Fitch Upgrades U.S. Bancorp's L-T IDR at 'AA' Following Large Regional Bank Review; Outlook Stable
The rating action follows a periodic review of the large regional banking group, which includes BB&T Corporation (BBT), Capital One Finance Corporation (COF), Comerica Incorporated (CMA), Fifth Third Bancorp (FITB), Huntington Bancshares Inc. (HBAN), Keycorp (KEY), M&T Bank Corporation (MTB), MUFG Americas Holding Corporation (MUAH), PNC Financial Services Group (PNC), Regions Financial Corporation (RF), SunTrust Banks Inc. (STI), US Bancorp (USB), Wells Fargo & Company (WFC), and Zions Bancorporation (ZION).
Company-specific rating rationales for the other banks are published separately, and for further discussion of the large regional bank sector in general, refer to the special report titled 'Large Regional Bank Periodic Review,' to be published shortly.
KEY RATING DRIVERS
IDRs, VRs, AND SENIOR DEBT
The upgrade of USB's ratings is reflective of an institution that for several years now has set itself apart from peer institutions due to a number of competitive advantages and a strong operating culture. This has led to better earnings and credit performance than nearly all peer banks over multiple operating cycles, and Fitch believes USB is taking steps to extend its advantages compared to peer institutions.
Fitch believes USB's key competitive advantages relate to cost and its differentiated business franchise. First, over time USB has enjoyed a cost of funding advantage relative to peers primarily driven by its low-cost deposit base, which has allowed USB to profitably lower loan prices to keep or win new clients. While it is noteworthy that there has been some compression in the funding cost advantage in recent years amid very low interest rates, Fitch believes this advantage will become more evident should interest rates eventually rise at some point.
Fitch believes the funding cost advantage is important because it helps to bring new banking relationships into the bank, to which the company can then actively cross-sell other services. To the extent that this cross-sell is successful, it creates a virtuous cycle that fosters stickier customer relationships, which in turn allows the company to keep deposit costs low. This can then be used to attract even more customers to the bank.
Secondly, USB operates a very efficient bank where operating expense management is ingrained in the company's corporate culture. It routinely has an efficiency ratio in the low 50's, better than many Fitch rated financial institutions, which largely helps to support the company's superior earnings performance. As an example, if USB's efficiency ratio was closer to industry averages, its return on assets (ROA) would also be closer to industry averages.
USB complements these core competitive advantages with a balanced business model, which Fitch views favorably from a credit perspective. This includes a loan portfolio that is well balanced between commercial and consumer assets, as well as an earnings stream that is nearly evenly balanced between net interest income (NII) and non-interest income.
It is in this latter category, that Fitch believes, USB is beginning to extend its advantages relative to peer institutions. USB's corporate trust business is an area of differentiation for the company. The returns on capital in this business are relatively stable and it also provides a source of advantageous deposit funding to the company. Merchant processing is another area of differentiation for USB. This business is highly scalable and not overly capital intensive with good growth prospects, particularly internationally.
In addition, Fitch would also note that USB is able to run the company at lower capital ratios than some larger competitors as USB is not subject to a G-SIB buffer, among other capital requirements. Furthermore, USB's ability to accrete capital via growth in retained earnings more quickly than some peers due to the earnings power noted above provides a buffer to these comparatively lower ratios from a creditor's perspective.
In Fitch's view, this capital advantage allows USB to potentially be more competitive than some peers for certain clients' business while at the same time maintaining appropriate risk and return parameters that are also consistent with the company's very balanced risk appetite.
Finally, underpinning all of these advantages is a management team that continuously makes keen strategic and operating decisions which are responsible for helping to create and sustain the company's corporate culture. Fitch views USB's management team as one of, if not the best, in the industry.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
USB's subordinated debt is notched one level below its VR of 'aa' for loss severity. USB's preferred stock is notched five levels below its VR, two times for loss severity and three times for non-performance. USB's trust and REIT preferred stock entities, USB Capital IX and USB Realty Corp, are notched four levels below its VR. These ratings are in accordance with Fitch's criteria and assessment of the instruments non-performance and loss severity risk profiles and have thus been upgraded.
LONG- AND SHORT-TERM DEPOSIT RATINGS
The uninsured deposit ratings of U.S. Bank National Association (USBNA) is rated one notch higher than USB's IDR and senior unsecured debt because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default.
USB's uninsured deposits outside of the U.S., through Elavon Financial Services Limited (Elavon), do not benefit from rating uplift because they do not typically benefit from the U.S. depositor preference unless the deposit is expressly payable at an office of the bank in the United States. Since Fitch cannot determine which foreign branch deposits may be dually payable, they do not get the rating uplift.
HOLDING COMPANY
USB's IDR and VR are equalized with those of its operating companies and bank, reflecting its role as the bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries. Ratings are also equalized reflecting the very close correlation between holding company and subsidiary failure and default probabilities.
SUBSIDIARY AND AFFILIATED COMPANY
The VR of USBNA is equalized with USB's VR reflecting Fitch's view that these are core to USB's business strategy and financial profile. The IDRs and VRs of USB's other major rated operating subsidiaries are equalized with USB's IDR reflecting Fitch's view that these entities are core to USB's business strategy and financial profile.
