U.S. Bancorp Shares Rally As Analysts Get Bullish After Q2 Report

Key Points

• U.S. Bancorp shares climbed 6.46% after Q2 earnings report, with the key catalyst for buying spree being a successful capital ratio raise.
• Raymond James, Goldman Sachs, and Wedbush upgrade ratings or raise price targets.
• U.S. Bancorp is categorized as a super-regional bank; the company has diversified revenue streams from various business lines.
• Wall Street expects 2% earnings decline in 2023, followed by growth in 2024, but investors are focused on capital build, not just earnings growth.

Analysts have been vocal lately about U.S. Bancorp’s NYSE: USB potential, emphasizing that shares have been undervalued as investors focused on requirements for capital holdings. 

U.S. Bancorp shares climbed 6.46% in heavy volume on July 19, following the bank’s second-quarter earnings report. Investors liked what they heard, but the top and bottom-line results were essentially in line with expectations, as you can see using MarketBeat’s U.S. Bancorp earnings data. 

What was the catalyst for the buying spree? 

It’s a bit of arcane jargon unique to the banking industry, but in the second quarter, U.S. Bancorp successfully raised its common-equity tier 1 (CET1) capital ratio. That’s a measure of a bank's essential capital compared to its risk-weighted assets, indicating its ability to absorb potential losses. 

Risk-weighted assets are a way to measure a bank's assets, adjusted based on their potential risk level, to ensure sufficient capital is held to cover potential losses.

Boost In Capital Raise Addressed Investor Concerns

That boost in CET1, achieved earlier than anticipated, addressed investor concerns about the bank's capital levels.

Following the earnings report, Raymond James, Goldman Sachs and Wedbush either boosted their price targets or upgraded their ratings, as U.S. Bancorp’s analyst ratings. 

The consensus view of the stock is “moderate buy,” with a price target of $48.47, a significant upside of 23.85%.

The stock has returned 17.76% in the past month and 9.39% in the past three months, showing the strength of the rally that began in early May. That’s when the stock found a floor above its May 4 low of $27.27 and gradually began trending higher. 

On the U.S. Bancorp chart, you can see the trend of higher lows that started after May 4. 

In the most recent quarter, the company earned $1.12 a share, a year-over-year increase of 3%. Revenue came in at $7.141 billion, up 19%. 

Shares Up Despite Slowing Growth Rates

Here’s what’s interesting about the U.S. Bancorp post-earnings rally: Both earnings and revenue growth declined, and Wall Street expects earnings to fall by 2% this year before growth returns in 2024. 

But blowout earnings growth isn’t what analysts and investors wanted to see. It was all about that capital build. 

Bank of America was early to the upgrade party, bumping the stock up to “buy” on July 11. In their note, analysts wrote, “We believe investor focus on capital build has distracted attention away from what is among the highest quality franchises in the US banking industry. USB's scale, earnings defensibility and strong execution should drive superior EPS growth and stock outperformance.”

Similarly, after the second-quarter report, Morningstar’s Eric Compton wrote that despite the bank reporting what he called an average quarter, “We believe the shares have been materially undervalued, and when they are as cheap as they have been, sometimes it only takes an average quarter to encourage some rerating by the market.”

Analysts Pleased With Company's Guidance

Compton added that he believed the market was most enthusiastic about management’s increased specificity and guidance with regard to the capital build process. 

U.S. Bancorp, with a market capitalization of $60 billion is categorized as a super-regional bank. Its balance sheet included the following assets at the end of the second quarter: 

• Earning assets: $619.9 billion
• Total loans: $379.4 billion
• Total deposits: $521.6 billion

The bank also has a number of business lines, allowing it to diversify its revenue streams. Those lines include corporate and commercial banking, consumer and business banking, wealth management and investment services, and payment services. 

Watching For Golden Cross

While the stock is still in the process of climbing its way out of a steep correction, exacerbated by the regional banking panic in March, the current upward trend line suggests the stock is actionable. 

More cautious investors might prefer to wait until the stock’s 50-day moving average crosses above its 200-day line. When that occurs, it’s known as the golden cross and is frequently a precursor to further price gains.