TEXT-S&P raises U.S. Bancorp ratings

Tue Aug 21, 2012 1:21am IST

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Overview
     -- 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.
Rating Action
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. 

Rationale
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 
sheets.

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.  

Outlook
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 
underwriting standards;
     -- 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 
below 7%. 

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
                                To                   From
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

Ratings List

Upgraded; Ratings Affirmed
                                        To                 From
U.S. Bancorp
 Counterparty Credit Rating             A+/Stable/A-1      A/Stable/A-1
 Senior Unsecured                       A+                 A
 Subordinated                           A                  A-

Upgraded
                                        
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

Ratings Affirmed

U.S. Bancorp
 Junior Subordinated                    BBB+               
 Preferred Stock                        BBB+               
 Commercial Paper                       A-1                

USB Capital IX
USB Realty Corp.
 Preferred Stock                        BBB+               

Not Rated Action
                                        To                 From
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+
FILED UNDER:
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