There are a handful of executives that avid bank stock investors should follow closely; US Bancorp's Richard Davis is one of them. For readers fond of sports analogies, he's the Aaron Rodgers of banking -- an exceptional, but understated, executive of a perennial industry leader.
At a recent conference, Davis shared his views on US Bancorp and the financial industry more generally. Here are the three main things that investors can take away from his presentation:
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1. Putting US Bancorp in perspectiveUS Bancorp occupies a unique position in the bank industry. While there's no question that it's a very big bank, it nevertheless pales in comparison to its four too-big-to-fail peers, as you can see in the slideshow below. By the same token, however, it towers over most other regional lenders, with $419 billion in assets on its balance sheet.
When trying to put US Bancorp in perspective, in turn, the easiest way to do so is to think of it as America's biggest regional bank. But Davis offered a more precise designation. As he explained:
By "G-SIFI," Davis is referring to the biggest banks in the world, which are subject to stricter regulatory oversight and higher capital requirements than their smaller rivals. Sidestepping these gives the "small bank from Bloomington, Minnesota," a competitive advantage over bigger banks, while also allowing it to exploit the economies of scale associated with being the nation's largest regional lender.
2. Insight into expensesIf you're looking for one thing that makes US Bancorp standout from the pack, it's the bank'sefficiency ratio -- that is, the percent of net revenue consumed by operating expenses. Most big banks strive for an efficiency ratio under 60%, but few achieve this over all stages of the credit cycle. US Bancorp is an exception. In fact, its efficiency ratio is typically closer to 50%.
This is important for multiple reasons. It allows a larger share of its revenue to fall to the bottom line, boosting net income and earnings per share. This in turn helps US Bancorp maintain its generous and dependable dividend and share buyback strategies -- between the two, it distributes 76% of its net income. And it allows US Bancorp to compete for the highest quality borrowers by undercutting the loan terms offered by its competitors without jeopardizing its industry-leading profitability metrics. This translates into lower loan losses over time, compounding it's already stellar return on equity.
Over the last few years, however, US Bancorp's efficiency ratio has headed in the wrong direction. Given this, Davis wanted to set the record straight by letting shareholders know that the bank is working to remedy this:
3. Why debt ratings matterLast but not least (to read the entire transcript of Davis' presentation, click here), Davis expounded on the importance of US Bancorp's stellar debt rating, which is among the best in the industry.
A bank's debt rating matters because it dictates its cost of funds. Just like you and me, a bank with a low rating must pay more to borrow money than a bank with a high rating. But unlike you and me, this is particularly critical for banks, as their entire business model is predicated on the ability to borrow funds at low interest rates which are then reinvested into higher-yielding loans and securities. If Bank of America's debt rating was as high as Wells Fargo's, for instance, the former would save somewhere along the lines of $2 billion a year in interest expense.
Davis teased out these advantages by explaining that US Bancorp's "best-in-class" debt ratings:
In sum, if you've ever wondered how US Bancorp has been able to separate itself from the pack, the three points discussed here should go a long way toward clearing that up.
The article 3 Things U.S. Bancorp CEO Richard Davis Wants Investors to Know originally appeared on Fool.com.
John Maxfield has no position in any stocks mentioned. The Motley Fool owns and recommends Wells Fargo. The Motley Fool recommends Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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