DBRS Confirms U.S. Bancorp’s Senior Debt at AA; Trend Stable

DBRS has today confirmed all ratings of U.S. Bancorp (USB or the Company), including its Issuer & Senior Debt rating at AA; the trend is Stable. At the same time, all ratings of its principal operating bank subsidiary, U.S. Bank National Association, including its Deposits & Senior Debt AA (high) rating, have been confirmed. The rating action follows a review by DBRS of the Company’s operating performance, financial fundamentals and future prospects.

The Company’s ratings and today’s rating confirmation recognize strong and sustainable operating performance that arises from a diverse business mix that includes top-tier market shares in banking, corporate trust, payments processing and various other financial services. These franchise strengths, combined with a relatively low risk profile, an efficient operating platform and relatively inexpensive funding, produce profitability that is consistently higher than that of its peers. USB’s super-regional banking franchise includes strong market positions and deposit market shares in states across the Midwest, Mountain and Pacific regions. In 2009, the Company was the sixth largest depository in the U.S. with a 2.4% market share. The loan portfolio is sufficiently granular, is diversified among various industries and regions and lacks material risk concentrations in volatile sectors. Furthermore, DBRS sees USB as well-positioned with regard to industry regulatory reform. While the Company’s revenues are being negatively impacted by some regulatory constraints on fees and charges, its current size and uncomplicated banking model that lacks significant capital market exposure should allow them to operate with less regulatory restriction.

Although results have been negatively impacted by higher than normal credit costs, USB has generated record levels of interest and fee revenues while still managing expenses prudently. This strong and resilient performance, which supports its AA rating, has enabled the Company to build its business and repay TARP while many others are retreating and focusing inwardly. Over the past two years, USB has expanded both its branch banking and fee businesses through the acquisition of banks, payment processors, processor portfolios, credit card portfolios, and trustee businesses. These acquisitions, if well-managed, will further enhance the Company’s core revenue and capital generation abilities.

Although not immune to the current hostile operating environment, USB’s low-risk operating model and strong balance sheet have enabled the organization to differentiate itself from most other large banks by generating profits in each and every quarter. USB has also continued to generate healthy top-line revenue growth and measured expense growth producing positive operating leverage. The difficult credit environment, however, has produced higher credit losses for the Company while USB continues to build provisions to absorb future potential losses, albeit at a slowing rate. DBRS believes that credit losses (1Q10 net charge-offs at 2.31% of loans, including loans held for sale) have peaked for the Company and expects provisions and charge-offs to decline for the remainder of 2010, but remain elevated relative to historical levels. Reserve levels appeared adequate at 87% of non-performing loans (including restructured but accruing loans yet excluding covered assets). DBRS also notes that in 1Q10, USB generated approximately $2.22 billion in income before provisions and taxes (IBPT adding back securities loss), which exceeded its $1.31 billion loan loss provision by 1.7 times, providing a substantial cushion against potential loss. Despite these challenges, USB’s profitability metrics (return on assets, risk-adjusted return and return on equity) are in the top tier among both the largest banks in the United States and banks similarly rated by DBRS, and DBRS expects that leadership to continue. Moreover, through the crisis, the Company has also demonstrated its relative strength in generating growth both through acquisitions and organically.

Rising fees and commissions from the Company’s consumer banking, wealth management and payment services, together with low funding costs, lower-than-peer loan loss provisions and a highly efficient operating platform all contributed to USB’s sustained industry-leading profitability. According to DBRS, USB’s financial fundamentals and capital position are sound and supportive of the Company’s rating levels and Stable trend. Reflecting its capital strength, the Company’s Tier 1 and Tier 1 Common capital ratios improved 30 bps each to 9.9% and 7.1% respectively in the first quarter of 2010. All regulatory ratios continue to be far above the well-capitalized levels. Tangible common equity (TCE) also grew 30 bps over the quarter to 5.6% of tangible assets supporting DBRS’s view of USB’s strong internal capital generation ability. Moreover, a solid core deposit base that funds virtually the entire loan book continues to underpin the operating bank’s sound liquidity position, while the holding company maintains sufficient unencumbered liquid assets to meet operating expenses and debt-service obligations in excess of 1.5 years.

Non-interest income is derived from a broad range of businesses, including payment services, corporate trust, asset management, private client and treasury operations, and accounted for approximately 50% of net revenues in 2009 (including banking and deposit fees). These businesses are highly attractive because they provide stable revenues, carry minimal credit risk (but do have operational risks) and are balance-sheet friendly – their operations require only modest amounts of assets, funding and capital. In most of these businesses, USB has sufficient market shares and scale to compete effectively.

In DBRS’s view, the principal challenges for the Company are to restore asset quality from the recent financial crisis, continue building out or filling in the banking franchise in newer markets and to maintain investment in wealth management, fiduciary, and payment services.

Note:

All figures are in U.S. dollars unless otherwise noted.

The applicable methodologies are Global Methodology for Rating Banks and Banking Organizations and Rating Bank Preferred Shares and Equivalent Hybrids, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.