New York, July 12, 2021 -- Moody's Investors Service ("Moody's") has downgraded certain long-term
ratings and assessments of U.S. Bancorp and its subsidiaries
(USB), including its bank subsidiary, U.S. Bank
National Association (US Bank or the bank). USB's long-term
senior unsecured and subordinated debt ratings were downgraded to A2 from
A1. US Bank's long-term deposit rating was downgraded
to Aa2 from Aa1 and its issuer and long-term senior unsecured debt
ratings were confirmed at A1, as was the (P)A1 subordinated bank
note program rating. In the same action, the bank's Baseline
Credit Assessment (BCA) was downgraded to a1 from aa3. The bank's
Prime-1 short-term deposit and counterparty risk ratings
were affirmed. Following this action, the rating outlooks
for both USB and US Bank are stable.
This action concludes the review for downgrade initiated on 16 March 2021
and also incorporates revisions to Moody's advanced Loss Given Failure
(LGF) analysis, which is applied to banks operating in jurisdictions
with Operational Resolution Regimes, following the publication of
Moody's updated Banks Methodology on 9 July 2021.
A complete list of affected ratings and entities can be found at the end
of this press release.
RATINGS RATIONALE
The downgrade of US Bank's standalone BCA to a1 from aa3 was based
on Moody's view that the formerly wider BCA gap with its peers was
no longer supported by the company's capitalization and profitability
prospects. Even at the lower a1, US Bank's BCA is positioned
two notches above the a3 median BCA of Moody's rated US banks and
five notches above the baa3 median BCA of global banks. Moody's
expects USB to continue to outperform the majority of its peers as the
US economy recovers from the coronavirus pandemic. However,
the margin of superiority will likely be narrower than in the past because
USB's peers have also demonstrated resiliency during the pandemic-induced
downturn. Additionally, the rating agency continues to believe
that USB's governance remains a key credit strength. USB has demonstrated
exemplary stewardship with a very strong risk governance and concentration
limit framework, which along with its business line diversity,
has supported a positive assessment of the company's corporate behavior,
and ultimately strengthened its credit profile.
Moody's considers capitalization as the weakest factor of USB's
financial profile, but it takes into account the bank's strong
stress capital resilience in its capitalization assessment. As
of 31 March 2021, USB's Moody's adjusted tangible common
equity (TCE)/risk-weighted assets ratio was 9.1%,
which is weaker than most of its US peers. USB reported a common
equity tier 1 (CET1) ratio reflecting the full implementation of the current
expected credit loss (CECL) accounting standard of 9.5%
as of the same date and its management has a stated target CET1 ratio
of 8.5%, even if it expects to operate with a CET1
ratio of around 9%. As a result, Moody's expects
that its measure of TCE, which has been stable, may in time
fall below the 9% level. Positively, in the Federal
Reserve's stress tests, USB has consistently demonstrated
a lower erosion of capital under the severely adverse scenario,
which also supports Moody's assessment of USB's better-than-peer
performance through economic cycles. Moody's also noted that
USB has a lower minimum stressed capital ratio under the regulatory stress
scenarios compared to its large peers, since its starting capitalization
is lower. This was a key factor in the downgrade of the BCA and
ratings.
USB's profitability has historically been above peers, benefitting
from its revenue diversity, strong operational efficiency,
and low credit costs resulting from its strong underwriting standards
and low concentration risk. The US banking sector, including
USB, is facing revenue pressures because of the lingering effects
of the coronavirus pandemic and the prolonged low interest rate environment,
which has in turned weakened the industry's operational efficiency.
USB's cost-to-income ratio of 63.5%
in the first quarter of 2021 and 59.7% in 2020 (Moody's
calculation) was high compared to its historical levels in the low 50s.
USB has been able to mitigate some of these pressures to net income with
reserve release, but this is a temporary boost to earnings.
USB only started to release reserves in the first quarter of 2021 whereas
most of its US peers had commenced in the last quarter of 2020.
Despite the later start, USB has released 52% of its 2020
reserve build, a higher level than the 41% median of its
large US peer. USB's operational efficiency will improve
as revenue recovers, but the previous low-to-mid 50s
cost-to-income ratio is likely to be elusive. In
particular, USB's payments businesses that in the past supported
its profitability, were adversely affected by lower consumer and
business spending since 2020. Prolonged interest rates and lower
mortgage banking revenue will continue to pressure the bank's profitability
for some time, making it difficult to restore pre-provision
profitability to pre-pandemic levels. At the same time,
Moody's expects USB to continue to investment in its franchise and
infrastructure, including maintaining its digital, payments,
and data analytics capabilities, adding to profitability pressures
until these costs are fully accounted for and the associated profitability
benefits come into fruition.
The downgrade of most of the long-term debt and deposit ratings
follows the downgrade of US Bank's BCA and the application of Moody's
advanced LGF analysis. However, the long-term senior
unsecured and subordinated bank note program ratings of US Bank of A1
and (P)A1, respectively, were confirmed as a result of revised
notching guidance table thresholds at lower levels of subordination and
volume in the liability structure that have been applied to all US banks.
This follows the publication of Moody's updated Banks methodology on 9
July 2021.
The A1 backed issuer rating of US Bank's Irish subsidiary,
Elavon Financial Services DAC, was also confirmed. Elavon
is rated based on a guarantee from US Bank. As such, its
issuer rating matches that of US Bank. These ratings better capture
the risk characteristics of these classes of debt following the agency's
updated view around the loss at failure for these creditors.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Given the downgrade of the BCA and ratings, an upgrade of the BCA
or ratings is unlikely over the next 12 to 18 months. The BCA and
long-term ratings could be upgraded if USB increases it capitalization
or maintains the stronger liquidity profile that resulted from the extraordinary
deposit growth of the last several quarters. The current ratings
incorporate Moody's expectation that some of this liquidity will
diminish as excess market liquidity subsides.
