U.S. Bancorp ( USB ) is under scrutiny and that too for the wrong reasons. Its long-term ratings have been placed under review and might be lowered by Moody's Investors Service, the rating arm of Moody's Corp. ( MCO ), as competition increases with rivals recuperating from the crisis.
One of the largest banks in the nation, U.S. Bancorp is susceptible to the unpredictable markets with growth in its mortgage banking business. This impact might be intensified with the capital level, which, though sound, is not distinct among its peers.
In particular, the rating agency will inspect U.S. Bancorp's long-term capacity to maintain its steady and improved performance amid an increasing competitive landscape with peers recouping from the crisis and aggressively looking for growth opportunities.
However, the downgrade, if it happens, is likely to be restricted at one level to A1 from Aa3, the current ratings of U.S. Bancorp. The bank's superior health and its efficiency in navigating through the downturn have been recognized by the rating agency. Even taking the review into consideration, the company still occupies a high position and is close to the top bank ratings.
We believe that the ratings 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. So a downgrade, even by a notch, is likely to send a short-term negative sentiment.
Yet, we believe that U.S. Bancorp holds a high stature and this is justified by the company's impressive figures over the past years. It is one of the few banks to have exhibited stability in both revenue and earnings during the financial crisis and subsequent to that period as well.
Though regulatory issues along with the continued low interest rate environment remain a concern, we note that with its attractive core franchisee, diverse revenue stream, healthy financial condition, improving credit quality and increasing lending activities, the company remains well poised for future growth.
Moreover, rather than opting for big acquisitions, the company has made efforts to make strategic but small acquisitions to augment its business. Its shareholders enjoy the benefits of an encouraging capital redeployment policy on part of the company as well.
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.