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Fitch Affirms U.S. Bancorp at 'AA/F1+'; Outlook Stable
October 3, 2017 / 8:55 PM / 17 days ago

Fitch Affirms U.S. Bancorp at 'AA/F1+'; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, October 03 (Fitch) Fitch Ratings has affirmed U.S. Bancorp's (USB) ratings at 'AA/F1+'. The Rating Outlook is Stable. The affirmation and Stable Outlook are driven by the company's continued better-than-peer operating performance, solid liquidity position, and stable capital ratios. 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), and Wells Fargo & Company (WFC). 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, VIABILITY RATING AND SENIOR DEBT USB's rating affirmation reflects the company's strong earnings and credit performance which has exceeded that of nearly all peer banks over multiple operating cycles. Fitch believes these results are driven by USB's key competitive advantages stemming from its balanced business model and its low-cost operating model. USB has a balanced business model with net interest revenue (NIR) and non-interest revenue nearly evenly split in their contribution to the company's overall revenue base. While Fitch would have expected NIR to have increased more over the last year given higher short-term interest rates, we still believe NIR will increase over time, as the company will benefit more meaningfully from future interest rate increases. Nevertheless, Fitch still views USB's revenue composition favorably as it helps to support the company's strong earnings performance over multiple operating cycles and its solid internal capital-generation capabilities. A key component of USB's non-interest revenue is the company's merchant processing business, Elavon Financial Services. Fitch views this growing source of revenue as stable and scalable, thereby providing some persistency to USB's earnings and internal capital generation. Combined with the company's strong credit performance, this helps USB to operate at lower capital ratios than its peers. While USB's capital ratios are at the low end of the peer group, the company continues to perform consistently better than nearly all peer institutions under the Federal Reserve's annual CCAR stress tests. Fitch measures the annual deterioration of each bank's capital ratios under the severely adverse scenario and notes that USB continues to be one of the strongest performing banks on this metric. Fitch attributes this performance under CCAR to the strong credit culture that has been inculcated into the bank over decades. While Fitch notes that credit costs for USB as well as the rest of the industry remain at or near cyclical troughs, USB's rating is predicated on the company continuing to outperform peers on credit metrics (excluding covered assets) should the credit cycle begin to deteriorate. USB's other key differentiator relative to peers is that management operates a very efficient bank where operating expense management has been ingrained in the company's corporate culture. The company 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. Fitch notes that at the same time, USB had been able to continue to invest in technology to digitize its operating platform all while maintaining its leading efficiency ratio. The extent to which the company successfully digitizes its operating platform could lead to more scalability of its business and incrementally improve the efficiency ratio further. USB's funding profile is strong and positively differentiated from peers by its large corporate trust business. This represents 15% of USB's deposit funding and is treated favorably by the Liquidity Coverage Rule (LCR). 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. Recently USB facilitated its long-planned management succession plans, and even considering this, Fitch continues to view USB's management team favorably. SUPPORT RATING AND SUPPORT RATING FLOOR USB has an 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. Issuer Default Ratings (IDRs) and Viability Ratings (VRs) do not incorporate any support. Elavon Financial Services DAC (Elavon) has a Support Rating of '1', which is an institutional SR, and indicates that there is an unconditional guarantee that USB would provide support to Elavon, which is domiciled in Ireland. 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. 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, do not benefit from rating uplift because they may not benefit from U.S. depositor preference rules 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. RATING SENSITIVITIES IDRS, VIABILITY RATING AND SENIOR DEBT USB's ratings are among the highest of Fitch's global banks, 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 element of Fitch's ratings viewpoint, 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. As noted, while Fitch would expect some deterioration in credit metrics for USB, should USB's credit metrics excluding covered assets deteriorate at a rate faster than peer group averages this could negatively impact ratings or the Rating Outlook. USB's Basel III Common Equity Tier 1 ratio of 9.1% as of June 30, 2017 is low compared to peers. However, should capital ratios decline meaningfully, this could pressure the ratings or Outlook. Should technological evolution occur that disrupts the amount and persistency of revenue in USB's merchant processing business it could negatively impact ratings. Additionally, Fitch views the cumulative effects of USB's regulatory initiatives and potential litigation risk as manageable and contemplated within the ratings. 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. 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. In addition, given their high level, any change in the U.S. sovereign rating (currently AAA/ Outlook Stable) could also negatively impact deposit ratings due to Fitch's country ceiling methodology. 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. 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. Fitch has affirmed the following ratings: U.S. Bancorp --Long-Term IDR at 'AA'; Outlook Stable; --Viability Rating at 'aa'; --Senior debt at 'AA'; --Subordinated Debt at 'AA-'; --Preferred Stock at 'BBB+; --Short-term IDR at 'F1+'; --Short-term debt at 'F1+'; --Support at '5'; --Support Floor at 'NF'. U.S. Bank National Association --Long-term IDR at 'AA'; Outlook Stable; --Viability Rating at 'aa'; --Long-term deposits at 'AA+'; --Senior debt at 'AA'; --Short-term IDR at 'F1+'; --Short-term debt at 'F1+'; --Short-term deposit at 'F1+'; --Support at '5'; --Support Floor at 'NF'. Elavon Financial Services DAC --Long-term IDR at 'AA'; Outlook Stable; --Long-term deposits at 'AA'; --Short-term IDR at 'F1+'; --Support at '1'; --Short-term deposit at 'F1+'. USB Capital IX USB Realty Corp. --Preferred stock at 'A-'. Contact: Primary Analyst Justin Fuller, CFA Senior Director +1-312-368-2057 Fitch Ratings, Inc. 70 West Madison Street Chicago, IL 60602 Secondary Analyst Julie Solar Senior Director +1-312-368-5472 Committee Chairperson Joo-Yung Lee Managing Director +1-212-908-0560 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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