USB - US Bancorp

[Viking]

The US banks are a pretty unloved sector right now. I have spent some time reading what I can find on USB and they appear to be the best looking risk/reward of the large US banks (WFC would be my second choice). Buffett likes these guys for a reason: their long term track record of looking after shareholders is great (dividends, share buybacks and growing earnings).

 

Peter Lynch talks about how doctors invest in commodity plays and CEO's of resource companies like to invest in pharmaceuticals. Buffett & Prem have told us who they feel are the truly GREAT companies out there... are we too blind to see the obvious??? Kind of like when Jim Rogers said you make money by picking up the $20 bill that is lying in front of you (or something like that).

 

USB is pretty transparent in their reporting. They look to have been more prudent than most during the orgy and now look to be healing faster than their peer group. They have been growing their business the past few years by taking advantage of the weak players (flight to quality and small aquisitions). Their capital position has improved greatly to the point that they have re-instated a decent dividend (2%) and will soon begin buying back meaningful amounts of stock (likely later this year). Most importantly, the company is in very solid shape to grow like stink when the US economy begins to improve. And being the number 5 player (of the large banks) with a great reputation and the best capital position they likely have lots of growth ahead of them.

 

In the near term government regulation changes are a cloud: 'Durbin' may cost them some money and they are waiting for 'Basil' to be finalized. And yes, if the US economy falls back into recession all banks will once again take a hit on their loan portfolios (but in the end this would just further improve USB's position in the marketplace as they would be in much better shape than their competitors and as a result grow their position... short term pain for long term gain... just as is unfolding right now).

 

I see USB as a a solid buy at current levels and an absolute steal should US economy outperform in the near term.

Price = $25.02

Earnings 2010 = $1.67

Earnings Est 2011 = $2.15 (RBC); PE = 11.64

Earnings Est 2012 = $2.55 (RBC); PE=  9.8

Dividend = $0.50 = 2%

 

 

[ShahKhezri]

Have you looked at PNC?

[Viking]

ShahKherzi, no I had not looked at PNC. I did spend some time reviewing their business over the weekend and it definitely look interesting. However, I do not see them as being a better investment at the present time than USB (for me). I see both bank as being cheap and I am going to take the lazy way out and go with the same pick as Buffett and Watsa.

 

WFC would be another option; my read is USB is a safer, more conservative pick. Although I would expect WFC to outperform should the ecomony improve more quickly than expected.

[StubbleJumper]

ShahKherzi, no I had not looked at PNC. I did spend some time reviewing their business over the weekend and it definitely look interesting. However, I do not see them as being a better investment at the present time than USB (for me). I see both bank as being cheap and I am going to take the lazy way out and go with the same pick as Buffett and Watsa.

 

WFC would be another option; my read is USB is a safer, more conservative pick. Although I would expect WFC to outperform should the ecomony improve more quickly than expected.

 

 

WFC looks cheap.  You only need to make a half-assed forecast of Pre-provision, pre-tax income, and then guesstimate the provision for credit losses.  A year ago, I thought that PCL in 2011 might be around $12.5B (1% or assets, which is high, but not stupid high).....however, if you are brave enough to run-rate PCL for Q1, it comes in nicely under $10B.  I can't see how EPS in 2011 could be lower than $3.25/sh, and it could be as high as $3.75.  If my arithmetic is anywhere close to correct, this beast trades at about 8.5X forward earnings.

 

Wow.

 

SJ

 

 

EDIT: OK, I must have been smoking drugs.  I meant EPS of $2.75-3.25.  Never post from memory before your second coffee. :-[ :-[

[Viking]

USB particiated in the short Q&A at RBC conference May 6; good listening for those interested in learning more about USB: http://phx.corporate-ir.net/phoenix.zhtml?p=irol-eventDetails&c=117565&eventID=4014108

 

Some notes:

- invested in all business lines the past three years

- all business lines are very well prepared for growth

- well positioned for economic recovery

 

- growth has slowed slightly in 1H 2011 (3 to 4%) compared to 2H 2010 (4 to 5%)

- regarding regulatory changes:

