Key Takeaways
- Of the 105 rated banks in the U.S. and Canada, we believe about 10% have greater sensitivity to ESG factors than peers.
- Governance-related factors generally play a more significant role in influencing banks' creditworthiness, particularly given the importance of sound enterprisewide risk management to overall creditworthiness.
- Social and environmental factors are credit relevant in fewer cases and typically reflect institution-specific considerations, such as exposure to higher-risk consumer lending products or natural disaster-prone geographies.
Analytic Approach
Environmental, social, and governance (ESG) risks and opportunities can affect an entity's capacity to meet its financial commitments in many ways. S&P Global Ratings incorporates these considerations into its ratings methodology and analytics, which enables analysts to factor in short-, medium-, and long-term impacts--both qualitative and quantitative--to multiple steps of their credit analysis. Strong ESG credentials do not necessarily indicate strong creditworthiness (see "The Role Of Environmental, Social, And Governance Credit Factors In Our Ratings Analysis," published Sept. 12, 2019).
We define ESG credit factors as ESG risks or opportunities that influence an obligor's capacity and willingness to meet its financial commitments. This influence may be reflected through a change in the size and relative stability of the obligor's current or projected revenue base; its operating requirements; the emerging risks it is exposed to; its earnings, cash flow, or liquidity; or the size and maturity of financial commitments.
This report card lists ESG insights for individual companies, including how and why ESG factors may have had a more positive or negative influence on an entity's creditworthiness compared to the broader sector. The list of entities covered in this report is not exhaustive. As companies increasingly focus on ESG in their communications and strategies, we may provide additional ESG insights and updates in individual company analyses throughout the year.
ESG Factors For U.S. And Canadian Banks
In keeping with the continued growth of investor interest in ESG considerations, S&P Global Ratings is increasing transparency regarding the influence of ESG factors as ratings considerations and where these factors suggest elevated risk or are more supportive of creditworthiness. Of the 105 rated banks in the U.S. and Canada, we believe about 10% have greater sensitivity to ESG factors than peers. (We currently do not consider any rated banks to have less sensitivity than the average bank to ESG factors.) This report introduces transparency regarding ESG factors for the largest 19 banks in the U.S. and Canada, as well as for 10 smaller banks that we believe are more sensitive to ESG factors.
We believe the prominence of ESG-related topics has increased in many banks' strategies, and topics like climate change, conduct and governance, and transparency rank higher on board agendas than they did a decade ago. We also recognize that embedding ESG considerations in business settings or risk frameworks takes time, especially in terms of articulating ways in which banks can look to support the transition to a carbon-neutral economy. While ESG-related initiatives have begun among banks, we believe cases where environmental or social factors positively influence bank rating actions are still rare, since the new initiatives are still in relatively early stages.
When rating banks, we recognize they are inherently exposed to certain risks, which for the most part are incorporated in our Banking Industry Country Risk Assessment (BICRA) analysis, which determines the anchor for each jurisdiction in which we rate banks. (Our BICRA analysis focuses on the systemic risks a bank is exposed to depending on where it operates.) ESG credit factors influence credit quality--in a more negative or positive way than for peers--when the magnitude or frequency of controversies is large enough to have a specific credit influence not reflected already in our anchor and view of industry risks, and when those controversies are recent--to the extent they have been weighing and continue to weigh on current credit quality.
Environmental
Banks are primarily exposed to environmental risks via their lending and securities portfolios, due to physical and transition risks. Direct or indirect environmental risks can arise from banks operating in geographies more prone to natural disasters such as hurricanes or earthquakes.
Transition risks--the financial risks that could result from the process of adjustment towards a lower carbon economy--can also inflate banks' credit, market, or operational risks, particularly for those institutions that finance the oil and gas, metals and mining, and other carbon-intensive industries. Transitioning to a low-carbon economy entails a large set of evolving environmental regulations, norms, and innovations, as well as changing customer preferences. The degree to which banks and their clients embrace these changes will influence the degree to which they are exposed to associated risks, including business model disruption.
Social
Conduct risk presents a direct social exposure for banks. Banks face social challenges such as how to avoid reputational or regulatory risks in retail activities (including those associated with lending to nonprime customers) at a time when banks' commercial practices are under heightened scrutiny in many countries. Also, expectations from customers and regulators are high, including expectations regarding cybersecurity and data privacy.