SUPPORT RATING AND SUPPORT RATING FLOOR
USB has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, USB is not systemically important and therefore, the probability of support is unlikely. IDRs and VRs do not incorporate any support.
Elavon has a support rating of '1', which is an institutional support rating, and indicates that there is a high probability that USB would provide support to Elavon, which is domiciled in Ireland.
RATING SENSITIVITIES
VR, IDRs, AND SENIOR DEBT
With today's upgrade, USB's ratings are at the top of Fitch's Global Bank Universe, and are solidly situated at their current level.
Downward pressure on ratings, while not expected, could result from a number of factors. Given that management is a key component in Fitch's analysis and views of the company, USB's ratings would be sensitive to any significant and unplanned management changes that would result in a change in business strategy or risk appetite.
While Fitch would expect some deterioration in credit metrics for USB--as well as the rest of the industry--given today's benign credit environment, should USB's credit results deteriorate at a rate faster than peer group averages, there could be pressure to ratings or the Rating Outlook.
Additionally, should USB's earnings performance begin to match peer levels rather than consistently exceed them, this could impact ratings over time.
While Fitch views USB's interest rate risk positioning as neutral, which Fitch views positively from a credit perspective, should the company's performance be negatively impacted by a rising rate environment, this could also impact ratings negatively.
Fitch views the cumulative effects of USB's regulatory initiatives and potential litigation risk as manageable and contemplated within the rating upgrade. If any of these efforts ultimately resulted in an outsized fine that pressures capital, it is may create downward rating pressure.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The ratings for USB and its operating companies' subordinated debt and preferred stock are sensitive to any change to USB's VR.
LONG- AND SHORT-TERM DEPOSIT RATINGS
The long-and short-term deposit ratings are sensitive to any change to USB's long-and short-term IDR.
HOLDING COMPANY
Should USB's holding company begin to exhibit signs of weakness, demonstrate trouble accessing the capital markets, or have inadequate cash flow coverage to meet near-term obligations, there is the potential that Fitch could notch the holding company IDR and VR from the ratings of the operating companies.
RATING SENSITIVITIES - SUBSIDIARY AND AFFILIATED COMPANY
As the IDRs and VRs of the subsidiaries are equalized with those of USB to reflect support from their ultimate parent, they are sensitive to changes in the parent's propensity to provide support, which Fitch currently does not expect, or from changes in USB's IDRs.
To the extent that one of USB's subsidiary or affiliated companies is not considered to be a core business, Fitch could also notch the subsidiary's rating from USB's IDR.
SUPPORT RATING AND SUPPORT RATING FLOOR
Since USB's Support and Support Rating Floors are '5' and 'NF', respectively, there is limited likelihood that these ratings will change over the foreseeable future.
Additionally, there is limited likelihood that Elavon's institutional support rating of '1' will change over the foreseeable future.
FULL LIST OF RATING ACTIONS
Fitch has taken the following rating actions:
U.S. Bancorp
--Long-term Issuer Default Rating (IDR) upgraded to 'AA' from 'AA-'; Outlook Stable;
--Viability Rating (VR) upgraded to 'aa' from 'aa-';
--Senior debt upgraded to 'AA' from 'AA-;
--Subordinated Debt upgraded to 'AA-' from 'A+';
--Preferred Stock upgraded to 'BBB+' from 'BBB';
--Short-term IDR affirmed at 'F1+';
--Short-term debt affirmed at 'F1+';
--Support affirmed at '5';
--Support Floor affirmed at 'NF'.
U.S. Bank National Association
--Long-term IDR upgraded to 'AA' from 'AA-'; Outlook Stable;
--Viability Rating (VR) upgraded to 'aa' from 'aa-';
--Long-term deposits upgraded to 'AA+' from 'AA';
--Senior debt to upgraded to 'AA' from 'AA-';
--Subordinated debt upgraded to 'AA-' from 'A+';
--Short-term IDR affirmed at 'F1+';
--Short-term debt affirmed at 'F1+';
--Short-term deposit affirmed at 'F1+';
--Support affirmed at '5';
--Support Floor affirmed at 'NF'.
Elavon Financial Services Limited
--Long-term IDR upgraded to 'AA' from 'AA-'; Outlook Stable;
--Long-term deposits upgraded to 'AA' from 'AA-';
--Short-term IDR affirmed at 'F1+';
--Support affirmed at '1';
--Short-term deposit affirmed at 'F1+'.
USB Capital IX
USB Realty Corp.
--Preferred stock upgraded to 'A-' from 'BBB+'.
The ratings for U.S. Bank National Association ND have been withdrawn as the entity no longer exists.
Fitch has withdrawn the following ratings:
U.S. Bank National Association ND
--Long-term IDR of 'AA-'; Outlook Stable
--Viability Rating (VR) of 'aa-';
--Senior debt of 'AA-';
--Subordinated debt of 'A+';
--Short-term IDR of 'F1+';
--Short-term deposit of 'F1+';
--Support of '5';
--Support Floor of 'NF'.
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