1.) waiting for final Basil 3 rules later this year

2.) Durbin: if passed as currently proposed impact earnings by $400 million annually and expect to mitigate 1/2 of this amount (via changes to debit program)

3.) Overdraft changes (already in place) impacting earnings by $450 million beginning with Q4 2010 results

 

- regarding size sit well below the largest players

- like their current size (have required scale and lots of growth opportunities)

- have seen continued pick up in their community business due to flight to quality

 

- asked what we should be watching for in sector:

1.) given slow economy managing expenses is very important (look to efficiency ratio)

2.) is the bank a good lender: UBS feels they have proved that they are good lenders through the cycle (i.e. they lend today the same way they always have)

----------------------------

Lending looks to have many similarities to underwriting; in the short term it is easy for players to get away with lax standards but not over the medium to long term. USB looks to be one of those best of class 'underwriters' when it comes to how they manage their loan book over the cycle. Definitely something I will pay more attention to moving forward.    

[vinod1]

USB is a gem and I like their business model a lot. Looking at any metric and they stand out for the past 10 years - ROA, efficiency, loan loss rate, non-interest income as a percentage of total income, etc.

 

That said I think and especially if you buy into Berkowitz's theory on Govt Auditors having scrubbed the loan books, other banks may be more attractive at the prices currently being offerred:

 

USB    5.8x PTPP

WFC    4.3x PTPP

C        3.1x PTPP

BAC    2.4x PTPP

 

You need to look at loan loss history, but if you do buy Berkowitz argument and even if you dont BAC is very compelling. Their loan loss history ex-Merill and ex-Countrywide is pretty good unlike Citi. Would not buy on this metric (PTPP multiple) alone but it gives one good way to visualize the value your are getting.

 

Vinod

[vinod1]

PTPP based on actual 2010 results. USB and WFC are likely to increase their PTPP significantly and BAC is likely to be stagnant for a while.

 

Vinod

[PlanMaestro]

USB is a gem and I like their business model a lot. Looking at any metric and they stand out for the past 10 years - ROA, efficiency, loan loss rate, non-interest income as a percentage of total income, etc.

 

That said I think and especially if you buy into Berkowitz's theory on Govt Auditors having scrubbed the loan books, other banks may be more attractive at the prices currently being offerred:

 

USB     5.8x PTPP

WFC    4.3x PTPP

C         3.1x PTPP

BAC     2.4x PTPP

 

You need to look at loan loss history, but if you do buy Berkowitz argument and even if you dont BAC is very compelling. Their loan loss history ex-Merill and ex-Countrywide is pretty good unlike Citi. Would not buy on this metric (PTPP multiple) alone but it gives one good way to visualize the value your are getting.

 

Vinod

 

I wonder if anyone has taken a look at WIBC (Wilshire Bancorp). They have some of the highest PTPP metrics in the country (PTPP/assets, PTPP/equity) and thanks to a recent dilutive capital injection it is priced at 2.6x PTPP. The total impact of the dilution might be less that the market thinks since they closed a very positive and large FDIC transaction where they basically took the deposits. It is a very simple Korean American bank so there is no need to worry about derivatives and that kind of stuff.

[Kraven]

PlanMaestro, I took a quick look at them recently.  Based upon a a minute's work it seemed as if there were some pretty serious fraud allegations.  I believe that is tied to past management, but could be some lingering issues?  Any color?

[Ballinvarosig Investors]

That last quarter from WIBC was pretty scary.

 

Have you looked at FCAL? Selling at less than book, back in profit, NPA's reversing and still cheap on a cash flow basis.

[Kraven]

Re FCAL, seems like other than a huge $35 mil gain on acquisition, they actually would have had a big loss again in the first quarter.  On a trailing p/ptpp basis, they don't seem very cheap to me at about 15x (making some basic adjustments for gains, etc.).  What am I missing?

[PlanMaestro]

PlanMaestro, I took a quick look at them recently.  Based upon a a minute's work it seemed as if there were some pretty serious fraud allegations.  I believe that is tied to past management, but could be some lingering issues?  Any color?

