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 USB’s Issuer & Senior Debt rating of AA. The trend on all ratings remains Stable. The rating action follows a detailed review of the Company’s operating performance, financial fundamentals and future prospects.

The rating confirmation and Stable trend is based on the Company’s continued strong and sustainable operating performance driven from a diverse business mix, including consumer and small business banking, wholesale banking and commercial real estate, payment services and wealth management, and securities services. Additionally, USB has shown solid credit and capital trends, as well as steady loan and deposit growth. Revenues are well diversified by type and geography.

DBRS views USB as conservatively operated with a thoughtful, disciplined and forward-looking management team. As such, USB continues to enhance its franchise by investing in its existing infrastructure and also through select acquisitions including additions to its bank, trust, and payment processing businesses. A recent example would be its pending acquisition of the Chicagoland branch network of RBS Citizens, which will double the Company’s existing deposit share in that market. These franchise strengths, combined with a relatively low risk profile, an efficient operating platform and inexpensive, yet robust funding profile, produce sustainable profitability that has been best in class for a number of years. DBRS expects that leadership to continue.

USB’s recent operating results are viewed by DBRS as reflecting steady, strong performance in a still difficult operating environment. The Company keeps a tight control on expenses, and reductions in expenses has helped offset revenue pressures. Core earnings are resilient, however, USB has not been immune to pressures in the current interest rate environment, which has pressured net interest margins and, with higher long-term rates, has impacted mortgage banking revenues as the refinance boom has dissipated. This has led to a year-on-year decline in the DBRS-calculated income before provisions and taxes. Revenue does benefit from substantial levels of non-interest revenue, which accounted for 45% of revenues in 2013, a key benefit as spread income remains pressured. 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 were inwardly focused.

Credit continues to be well managed. The loan portfolio is sufficiently granular, is diversified among various industries and regions, and lacks material risk concentrations in volatile sectors. In 1Q14, non-performing assets (including covered loans) declined and are now at a modest 0.84% of loans and other real estate. Given the improvement in credit, declining credit losses and its overall level of reserve coverage, the Company has been able to release reserves. However, DBRS anticipates that reserve releases will decline as loan growth accelerates and credit metrics normalize.

USB’s strong earnings provide for robust capital generation and financial flexibility. The Company maintains ample capitalization with a Common Equity Tier 1 capital ratio under the Basel III standardized approach transition rules of 9.7%. This is a 30 basis point increase from the Basel I Tier 1 Common Equity ratio as of the prior quarter end and readily above the Company’s internal and anticipated regulatory requirements. With average deposits at 109% of average loans, anchoring a healthy funding profile, the Company also continues to enhance its liquidity profile by purchasing U.S. government agency-backed securities to comply with future regulatory liquidity requirements. DBRS believes the Company will be in full compliance with the anticipated liquidity standards by YE14.

Minneapolis-based USB had over $371 billion in assets as of March 31, 2014.

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 applicable methodologies include the DBRS Criteria: Support Assessment for Banks and Banking Organisations and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities. These can be found on the DBRS website under Methodologies.

The primary sources of information used for this rating include company documents 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: Elisabeth Rudman
Initial Rating Date: 4 April 2005
Most Recent Rating Update: 21 December 2012

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