DBRS Confirms U.S. Bancorp Senior Debt at AA; Trend Remains Stable

DBRS, Inc. (DBRS) has today confirmed all ratings of U.S. Bancorp (USB or the Company), and its related entities including its Issuer & Senior Debt rating at AA. The trend on all ratings is Stable. The rating action follows a review by DBRS of the Company’s operating performance, financial fundamentals and future prospects.

Today’s rating confirmation is based on the Company’s continued strong and sustainable operating performance that arises from a diverse business mix that includes top-tier or growing market shares in retail and small business banking, payment services, wholesale banking, commercial real estate (CRE), wealth management, and securities services. Indeed, non-interest revenue, which typically requires less capital support, yet higher operational risk than spread income, accounted for a substantial 46% of revenues in the first nine months of 2012; identical to 2011. USB also continues to enhance its franchise by investing in its existing infrastructure as well as through select acquisitions including additions to its bank, trust, and payment processing businesses in 2012. These franchise strengths, combined with a relatively low risk profile, an efficient operating platform, and an inexpensive, yet robust funding profile, produce sustainable profitability that is generally higher than its peers.

USB’s super-regional retail banking franchise includes strong market positions and deposit market shares in states across the Midwest, Mountain and Pacific regions. At the same time, the Company’s wholesale banking and trust businesses are national in scope, while its payments business conducts business internationally. DBRS also sees the Company as conservatively operated with a thoughtful, disciplined and detail-oriented management team.

Improved Company performance for 9M12 has featured stronger revenues, better profitability, lower credit costs and positive operating leverage. Mortgage banking, a cyclical fee income source, continued to bolster results at this point in the cycle given the low interest rate environment. In 2012, USB advanced to the fifth largest depository in the U.S. with a 2.75% market share. The loan portfolio is sufficiently granular, is diversified among various industries and regions, and lacks material risk concentrations in volatile sectors. Furthermore, DBRS sees USB as well-positioned with regard to industry regulatory reform. While the Company’s revenues and expenses have been negatively impacted by the changing regulatory landscape, its current size and uncomplicated banking model, which does not have significant capital markets exposure, allows it to operate with less regulatory constraint than the largest U.S. banks.

Through its careful navigation of the difficult operating environment, USB has generated record levels of net interest income reflecting above average loan growth and fee revenues at a time when most banks are struggling to generate revenue growth. This revenue growth has been able to more than offset the negative impact of rising operating expenses (particularly regulatory and mortgage banking) and margin pressure, and still higher than normal credit costs, contributing to higher earnings. This strong and resilient performance including remaining profitable every quarter during the most recent downturn has enabled the Company to continue building its business, at a time when other institutions have been inwardly focused repairing their balance sheets and business models. USB’s profitability metrics (return on assets, risk-adjusted return and return on equity) are in the top tier among banks similarly rated by DBRS as well as the largest banks in the United States. DBRS expects that leadership to continue.

Following 10 consecutive quarters of steady improvement, USB’s credit metrics have stabilized and DBRS characterizes the overall charge-off and non-accrual levels as manageable, while loan reserve levels (excluding FDIC covered) appeared adequate at 84% of non-performing loans (including restructured but accruing loans yet excluding GNMA and covered loans). DBRS also notes that in 3Q12, USB generated approximately $2.5 billion in income before provisions and taxes (IBPT), which exceeded its $488 million loan loss provision by 5.1 times, providing a substantial cushion against unexpected potential losses.

In DBRS’s view, USB’s financial fundamentals and capital position are sound and supportive of the Company’s rating levels and Stable trend. Reflecting its capital strength, the Company’s Basel I Tier 1 and Tier 1 Common capital ratios improved to 10.9% and 9.0% respectively in the third quarter of 2012, while the Tier 1 Common ratio under the June 2012 Basel III proposals approximated 8.2%. DBRS believes that compliance will be clear-cut given current capital levels combined with the Company’s strong internal capital generation ability. Moreover, a solid core deposit base which funds virtually the entire loan book continues to underpin the Company’s sound liquidity position. Furthermore, DBRS calculates that the holding company maintains sufficient unencumbered liquid assets (in the absence of subsidiary dividends) to meet operating expenses, dividends and debt-service obligations for 1.7 years. Although still awaiting final rulings, DBRS also sees USB as making the balance sheet adjustments necessary for an orderly transition to Basel III Liquidity Coverage Ratio (LCR) compliance.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments, Rating Bank Subordinated Debt and Hybrid Instruments with Discretionary Payments, and Rating Bank Preferred Shares and Equivalent Hybrids. All can be found on the DBRS website under Methodologies.

The sources of information used for this rating include company documents, the Federal Reserve, the Federal Deposit Insurance Corporation and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: William Schwartz
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 4 April 2005
Most Recent Rating Update: 06 July 2011

For additional information on this rating, please refer to the linking document under Related Research.