 

I just want to have a serious discussion on this, so please do not think I am pumping it. Korean American banks are a strange beast. They are run by the board of directors and CEOs rarely last long.

 

The other piece to the puzzle is that the Center/Nara merger was an unexpected shock to Wilshire. And Hanmi is still there for the take. So it is difficult to decide what has been the main cause of the recent actions.

 

http://webcache.googleusercontent.com/search?q=cache:-VE10PKN8q8J:www.findata.co.nz/News/11271944/CEO_Carousel_for_Koreatown_Banks.htm+ceo+carrusel+koreatown&cd=5&hl=es-419&ct=clnk&gl=mx&client=safari&source=www.google.com.mx

 

The fraud allegations are not that clear either. There is a chance that they were the excuse to oust the former CEO and bring the former Center CEO (that was ousted after he recognized that he was shopping around after he did not get the CEO job).

 

When this new CEO  was asked what percentage of the new NPAs were related to the rogue lone officer, I think he said it was less than 20%. It looks more like a new CEO breaking from the past. and shortening the measuring stick.

 

Most probably it will take at least two quarters of flushing NPAs but the company very high PTPP profitability ratios should help it navigate those issues and now they have an extra $100 million in capital.

 

PTPP per share last year was like $1.2 but that includes several one offs. Actually I think the FCF per share is higher than that. One thing to consider is that the $62 million in TARP money is still unresolved.

[Rabbitisrich]

I used to own Nara, partly on the belief that their internal processes were clean after coming out of an MOU right before the recession, but PlanMaestro is on the money about the opacity of operations.

 

Nara issued shares at $7.50, iirc, but the price crept up to $12 supposedly on some inside information about meetings with Hanmi bank. A few months later Hanmi announced a deal with Woori bank, Nara's price drifted to $7, and then the CEO left, followed by the Chairman.

 

WIBC might need more capital to maintain the tier 1 to weighted assets ratio and also to pay off their TARP preferreds.

[Kraven]

Seems like an interesting situation.  Worth spending some time on.

[Kraven]

I looked a little more at WIBC.  Their past performance was certainly good, but I definitely have some questions.  Their NIM has skyrocketed which isn't going to be sustainable.  In addition, I wonder how much of their past high performance is due to these questionable loans being made.  You noted that they said under 20% of recent NPAs are due to the rogue loan officer, but I would think at some level the whole past loan book needs to be somewhat in question if they did not have adequate controls in place.  They have a lot of reliance on the SBA program as well which given their current situation could be in jeopardy.  I'm not saying it will be or even is likely to be, but the government can be a mercurial beast.  If they think they need to make an example of someone, they could do that.  Of course, they can always do that.  Any thoughts?

[PlanMaestro]

Morningstar recommends Wilshire WIBC

http://news.morningstar.com/articlenet/article.aspx?id=536087

[Rabbitisrich]

Morningstar recommends Wilshire WIBC

http://news.morningstar.com/articlenet/article.aspx?id=536087

 

(Dollars In thousands, except per share info)			Dec 31, 2011		Well Capitalized   Regulatory   Requirements			Total Excess Above   Well Capitalized   Requirements
Tier 1 Leverage Capital  Ratio			13.86	%	5.00	%	$	235,961
Tier 1 Risk-Based Capital  Ratio			19.59	%	6.00	%		255,993
Total Risk-Based Capital  Ratio			20.89	%	10.00	%		205,212
Tangible Common Equity To  Tangible Assets			8.95	%	N/A			N/A
Tangible Common Equity Per  Common Share		$	3.37		N/A			N/A

 

Yeesh.

[PlanMaestro]

 

(Dollars In thousands, except per share info)			Dec 31, 2011		Well Capitalized   Regulatory   Requirements			Total Excess Above   Well Capitalized   Requirements
Tier 1 Leverage Capital  Ratio			13.86	%	5.00	%	$	235,961
Tier 1 Risk-Based Capital  Ratio			19.59	%	6.00	%		255,993
Total Risk-Based Capital  Ratio			20.89	%	10.00	%		205,212
Tangible Common Equity To  Tangible Assets			8.95	%	N/A			N/A
Tangible Common Equity Per  Common Share		$	3.37		N/A			N/A

 

Yeesh.

