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 ratings confirmation and Stable trend reflects the strength of the USB franchise, which includes a scaled and diversified mix of businesses including consumer and small business banking, wholesale banking and commercial real estate, wealth management and securities services and payment services. The ratings also consider the Company’s sustained peer-leading profitability metrics, its robust funding and liquidity profile, conservative credit culture and ample capitalization.

Given USB’s very high rating level, DBRS believes upward ratings momentum is unlikely. Conversely, negative ratings pressure could arise from a sustained material decline in profitability or a significant increase in risk appetite or asset quality deterioration.

USB’s earnings power remains resilient, benefitting from substantial sources of fee income (45% of revenues in 2015) and disciplined expense management, which have mitigated revenue pressure from the still challenging operating environment. Overall, USB’s financial performance has remained strong, as the Company continues to generate best in class returns. Indeed, the Company reported a return on average assets (ROAA) and return on average common equity (ROACE) of 1.45% and 14.03%, respectively, in 2015.

The Company’s superior risk profile is supported by its conservative culture, consistent and disciplined underwriting standards, as well as granular loan portfolio that is diversified among various industries and regions and lacks material risk concentrations in volatile sectors. Indeed, USB’s asset quality trends have remained favorable even with further deterioration in its energy book. Specifically, the Company’s nonperforming assets ratio was a modest 0.65% at March 31, 2016 with net charge-offs still below historical norms at 0.48% for 1Q16. Importantly, DBRS views USB’s energy exposure as highly manageable, with energy-related loans representing just 1.3% of the total loan portfolio at 1Q16. Additionally, the Company built the energy-related reserve to 9.1% of total energy loans, up from 5.4% at 4Q15.

USB’s strong earnings provide for robust capital generation and financial flexibility. In 2015, the Company returned 72% of earnings to shareholders in buybacks and dividends, consistent with its targeted range of 60% to 80%. Even with continued capital management activity and balance sheet growth, USB maintains ample capital levels, including a Common Equity Tier 1 capital ratio under the Basel III transitional standardized approach rules of 9.5%, as of March 31, 2016. Moreover and reflective of its healthy funding and liquidity profile, average deposits represented 113% of average loans and the Company currently exceeds the fully-implemented LCR requirement.

Minneapolis-based USB had over $428 billion in assets as of March 31, 2016.

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 (December 2015). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organisations (March 2016) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016). 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: John Mackerey
Rating Committee Chair: William Schwartz
Initial Rating Date: 4 April 2005
Most Recent Rating Update: 15 May 2015

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