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U.S. Bancorp USB and its subsidiaries’ long-term ratings and assessments have been placed under review for downgrade by Moody’s Investors Service, a rating arm of Moody’s Corporation MCO.
The rating agency took this action because of the company’s narrowing performance gap relative to peers during last year.At present, U.S. Bancorp’s ratings for senior unsecured and subordinated debt is A1. The bank’s baseline credit assessment (BCA) is aa3. It is worth noting that with its aa3 BCA, the company is Moody’s highest positioned bank, globally, on a standalone basis.
Notably, Moody’s affirmed U.S. Bancorp’s short-term ratings for deposits and counterparty risk at Prime-1, and are not under review.
Rationale Behind Ratings
The review for downgrade highlights U.S. Bancorp’s contracting performance supremacy compared with its peers over the last several years, which until early 2020 was a very opportune operating environment for banks in the United States. Though the company’s capitalization declined last year conjunction with its peers, its capital target of a common equity tier 1 ratio of 8.5% was among the lowest of all Moody’s-rated U.S. banks.
During the review process, Moody’s will evaluate the bank’s stress capital resilience, which previously supported its leaner capital position and was a major reason for the above-average ratings. This includes capital generation from the bank’s well-diversified revenue streams, considerable fee income and robust operational competence. Per Moody’s, U.S. Bancorp’s operating efficacy worsened with the need for continuous technological investments along with COVID-related expenses.
The review will take into account as to how the bank will boost its long-term profitability via expense control and revenue diversity. It will also assess whether the bank’s risk profile is more likely to generate considerably lower credit costs, on average, with respect to its lower-rated peers.
Moody’s also notes U.S. Bancorp’s governance as a primary credit strength. The bank portrayed commendable management with a robust risk governance and concentration limit framework. These, along with its diversified business lines aided a positive evaluation of the bank’s corporate behavior.
When Can the Rating be Upgraded/Downgraded?
U.S. Bancorp’s BCA and long-term ratings might be confirmed if it continues to better its asset quality, profitability and stress capital resilience over the long term compared to its peers.
The BCA and long-term ratings could be downgraded if Moody's views that U.S. Bancorp's performance is not likely to be substantially better than its peers.
Price Performance & Zacks Rank
Over the past six months, shares of U.S. Bancorp have gained 43.1%, underperforming the 54.5% rally of the industry it belongs to.
Currently, the company carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Actions Taken by Moody’s on Other Banks
Of late, Moody’s undertook several rating actions on several banks. The rating agency affirmed stable outlooks for SVB Financial Group SIVB and Texas Capital Bancshares, Inc. TCBI.
SVB Financial’s ratings followed the announcement of its plan to acquire Boston Private in a stock-cum-cash deal valued at $900 million.
The rating affirmation for Texas Capital reflects Moody's outlook about the company’s improved capitalization and liquidity position that will alleviate execution risks associated with recent management changes.
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