DBRS Confirms U.S. Bancorp at AA and U.S. Bank National Association at AA (high), Trend Remains Stable
Banking OrganizationsDBRS has today confirmed all ratings of U.S. Bancorp (USB or the Company), including its Issuer & Senior Debt rating at AA; the trend is Stable. At the same time, all ratings of its principal operating bank subsidiary, U.S. Bank National Association, including its Deposits & Senior Debt AA (high) rating, have been confirmed. The rating action follows a review by DBRS of the Company’s operating performance, financial fundamentals and future prospects.
Although not immune to the current hostile operating environment, USB’s low-risk operating model and strong balance sheet have enabled the organization to differentiate itself from most other large banks. Over the past year, USB has continued to generate healthy top-line revenue growth and measured expense growth. The difficult credit environment, however, has produced higher credit losses and one-off charges for the Company while USB continues to build provisions to absorb future potential losses. Credit losses have been primarily from residential housing and construction portfolios; however, DBRS believes that credit card and commercial loans may experience disproportional deterioration going forward given the recessionary economic climate. Despite these challenges, USB’s profitability metrics (return on assets, risk-adjusted return and return on equity) for the first nine months of 2008 remained the highest among both the largest banks in the United States and banks similarly rated by DBRS, and DBRS expects that leadership to continue.
Rising fees and commissions from the Company’s consumer banking, wealth management and payment services, together with low funding costs, lower-than-peer loan loss provisions and a highly efficient operating platform all contributed to USB’s sustained industry-leading profitability. Capitalization has remained strong relative to the Company’s low risk profile and in line with those of similarly constituted and rated banks. On November 14, 2008, USB received $6.6 billion in capital in exchange for issuing 6.6 million shares of cumulative perpetual preferred stock and applicable warrants to the U.S. Treasury, according to the Troubled Assets Relief Program (TARP) guidelines. The new TARP capital is expected to increase Tier 1 capital to approximately 11.4%, a very well capitalized position. Moreover, a solid core deposit base continues to underpin the operating bank’s sound liquidity position, while the holding company maintains sufficient unencumbered liquid assets to meet operating expenses and debt-service obligations in excess of 1.5 years.
The Company’s ratings recognize a strong and sustainable operating performance that arises from a diverse business mix that includes top-tier market shares in banking, corporate trust, payments processing and various other financial services. These franchise strengths, combined with an efficient operating platform, low loan loss provisions and relatively inexpensive funding, produce profitability that is consistently higher than that of its peers.
USB’s super-regional banking franchise includes strong market positions and leading or top-tier deposit market shares in states across the Midwest, Mountain and Pacific regions. The loan portfolio is sufficiently granular, is diversified among various industries and regions and lacks material risk concentrations in volatile sectors.
On November 21, 2008, USB acquired the banking operations of Downey Savings & Loan and PFF Bank & Trust in a transaction assisted by the Federal Deposit Insurance Corporation (FDIC). DBRS views the acquisitions positively as they vault the Company to the sixth largest bank by deposits in California, with the fourth largest branch network in the state. The transactions have no cash consideration and minimal impact on capital, while a loss-sharing agreement with the FDIC is expected to produce losses in the $600 million range, which should be manageable.
Non-interest income from a broad range of businesses, including payment services, corporate trust, asset management, private client and treasury operations, contribute about 50% to net revenues. These businesses are highly attractive because they provide stable revenues, carry minimal credit risk and are balance-sheet friendly – their operations require only modest amounts of assets, funding and capital. In most of these businesses, USB has sufficient market shares and scale to compete effectively.
In DBRS’s view, the principal challenges for the Company are to continue building out the banking franchise in newer markets and to continue investing in wealth management and fiduciary services. In the highly competitive West Coast region, USB’s market shares are less robust than in its more mature Midwest markets, necessitating the continued building out of the banking franchise. At the same time, USB is required to make sizable capital expenditures to maintain state-of-the-art technology and to build sufficient scale to remain competitive in both wealth management and payment services.
More recently, USB seems to be more open to even relatively large bank acquisition opportunities. Executive management believes that the Company will be an industry consolidator, but USB will be staying within its disciplined criteria. DBRS will evaluate any potential acquisitions on a deal-by-deal basis at the time of announcement. Transactions with potential to negatively affect the Company’s risk profile could lead to negative rating actions.
U.S. Bancorp, a financial services holding company based in Minneapolis, Minnesota, reported assets of $247 billion at September 30, 2008.
Notes:
All figures are in U.S. dollars unless otherwise noted.
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