July 15, 2008 – 7:28 am

In a most blatant example of the pot calling the kettle black, Deutsche Bank downgraded U.S. Bancorp today, issuing the death sentence of “sell.” The recommendation would have served investors much better if it had it been issued on May 1, when the shares closed at nearly $35; today they sold for $22.
This is an old Wall Street dance in which the analysts issue downgrades following cliff dives of 50% or more, just before the last few sellers have sold. The desired effect is to scare the weak holders into selling their shares, creating a temporary bottom for the stock just before institutions intend to buy it up.

The step is good for the stock, but it does nothing to help the bank, which is seemingly getting worse in every category.

U.S. Bancorp set aside $596 million for credit losses, triple the year-earlier level, citing the impact of falling housing prices on homeowners, homebuilders and suppliers, as well as on commercial and consumer lending.

Net charge-offs, or loans the bank doesn’t expect to be repaid, doubled to $396 million, and nonperforming assets doubled to $1.14 billion. The latter increased 34 percent from $845 million as of March 31

Oddly enough, in the fog of the credit burst, Minnesota’s biggest bank enjoys a safe haven status as a result of its non-interest income.

The lender has been building its fee-based businesses as lending became less profitable and the bank said credit costs ate into higher revenue from those operations. The lender got more than 26 percent of its revenue from its payment processing unit in 2007. U.S. consumer borrowing in the first quarter rose by $34 billion, the most since 2001, when the economy was headed into a recession.

U.S. Bancorp has some sort of “safe haven status, that kind of leaves them a little less room for any uncertainty or weakness,”

A little less uncertainty is comforting, but a tripling of loan loss reserves is a harbinger of ill. Banks are designed to profit from interest, but in the aftermath of the credit pop and the resulting credit deterioration, interest is crushing them. If lines form in front of any of US Bancorp’s 2,542 branches it most likely will not be customers applying for loans, but depositors clamoring for their savings, i.e. a run on the bank.

Unfortunatly it is going to take a take a lot more than a cheery “little less uncertainty” and dead cat bounce in the stock price to change that.

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