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 Stable trends reflect 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 consistent and top-tier profitability metrics, its robust funding and liquidity profile and proven conservative credit culture. While there remains growing economic uncertainty, we see revenues on a positive trajectory going forward, supported by higher interest rates. We also expect normalizing credit trends within the Company’s loan portfolio, given our view that current asset quality metrics remain 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.
Additionally, the pending acquisition of MUFG Union Bank, National Association (MUB) 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.
Given USB’s very high rating level, an upgrade of the ratings 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 ratings downgrade. Additionally, operational issues with merger integration or the inability to rebuild capital post acquisition close, would result in a ratings downgrade.
Franchise Combined Building Block (BB) Assessment: Very Strong
USB’s diverse banking and financial services franchise is underpinned by its leading efficient operating platform, including a branch network with approximately 2,200 banking offices in 26 states, primarily in the Midwest and West. The Company ranks as the fifth largest commercial bank in the U.S. by assets, deposits and market value. USB ranks in the top five by deposit market share in 17 states, which represents about 81% of total deposits.
USB is one of the largest U.S. corporate trustees. The Company also maintains a sizable global market position in payment services, including merchant processing, credit and debit card, as well as corporate payment products.
In September 2021, 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 2H22. 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.
Earnings Combined Building Block (BB) Assessment: Strong
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. 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.
Risk Combined Building Block (BB) Assessment: Strong
USB'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. The Company is mostly a prime-based lender in its retail portfolios and investment grade equivalent in commercial portfolios, with limited leveraged lending. Additionally, commercial real estate lending is relationship-based with consistent loan underwriting. 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 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.
Funding and Liquidity Combined Building Block (BB) Assessment: Very Strong / Strong
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 69% at the end of 2Q22. USB typically benefits from a flight to quality in times of industry stress. Additionally, USB also has ready access to a variety of additional sources of liquidity.
Capitalization Combined Building Block (BB) Assessment: Strong / Good
USB has historically been an active capital manager and generally maintains capital levels somewhat below many global peers, although comfortably above regulatory minimums. DBRS Morningstar views the Company’s capitalization as sound, given its historically robust and predictable capital generation and conservative credit risk management. USB reported a Common Equity Tier 1 (CET1) capital ratio of 9.7% at the end of 2Q22. The Company suspended its share repurchase program when it announced the purchase of MUFG Union Bank. USB’s pro forma CET1 capital ratio is expected to decline when it closes the MUB acquisition while staying in its targeted CET1 range of 8.5% to 9.0%. Following the latest round of Federal Reserve stress testing the Company’s preliminary stress capital buffer remained at 2.5%.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/400133.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/ Social/ Governance factor(s) that had a significant or relevant effect on the credit analysis
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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
All figures are in U.S. dollars unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 23, 2022): 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 (May 17, 2022): https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings,
The primary sources of information used for this rating include Morningstar, Inc. and Company Documents. 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 September 21, 2021, when all ratings were confirmed and the trend remained Stable.
The conditions that lead to the assignment of a Negative or Positive trend are generally 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: https://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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