulate the lender from financial market losses and tougher regulation. U.S. Bancorp has the highest return on equity and return on assets of 15 U.S. banks valued by stock-market investors at more than $5 billion, data compiled by Bloomberg show. By those measures, the Minneapolis- based bank is the most profitable in the group.
“They’ve really been one of the best, if not the best, in terms of execution,” said Chris Kotowski, a New York-based analyst for Oppenheimer & Co. who has an outperform rating on the shares. “You haven’t had this kind of uncertainty that you’ve have with other companies.”
U.S. Bancorp gained 8 percent this year through yesterday and added 0.6 percent to $29.40 as of 11:09 a.m. in New York. The shares had a total return of 34 percent in the two years through May, with a volatility that was lower than 71 percent of stocks in the index, for a risk-adjusted gain of 1.1 percent.
JPMorgan fell 13 percent before adjusting for its above- average volatility, the ninth-worst performance. Bank of America and Citigroup had the worst total returns and the second- and third-highest volatility, the ranking showed.
The risk-adjusted return, which isn’t annualized, is calculated by dividing total return by volatility, or the degree of daily price variation, giving a measure of income per unit of risk. A higher volatility means the price of an asset can swing dramatically in a short period, increasing the potential for unexpected losses.
Except for the first quarter of this year, Davis boosted profit every period since the fourth quarter of 2009 -- a record that even JPMorgan chief Jamie Dimon can’t match. Davis has never posted a loss while at the helm of U.S. Bancorp, and the company beat analysts’ estimates each quarter since the third period of 2009, data compiled by Bloomberg show. Revenue increased every year since 2007.
“It’s pretty boring and it’s pretty steady and it’s pretty consistent, and I hope to you, that’s pretty good,” Davis said in December at a conference hosted by Goldman Sachs Group Inc.
Davis increased U.S. Bancorp’s quarterly dividend in 2007 and 2008 to a high of 42.5 cents before cutting it to 5 cents in 2009 while the bank held taxpayer bailout funds. The lender resumed a 12.5-cent payout in 2011 and raised it to 19.5 cents this year.
Davis and his executives are among the “very few top management teams in banking,” said Brian Foran, an analyst at Nomura Holdings Inc. in New York who rates the shares neutral. “They’ve been pretty honest and accurate at all points in the cycle.”
They’ve also attracted attention from Berkshire Hathaway Inc., the holding company run by billionaire Warren Buffett. His Omaha, Nebraska-based firm ranks fourth among U.S. Bancorp’s biggest owners, with a stake of about 3.6 percent, according to data compiled by Bloomberg.
Donald Yacktman, who manages the top-performing Yacktman Fund, said he likes U.S. Bancorp because it is less at risk from record-low interest rates, which are putting pressure on lenders’ net interest margins, the difference between what a bank pays to borrow money and what it gets for loans.
“A lot of their income comes from fee-driven sources as opposed to spread-driven sources,” said Yacktman, who manages $17 billion including shares of U.S. Bancorp as chief investment officer of Yacktman Asset Management. His flagship fund has beaten 99 percent of peers over the past five years, according to data compiled by Bloomberg.
Fee businesses -- including U.S. Bancorp’s payments unit and its trust and investment-management division -- generate steady earnings and use little capital. Each business has earned the company at least $1 billion in non-interest income since 2009. The payments unit includes interchange and fees from credit and debit cards as well as from corporate card transactions, while trust and investment management collects fees based on assets under management.
Stability is enhanced by the diversity of revenue sources and the bank’s determination to avoid becoming too big in any one unit, Foran said. Last year, U.S. Bancorp received the biggest chunk of its non-interest income, $1.36 billion, from merchant-processing services. Still, that was only 15 percent of the $8.76 billion in non-interest income.
When U.S. Bancorp does pursue riskier businesses, they’re “disciplined” about growth, Foran said.
“Other regional banks are not monolines, but some of them do let themselves get very exposed to a single product,” Foran said. U.S. Bancorp’s self-imposed limits shielded earnings after the housing boom turned to bust, he said. “I’m sure they wish they didn’t do subprime mortgages, but those never really hurt them that bad because they were so small.”