 

But when you subtract the $62 milllion TARP ... they are still swimming in capital. Yeesh indeed.

[PlanMaestro]

Wilshire pays TARP!

[PlanMaestro]

WIBC Wilshire: No loan loss provisions this quarter! Earnings $0.25 per share, priced at 5x annualized earnings,  2.5% ROA and 20.8% ROE annualized. And incredible capital ratios and allowances to boot AFTER paying TARP. Why am I not buying all of it? ... OK, maybe an earthquake in Los Angeles.

 

                March 31, 2012 Regulatory Requirements Total Excess Above

Tier 1 Leverage Capital Ratio 12.49% 5.00% 196,687

Tier 1 Risk-Based Capital Ratio 18.00% 6.00% 218,629

Total Risk-Based Capital Ratio 19.31% 10.00% 169,539

Tangible Common Equity To Tangible Assets 9.79% N/A N/A

Tangible Common Equity Per Common Share $ 3.65 N/A N/A

 

http://finance.yahoo.com/news/wilshire-bancorp-reports-net-income-003553163.html

[kevin4u2]

WIBC Wilshire: No loan loss provisions this quarter! Earnings $0.25 per share, priced at 5x annualized earnings,  2.5% ROA and 20.8% ROE annualized. And incredible capital ratios and allowances to boot AFTER paying TARP. Why am I not buying all of it? ... OK, maybe an earthquake in Los Angeles.

 

                March 31, 2012 Regulatory Requirements Total Excess Above

Tier 1 Leverage Capital Ratio 12.49% 5.00% 196,687

Tier 1 Risk-Based Capital Ratio 18.00% 6.00% 218,629

Total Risk-Based Capital Ratio 19.31% 10.00% 169,539

Tangible Common Equity To Tangible Assets 9.79% N/A N/A

Tangible Common Equity Per Common Share $ 3.65 N/A N/A

 

http://finance.yahoo.com/news/wilshire-bancorp-reports-net-income-003553163.html

 

No doubt the lack of loan loss provision this quarter helped earnings.  Thus taking EPS and annualizing doesn't exactly reflect reality.  Do you expect the company to never make a loan loss provision again? 

[PlanMaestro]

No doubt the lack of loan loss provision this quarter helped earnings.  Thus taking EPS and annualizing doesn't exactly reflect reality.  Do you expect the company to never make a loan loss provision again?

 

Kevin, what gives me confidence is that they are way, way over capitalized ... way, way over reserved ... and they have a large valuation allowance against their DTA.  Their current capital and reserves could support a bank almost 50-70% larger (or if you prefer, a bank with at least 3% of assets in more reserves to cushion future charge-offs). I think their current earnings is a conservative estimate of its potential, and their pre-2007 profitability and growth seems to hint that I may be on to something.

 

Look, this is a bank with profitability ratios that would be the envy of Wells Fargo, serves a growing niche, and has a LOT of capital.

[kevin4u2]

No doubt the lack of loan loss provision this quarter helped earnings.  Thus taking EPS and annualizing doesn't exactly reflect reality.  Do you expect the company to never make a loan loss provision again?

 

Kevin, what gives me confidence is that they are way, way over capitalized ... way, way over reserved ... and they have a large valuation allowance against their DTA.  Their current capital and reserves could support a bank almost 50-70% larger (or if you prefer, a bank with at least 3% of assets in more reserves to cushion future charge-offs). I think their current earnings is a conservative estimate of its potential, and their pre-2007 profitability and growth seems to hint that I may be on to something.

 

Look, this is a bank with profitability ratios that would be the envy of Wells Fargo, serves a growing niche, and has a LOT of capital.

 

I'm not disagreeing.  You answered a question I didn't ask. 

[PlanMaestro]

I'm not disagreeing.  You answered a question I didn't ask.

 

Good. It looks like I made my point anyway.

[LC]

I will be going to a presentation with David Moffett tomorrow (US Bancorp CEO 1993-2007 and Freddie Mac CEO 2008-2009) if anyone has any questions feel free to post them.