-- We believe U.S. Bancorp (USB) should continue to outperform
peers, delivering consistent revenue and earnings while maintaining a
conservative growth strategy and solid capitalization.
-- Supporting our expectation, we believe home prices are nearing a
bottom in the U.S. This should enable USB's outperformance to continue, which
the company's above-peer reserves to nonperforming loans and improving credit
trends should support, in addition to its minimal exposure to mortgage
putbacks, litigation, and pressures from the eurozone.
-- We are raising our long-term issuer credit rating on USB to 'A+' from
'A' and affirming our 'A-1' short-term issuer credit rating. At the same time,
we are raising our issuer credit rating on its operating subsidiaries to 'AA-'
from 'A+' and our short-term issuer credit rating to 'A-1+' from 'A-1'. We are
also factoring in an additional notch to USB's issuer credit rating to reflect
the company's outperformance versus peers over the last four years.
-- The outlook is stable, reflecting USB's consistent revenue and
earnings and our expectations for credit quality to continue to improve, such
that net charge-offs remain below the average for USB's peers.
On Aug. 20, 2012, Standard & Poor's Ratings Services raised its long-term
issuer credit rating on U.S. Bancorp to 'A+' from 'A' and its issuer credit
ratings on the bank's operating subsidiaries, U.S. Bank National Association,
U.S. Bank National Association, ND, and Elavon Financial Services Ltd., to
'AA-/A-1+' from 'A+/A-1'. The stand-alone credit profile (SACP) at the
operating level remains 'a+' because the upgrade is based on an additional
notch to the issuer credit rating. Given that USB's SACP has not changed, our
ratings on USB's preferred stock and hybrids also remain unchanged.
The upgrade reflects USB's sustained outperformance versus peers over the last
four years, which the stability in its revenue and earnings during and after
the financial crisis demonstrate. Additionally, the company maintains risk
aversion in terms of acquisitions. In December, our expectation was for
continued home price declines, which could have dampened USB's credit quality
and resulted in higher net charge-offs (NCOs). Our revised expectation is that
housing prices are nearing a bottom. As such, we believe that USB's
outperformance compared with peers will continue.
Positively, USB's total NCOs have declined for the last nine quarters. Given
the decline in delinquencies and criticized assets in second-quarter 2012, we
believe NCOs will continue to decrease, at least through the remainder of the
year. In addition, USB's provisions for mortgage representation and warranties
liability (reps & warranties) have stabilized. Specifically, USB's reserves at
the end of second-quarter 2012 totaled $216 million, versus $160 million at
the end of 2011. Provisions for the reserve totaled $45 million, down from $67
million the previous quarter. We expect USB's provisions for reps & warranties
to remain at $45 million or below for the remainder of the year and into 2013.
USB has no exposure to private-label securitization putbacks. Its litigation
exposure is minimal, as is its direct exposure to Europe.
We believe USB's outperformance versus peers is reflected in its stable
revenue and pretax operating margins, despite adverse economic conditions.
Unlike most industry peers, USB's revenue has remained relatively stable in
each of the years following the financial crisis. Notably, USB has been able
to grow its loan book despite the downturn, largely by picking up market
share. We believe this stems from the company's solid financial health and its
ability to extend loans, while some of its competitors reduce their balance
USB's average loans rose 4.4% and 3.9% in 2011 and 2010, respectively, largely
as a result of growth in its commercial and residential portfolio. In
contrast, average loans for all FDIC banks declined 1.0% in 2011 and declined
1.3% in 2010. We believe USB has grown its loan book while maintaining its
conservative underwriting standards. Notably, commercial loans are evenly
distributed across a spectrum of industries with the highest concentration in
consumer products and services--16.1%--as of December 2011 (latest information
available). In addition, the weighted average loan to value of USB's
residential loan portfolio valued at today's real estate prices totaled only
74% as of second-quarter 2012, with a weighted average FICO score of 758.
USB's 2000-2011 NCOs were lower than our calculation of the company's
normalized losses (our assumption of average annual credit losses over a
12-year credit cycle for a particular bank, taking into account its loan
book), which reflects USB's conservative underwriting standards.
