DBRS Morningstar Revises U.S. Bancorp’s Trend to Stable; Confirms at AA

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 Stable from Negative. 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 revised trend to Stable incorporates DBRS Morningstar’s view that the economic fallout from the Coronavirus Disease (COVID-19) pandemic on USB’s asset quality and capital will continue to be manageable. While low interest rates, a lack of loan demand and reduced spending activity have adversely impacted USB’s top line in recent periods, we see revenues on a positive trajectory going forward, supported by a recovering economy. We also expect normalizing credit trends within the Company’s loan portfolio, given our view that current asset quality metrics are at unsustainably low levels. Consistent with historical trends, USB’s capital ratios are expected to remain at the lower end of the peer group, which we consider appropriate, given its strong capital generation capabilities and relatively low risk profile.

The ratings confirmation reflects USB’s very strong franchise that is underpinned by a scaled and well-diversified mix of businesses, including top-tier market share positions in regional and national wholesale banking, as well as global payments and securities services. The ratings also consider the Company’s sustained peer-leading profitability metrics, its robust funding and liquidity profile and proven conservative credit culture.

RATING DRIVERS
Given USB’s very high rating level, upward ratings momentum is unlikely. Conversely, a sustained decline in the overall level of profitability, an increase in risk appetite or a pronounced deterioration in asset quality would result in a downgrade.

RATING RATIONALE
USB is the fifth largest bank in the U.S. by assets and deposits, with significant deposit market shares throughout the Midwest and West. The Company’s highly diversified franchise has consistently delivered industry-leading returns, which we expect will continue. USB’s earnings benefit from a substantial level of fee income (greater than 40% of total revenue) that is not overly reliant on markets or the level of interest rates. Additionally, we consider the Company’s disciplined expense management as a cultural strength, allowing it to balance short-term objectives with long-term investments that, in our view, positions USB to compete effectively in an increasingly digital world. Meanwhile, we view the recent rise in USB’s efficiency ratio as being primarily a function of the pressured revenue environment and expect it to revert to its targeted low 50% range, with an improving economic backdrop and higher interest rates.

Despite the unprecedented operating environment in 2020, USB’s income before provisions and taxes (IBPT) remained stable compared to prior years. Consistent with industry trends, bottom line results were materially impacted by an outsized provision for credit losses, reflecting reserve building based on the economic fallout from the pandemic, which was further exacerbated by the implementation of the Current Expected Credit Loss (CECL) accounting standard for calculating loan loss reserves. Nonetheless, USB reported a return on equity (ROE) of 10.0% in 2020, which we view as solid in the context of the challenging operating environment, especially considering it was a better performance than in 2009.

More recently, the Company reported $2.3 billion of net income in 1Q21, which was up 50% linked-quarter. The markedly improved performance was primarily due to an outsized reserve release, reflecting an improved economic outlook and modest credit migration, as IBPT remained in line with recent periods. Profitability metrics remained among the best in the industry, with a return on assets (ROA) of 1.69% and ROE of 19.0%. Looking forward, as the benefit from reserve releases moderates, we would expect a normalization of profitability metrics, but for USB to consistently deliver on its long-term performance targets, including a ROA of 1.35% to 1.65% and ROE of 14.5% to 17.5%.

The Company’s superior risk profile is supported by its conservative culture, consistent and disciplined underwriting standards, as well as a granular loan portfolio that is diversified among various industries and regions and lacks material risk concentrations in volatile sectors. Additionally, USB’s exposure to COVID-19 impacted exposures appears to be manageable, at 7.9% of total loans. Further, the payment performance of borrowers exiting payment relief has been in line with the Company’s expectations. Overall, USB’s nonperforming assets and net charge-offs remain at historically low levels.

Balance sheet trends continue to be favorable. 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 68% at the end of 1Q21. Additionally, the Company has ready access to a variety of additional liquidity sources. 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 1Q21.

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.

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.

Notes:
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): https://www.dbrsmorningstar.com/research/362170/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 19, 2020, when all ratings were confirmed and the trend on long-term ratings was revised to Negative from Stable.

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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