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

CHICAGO--()--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 good 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), Wells Fargo & Company (WFC), and Zions Bancorporation (ZION).

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, VR AND SENIOR DEBT

USB's ratings affirmation is reflective of the company's continued better earnings and credit performance than nearly all peer banks over multiple operating cycles. Additionally, USB continues to consistently perform better than peers in the Federal Reserve's annual CCAR stress tests as measured by the company's capital ratio deterioration under severely adverse scenario of the test.

Fitch believes USB's key advantages relate to its business model and its low cost operating model, both of which have contributed to USB's 'AA' ratings.

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. Fitch views this balance favorably as it helps to support the company's strong earnings performance through the cycle as well as its solid internal capital generation.

USB's merchant processing business is a significant proportion of the company's non-interest revenue. Fitch views this growing source of revenue as somewhat stable and very scalable, thereby providing some persistency to both 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 lower than peers, 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 consistently be one of the strongest performing banks on this metric.

USB's other key differentiator relative to peers is that management operates a very efficient bank where operating expense management is 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.

USB's funding profile is strong and positively differentiated from peers by its large corporate trust business. This represents nearly 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. Fitch continues to view USB's management team as one of, if not the, best in the industry.

SUPPORT RATING AND SUPPORT RATING FLOOR

USB has a 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 Limited (Elavon) has a support rating of '1', which is an institutional support rating, and indicates that there is a high probability 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 do not typically benefit from the U.S. depositor preference 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, VRs 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 component in Fitch's analysis and views of the company, 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.

While Fitch would expect some deterioration in credit metrics for USB (as well as the rest of the industry) given today's benign credit environment, should USB's credit results 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 9.3% as of June 30, 2016 is on the lower end relative to peers, but the company continues to perform very well under CCAR stress tests and generates a substantial amount of internal capital via earnings, both of which support ratings. However, given the comparatively low position of the ratio, should capital ratios meaningfully decline, 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 this could negatively impact ratings. At the same time, should Fitch observe that USB not incur sufficient expenditures to maintain its technological infrastructure and develop new technological enhancements, this could pressure ratings or the Outlook.

Fitch views the cumulative effects of USB's regulatory initiatives and potential litigation risk as manageable and contemplated within ratings. If any of these efforts ultimately resulted in an outsized fine that pressures capital or significant long-term reputational damage, it may create downward rating pressure.

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.

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

--IDR at 'AA'; Outlook Stable;

--Viability Rating (VR) 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 (VR) at 'aa';

--Long-term deposits at 'AA+';

--Senior debt at 'AA';

--Subordinated 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 Limited

--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-';

Additional information is available on www.fitchratings.com

Applicable Criteria

Global Bank Rating Criteria (pub. 15 Jul 2016)

https://www.fitchratings.com/site/re/884135

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1012638

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012638

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings, Inc.
Justin Fuller, CFA
Senior Director
+1-312-368-2057
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Julie Solar
Senior Director
+1-312-368-5472
or
Committee Chairperson
Christopher Wolfe
Managing Director
+1-212-908-0771
or
Media Relations
Hannah James, + 1-646-582-4947
hannah.james@fitchratings.com