DBRS Morningstar Confirms U.S. Bancorp at AA Following MUFG Union Bank, N.A. Acquisition Announcement; Trend Remains Stable

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 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.

KEY RATING CONSIDERATIONS
The ratings confirmation and maintenance of the Stable trend reflects the incremental improvement in USB’s franchise following the announced acquisition of MUFG Union Bank, National Association (MUB). Specifically, the combination enhances USB’s market share in West Coast markets, and most notably in California where the Company’s deposit market share ranking increases to fifth from tenth. Additionally, the transaction provides the opportunity for significant costs savings and earnings accretion. In DBRS Morningstar’s view, the combination does not add incrementally to credit risk as both companies have a strong lending track record. However, as with all acquisitions, there are integration risks, especially for an acquisition of this size, and it has been some time since USB has completed a large banking acquisition.

RATING DRIVERS
Given USB’s very high rating level, upward ratings momentum is unlikely. Conversely, operational issues with the integration or the inability to rebuild capital, would result in a ratings downgrade.

RATING RATIONALE
USB announced the acquisition of MUB from Mitsubishi UFJ Financial Group for approximately $8.0 billion in cash and stock. Upon close, MUFG will retain a minority equity stake of approximately 2.9% in USB. The transaction excludes MUB’s Global Corporate & Investment Bank, certain middle and back-office functions, and other selected assets. Subject to regulatory approvals, the transaction is expected to close in 1H22. The acquisition adds approximately $105 billion in total assets, $90 billion in deposits, and $58 billion in loans. Overall, we view the announced acquisition as incrementally improving the franchise strength of USB through better scale and an enhanced presence in affluent markets.

The Company has identified approximately $900 million in annualized cost savings, representing approximately 40% of MUB’s cost base and expects to incur integration costs of approximately $1.2 billion (pre-tax). USB is not including any revenue synergies in its assumptions although these could be substantial, as the Company rolls out its more comprehensive product mix, including wealth management offerings, to MUB’s demographically attractive customer base.

MUB’s track record with credit risk has been strong and does not add materially to USB’s credit risk profile. However, the combination will incrementally increase USB’s exposure to CRE and residential real estate, especially in California. However, we expect that USB will manage down this exposure over time, if necessary. Additionally, MUB just entered into a consent order with the Office of the Comptroller of the Currency on September 20, 2021. USB anticipates it can successfully remediate the issues applicable to MUB with the system conversion, and that the order will not delay the close of the transaction or restrict USB’s ability to operate and grow its business as planned.

USB’s pro forma Common Equity Tier 1 (CET1) capital ratio is expected to decline to approximately 9% from 9.9% at 2Q21, which would still be in the high-end of the Company’s targeted CET1 range of 8.5% to 9.0%. USB has deferred its planned share repurchases until the second half of 2022. 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 capital ratio of 9.9% at the end of 2Q21.

Franchise Combined Building Block (BB) Assessment: Very Strong
Earnings Combined Building Block (BB) Assessment: Strong
Risk Combined Building Block (BB) Assessment: Strong
Funding and Liquidity Combined Building Block (BB) Assessment: Very Strong/Strong
Capitalisation Combined Building Block (BB) Assessment: Strong/Good

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/384724.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (July 19, 2021): https://www.dbrsmorningstar.com/research/381742/global-methodology-for-rating-banks-and-banking-organisations.
Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021): https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings,

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 Morningstar 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 United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed ratings:

Each of the principal methodologies/principal asset class methodologies employed in the analysis addressed one or more particular risks or aspects of the rating and were factored into the rating decision, Specifically, the “Global Methodology for Rating Banks and Banking Organisations” was used to evaluate the Issuer and the “DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings” was used in assessing potential ESG implications for the ratings.

The last rating action on this issuer took place on June 18, 2021, when all ratings were confirmed and the trend on long-term ratings was revised to Stable from Negative.

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: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

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

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.

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