U.S. Bancorp Encroaches on BofA as Davis Seizes Market Share



When Brian T. Moynihan was asked at a November panel discussion who he worried would steal his customers, Bank of America's chief executive officer looked to the man seated on his right.

"Richard," he said, nodding to U.S. Bancorp CEO Richard Davis, drawing laughter from the bankers and regulators in the New York ballroom. Then it was William Demchak's turn to answer. "Yeah, I'd say Richard," said Demchak, the head of PNC Financial Services Group Inc.

Under Davis, U.S. Bancorp has increased market share in more than a dozen business lines since 2007. The nation's largest regional lender beat the four biggest U.S. banks in key gauges of management prowess for most of 2013, including return on equity, return on assets and cost controls. Analysts are predicting more of the same when the company reports full-year results tomorrow.

By stock-market valuation, Davis has already outdone his larger rivals with shares that trade at about 3.3 times tangible book value, more than any of its peers. That's raised doubt about how much higher it can go. Fewer than half of the 39 analysts following U.S. Bancorp rate it a buy, and Atlantic Equities LLP's Richard Staite has the equivalent of a sell with a price target lower than the current level.

Earnings Estimates

The bank probably will say annual net income fell about 2 percent, or a 5 percent gain on a per-share basis, according to estimates compiled by Bloomberg. While fourth-quarter profit declined about 3 percent, according to the data, Staite predicted in a Dec. 19 note that the period will include a 16.2 percent return on equity and a 1.59 percent return on assets, the highest among the biggest commercial banks.

"It's very hard to see how they're going to improve from an already impressive level," Staite said. "There are other banks that are going to see their earnings improve at a much faster rate."

The quarterly report may show whether U.S. Bancorp will continue to outpace peers whose attention is shifting from credit-crisis fallout to the nation's improving economy. One area of focus for analysts is mortgage revenue, which the firm has said may slide 30 percent from the third quarter as lenders grapple with rising interest rates. A drop in earnings from home loans and corporate payments and an increase in taxes could cause results to miss estimates, Matt O'Connor, a Deutsche Bank analyst, said in a Jan. 3 note with a hold rating.

Retail Concentration

Davis, 55, has never posted an annual loss during his seven-year tenure as CEO of the Minneapolis-based firm. He's done it while eschewing investment banking and riskier assets to concentrate on retail customers and the corporate trust business. He's also avoided the worst of the mounting legal costs that plague larger peers. With regulators pressing banks to become simpler and safer, U.S. Bancorp is being held up by investors and analysts as a model for how lenders should be run.

"We need more U.S. Bancorps," said David Ellison, a money manager for 30 years who runs the Hennessy Large Cap Financial Fund, which has beaten two-thirds of its peers for the past five years. "We're in a significant period of flux in the industry that is unprecedented in my lifetime," he said. "So I want to own the better management."

Davis has been able to concentrate on growth while competitors were consumed with "resolving legacy issues," analysts at Goldman Sachs said in a Dec. 3 report with a buy rating. Legal expenses and claims over shoddy mortgages have cost the six biggest lenders more than $114 billion since 2007, and probes and new regulations like the Volcker Rule have put pressure on revenue.

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