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Rising Loans Aid U.S. Bancorp (USB), Cost Woes Prevail

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U.S. Bancorp (USB - Free Report) continues to gain from rising loans and deposit balances as well as inorganic growth strategies. Nonetheless, mounting expenses on investments in technology, lack of diversification of the loan portfolio and depressed margins remain near-term headwinds.

Shares of this currently Zacks Rank #3 (Hold) player have inched up 0.2% in the past six months, while the industry has witnessed 4.2% growth. You can  the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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U.S. Bancorp’s average deposits and loans reflected a five-year CAGR of 3.5% and 6.2%, respectively, in 2020. Total deposits witnessed a rising trend in the first nine months of 2021, while total loans declined. We believe that both loan and deposit balances are poised to increase in a recovering economy. Management expects sequential modest loan growth in the fourth quarter of 2021 on the back of growth in its auto lending and credit card balances as the economy is on the mend and business activities resume in full swing.

USB witnessed organic growth over the last few years, backed by its constant efforts to fortify the existing relationships and improve customer experience through product launches. A decent lending scenario, aided by economic growth, might support U.S. Bancorp’s net interest income (NII) in the days to come. Also, USB’s diverse revenue streams boost fee income growth.

Driven by a strong liquidity position, U.S. Bancorp has been able to expand via a couple of mergers and acquisitions in the past couple of years. These moves opened up new markets to it and solidified the existing ones. In December 2021, USB’s subsidiary U.S. Bank completed the previously-announced deal to acquire PFM Asset Management through U.S. Bancorp Asset Management. The buyout amplifies U.S. Bank’s presence in the institutional asset management space nationwide and bolsters its position as a dominant provider of varied investment solutions in the country. In September 2021, U.S. Bancorp had closed the acquisition of Bento Technologies, a FinTech company providing payment and expense management services to small and mid-size businesses. In the same month, USB entered into a definitive agreement to acquire MUFG Union Bank’s core retail banking operations from Mitsubishi UFJ Financial Group for a cash-and-stock transaction valued at $8 billion. These acquisitions, combined with the ongoing investments in innovative product improvements and services, bolstered USB’s balance sheet and fee-based businesses besides boosting its market share.

However, rising costs are hurting U.S. Bancorp’s bottom-line growth. As it intends to make investments in digital, data and technology refinements, product differentiation and other initiatives, we believe, such costs might weigh on its expense base to some extent in the upcoming quarters.

A bulk of U.S. Bancorp’s loan portfolio — nearly 48% as of Sep 30, 2021 — comprises total commercial loans. Such a lack of diversification can be precarious for USB amid a challenging economy and competitive markets.

Margin pressure for U.S. Bancorp is persistently weighs on its financials. In mid-March 2020, the Federal Reserve lowered rates to near-zero levels to protect the economy from the coronavirus-induced financial breakdown. Net interest margin is expected to continue being affected in the near term as the central bank maintains its relatively accommodative and moderately hawkish monetary policy.

Stocks to Consider

Some better-ranked stocks in the banking space are Shore Bancshares, Inc. (SHBI - Free Report) , Southern First Bancshares, Inc. (SFST - Free Report) and Bank OZK (OZK - Free Report) . At present, SHBI and SFST sport a Zacks Rank #1 each, while BMTX carries a Zacks Rank #2 (Buy).

Over the past year, the stock of Shore Bancshares has gained 40.8%, whereas shares of Southern First and Bank OZK have jumped 84.1% and 49.9%, respectively.

Over the past 30 days, the Zacks Consensus Estimate for Shore Bancshares’ current-year earnings has been revised 21.7% upward, while that of Southern First has moved 13.3% north. Current-year earnings estimates for Bank OZK have moved marginally upward over the past two months.

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