Questions on US Bancorp

By David Shankbone (Own work) [CC BY 3.0 (http://creativecommons.org/licenses/by/3.0)], via Wikimedia Commons

In my last post I mentioned that US Bancorp is arguably the best run US bank in terms of metrics, beating the golden standard Wells Fargo in ROA, ROE, and Efficiency Ratio.

What has eluded my comprehension is why US Bancorp can have such a low cost efficiency ratio.

Fitch thinks that US Bancorps’ low cost efficiency stems from two sources:

  • Low-cost deposit base
  • Corporate culture focused on operating expense management

The natural follow-up questions that confuse me right now are:

  • Why is US Bancorp’s deposit base lower cost than its peers?
  • What does it mean to have a corporate culture focused on operating expense management?

Let’s start off with my first confusion, which is “Why is US Bancorp’s deposit base lower cost than its peers?”

It’s definitely not because of having deposits making up a huge part of total assets, since for the top 20 banks in asset size, the average deposit to total asset % is 73.2% compared to US Bancorp’s 74.5% [1].

It’s not really because of size because all of the top 20 banks in asset size have past the threshold of $1 billion in assets, which marks the threshold where anymore assets doesn’t really contribute to cost efficiency.

It’s also not really unit-level economy of scale (which is supposedly another aspect that drives higher operational efficiency). There does seem to be a correlation (but not very strong) between deposits / branch versus cost efficiency (as seen in graph below) when looking at the top 20 banks in # of bank branches, but considering there are a total of 10 banks with higher deposits / branch but still possessing higher cost efficiency ratio than US Bancorp in this group [2], unit-level economy of scale isn’t a sufficient explanation.

Correlation Between Deposit per Branch to Cost Efficiency.png

What’s left is the illusive concept of culture being the source of lower cost deposit base, which I find to be extremely hard to judge, which is why I ask the question “What does it mean to have a corporate culture focused on operating expense management?”

And why is culture hard to judge? Well I’ve went through US Bancorp’s annual reports from 2000-2015, and all of them describe how cost efficient US Bancorp is and how cost efficiency is a key focus for US Bancorp, but none of the annual reports delve into details of how they do it.

The closest thing I have to gauging US Bancorp’s culture of focusing on operating expense management is US Bancorp:

But I don’t know enough about other banks to know if this already constitutes a culture of focusing on operating expense management that’s much more superior to peers, because in my mind, what US Bancorp can do with the aforementioned initiatives, its peers can also copy. The questions thus becomes:

  • Are US Bancorp’s peers cost cutting in the same way, same degree and same effectiveness?
  • If not, what’s stopping US Bancorp’s peers from following suit?

[Footnotes]

[1] As of Jul 9th 2016 (http://www.bankregdata.com/allIEmet.asp?met=EFF) + (http://www.usbanklocations.com/bank-rank/total-deposits.html)

Ranking by Asset Size – Bank – Cost Efficiency Ratio (%)

  1. JPMorgan Chase – 62.10
  2. Wells Fargo – 55.39
  3. Bank of America – 59.68
  4. Citigroup – 55.68
  5. U.S. Bancorp – 54.32
  6. Capital One Financial – 57.63
  7. PNC Bank – 65.15
  8. Bank of New York Mellon – 70.32
  9. Toronto-Dominion Bank – 72.26
  10. State Street Bank – 80.08
  11. Branch Banking and Trust – 61.60
  12. HSBC Holdings – 71.15
  13. SunTrust Bank – 59.29
  14. Morgan Stanley – 21.45
  15. Charles Schwab Bank – 16.98
  16. Citizens Financial Group – 65.15
  17. Goldman Sachs – 33.14
  18. Fifth Third Bank – 59.47
  19. M&T Bank Corp – 58.63
  20. Regions Bank – 60.26

Above Average Cost Efficient Bank- Deposit % of Total Assets – Deposits ($) / Assets ($)