A downgrade of the BCA and ratings could occur if USB's capitalization,
asset quality, or profitability were to worsen significantly compared
to peers.
Downgrades:
..Issuer: Elavon Financial Services DAC
....Backed LT Deposit Rating, Downgraded
to Aa3 from Aa2, Stable from Ratings under Review
..Issuer: U.S. Bancorp
.... Issuer Rating, Downgraded to A2
from A1, Stable from Ratings under Review
....Senior Unsecured MTN, Downgraded
to (P)A2 from (P)A1
....Subordinate MTN, Downgraded to (P)A2
from (P)A1
....Senior Unsecured Shelf, Downgraded
to (P)A2 from (P)A1
....Subordinate Shelf, Downgraded to
(P)A2 from (P)A1
....Junior Subordinate Shelf, Downgraded
to (P)A3 from (P)A2
....Pref. Shelf, Downgraded to
(P)A3 from (P)A2
....Pref. shelf Non-cumulative,
Downgraded to (P)Baa1 from (P)A3
....Pref. Stock Non-cumulative,
Downgraded to Baa1 (hyb) from A3 (hyb)
....Subordinate Regular Bond/Debenture,
Downgraded to A2 from A1
....Senior Unsecured Regular Bond/Debenture
(Local Currency), Downgraded to A2 from A1, Stable from Ratings
under Review
....Senior Unsecured Regular Bond/Debenture
(Foreign Currency), Downgraded to A2 from A1, Stable from
Ratings under Review
..Issuer: U.S. Bancorp (Old)
....Backed Subordinate Regular Bond/Debenture,
Downgraded to A2 from A1 (Assumed by U.S. Bancorp)
..Issuer: U.S. Bank National Association
.... Adjusted Baseline Credit Assessment,
Downgraded to a1 from aa3
.... Baseline Credit Assessment, Downgraded
to a1 from aa3
.... LT Counterparty Risk Assessment,
Downgraded to Aa3(cr) from Aa2(cr)
.... LT Counterparty Risk Rating (Foreign
Currency), Downgraded to A1 from Aa3
.... LT Counterparty Risk Rating (Local Currency),
Downgraded to A1 from Aa3
....LT Deposit Rating, Downgraded to
Aa2 from Aa1, Stable from Ratings under Review
..Issuer: USB Capital IX
....Pref. Stock Non-cumulative,
Downgraded to Baa1 (hyb) from A3 (hyb)
..Issuer: USB Realty Corp.
....Pref. Stock Non-cumulative,
Downgraded to Baa1 (hyb) from A3 (hyb)
Confirmations:
..Issuer: Elavon Financial Services DAC
.... Backed LT Issuer Rating, Confirmed
at A1, Stable from Ratings under Review
..Issuer: U.S. Bank National Association
.... Issuer Rating, Confirmed at A1,
Stable from Ratings under Review
....Senior Unsecured Bank Note Program,
Confirmed at (P)A1
....Subordinate Bank Note Program, Confirmed
at (P)A1
....Senior Unsecured Regular Bond/Debenture,
Confirmed at A1, Stable from Ratings under Review
..Issuer: Firstar Realty LLC
....Pref. Stock Non-cumulative,
Confirmed A3 (hyb)
Affirmations:
..Issuer: Elavon Financial Services DAC
.... Backed ST Issuer Rating, Affirmed
P-1
.... Backed ST Deposit Rating, Affirmed
P-1
..Issuer: U.S. Bancorp
....Commercial Paper, Affirmed P-1
..Issuer: U.S. Bank National Association
.... ST Counterparty Risk Assessment,
Affirmed P-1(cr)
.... ST Counterparty Risk Rating (Foreign
Currency), Affirmed P-1
.... ST Counterparty Risk Rating (Local Currency),
Affirmed P-1
.... ST Deposit Rating, Affirmed P-1
....ST Bank Note Program, Affirmed (P)P-1
....Commercial Paper, Affirmed P-1
..Issuer: U.S. Bank National Association,
Canada Br.
....Commercial Paper, Affirmed P-1
Outlook Actions:
..Issuer: Elavon Financial Services DAC
....Outlook, Changed To Stable From
Rating Under Review
..Issuer: Firstar Realty LLC
....Outlook, Changed To No Outlook From
Rating Under Review
..Issuer: U.S. Bancorp
....Outlook, Changed To Stable From
Rating Under Review
..Issuer: U.S. Bancorp (Old)
....Outlook, Changed To No Outlook From
Rating Under Review
..Issuer: U.S. Bank National Association
....Outlook, Changed To Stable From
Rating Under Review
..Issuer: USB Capital IX
....Outlook, Changed To No Outlook From
Rating Under Review
..Issuer: USB Realty Corp.
....Outlook, Changed To No Outlook From
Rating Under Review
The principal methodology used in these ratings was Banks Methodology
published in July 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1269625.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the UK and is endorsed
by Moody's Investors Service Limited, One Canada Square,
Canary Wharf, London E14 5FA under the law applicable to credit
rating agencies in the UK. Further information on the UK endorsement
status and on the Moody's office that issued the credit rating is
available on www.moodys.com.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Rita Sahu, CFA
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Andrea Usai
Associate Managing Director
Financial Institutions Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
