USB Exits Rescue Program

On July 15, U.S. Bancorp (USB - Analyst Report) announced that it paid $139 million to buyback the stock warrants held by the U.S. Treasury Department. As part of the company’s participation in the U.S. Treasury’s Capital Purchase Program, the 10-year warrants were issued in November 2008. U.S. Bancorp entitled the Treasury to purchase 32.7 million common shares at an exercise price of $30.29 per share.

Last Friday, State Street Corp. (STT - Analyst Report) said that it paid $60 million to repurchase its own warrants. U.S. Bancorp and State Street are among the 10 major financial services companies to be permitted by the federal regulators last month to repay the bailout money.

In May this year, the Federal Reserve conducted a Stress Test and concluded that U.S. Bancorp did not need any additional capital buffer. The decision came after estimating the adequacy of the company’s capital base under a hypothetical two-year scenario, considering adverse economic conditions than actually expected.
 
During May 2009, U.S. Bancorp made a public offering of its common stock and senior notes. Last month, the company redeemed the $6.6 billion of preferred stock issued to the Treasury under the Capital Purchase Program of the Emergency Economic Stabilization Act of 2008. The repurchase of warrants and the redemption of the preferred stock, essentially indicate the company’s final exit from the government’s financial rescue program. This will not only reduce government intervention but also maintain a strong capital base.
 
Besides U.S. Bancorp, the other banks that are not required to raise capital according to the Federal Reserve include American Express (AXP - Analyst Report), Bank of New York Mellon (BK - Analyst Report), BB&T (BBT - Analyst Report) and Goldman Sachs (GS - Analyst Report). However, banks such as Fifth Third Bancorp (FITB - Analyst Report), KeyCorp (KEY - Analyst Report), Regions Financial (RF - Analyst Report), Citigroup (C - Analyst Report) and Wells Fargo (WFC - Analyst Report) were asked to raise capital.
 
With a wide range of product offerings, USB remains well positioned for organic growth. Its strong retail banking franchise and leadership in payment processing will continue to create growth opportunities, going forward.
 
During the first quarter of fiscal 2009, U.S. Bancorp continued to experience a growth in loans and earnings assets, reflecting acquisitions. Furthermore, we expect the company to benefit from strategic acquisitions and expense management. However, the stressed residential real estate markets and the mortgage-related industries along with the continued impact of the U.S. recession on commercial and retail customers will continue to weigh on U.S. Bancorp.

Prior to the scheduled release of second quarter financial results on Wednesday, July 22, 2009, we maintain our Hold rating on the shares.

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