Wells Fargo: Credit Rating A+
Morningstar is maintaining our A+ issuer credit rating for Wells Fargo (WFC). Although Wells Fargo has endured credit-quality issues, it has been well managed through the credit crisis, more than doubling in size thanks to the 2008 acquisition of Wachovia. As a result, Wells Fargo now has a coast-to-coast banking presence. The company is an excellent operator, and we expect it to generate strong earnings and capital. Wells Fargo is adept at selling multiple products to each of its customers, and it earns strong net interest margins, producing healthy risk-adjusted returns. Wells Fargo has repaid its $25 billion of Troubled Asset Relief Program preferred stock in full.
In our Stress Test analysis, we assigned an average underwriting quality rating to most of Wells Fargo's loans and securities. We assigned an above-average rating to its "credit impaired" portfolio, where significant losses have already been taken. The company received a good score on the Stress Test, as its earnings power more than offset potential credit losses under our stress-case assumptions. Wells Fargo received a fair Solvency Score, as its strong earnings power was offset by its low relative tangible common equity, deposit funding, and credit quality metrics. We awarded it a very good Business Risk score because of its size, attractive funding mix, excellent management, diversification, and narrow moat. These factors led to a raw credit score in the middle of the A- rating category. However, given the company's superior earnings power, size, and importance to the national economy, Wells Fargo was assigned an A+ credit rating, a two-notch upgrade from its model-driven score.
US Bancorp: Credit Rating A+
Morningstar is maintaining its A+ issuer credit rating for US Bancorp (USB), a $291 billion company with branches in 24 states. US Bancorp performed admirably during the economic downturn, recording profits in both 2008 and 2009. The company generates about 40% of its normalised revenue from its payment processing and wealth-management businesses, which earn large returns without much capital commitment. Additionally, US Bancorp has taken advantage of the credit crisis by acquiring several financial institutions in FDIC-assisted deals. We believe these acquisitions will be major earnings drivers for years to come. Overall, US Bancorp has an excellent credit profile with stable earnings, strong credit quality, and solid reserves. Capital levels are in line with peers, and though earnings are down from historical levels, we believe they remain strong and are poised to grow from current levels.
In our Stress Test analysis, we assigned an above-average underwriting quality rating to the loan and securities portfolios because of the bank's consistently strong credit quality. US Bancorp receives a good Stress Test score, building significant capital under our stress-case assumptions. It achieved a fair Solvency Score, as its strong earnings power and reserves were offset by its lower relative tangible common equity and deposit funding levels. We awarded US Bancorp a very good Business Risk score because of its strong funding mix, geographic and business line diversification, size, wide moat, and strong management. These factors led to a raw credit score at the high end of the A- rating category. However, taking into account its consistent earnings, credit quality, lower volatility relative to peers, and overall exceptional credit profile, we assigned US Bancorp a credit rating of A+, a two-notch upgrade from the model-driven rating.
Bank of America: Credit Rating A-
Morningstar is maintaining our A- issuer credit rating for Bank of America (BAC). BofA is the largest financial institution in the United States by assets and deposits. The bank is greatly exposed to consumers with large residential mortgage, home equity, credit card, and consumer loan balances. Its commercial loan book is also large and depends on an improving economy. BofA is among the leaders in all investment banking categories, which increases the level and volatility of earnings. While capital adequacy was a big question during the credit crisis, BofA has taken several steps to improve its capital cushion and positioned itself for profitability. Thanks to its improved financial condition, BofA repaid its entire $45 billion Troubled Asset Relief Program preferred stock investment in December 2009.
In our Stress Test, we assign an average underwriting score to BofA's loan and securities portfolios, except for credit cards, to which we assign our worst rating. BofA has a modest Solvency Score as its strong earnings power and reserves are offset by weaker relative deposit funding and capital. BofA's size and diversified business mix are partially offset by weak management performance and very high equity uncertainty in the Business Risk score. This leads to a raw credit score of BBB. We believe BofA's capital position will grow, given strong earnings and low dividend payouts, putting upward pressure on ratings. Liquidity is strong, with no need to tap the debt markets. Reserves are solid at 4.9% of loans. Finally, we increase the credit rating by one notch because of BofA's "too big to fail" status.