Governance
We also form a view of banks' governance, which is an important component of our assessment of the quality of management and strategy. We look at a number of factors, including the risk appetite and stability of the strategy, the quality of the management team, the incidence of governance-related controversies, and the efficacy of corporate governance--including board oversight and the transparency of communications. Out of the three factors, governance by far influences the creditworthiness of banks the most.
ESG Risks For U.S. Banks
| U.S.: BICRA '3' | ||
|---|---|---|
| Company/Rating/Comments | Analyst | |
| American Express Co.(BBB+/Stable/A-2) | ||
| We believe ESG credit factors for American Express Co. (AmEx) are broadly in line with those of industry and U.S. peers. We view social and governance factors as most material to our credit analysis of retail-focused banks, like AmEx. AmEx is exposed to social factors through its significant credit card operations, which are some of the largest in the U.S. The company’s consumer cards are largely targeted toward an affluent clientele that earns rewards or other benefits by transacting rather than borrowing, which we view positively. (It generates about 80% of its revenue via payment processing and fees rather than lending.) Moreover, AmEx’s lending activities are targeted to consumers with high FICO scores, thus lessening compliance and reputational risks, in our view. We view governance at AmEx as largely consistent with better-performing U.S. banks. AmEx has historically had to manage litigation risk owing to its prominent position as a top payment processor and card issuer. Nonetheless, the company’s business performance has largely remained excellent and operations unimpeded. We view indirect environmental exposure at AmEx as nil, given that it lacks a significant commercial lending operation (although AmEx does offer cards to small businesses and its largest card partner is an airline). | Pressman, Rian | |
| Bank of America Corp.(A-/Stable/A-2) | ||
| We believe ESG credit factors at Bank of America Corp. (BAC) are broadly in line with those of industry and U.S. peers. We consider governance factors, and to a lesser extent social ones, more relevant than environmental risks. BAC's governance is largely consistent with that of better-performing U.S. banks, in our view, considering its substantial improvement from the postcrisis period, when management had to grapple with significant legal and regulatory issues, largely associated with legacy acquisitions. Nonetheless, risks to governance are relatively high since BAC is one of the largest banking organizations in the U.S., with significant potential legal risk and ongoing regulatory scrutiny. We believe BAC's social risks arise from its participation in consumer lending by virtue of its diversified product set. BAC lends mostly to prime or superprime borrowers (including through its wealth management operations), which we view positively, and management has generally avoided wholesale origination channels and other higher-risk business practices. In addition, BAC has ceased doing business with certain industries that have high social, reputational, or legal risk. We view BAC’s direct exposure to environmental risks as manageable, similar to most other U.S. banks. BAC has indirect exposure to environmental risks through its commercial lending activities and investments. In particular, we believe the company is one of the largest lenders to companies in industries with higher environmental risks, including those in resource extraction and manufacturing. This exposes BAC, like any global bank with a large corporate portfolio, to energy transition risks, in particular evolving norms and regulations, including for climate change risks, which could affect borrowers’ creditworthiness. BAC’s commercial loan portfolio is highly diversified, and we do not view its exposure to these industries as outsize. (For example, its exposure to energy companies is about 3.4% of total commercial committed exposures.) | Pressman, Rian | |
| Bank of New York Mellon Corp.(A/Stable/A-1) | ||
| We view ESG credit factors for Bank of New York Mellon Corp. (BK) as comparable to industry and U.S peers. Our credit analysis of BK mainly incorporates governance factors, while social and environmental issues are less relevant to the credit rating. As a major U.S. trust bank, BK has advantages from its fee-based business model, and its relatively conservative management strategies have helped support our high ratings on the company. That said, BK has had changes in its CEO role over the past few years. In September 2019, BK announced the appointment of Todd Gibbons (who has had leadership positions at BK for numerous years) as the interim CEO, following Charles Scharf's resignation as CEO after a tenure of less than two years. Still, we do not expect any significant changes in BK's business or financial strategies as a result of the CEO transition. We believe the company’s corporate governance structure and practices are comparable to industry norms. As mainly an asset servicing and investment management provider to institutions, BK does not have the retail practices risk (a potential social risk) of other commercial banks. However, like other large global banks, the company is highly subject to operational risks, including legal risks. We believe BK’s legal risks are significant but currently very manageable, given its disclosure that its estimated reasonable and possible legal losses in excess of accrued liability were up to $850 million as of Sept. 30, 2019. Environmental factors are currently less pertinent to the rating than for commercial banks, both in terms of direct environmental risks and indirect environmental risks from counterparties or industry concentrations in loan or securities portfolios. | Duberstein, Barbara | |
