Moody's said that the downgrade of US Bancorp reflects the inescapable challenges that even a well-managed and diverse banking franchise currently faces. Among these challenges are protracted low interest rates that will place pressure on US Bancorp's net interest margin, evolving operating constraints that will continue to affect revenues and expenses, including those influenced by regulation, and heightened lending competition from peers that are actively seeking to expand in a slow-growth economy. Additionally, US Bancorp has increased its dependence on potentially volatile mortgage banking income. Taken together, these challenges suggest a modest decrease in US Bancorp's core earnings power relative to Moody's previous expectations.
Notwithstanding today's downgrade, US Bancorp continues to be one of Moody's highest-rated banks, both domestically and globally. This positioning recognizes the strength of its diverse business model, which results in limited concentration risk, superior operating efficiency, and above average and more stable earnings than other banks. Moreover, to the extent these attributes endure, US Bancorp will remain comparatively highly-rated.
Despite US Bancorp's business line diversity, the rating agency noted that US Bancorp's expanded mortgage banking platform exposes it to some incremental volatility, particularly as gain on sale margins weaken from their current historically high levels. In Moody's view, US Bancorp's recent growth in mortgage banking has been well-timed, but the business has attracted significant regulatory and political attention, and the ultimate structure of the US mortgage market remains unclear. As a result, while currently robust, US Bancorp's earnings from mortgage banking are exposed to heightened volatility, with a bias towards weaker earnings over time, said Moody's.
The stable outlook on US Bancorp's ratings reflects the strengths cited above as well as US Bancorp's strong credit quality, prudent liquidity and good capital position.
Finally, as part of today's rating action, Moody's also downgraded the backed long-term deposit and issuer ratings of US Bancorp's Irish subsidiary, Elavon Financial Services Limited, to Aa3 from Aa2 and left the ratings on review for possible further downgrade. Elavon's ratings have historically been linked to those of US Bank, NA, which guarantees Elavon's obligations. However, as a result of Moody's September 2012 reduction in Ireland's country ceiling to A3 from Aaa, Elavon's long-term ratings will remain on review for possible downgrade.
In reviewing Elavon's ratings, Moody's will evaluate the existing US Bank, NA guarantee and other documents to assess the risk to Elavon's creditors of a potential exit and currency redenomination in the unlikely event of a default by the Irish sovereign. Additionally, because Elavon's long-term ratings could be lowered to the A3 Irish country ceiling (a level that is typically consistent with a Prime-2 short-term rating), Moody's also placed Elavon's Prime-1 short-term rating on review for possible downgrade. Moody's expects to conclude the review of Elavon's ratings in the next several weeks.
The principal methodology used in this rating was Moody's Consolidated Global Bank Rating Methodology published in June 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
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Allen H. Tischler Senior Vice President Financial Institutions Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Robert Franklyn Young MD - Financial Institutions Financial Institutions Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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