Goldman Sachs Group: Credit Rating A-
We are maintaining our issuer credit rating of A- for Goldman Sachs (GS), a leading investment banking, securities, and investment management company. Goldman has historically been very profitable, consistently earning returns on equity well in excess of the cost of equity assigned to the firm. However, new financial regulations being implemented by Congress have increased the uncertainty surrounding future profitability. The company is highly exposed to the enactment of the Volcker Rule (which curbs or eliminates proprietary trading, hedge funds, and private equity for those who accept deposits) and the Lincoln Amendment (regulates derivatives trading). In addition, funding costs could rise for large institutions like Goldman if and when new regulation lessens the likelihood of systemic support from the government. At present, a number of these potential costs are difficult to quantify, but may be material.
In our Stress Test analysis, we assigned an average underwriting quality rating for Goldman Sachs' loan and securities portfolios. The firm achieved a very good score on the Stress Test, as we believe it could build capital under our stress-case assumptions. Goldman managed a good Solvency Score because of its decent capital position and strong earnings power. We awarded the company a fair Business Risk score, as its geographic diversification and size were partially offset by its high dependence on capital markets. These factors led to a raw credit score in the upper half of the BBB+ rating category. However, given its size and importance in the global economy, we awarded Goldman Sachs a credit rating of A-, a one-notch upgrade from its model-driven score.
Morgan Stanley: Credit Rating BBB
We are maintaining our issuer rating of BBB for Morgan Stanley (MS), a leading investment banking and wealth- and asset-management company. Its three primary businesses are institutional securities (investment banking, sales and trading, and corporate lending), global wealth management (brokerage and investment advisor services, including Morgan Stanley's 51% interest in Morgan Stanley Smith Barney), and asset management. As with its peers, new financial regulations set to be enacted by Congress have increased the uncertainty surrounding future profitability. Morgan Stanley is highly exposed to the enactment of the Volcker Rule (curbs on proprietary trading, hedge funds, and private equity for those who accept deposits) and the Lincoln Amendment (limits on derivatives trading).
In our Stress Test analysis, we assigned an average underwriting quality rating for Morgan Stanley's loan and securities portfolios. Morgan Stanley received a good score on the Stress Test as its post-test tangible common equity ratio remained adequate despite burning capital under our stress-case assumptions. Morgan Stanley achieved a fair Solvency Score thanks to its relatively low capital position and recent weakness in earnings. We awarded the company a fair Business Risk score as its geographic diversification, size, and narrow moat were partially offset by its below-average management performance and significant dependence on short-term funding. These factors led to a raw credit score in the high end of the BBB- category. Given its size and importance in the global economy, we awarded Morgan Stanley a final rating of BBB, a one-notch upgrade from our model-driven score.
Regions Financial: Credit Rating BBB-
Morningstar is maintaining its BBB- issuer credit rating for Regions Financial (RF), a $133.5 billion company with headquarters in Birmingham, Ala., and branches across the Southern and Midwestern United States. In addition to a full complement of banking services, Regions provides brokerage and investment banking services through its Morgan Keegan subsidiary. While Regions raised a significant amount of capital as part of the Supervisory Capital Assessment Program, we think more will be needed before it will be allowed to repay its $3.5 billion of Troubled Asset Relief Program preferred stock.
In our Stress Test analysis, we assigned a below-average underwriting quality rating to Regions' loan portfolio, given its poor performance to date. We assigned an above-average rating to its securities portfolio. Regions received a fair rating on the Stress Test, as we believe its capital position would deteriorate under our stress-case assumptions. Regions achieved a fair Solvency Score, as its decent reserve position was more than offset by its weak tangible common equity levels, poor credit quality, and weak relative deposit funding. We awarded the bank a good Business Risk score because of its funding mix, size, business line and geographic diversification, and narrow moat. These factors led to a rating of BBB-.
Morningstar Corporate Credit Research
Morningstar has created a transparent framework for our credit ratings built from four quantitative and qualitative metrics—Business Risk, Morningstar® Cash Flow Cushion™, Morningstar® Solvency Score™, and Distance to Default. The first two are qualitative and depend on the analyst’s business forecast. The latter two are primarily quantitative. While the Solvency Score is based on a company’s financial ratios, Distance to Default is a market-driven measure of financial health and distress. All of these metrics add up to the Morningstar® Corporate Credit Rating™.