| BOK Financial Corp.(BBB+/Stable/--) | ||
| We view BOK Financial Corp.’s exposure to indirect environmental risk as somewhat higher than the U.S. bank average because of its lending to the oil and gas industry. BOK has significant lending activities in the energy extraction industry in Oklahoma and Texas. At year-end 2019, the company had just under $4.0 billion of energy loans outstanding, which is 18.3% of total loans and 9.5% of total assets--higher than at other U.S. regional banks. Most of BOK’s energy loans are for shale oil and gas exploration and production. We view BOK’s direct exposure to environmental risk as low and its social and governance factors as largely in line with those of U.S. banking peers. | Oja, Erik | |
| Cadence Bancorporation(BB+/Stable/--) | ||
| We view Cadence Bancorporation’s exposure to indirect environmental risk as somewhat higher than the U.S. bank average because of its lending to the oil and gas industry. As of Dec. 31, 2019, Cadence’s energy-related loans accounted for a relatively high 11% of total loans and 8% of total assets. (About one-third of Cadence’s large shared national credit portfolio consists of energy-related loans.) The company’s energy portfolio includes exploration and production exposure (25% of energy loans), midstream (62%), and energy services (13%). We continue to view these loans as more vulnerable to deterioration in energy prices than more traditional commercial and industrial loans. We view Cadence’s direct exposure to environmental risk as low, and we do not view its management of governance or social factors as materially different from that of industry peers. | Mattson, Catherine | |
| Capital One Financial Corp.(BBB/Stable/--) | ||
| ESG credit factors are slightly more pronounced for Capital One Financial Corp. than for its U.S. bank peers. We view social and governance factors as most material to our credit analysis of retail-focused banks, like Capital One. The company is exposed to social factors through its significant credit card and auto lending operations, which are among the largest in the U.S. Moreover, a significant portion of Capital One’s card and auto borrowers have credit profiles less than prime. (About one-third of card borrowers and one-half of auto borrowers are nonprime.) We believe lending to nonprime consumers heightens compliance, reputational, and regulatory risks. Although Capital One has managed this risk well, isolated issues have arisen, such as the significant payments it has made related to payment protection insurance it once offered to card borrowers in the U.K. In 2019, Capital One experienced a governance-related challenge associated with a significant cybersecurity-related data breach, which management announced on July 29. The data breach increased its reputational risk, in our view, although the company’s estimate of direct costs appears manageable. This event underscores the importance of cybersecurity to consumer-focused banking institutions, which collect vast amounts of data from consumers to facilitate underwriting processes. Capital One has some indirect environmental exposure via its oil and gas lending operation (about 5% of commercial loans), although we do not expect this to grow significantly. | Pressman, Rian | |
| Citigroup Inc.(BBB+/Stable/A-2) | ||
| We view Citigroup Inc.’s ESG factors as broadly in line with those of industry and U.S peers. Citi’s size, complexity, global presence, and the role it plays in providing banking services, particularly to consumers, make good management of governance and social factors crucial. We view governance at Citi as largely consistent with that of better-performing U.S. banks. In recent years, the bank has avoided the type of outsize legal and regulatory problems that it encountered during the financial crisis. Nonetheless, we view risks to governance as relatively high, owing to Citi’s large size and far-reaching presence in dozens of developed and developing economies, as well as significant potential legal risk and ongoing regulatory scrutiny. Notwithstanding its good governance in recent years, the company has not been immune to challenges in the postcrisis period, such as the Oceanografia fraud at its Mexican subsidiary in 2014. However, we believe Citi has tightened its controls significantly, particularly in its Latin American operations. The banking services Citi provides to consumers, particularly credit card lending, and the increased regulatory focus on banks’ business conduct make social factors important. For example, Citi has the largest portfolio of credit card loans, including domestic and international loans, of any bank. Citi faces some indirect risk to environmental factors because it provides banking services to some industries that face their own material environmental risks. For example, the company is a significant banker to the energy and commodities industries. Nonetheless, we do not believe Citi has any outsize concentrations. (For example, its exposure to energy and commodities companies totals about 8% of total corporate credit exposure.) | Browne, Brendan | |