Measured by deposits, U.S. Bancorp is only about a quarter of the size of Citigroup (C), ranked fourth in the U.S. by that measure. By assets, it is one-10th the size of JPMorgan, the nation’s biggest bank by both deposits and assets. Those New York-based companies have delivered some of the worst risk- adjusted returns in the past 24 months amid investor concern that their profits are at risk from the debt crisis in Europe, largely through trading positions in their investment banks.
Citigroup declined 33 percent in the past two years through May, the worst after Bank of America’s 53 percent loss, before adjusting for price swings. It had the third-highest volatility, at 45.9, after Bank of America’s 50.4 and a reading of 51.5 for Regions Financial Corp. JPMorgan had a volatility of 36.4, 10th- highest among the 24 stocks.
Dimon is grappling with a $2 billion loss in the company’s chief investment office, following what he called “flawed” and “poorly-executed” handling of trading in synthetic credit positions. The company’s shares have fallen 21 percent through yesterday since he announced the loss on May 10.
Davis has said U.S. Bancorp will not enter investment banking or insurance businesses. His deposit acquisition strategy has been to pursue smaller transactions assisted by the Federal Deposit Insurance Corp. that add branches within U.S. Bancorp’s geographic operating area, which encompasses 25 states with 3,080 branches serving 17.4 million customers, according to an investor presentation last month. U.S. Bancorp has added $34 billion in deposits through acquisition since Davis has become CEO.
“Everyone’s flocking to plain-vanilla banking,” said Keith Davis, an analyst at Farr, Miller & Washington LLC, which manages about $800 million and doesn’t hold U.S. Bancorp shares. Investors “are taking their money out of anything that might have a ticking time bomb and putting it in something more stable like U.S. Bancorp,” said Davis, who isn’t related to Richard Davis.
Capital One Financial Corp. (COF), the next-biggest bank by deposits behind U.S. Bancorp, has also grown through acquisition. The lender returned a risk-adjusted 0.7 percent during the two-years ended May 31, making it the third-best performer in the KBW Bank Index. Richard Fairbank, CEO of the McLean, Virginia-based firm has spent more than $28 billion on acquisitions since 2005 to expand beyond the firm’s core credit- card business.
More analysts are bullish than bearish on U.S. Bancorp, with 17 buy recommendations, 20 holds and only one sell. Foran said the stock may not rise as much as Citigroup or New York- based Morgan Stanley if the macroeconomic environment improves. That’s because the shares already sell for more than two times tangible book value, Foran said, double the level of JPMorgan.
A company’s price to tangible book value measures what investors are willing to pay for a company’s equity after removing intangible items such as goodwill and brand names that would have little value if the company went out of business.
“I think that a JPMorgan is much more attractive at a fraction of tangible book value compared to U.S. Bancorp,” said Keith Davis, the analyst. “I would prefer to take advantage of the really cheap valuations that the market is giving you for a name that has been knocked off its pedestal.”
With stock markets in decline, shareholders so far are still opting for U.S. Bancorp’s stable business. The stock had the second-best total return and the sixth-lowest volatility in the KBW index this quarter. Bank of America, Regions Financial, JPMorgan and Citigroup were the most volatile.
“Never underestimate the power of just being able to focus on doing your daily business and not having to worry about cleaning things up all the time,” said Oppenheimer’s Kotowski.
U.S. Bancorp’s stability has given Davis more influence in Washington, where he met more than once with President Barack Obama to discuss ways to boost the economy and create jobs. He also socializes with Wells Fargo & Co. (WFC) CEO John Stumpf, whose bank had a 0.4 percent risk-adjusted return over the past two years, the fourth-best in the KBW Bank Index.
“If he doesn’t know something, he’ll say, I don’t know what this is,” Kotowski said of the U.S. Bancorp chief. “If he says he’s pretty sure something’s going to happen, it almost always happens.”
To contact the reporter on this story: Laura Marcinek in New York at email@example.com