TEXT-Fitch affirms U.S. Bancorp ratings
July 18 - Fitch Ratings has affirmed U.S. Bancorp's (USB) ratings including its long- and short-term Issuer Default Ratings (IDR) at 'AA-' and 'F1+', respectively. The Rating Outlook is Stable. A full list of ratings is provided at the end of this release. The affirmation of USB's ratings reflects the company's peer leading performance despite a challenging economic and banking environment. Further, given the company's strong competitive position, Fitch expects USB's performance to continue to exceed those of peers over the near-to-intermediate term. Fitch notes that USB operating performance continues to exceed those of peers as well as some of Fitch's expectations. USB is able to generate earnings and profitability owing to its low cost deposit base, efficient cost structure and high proportion of non-interest income. This relative outperformance has been sustained over a multi-year period. The company's impressive average annual return on assets (ROA) of 1.33% over the last five years handily exceeded the average ROA of similar regional banks. Fitch notes that USB's strong net interest margin (NIM) has been a significant contributor to this performance, as has been its solid contribution of non-interest income, which over time has represented nearly 50% of operating revenue. This strong earnings generation has allowed USB to accrete capital at a significantly faster rate than several peers. Thus, USB has been able to both return capital to shareholders and invest in future growth, while maintaining strong capital ratios. Fitch believes that given the company's strong earnings profile, USB should continue to generate capital at a faster rate than most peers. USB's Tier 1 risk-based capital ratio of 10.7% in the second quarter of 2012 (2Q'12) places it in the middle of the pack compared to its large regional bank peer group. However, Fitch believes that this level of capitalization is more than adequate for USB's rating category, particularly given its strong earnings generation and good asset quality trends over economic cycles. USB's current Tier 1 common ratio is 8.8% under Basel I standards, Fitch would also note that USB estimates that its Tier 1 common ratio under fully implemented current Basel III proposals remains reasonable at 7.9%. Fitch notes that USB's level of non-performing assets (NPAs) continues to decline quarter over quarter. In 2Q'12, the company's level of NPAs declined notably due to a significant reduction in NPAs related to commercial mortgage and construction and development loans, partially offset by an increase in non-accrual junior lien loans. The latter was due to the inclusion in non-accrual loans of junior liens greater than 120 days past due as well as junior liens behind a first lien greater than 180 days past due per interagency regulatory guidance. Fitch believes the increase in this loan category is manageable. Additionally, Fitch's more granular analysis of USB's 2Q'12 overall asset quality profile indicates that $773 million of the $8.8 billion in total NPAs (which includes non-accrual loans, 90 days past due, real estate owned, and restructured loans) are related to assets covered by loss share agreements with the FDIC. Fitch would further note that approximately $6 billion of the company's $8.8 billion in total NPAs are related to troubled debt restructurings (TDRs). While the growth of TDRs is impacting the entire banking industry, particularly given new accounting guidance that went into effect in 3Q'11, Fitch believes that USB's level of TDR growth remains very manageable relative to many peers. Of the company's total TDRs, nearly 30% are either loans covered by FDIC loss-sharing agreements or federal government guaranteed loans, where the risk of ultimate loss is minimal. As such, Fitch estimates that with these adjustments the company's NPA ratio is approximately 3.5%, and thus very manageable relative to the size of the company's overall balance sheet. Rating Drivers and Sensitivities Fitch believes USB's strong performance throughout the credit crisis as well as its prospects for future growth are reflective in its current ratings, which are near the top of Fitch's bank rating universe globally. Thus, there is not a significant amount of upside to the current ratings. However, Fitch could envision very modestly higher ratings or a change in the Rating Outlook over time should USB continue to profitably grow while continuing to deliver industry leading operating performance and adhering to long-term strategic objectives. Fitch notes that USB's regulatory and legal issues appear manageable, but that USB as well as the rest of the industry face challenges regarding consumer regulatory changes as well as the implementation of Basel III capital and liquidity standards. Fitch would note that USB has been one of the more pro-active institutions in addressing these challenges, but they do have the potential to create headwinds for the entire industry. More significant risks to ratings or the Rating Outlook could result from a decision to expand USB's balance sheet through a large acquisition, or through a material change in corporate strategy. On the former, Fitch would acknowledge that a large acquisition done at a good price with comprehensive due diligence on the potential target could potentially be transformative for USB's franchise it is not without potential risks related to price, integration, and operational issues. Thus, Fitch would analyze the terms of any potential large acquisition closely in assessing the potential impact to ratings. Fitch would note, however, that historically USB has been both a good and disciplined acquirer. While Fitch does not anticipate USB materially shifting its corporate and business strategy, Fitch would note that underpinning USB's ratings is a consistent strategy and solid operating history that has been executed successfully over a multi-year period. Should this strategy change, there could be an impact to ratings. Examples of a strategy shift could include USB becoming more internationally focused or sustainably more reliant on mortgage banking. Fitch does not view the former as likely, but on the latter, Fitch does recognize that USB has benefited from competitive dynamics in the residential mortgage market, but would also note that to the extent that this becomes a more prominent business for the company than it has been historically it could potentially alter the predictability of company's earnings stream, which could impact ratings or the Outlook. USB operates one of the premier banking franchises in the U.S. with a retail banking network spanning 25 states, which is augmented by meaningful presence in payment systems, corporate trust, asset management, and credit cards. Fitch has affirmed the following ratings with a Stable Outlook: U.S. Bancorp --Long-term IDR at 'AA-'; --Senior debt at 'AA-'; --Subordinated debt at 'A+'; --Preferred stock at 'BBB'; --Short-term IDR at 'F1+'; --Commercial paper at 'F1+'; --Viability at 'aa-'; --Support at '5'; --Support Floor at 'NF'. U.S. Bank, NA --Long-term deposits at 'AA'; --Short-term deposits at 'F1+'; --Long-term IDR at 'AA-'; --Senior debt at 'AA-'; --Subordinated debt at 'A+'; --Short-term IDR at 'F1+'; --Short-term debt at 'F1+'; --Short-term deposits at 'F1+'; --Viability at 'aa-'; --Support Rating at 5; --Support Floor at NF. U.S. Bank NA ND --Long-term deposits at 'AA'; --Short-term deposits at 'F1+'; --Long-term IDR at 'AA-'; --Senior debt at 'AA-'; --Subordinated debt at 'A+'; --Short-term IDR at 'F1+'; --Short-term deposits at 'F1+'; --Viability at 'aa-'; --Support Rating at 5; --Support Floor at NF. Elavon Financial Services Limited --Long-term IDR at 'AA-'; --Short-term IDR at 'F1+'; --Long-term deposits at 'AA'; --Short-term deposits at 'F1+'; --Support Rating at '1'. USB Capital IX USB Capital XIII USB Realty Corp. --Preferred at 'BBB+'. Fitch has withdrawn the following rating: U.S. Bancorp --Junior subordinated debt at 'A'.
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