Press Release

DBRS Morningstar Confirms U.S. Bancorp at AA; Trend Revised to Negative

Banking Organizations
June 19, 2020

DBRS, Inc. (DBRS Morningstar) confirmed the ratings of U.S. Bancorp (USB or the Company), including the Company’s Long-Term Issuer Rating of AA and Short-Term Issuer Rating of R-1 (middle). At the same time, DBRS Morningstar confirmed the ratings of its primary banking subsidiary, U.S. Bank National Association (the Bank). The trends for all long-term ratings have been revised to Negative, while all short-term ratings remain Stable. The Intrinsic Assessment (IA) for the Bank is AA (high), while its Support Assessment remains SA1. The Company’s Support Assessment is SA3 and its Long-Term Issuer Rating is positioned one notch below the Bank’s IA.

The Negative trend reflects the wide scale of the economic disruption resulting from the Coronavirus Disease (COVID-19) pandemic and lower interest rates, which has already pressured USB’s earnings, affecting a number of business lines, and will likely continue to have a significant impact in future quarters. Nevertheless, unprecedented support measures have been put in place through monetary and fiscal stimulus, as well as relaxed criteria from regulators, which in our view, could help mitigate some of the negative impact of the crisis. However, should the crisis be prolonged, or if the recovery is muted, additional ratings pressure is likely.

The confirmation of USB’s ratings reflect its highly diversified franchise that has historically delivered peer-leading profitability metrics, coupled with sound and proven risk management practices. In addition to USB’s strong regional banking franchise, USB has substantial positions in global payments and securities services, as well as national wholesale banking. The ratings also consider the Company’s ample deposit funding and liquidity, and strong capital generation capabilities. Additionally, the ratings consider USB’s capital management activities, which have resulted in regulatory capital levels migrating towards the low end of global peers.

Given the Negative trend, the current economic environment and USB’s very high rating level, an upgrade of ratings is unlikely. However, DBRS Morningstar would revise the trend to Stable if the economic fallout from the coronavirus pandemic is not prolonged and remains manageable from a profitability and capital perspective. Conversely, ratings would be downgraded if there is sustained weakening of profitability metrics. Additionally, a prolonged adverse impact from the coronavirus pandemic resulting in a sustained deterioration in asset quality, especially if it highlights deficiencies in risk management, would also result in a ratings downgrade.

USB’s highly-diversified franchise has historically delivered robust and industry-leading returns. USB’s earnings benefit from a substantial level of fee income (43% of revenues in 2019), which is not overly reliant on markets or the level of interest rates. Additionally, the Company’s disciplined expense management has helped to keep the efficiency ratio low. However, the current economic environment and lower interest rates will likely lead to lower revenues in the coming quarters. This includes USB’s payments business, with its significant travel-related component, which will especially be affected by the sharp downturn in travel-related activities globally. Additionally, a challenging rate environment will pressure spread income and elevated provisioning needs will dampen the bottom line.

While USB’s strong risk management culture remains in place, the Company is expected to report higher nonaccrual loans and net charge-offs in the coming quarters. However, DBRS Morningstar expects that USB’s asset quality will likely outperform the industry, considering its granular and diversified loan portfolio that lacks material risk concentrations in potentially higher credit-risk sectors. The $993 million provision for credit losses during 1Q20 included a substantial reserve build for loans of $600 million. The reserve build reflects forecasted credit deterioration primarily due to the deteriorating economic outlook. Inclusive of the CECL adoption in January 1, 2020, the allowance for loan and lease ratio ended the quarter at 1.92%, up significantly from 1.33% at YE19.

Balance sheet trends remained positive for the Company. USB maintains a strong level of on-balance sheet liquidity and has a robust deposit franchise that fully funds the loan portfolio, with a loan to deposit ratio of 81% at March 31, 2020. Additionally, USB has ready access to a variety of additional sources of liquidity. Historically, USB has actively managed its capital to levels lower than many global peers, which we view as justified given the Company’s typically strong and consistent earnings generation. USB reported a Common Equity Tier 1 (CET1) capital ratio of 8.95% at the end of 1Q20. Similar to peers, the Company suspended buyback activity in mid-March.

Minneapolis-based USB had approximately $543 billion in assets and ranked as the fifth largest U.S. bank by assets, deposits and market capitalization, as of March 31, 2020.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at:

The Grid Summary Grades for USB are as follows: Franchise Strength – Very Strong; Earnings Power – Very Strong; Risk Profile – Very Strong/Strong; Funding & Liquidity – Very Strong/Strong; Capitalisation – Very Strong/Strong.

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

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 8, 2020), which can be found on our website under methodologies and criteria:

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release:

The primary sources of information used for this rating include Company Documents and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This rating is endorsed by DBRS Ratings Limited for use in the European Union. The following additional regulatory disclosures apply to endorsed ratings:

The last rating action on this issuer took place on June 21, 2019, when all ratings were with Stable trends.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see:

Lead Analyst: John Mackerey, Senior Vice President, North American Financial Institutions – Global FIG
Rating Committee Chair: Michael Driscoll, Managing Director, Head of North American FIG – Global FIG
Initial Rating Date: 04 April 2005

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