US BANCORP
At the same time, Morningstar DBRS downgraded the long-term credit ratings of its primary banking subsidiary,
KEY CREDIT RATING CONSIDERATIONS
The downgrade reflects USB's less differentiated earnings performance from peers as well as a relatively weaker capital position, although significantly improved year over year.
The credit ratings and Stable trend reflect USB's very strong franchise that is underpinned by a scaled and well-diversified mix of businesses, including top-tier market share positions in regional and national wholesale banking, as well as global payments and securities services. The credit ratings also consider the Company's sound funding and liquidity profile and proven conservative credit culture. With tougher regulatory capital requirements expected, Morningstar DBRS expects that USB will need to continue to build capital and limit share repurchases. The Stable trend also incorporates Morningstar DBRS's view that the Company's loan portfolio will to continue to normalize.
CREDIT RATING DRIVERS
A return to sustained industry leading profitability metrics while maintaining a similar risk profile would result in a credit ratings upgrade. Conversely, an inability to improve capital ratios over time or a pronounced deterioration in asset quality would result in a credit ratings downgrade. In addition, a sustained reduction in profitability metrics would also result in a credit ratings downgrade.
CREDIT RATING RATIONALE
Franchise Combined
USB's diverse banking and financial services franchise is underpinned by its strong operating platform, including a branch network with over 2,200 banking offices in 26 states, primarily in the Midwest and West. The Company ranks as the fifth largest commercial bank in the
Earnings Combined
The Company's highly diversified franchise has historically delivered industry-leading returns, although the level has moderated in recent periods. USB's earnings benefit from a substantial level of fee income that is not overly reliant on markets or the level of interest rates. Additionally, Morningstar DBRS considers the Company's disciplined expense management as a cultural strength, although the Company's efficiency ratio is higher than historical levels. For 1Q24, USB reported net income of
Risk Combined
USB's risk profile is supported by its conservative culture, consistent and disciplined underwriting standards, as well as a granular loan portfolio that is diversified among various industries and regions and lacks material risk concentrations in volatile sectors. The Company is mostly a prime-based lender in its retail portfolios and investment grade equivalent in commercial portfolios, with limited leveraged lending. Additionally, commercial real estate lending is relationship-based with consistent loan underwriting and its exposure to office CRE, at approximately 2% of total loans is manageable. Asset quality metrics, while normalizing, remain at sound levels, including a nonperforming assets ratio of 0.48% and net charge-off ratio of 0.53% in 1Q24.
Funding and Liquidity Combined
USB maintains a strong level of on-balance sheet liquidity and has a robust deposit franchise that fully funds the loan portfolio, with a loan to deposit ratio of 77% at the end of 1Q24. USB typically benefits from a flight to quality in times of industry stress. Additionally, USB also has ready access to a variety of additional sources of liquidity.
Capitalization Combined
Morningstar DBRS views the Company's capitalization as sound, given its historically robust and predictable capital generation and conservative credit risk management. However, the MUB acquisition, as well as pending higher capital regulatory requirements, has pressured capital levels with USB reporting a Common Equity Tier 1 (CET1) capital ratio of 10.0% at the end of 1Q24. To build capital, in addition to its strong internal capital generation, the Company suspended its share repurchase program and has undergone some balance sheet optimization exercises. Following the latest round of
Further details on the Scorecard Indicators and
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Environmental (E) Factors
There were no Environmental factor(s) that had a relevant or significant effect on the credit analysis.
Social (S) Factors
There were no Social factor(s) that had a relevant or significant effect on the credit analysis.
Governance (G) Factors
There were no Governance factor(s) that had a relevant or significant effect on the credit analysis.
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (
Notes:
All figures are in US Dollars unless otherwise noted.
The principal methodology is the Global Methodology for
The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.
The primary sources of information used for these credit ratings include Morningstar, Inc. and company documents. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings was of satisfactory quality.
The credit rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the credit rating process for this credit rating action.
Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.
This is a solicited credit rating.
These credit ratings are endorsed by
The last credit rating action on this issuer took place on
The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS's outlooks and credit ratings are monitored.
For further information on Morningstar DBRS historical default rates published by the
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