USB's management has demonstrated its ability to steer the company through the
financial crisis consistently without suffering a quarterly loss. USB's pretax
operating margin, as calculated by Standard & Poor's, averaged 26.1% from
2008-2011, versus the average for all FDIC banks of roughly 11.5%. Notably,
USB has achieved consistent returns over the last year without significant
reserve releases. USB's reserves to nonperforming loans (adjusted for covered
loans) at the end of second-quarter 2012 totaled 235%, versus the large U.S.
complex bank median of 159%. Given USB's dearth of reserve releases, we
believe that the quality of its earnings has been better than peers.
USB's management team is cautious, maintaining conservative principles in
terms of acquisitions in the aftermath of the financial crisis. Although USB
had the capital to pursue a large acquisition, management chose to grow
through small bolt-on acquisitions, most of which had loss-sharing agreements
with the FDIC. In addition, USB focused on growing its fee businesses,
particularly credit cards, merchant processing, and trust businesses, which
helped further diversify USB's revenue stream.
Although we recognize these factors in scoring within our bank criteria, we
believe the SACP doesn't fully capture USB's above-peer consistent
performance. As such, we are factoring an additional notch to USB's issuer
credit rating, resulting in a rating that reflects the conservative qualities
that we believe USB possesses, in line with a higher-rated bank.
The stable outlook reflects our belief that USB should be able to maintain
consistent revenue and earnings and that credit quality should continue to
improve, such that NCOs remain below the average for USB's peers. In addition,
we expect USB's reserve-to-nonperforming loan ratio to remain at or higher
than the median for large U.S. complex banks. We also expect USB to continue
to deliver consistent profitability as measured by its pretax operating
margins. We look for USB's quality of earnings to remain high, with core
earnings being the key source of results, as opposed to large one-time items
such as reserve releases.
We could lower the rating if USB's performance declines such that we no longer
consider its performance as above peers'. Volatility in USB's quarterly
revenue and earnings would indicate this, as well as a low quality of earnings
(as measured by one-time items that boost profitability). In addition, we
could lower the ratings if:
-- We determine that USB's loan growth is a result of a decline in
-- Credit quality versus industry peers worsens to the extent that NCOs
exceed the peer and industry averages;
-- USB makes a large, risky acquisition; or
-- USB pursues an aggressive capital strategy, causing capitalization to
weaken such that its risk-adjusted capital (RAC) ratio falls consistently
We could raise the rating on a strengthening of the bank's capital, resulting
in a projected RAC ratio of more than 10%. However, we consider this scenario
unlikely, given management's plans to return 60%-80% of capital to
shareholders over at least the next two years. Nevertheless, we expect the RAC
ratio to remain well within the 7%-10% range.
Ratings Score Snapshot
Issuer Credit Rating AA-/Stable/A-1+ A+/Stable/A-1
Bank Holding Company Rating A+/Stable/A-1 A/Stable/A-1
SACP a+ a+
Anchor bbb+ bbb+
Business Position Very Strong (+2) Very Strong (+2)
Capital and Earnings Adequate (0) Adequate (0)
Risk Position Strong (+1) Strong (+1)
Funding and Liquidity Average Average
and Adequate (0) and Adequate (0)
Support 0 0
GRE Support 0 0
Group Support 0 0
Sovereign Support 0 0
Additional Factors 1 0
Related Criteria And Research
-- Banking Industry Country Risk Assessment Methodology And Assumptions,
Nov. 9, 2011
-- Banks: Rating methodology And Assumptions, Nov. 9, 2011
-- Bank Hybrid Capital Methodology And Assumptions, Nov. 1, 2011
-- Bank Capital Methodology And Assumptions, Dec. 6, 2010
Upgraded; Ratings Affirmed
Counterparty Credit Rating A+/Stable/A-1 A/Stable/A-1
Senior Unsecured A+ A
Subordinated A A-
Elavon Financial Services Ltd.
U.S. Bank National Association, ND
U.S. Bank National Association
Counterparty Credit Rating AA-/Stable/A-1+ A+/Stable/A-1
U.S. Bank National Association
Certificate Of Deposit
Local Currency AA-/A-1+ A+/A-1
Senior Unsecured AA- A+
Subordinated A+ A
Commercial Paper A-1+ A-1
Junior Subordinated BBB+
Preferred Stock BBB+
Commercial Paper A-1
USB Capital IX
USB Realty Corp.
Preferred Stock BBB+
Not Rated Action
USB Capital VI
USB Capital VII
USB Capital VIII
USB Capital X
USB Capital XI
USB Capital XII
USB Capital XIII
Preferred Stock NR BBB+