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 scaled and diverse business mix, including consumer and small business banking, wholesale banking and commercial real estate, wealth management and securities services and payment 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 strategic, disciplined and forward-looking management team. As such, USB continues to enhance its franchise by investing in its existing infrastructure and also opportunistically through select acquisitions including previous additions to its bank, trust, and payment processing businesses. 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 remained best in class for a number of years. DBRS expects that leadership to continue. DBRS also views the Company as well-positioned to adapt to and comply with the heightened scrutiny in the current regulatory environment.

Given USB’s high rating level, DBRS does not currently envision any upwards pressure on the Company’s ratings. Negative rating pressure could arise from a degradation of any of the qualities that have differentiated the Company including a reduction in its superior profitability levels or a material increase in its risk appetite.

USB’s recent operating results are viewed by DBRS as reflecting steady, strong performance in a still challenging operating environment. For 2014, the Company reported a return on average assets (ROAA) and a return on average common equity (ROACE) of 1.54% and 14.7%, respectively, placing the Company comfortably at the top of its large bank peers. The Company continues to invest in its businesses and ongoing expense management has helped offset revenue pressures. DBRS views expense management as ingrained within the organization and a key cultural strength. While core earnings have been resilient, USB has not been immune to the challenging interest rate environment which has pressured net interest margins. Additionally, loan growth, while positive, has remained in the mid-single digit range. Revenues also benefit from substantial levels of non-interest revenue, which accounted for 45% of revenues in 2014. This strong and recurrent performance, including remaining profitable every quarter during the financial crisis, enabled the Company to continue building its business at a time when other institutions were inwardly focused. DBRS views the Company as well-positioned to benefit from higher interest rates.

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 1Q15, non-performing assets (including covered loans) declined and are now at a modest 0.69% 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, as anticipated, reserve releases have moderated with loan growth and stabilizing credit metrics.

USB’s strong earnings provide for robust capital generation and financial flexibility. The Company’s goal is to return 60% to 80% of their earnings in the form of buybacks and dividends to shareholders with 72% returned in 2014. The Company maintains ample capitalization and reported a March 31, 2015 Common Equity Tier 1 capital ratio under the Basel III transitional standardized approach rules of 9.6%. With 1Q15 average deposits at 112% of average loans, anchoring a healthy funding profile, the Company also has enhanced its liquidity profile by purchasing U.S. government agency-backed securities to comply with Basel III liquidity requirements. Based on management’s interpretation of the final U.S. LCR rule, the Company is already compliant with the fully-implemented LCR requirement.

Minneapolis-based USB had over $410 billion in assets as of March 31, 2015.

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 (June 2014). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organisations (March 2015) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015). These can be found at: http://www.dbrs.com/about/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: Roger Lister
Initial Rating Date: 4 April 2005
Most Recent Rating Update: 16 May 2014

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