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We have recently reaffirmed our long-term Neutral recommendation on U.S. Bancorp (USB - Analyst Report) based on its solid fundamentals and strategic acquisitions amidst the current stressed operating environment and limited exposure to various critical issues that have crippled a number of its competitors.  

Aided by growth in revenue and lower provision for credit losses, U.S. Bancorp’s second quarter 2012 earnings per share of 71 cents outpaced the Zacks Consensus Estimate of 69 cents. Top line was supported by growth in net interest income and fee-based revenue. Yet, on the negative side, expenses advanced and to some extent, dwarfed the positive impact that the top-line growth bore on the profit.

We believe that investors should not be disappointed with their investments in U.S. Bancorp over the long term, given its attractive core franchisee and diverse revenue stream. Stable revenue and earnings both pre-and-post financial crisis periods is impressive. Also, it is encouraging to note that the company has fewer exposures to mortgage repurchases and litigation issues than its competitors.

Solid capital position, improving credit quality and increase in lending activities augur well. Additionally, U.S. Bancorp has made several strategic bank acquisitions in the past years, which have opened new markets to it, fortified existing markets and augmented its scale of business.

Moreover, U.S. Bancorp has a well-balanced business model, with non-interest revenue representing nearly half of its total revenue. Its results have been driven by a combination of acquisitions and organic growth. This diversification in business is expected to continue to help maintain growth in an otherwise unfavorable operating environment. Moreover, it has announced consecutive dividend increases over the past three years with the latest hike of 56% being announced in March 2012.

Yet, a tepid economic recovery, regulatory issues along with the expectation of continued low interest rate environment are projected to limit the stock’s upside potential in the upcoming quarters.

Though the company is expected to experience a growth in loans in the rest of 2012, we believe that owing to the company’s cash position and the current low interest rate environment, which is anticipated to continue in the next several quarters, net interest margin is likely to remain under pressure going forward. And hence, our Neutral stance is reaffirmed.

However, the shares of U.S. Bancorp, which compete with Fifth Third Bancorp (FITB - Analyst Report) and M&T Bank Corp. (MTB - Analyst Report) among others, retain a Zacks #2 Rank, which translates into a short-term Buy rating over the short term.

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