With interest rates being at a significantly low level, the
pressure on earnings of
) continues to build up. Therefore, Moody's Investors Service, a
) has lowered its ratings, according to a Bloomberg report.
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Moody's have reduced the senior debt rating of U.S. Bancorp to A1
from Aa3. Despite having a diversified business model which is
also well-managed, U.S. Bancorp cannot avoid the ill-effects of a
low interest rate environment. As a consequence, the company's
net interest margin is likely to remain stressed.
U.S. Bancorp also faces the risks of increased volatility and
weak earnings in due course for the rise in its mortgage banking
business. Notably, the company is positive about this business
and continues to build it and gain market share. Increased
regulation and competition may also limit revenue growth
potentials of the company in the future.
However, the rating agency acknowledged U.S. Bancorp's well
diversified business model. The company operates with higher
efficiency while its concentration risk is restricted, and hence
it is expected to achieve above-average earnings.
While downgrades in ratings affect investors' confidence in the
company and its creditworthiness in the market, we note that U.S.
Bancorp is still among the highest rated banks in Moody's list.
Its robust core franchisee, diverse revenue stream and strong
performance in the past years are quite impressive. Solid capital
position and an increase in lending activities also augur well.
Nevertheless, in our point of view, regulatory issues along with
the expectation of a continued low interest rate environment are
likely to limit the stock's upside potential in the upcoming
U.S. Bancorp currently retains its Zacks #2 Rank, which
translates into a short-term Buy rating. Though the company
witnessed a downgrade in ratings, the ratings are still high.
Therefore, we do not expect much estimate revisions in the near
Among U.S. Bancorp's peers,
Bank of America Corp.
) also have a Zacks #3 Rank.