  • Wells Fargo – (75.87%) – 1,285,439,000,000 / 1,694,163,387,000
  • Citigroup – (70.53%) – 947,446,000,000 / 1,343,346,509,000
  • U.S. Bancorp – (74.48%) – 315,187,684,000 / 423,203,763,000
  • Morgan Stanley -(66.48%) – 119,548,000,000 / 179,838,000,000
  • Charles Schwab Bank – (92.32%) – 135,753,000,000 / 147,039,000,000
  • Citizens Financial Group – (52.67%) – 77,780,394,000 / 145,687,025,000
  • Goldman Sachs – (64.71%) – 92,800,000,000 / 143,403,000,000

Below Average Cost Efficient Bank- Deposit % of Total Assets – Deposits ($) / Assets ($)

  • JPMorgan Chase – (64.47%) – 1,391,743,000,000 / 2,158,702,851,000
  • Bank of America – (77.39%) – 1,297,680,000,000 / 1,676,743,000,000
  • Capital One Financial – (56.33%) – 208,821,499,000 / 370,739,538,000
  • PNC Bank – (72.46%) – 254,089,464,000 / 350,643,006,000
  • Bank of New York Mellon – (77.03%) – 249,861,000,000 / 324,382,710,000
  • Toronto – Dominion Bank – (78.13%) – 213,629,023,000 / 273,414,002,000
  • State Street Bank – (79.77%) – 190,872,030,000 / 239,277,838,000
  • Branch Banking and Trust – (76.40%) – 158,050,500,000 / 206,874,891,000
  • HSBC Holdings – (72.84%) – 144,846,147,000 / 198,852,159,000
  • SunTrust Bank – (81.53%) – 154,833,252,000 / 189,907,589,000
  • Fifth Third Bank – (75.58%) – 105,781,664,000 / 139,966,392,000
  • M&T Banking Corp – (75.40%) – 95,316,346,000 / 126,407,811,000
  • Regions Bank – (79.95%) – 99,645,528,000 / 124,637,433,000

[2] As of Jul 9th 2016 (http://www.bankregdata.com/allIEmet.asp?met=EFF) + (http://www.usbanklocations.com/bank-rank/total-deposits.html) + (http://www.usbanklocations.com/bank-rank/number-of-branches.html)

Ranking by # of Branches – Bank – Cost Efficiency Ratio (%) – Deposit $ / Branch

  1. Wells Fargo – 55.39 – 205,440,147
  2. JPMorgan Chase – 62.10 – 251,217,148
  3. Bank of America – 59.68 – 270,350,000
  4. U.S. Bancorp – 54.32 – 97,672,043
  5. PNC Bank – 65.15 – 91,202,248
  6. Branch Banking and Trust – 61.60 – 69,198,993
  7. Regions Bank – 60.26 – 60,870,817
  8. SunTrust Bank – 59.29 – 105,257,139
  9. Toronto-Dominion Bank – 72.26 – 160,865,228
  10. Fifth Third Bank – 59.47 – 82,706,539
  11. KeyBank – 63.74 – 75,790,871
  12. The Huntington National Bank – 61.50 – 60,283,489
  13. M&T Bank Corp – 58.63 – 110,192,308
  14. Citizens Financial Group – 65.15 – 90,653,140
  15. Capital One Financial – 57.63 – 252,810,531
  16. Citigroup – 55.68 – 1,174,034,696
  17. Woodforest National Bank – N/A – 5,886,650
  18. Santander Bank, N.A – 88.47 – 91,801,086
  19. Compass Bank – 72.06 – 102,387,717
  20. BMO Harris Bank – 72.74 – 127,469,966

[Disclosure]

I currently own US Bancorp (USB) stocks, and intend to keep increasing my position size of USB.

[Disclaimer]

Not advice. No offer. Do not rely. May lose value. Risky. Conflicts hidden/obscured. (Borrowed from Terrence Yang‘s Disclaimer on Quora)

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