Bank of America’s (NYSE:BAC) fourth-quarter results had a clear message: It still pays to be in banking. In the fourth quarter, not only did net income jump 369 percent to $3.4 billion, but the bank posted a dramatic 84.8 percent decline in provisions for credit losses, a 48.4 percent decline in net charge-offs, and the net charge-off ratio — the rate at which debt has to be purged from a bank’s books — declined from 1.4 percent to 0.68 percent.
But while those gains show that the institution is strengthening its financial position, despite the progress, Bank of America still has whole host of problems to face, ranging from increased regulatory controls to lingering litigation to rising competition from its smaller commercial banking peers.
That larger American banks are concerned smaller rivals will be able to entice their customers away became obvious during a November panel discussion known as the “chairmen’s panel.” With Joe Walsh of McKinsey & Co.’s Financial Regulation practice as moderator, Bank of America CEO Brian Moynihan, U.S. Bancorp (NYSE:UBS) CEO Richard Davis, and PNC Financial (NYSE:PNC) CEO William Demchak gathered to discuss “emerging trends in the banking industry.”
When talking about the challenges of meeting the needs of customers, Walsh asked Moynihan to say who he was most worried would steal his customers. Turning to his right, he said U.S. Bancorp’s Davis, per Bloomberg’s video coverage of the event. Demchak of PNC Financial Services added, “Yeah, I’d say Richard.” Davis’s firm has surpassed its larger rivals in terms of stock market valuation.
The regional bank’s shares trade at 3.3 times tangible book value, more than any of its peers. Of course, that strength has prompted some analysts to wonder how much higher shares can go, and fewer than 39 of the analysts holding ratings on the stock have given it a Buy. In particular, Atlantic Equities analyst Richard Staite has rated U.S. Bancorp shares the equivalent of a Sell, with a price target lower than the shares’ current level of approximately $40.
Still, the gains made by the company are worthy of note. Since Davis was named chief executive in 2007, U.S. Bancorp has grown its market share in more than a dozen different businesses. Even more concerning for its larger competitors, the institution also beaten the four largest banks in the United States — JPMorgan Chase (NYSE:JPM), Bank of America, Citigroup (NYSE:C), and Wells Fargo (NYSE:WFC) — in important measures of management strength last year in areas like return on equity, return on assets, and cost controls.
When U.S. Bancorp reports full-year results on Wednesday, analysts expect those strengths to be reflected. However, annual estimates have been dialed back to some degree. Analysts now forecast the bank to report earnings per share of 75 cents on revenue of $19.58 billion. While the profit estimate matches the previous year’s results, the sales number is a slight decrease.
During his years as U.S. Bancorp’s CEO, Davis has never posted an annual loss, even though his tenure encompasses the financial crisis, years of recession, and marginal economic growth. Part of the bank’s success can be attributed to the fact that has avoided subprime mortgages and proprietary trading.
“There’s not a London Whale swimming in U.S. Bancorp’s closet, and they are not going to have a huge legal reserve that is taking from dividend growth,” Bahl & Gaynor’s Matthew McCormick told Bloomberg, referring to the $6.2 billion derivative loss sustained by JPMorgan in 2012.
For U.S. Bancorp, the problem is besting great results. “It’s very hard to see how they’re going to improve from an already impressive level,” Staite, the Atlantic Equities analyst, wrote. “There are other banks that are going to see their earnings improve at a much faster rate.” While Bank of America and Citigroup are closing branches in hopes boosting earnings through cost cuts, U.S. Bancorp extended its network to more than 3,000 by adding 94 branches this year.
Bancorp’s CEO described his strategy as “boring,” a synonym for conventional banking. “Boring means we won’t get in and out of stuff we don’t know,” he said, per Bloomberg. By being “boring,” Davis’s bank has well been able to handle new regulations aimed at forcing financial institutions to hold more capital and decrease risk-taking ventures.
Investors, who have bid shares up more than 27 percent in 2013, will inspect the bank’s results to detect evidence of whether the institution will be able to continue to outmatch its rivals as the industry moves from its financial crisis-era mindset to strategies in line with an improving economy.
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