| Discover Financial Services Inc.(BBB-/Stable/NR) | ||
| ESG credit factors are slightly more pronounced for Discover Financial Services Inc. (DFS) than for its U.S. bank peers. While DFS historically has managed ESG risk well, we believe the company remains exposed to social factors through its significant credit card lending operations, which are some of the largest in the U.S. DFS predominantly targets low-risk and high-FICO clients, though it still faces heightened compliance, reputational, and regulatory risks from lending activities, like subprime credit card loans (which constitute one-fifth of DFS’ total card portfolio). Governance risks, such as legal challenges regarding privacy and data security, may also emanate from DFS’ closed-loop network, where it acts both as the issuer and payment network for credit cards, domestically and internationally. In the past, the company has been the subject of consent orders from regulators, which have issued enforcement actions requiring it to remediate deficiencies in anti-money-laundering processes. We view direct and indirect environmental exposure at DFS as negligible, given that it does not have a branch network or commercial lending operations. | Bandeally, Shameer | |
| FirstBank Puerto Rico(BB-/Positive/--) | ||
| Environmental factors, as opposed to social or governance factors, are the most significant in our credit analysis of FirstBank Puerto Rico (FBP). We assess environmental factors as a bigger constraint for FBP than for most domestic regional bank peers located in the U.S. mainland. We believe FBP’s high geographic concentration in Puerto Rico and the U.S. and British Virgin Islands, which together account for about 80% of the bank’s loans, exposes it to meaningful environmental risks because these territories have been highly vulnerable to hurricanes and earthquakes. In 2017, two strong hurricanes (Maria and Irma) caused significant damage to Puerto Rico’s infrastructure, property, and power grid, severely disrupting normal economic activity across the island. FBP also has meaningful indirect exposure to environmental risks given its commercial and consumer lending operations, since most of its borrowers are highly vulnerable to the local island economy. | Bandeally, Shameer | |
| The Goldman Sachs Group Inc.(BBB+/Stable/A-2) | ||
| We view Goldman Sachs Group Inc.’s environmental and social factors, and to a lesser extent governance factors, as broadly in line with those of industry and U.S peers. Similar to several large international investment banks, Goldman is not immune to governance controversies, and some uncertainty remains regarding the company’s controls as they relate to the misappropriation of funds that it underwrote for 1MalaysiaDevelopment Berhad (1MDB) in 2012 and 2013. On Nov. 1, 2018, the U.S. Department of Justice unsealed a criminal information and guilty plea by a former Goldman employee and indictments against one other former Goldman employee. The company has stated that it is in discussions about a potential settlement of issues related to 1MDB and has increased its legal reserves accordingly. In addition to significant legal penalties and an admission of guilt as part of a settlement, regulators may require Goldman to improve its control practices. At present, it remains unclear how this issue will be resolved. The upper end of estimated reasonable and possible legal losses in excess of accrued liability was $2.9 billion as of Sept. 30, 2019, compared with earnings of approximately $8 billion. At this stage, we believe Goldman's strong franchise and earnings generation capacity should help the bank navigate these issues. However, a material increase in legal actions, regulatory sanctions, or fines from 1MDB could lead us to lower the rating if it were to materially impair Goldman's reputation, profitability, market share, or capital levels. Given the company is globally diversified, we believe its environmental and social risks are manageable. The company faces some environmental risk via its commodity- and energy-related financing, investing, or advising activities, but we believe it is well managed and not distinct from that of other large investment banks. The company has also added to its social risk by entering the consumer space, though the majority of its borrowers are prime, which we view positively. | Plesser, Stuart | |
| JPMorgan Chase & Co.(A-/Stable/A-2) | ||
| We view JPMorgan Chase & Co.'s (JPM’s) ESG factors as broadly in line with those of industry and U.S. peers. JPM’s size, complexity, and the role it plays in providing banking services, particularly to consumers, make good management of governance and social factors crucial. We view governance at JPM as largely consistent with that of better-performing U.S. banks. JPM has demonstrated good governance in recent years with a stable management team and avoidance of any outsize legal or regulatory problems. Nonetheless, we view risks to governance as relatively high, owing to JPM’s status as one of the largest banking organizations in the U.S., with significant potential legal risk and ongoing regulatory scrutiny. Over the past decade, the company, like most international peers, has not been immune to controversies. In 2012, JPM had significant mark-to-market losses in its synthetic credit portfolio in its chief investment office, raising questions about governance. However, we believe the company has since