(USB) U.S. Bancorp Wins Ratings Upgrade

Credit rating agency, Standard & Poor’s (S&P), ushered in good news for U.S. Bancorp (USB), by raising its long-term issuer credit rating to ‘A+’ from ‘A’ and affirming its ‘A-1’ short-term issuer credit rating. Moreover, the rating agency has raised its issuer credit ratings on the company’s operating subsidiaries to ‘AA-‘ from ‘A+’ and short-term issuer credit rating to ‘A-1+’ from ‘A-1’. The outlook is stable.

Moreover, the stand-alone credit profile (SACP) at the operating level remains ‘a+’ since the upgrade is based on an additional notch to the issuer credit rating. As U.S. Bancorp’s SACP did not alter, ratings on its preferred stock and hybrids also remain same.

Notably, as a result of the company’s impressive performance over the past four years compared to its peers, the rating agency factored in an additional notch to the company’s issuer credit rating.

The rating upgrade reflects an optimistic outlook for U.S. Bancorp. According to the rating agency, the action depicts the company’s stable revenue and earnings, both during and after the financial crisis.

Previously, the rating agency predicted home prices to continue to fall. This could have adversely affected U.S. Bancorp’s credit quality. However, with the rating agency’s recent expectations that home price declines are approaching a floor, the company is expected to continue to outperform its peers, with support from its improving credit trends. Its reserves to nonperforming loans, which are higher compared to its peer group level, would enable it to continue its profitability trend.

U.S. Bancorp’s strong financial condition with solid capital levels is impressive. It adheres to a conservative growth strategy and its exposure to mortgage putbacks, litigation and eurozone exposure are minimal.

The Stable outlook assigned by the rating agency reflects its expectations for sustained revenue and earnings at U.S. Bancorp coupled with improvement in credit quality. The company’s earnings quality is likely to remain high based on its core earnings power rather than benefits from large non-recurring items.

Our Viewpoint

The rating upgrades are valuable for U.S. Bancorp as they play a major role in preserving investor confidence in the stock and help boost its creditworthiness in the market.

We also remain encouraged by U.S. Bancorp’s attractive core franchisee and diverse revenue stream. The company’s robust capital position, improving credit quality and increase in lending activities also augur well. Rather than opting for big acquisitions, the company has made efforts to make strategic but small acquisitions to augment its business. Moreover, the company’s capital redeployment efforts gives a boost to investors’ confidence.

Yet, a tepid economic recovery, regulatory issues along with the expectation of continued low interest rate environment are projected to limit the stock’s upside potential in the upcoming quarters.

U.S. Bancorp currently retains its Zacks #2 Rank, which translates into a short-term Buy rating. Considering its fundamentals, we have a long term Neutral recommendation on the stock. One of its closest peers, Fifth Third Bancorp (FITB) also has a Zacks #2 Rank.

Read the full analyst report on “USB”
Read the full analyst report on “FITB”
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