The ratings of U.S. Bancorp USB and its rated subsidiaries, including the group's main bank operating entity U.S. Bank National Association (“USBNA”), and Elavon Financial Services DAC have been affirmed by Moody's Investors Service. Notably, the rating outlook on the group has been downgraded to negative from stable.
The ratings agency has rated U.S. Bancorp’s long-term senior unsecured and subordinate debt as A1. Also, it affirmed the aa3 standalone baseline credit assessment ("BCA") of USBNA as well as the bank's Aa1 long-term deposit rating and A1 long-term senior unsecured rating. The Aa2(cr)/Prime-1(cr) Counterparty Risk Assessments and the Aa3/Prime-1 Counterparty Risk Ratings of USBNA were also affirmed.
Rationale Behind Ratings Affirmation
The group’s fundamental credit strengths have supported aa3 ratings for USBNA's BCA. The strengths include good business and geographic diversification, which supported strong and above-peer average profitability over the long term, a solid asset quality record and conservative risk appetite, and robust liquidity. On the downside, BCA incorporates the company’s weaker capitalization relative to peers.
U.S. Bancorp’s exposure to several high-profit margin businesses such as consumer and commercial credit cards, global corporate trust, fund services, and payment processing has been benefitting its bottom-line growth. Per Moody’s, though U.S. Bancorp’s operating efficiency has been affected by increasing competition and more challenging operating conditions, the company remains comparatively well-positioned to compete on price, while remaining conservative in its underwriting and risk appetite.
Reasons for Outlook Downgrade
The ratings agency is of the opinion that U.S. Bancorp’s weaker capitalization relative to most peers combined with the uncertain operating environment resulting from the potential broadening and lengthening of the coronavirus pandemic could narrow the balance sheet strength and profitability gap with its US peers.
Although it exhibited solid pre-provision earnings power during the first six months of 2020, Moody’s expects the group’s profitability to be pressured by lower revenues from low interest rates and reduced business activity, and higher credit provisions over the near term. This will likely result in reduced internal capital-generation capacity.
Factors That Might Trigger Change in Ratings & Outlook
Ratings upgrade seems unlikely over the next 12-18 months due to the deteriorating economic environment and its uncertain duration. However, the outlook could return to stable if the company strengthens its capitalization over the outlook period, and if Moody's observes that U.S. Bancorp’s performance in asset quality, capitalization and profitability proves more resilient than peers.
A stable outlook could also result from Moody's assessment that the risks associated with the coronavirus pandemic outbreak have abated, leading to an improvement in operating conditions that support the company’s pre-pandemic credit strengths of high earnings and low credit costs.
However, BCA and ratings could be downgraded if capitalization weakens and Moody's observes that the performance of U.S. Bancorp is not significantly better than its lower-rated peers under the weaker operating environment. This includes exhibiting strength in pre-provision profitability and lower credit costs than peers. Additionally, a perceived weakening in its risk profile, for example, resulting from an increase in concentration risk or evidence of a significant control failure, could also lead to rating pressure.
Shares of U.S. Bancorp have lost 32.5% over the past six months compared with 33.2% decline of the industry it belongs to.
The company currently carries a Zacks Rank #3 (Hold). Some better-ranked companies in the same space are Old Second Bancorp, Inc. OSBC, Lakeland Financial Corporation LKFN and Independent Bank Corporation IBCP, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for Old Second moved up 40% for the current year in the last 30 days. The company’s share price has decreased 33% in the past year.
Lakeland Financial witnessed a 3.7% upward earnings estimate revision for the current year in the last 30 days. Its share price has risen 11.8% in the past year.
Independent Bank’s shares have lost 30% in a year and its earnings estimates for 2018 moved up 28.2% in the last 30 days.
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