U.S. Bancorp Might Witness Ratings Downgrade By Moody's

U.S. Bancorp’s (NYSE:USB) long-term ratings are under review for downgrade by Moody's Investors Service, a rating arm of Moody's Corporation. In March 2017, the rating agency had rated U.S. Bancorp’s senior unsecured and subordinated debt as A1.

Moody’s initiated the review on account of the $613 million settlement that U.S. Bancorp had agreed upon with several U.S. regulatory bodies last week due to shortcomings in its anti-money laundering and willful violations of the Bank Secrecy Act. (Read more: U.S. Bancorp to Pay Penalty of $613M for Money Laundering)

Ratings for U.S. Bancorp’s subsidiaries along with its bank subsidiary, U.S. Bank National Association, have been placed for review. U.S. Bank’s long-term deposits rating of Aa1, issuer and senior unsecured debt rating of A1, baseline credit assessment (BCA) of aa3 and counterparty risk assessment of Aa2(cr) are also under review. However, short-term ratings of Prime-1 for short-term deposits and senior debts were affirmed and are not under review.

Following the legal settlement, Moody’s felt the necessity to review whether the company’s risk management system continues to be better in comparison to its competitors. Though, the settlement amount was beyond Moody’s expectations, it anticipates U.S. Bancorp’s earnings and capital position remains well poised to bear the impact.

The rating agency will be considering whether U.S. Bank’s BCA rating of aa3 is still justified. Also, the changes in board processes along with oversight and the ability to guide management in identifying and mitigating potential future risk will be reviewed.

U.S. Bancorp’s enterprise-wide risk governance, asset quality and operational risks will also be in focus of the review process. Notably, the company remains exposed to the risk of coming into light some other breach of law, which would lead to a violation of the two-year deferred prosecution agreement that the company had agreed upon with the regulators.

What Can Drive the Ratings Up

Ratings of the company might witness an upgradation if Moody's is of the opinion that its enterprise risk governance and management stand superior to its peers and that it is likely to maintain above-average and consistent financial metrics.

What Can Bring the Ratings Down

On the flip side, long-term ratings can be downgraded if Moody’s finds that the company’s enterprise-wide risk governance and management are not strong enough to place it above its peers. A sustained weakening in asset quality, capital or profitability metrics could also act as a negative factor.

Shares of U.S. Bancorp have gained 4.7% over the past six months, underperforming the 19.7% growth for the industry it belongs to.

Zacks Rank & Key Picks

The stock carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the same space are The PNC Financial Services Group (NYSE:PNC) , State Street Corporation (NYSE:STT) and Northern Trust Corporation (NASDAQ:NTRS) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here here.

The Zacks Consensus Estimate for PNC Financial has moved up 1.3% for the current year, in the last 30 days. The company’s share price has increased 24.2% in the past year.

State Street has witnessed 2.5% upward earnings estimate revision for 2018, in the last 30 days. Its share price has risen 30.1% in the past year.

Northern Trust’s shares have gained 19.6% in a year and its earnings estimates for 2018 have moved up 2.9% in the last 30 days.

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