made significant improvements to its governance and has not had any similar issues. The wide-ranging banking services JPM provides to consumers and the increased regulatory focus on banks’ business conduct make social factors important. (For example, JPM is the largest credit card lender in the U.S.) JPM, like many other banks, paid large fines following the financial crisis related to residential mortgage lending (stemming in part from the prior activities of banks it acquired during the crisis). Since then, it has not seen any material conduct problems related to consumer banking. JPM faces indirect risk to environmental factors because it provides banking services to some industries that face their own material environmental risks. For example, we believe the company is among the largest lenders to resource extraction and manufacturing companies. The bank will have to manage those risks related to energy transition, but in the context of the wider group, we do not believe JPM has any outsize concentrations. (For example, its credit exposure to oil and gas and metals and mining companies totals less than 7% of total wholesale credit exposure.) | Browne, Brendan | |
| Morgan Stanley(BBB+/Stable/A-2) | ||
| We view Morgan Stanley's (MS’) ESG factors as broadly in line with those of industry peers. MS’ size, complexity, and the role it plays in providing wealth management services to consumers make good management of governance and social factors crucial. We view governance at MS as largely consistent with that of better-performing U.S. banks. MS has demonstrated good governance in recent years with a stable management team and avoidance of any outsize legal or regulatory problems. Nonetheless, we view risks to governance as relatively high, owing to the company's status as one of the largest banking organizations in the U.S., with significant potential legal risk and ongoing regulatory scrutiny. The wealth management services MS provides to consumers and the increased regulatory focus on banks’ business conduct make social factors important. There has been increased scrutiny of the standards of conduct and required disclosures relating to providing securities-related recommendations to retail investors. It is important for MS not only to follow those rules, but also to avoid any perception that it is not acting in the best interest of its customers. MS has thus far successfully navigated these challenges. MS faces indirect risk to environmental factors because it provides banking and advisory services to some industries that face their own material environmental risks. The company extends credit to energy companies (about 6% of total institutional securities loans and lending commitments), although MS’ commercial lending activities are less significant than those of many of its global systemically important bank peers. | Browne, Brendan | |
| OFG Bancorp(B/Positive/--) | ||
| Environmental factors, and to a lesser extent social factors, are the most significant in our credit analysis of OFG Bancorp. Almost all of OFG’s loans are geographically concentrated in Puerto Rico, which remains susceptible to hurricanes and major storms. Puerto Rico is still recovering from two strong hurricanes (Maria and Irma) in 2017, which caused significant damage to the infrastructure, property, and power grid and severely disrupted economic activity on the island. OFG also has meaningful indirect exposure to environmental risks, since most of its clients are small businesses and Puerto Rico residents who are highly dependent on the island economy for their livelihood. Despite a history of transformational mergers and acquisitions (of Eurobank in 2010, BBVA’s Puerto Rico unit in 2012, and Bank of Nova Scotia’s Puerto Rico and U.S. Virgin Islands operations in December 2019), OFG has managed its governance risks adequately. OFG’s auto loan business, which accounts for approximately 22% of OFG’s total loans, consists of auto lending to economically vulnerable island residents and could expose the company to somewhat more elevated social risks than its peers. | Bandeally, Shameer | |
| The PNC Financial Services Group Inc.(A-/Stable/A-2) | ||
| ESG credit factors for PNC Financial Services Group Inc. are broadly in line with those of industry and U.S. peers. PNC has had limited governance-related issues in recent years, including few substantial regulatory or legal fines. (The company had previously resolved significant legacy items associated with its October 2008 acquisition of troubled lender National City Corp.) PNC’s exposure to social risks is lower than that of large regional bank peers owing to its concentration in commercial lending, which makes up more than two-thirds of total loans. Consumer loans not related to real estate represent less than 15% of loans and are largely to prime consumers. We view PNC’s direct exposure to environmental risks as low and manageable, though similar to that of most other U.S. banks. PNC has indirect exposure to environmental risks through its commercial lending and asset management activities. In particular, PNC lends to companies in industries with higher environmental risks, including those in resource extraction (coal mining, oil and gas, and metals and mining) and manufacturing (auto, building materials, chemicals, and steel). We do not view PNC’s exposure to these industries as outsize. | Pressman, Rian | |
| Popular Inc.(BB-/Positive/B) | ||
