With interest rates being at a significantly low level, the pressure on earnings of U.S. Bancorp (USB) continues to build up. Therefore, Moody’s Investors Service, a unit of Moody’s Corp. (MCO) has lowered its ratings, according to a Bloomberg report.
Moody’s have reduced the senior debt rating of U.S. Bancorp to A1 from Aa3. Despite having a diversified business model which is also well-managed, U.S. Bancorp cannot avoid the ill-effects of a low interest rate environment. As a consequence, the company’s net interest margin is likely to remain stressed.
U.S. Bancorp also faces the risks of increased volatility and weak earnings in due course for the rise in its mortgage banking business. Notably, the company is positive about this business and continues to build it and gain market share. Increased regulation and competition may also limit revenue growth potentials of the company in the future.
However, the rating agency acknowledged U.S. Bancorp’s well diversified business model. The company operates with higher efficiency while its concentration risk is restricted, and hence it is expected to achieve above-average earnings.
While downgrades in ratings affect investors’ confidence in the company and its creditworthiness in the market, we note that U.S. Bancorp is still among the highest rated banks in Moody’s list. Its robust core franchisee, diverse revenue stream and strong performance in the past years are quite impressive. Solid capital position and an increase in lending activities also augur well.
Nevertheless, in our point of view, regulatory issues along with the expectation of a continued low interest rate environment are likely to limit the stock’s upside potential in the upcoming quarters.
U.S. Bancorp currently retains its Zacks #2 Rank, which translates into a short-term Buy rating. Though the company witnessed a downgrade in ratings, the ratings are still high. Therefore, we do not expect much estimate revisions in the near future.
Among U.S. Bancorp’s peers, Bank of America Corp. (BAC) and KeyCorp (KEY) also have a Zacks #3 Rank.
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