| We view environmental factors, instead of social or governance risks, as the most material ESG factor in our credit analysis of Popular Inc. (BPOP). With roughly three-quarters of the company’s loan portfolio concentrated in Puerto Rico and the U.S. and British Virgin Islands, its high geographic concentration exposes it to environmental risks in an area that remains highly vulnerable to hurricanes and earthquakes. In 2017, hurricanes Maria and Irma inflicted significant damage on the island, including on its electrical infrastructure, which resulted in substantial losses and challenges for the local economy, from which the island has been recovering gradually. Our credit analysis also considers BPOP’s indirect environmental risk exposure from its lending to commercial companies in industries with high environmental risks, although we believe the bank’s customers tend to be better diversified and more resilient, given its leading market position in Puerto Rico. We therefore view BPOP’s exposure to physical risk as much higher than the average U.S. bank's, since most of its borrowers are highly vulnerable to the local island economy. However, despite significant environmental risks, we think BPOP is better positioned than its peer banks based in Puerto Rico to weather any additional challenges, should they arise. | Hansen, E. Robert | |
| Santander Holdings USA Inc.(BBB+/Stable/A-2) | ||
| ESG credit factors are slightly more pronounced for Santander Holdings USA Inc. (SHUSA) than for its U.S. bank peers. We view social issues as the most material ESG factor in our credit analysis of SHUSA, which is exposed to those factors through its majority-owned auto lending operation, Santander Consumer USA (SCUSA). A significant portion of SCUSA’s auto borrowers have credit profiles less than prime (more than one-half of its auto borrowers are nonprime), and we estimate approximately 30% of SHUSA’s total loans are subprime. We believe lending to nonprime consumers entails heightened compliance, reputational, and regulatory risks. Illustrating this, over the past several years, SHUSA has grappled with several compliance-related issues, including some related to governance, risk management, and financial reporting at SCUSA. Although we believe these issues have been largely remediated, they show the heightened risks associated with this type of lending. Despite its past issues with governance and some recent management turnover, we see governance risks at SHUSA as moderate. We don’t view SHUSA’s exposure to environmental risks as a significant ratings factor. | Mattson, Catherine | |
| State Street Corp.(A/Stable/A-1) | ||
| We believe ESG factors for State Street Corp. (STT) are broadly in line with those for U.S. and industry peers. Our credit analysis of STT mainly incorporates governance factors, while social and environmental issues are less relevant to the rating. STT’s advantages from its fee-based business model and its relatively conservative management strategies have helped support our high ratings on the company. In our view, STT’s overall corporate governance structure and practices are comparable to industry norms. We believe the company has recently refocused its governance of its client contract pricing, addressing the intensified pricing pressure it has experienced since 2018, particularly from its asset manager clients. As a major global trust bank, STT remains highly subject to operational risks, including legal risks. For example, it continues to grapple with improper billing issues it identified in 2015 and 2017. Still, we believe STT’s legal risks are currently very manageable, given its disclosure that its estimated reasonable and possible legal losses in excess of accrued liability were up to approximately $300 million as of Sept. 30, 2019. Environmental factors are currently less pertinent to the rating than for commercial banks, both in terms of direct environmental risks and indirect environmental risks from counterparties or industry concentrations in loan or securities portfolios. | Duberstein, Barbara | |
| Synchrony Financial(BBB-/Stable/--) | ||
| ESG credit factors are slightly more pronounced for Synchrony Financial (SYF) than for its U.S. bank peers. Social risks arise from its significant credit card lending operations, which are among the largest in the U.S. (In addition to Retail Card, this includes most lending products categorized under the Payment Solutions and CareCredit platforms.) While a significant portion of SYF’s card borrowers are lower-risk (FICO scores above 660), it still faces heightened compliance, reputational, and regulatory risks from lending activities, like subprime credit card loans (which constitute one-quarter of SYF’s total card portfolio). Governance risks are also slightly heightened relative to U.S. bank peers, given SYF’s limited operating history as an independent public company (prior to November 2015, it had been a subsidiary of General Electric Capital Corp.), as well as the added complexity of operating a closed-loop network (for its private-label card offering). These risks have thus far been well managed, as have data security issues, which are high for card issuers. Direct and indirect environmental risks are low for SYF, given its lack of a branch footprint and negligible commercial lending activities. | Pressman, Rian | |
| Truist Financial Corp.(A-/Stable/A-2) | ||
| ESG credit factors for Truist Financial Corp. are broadly in line with those of industry and U.S. peers. BB&T and SunTrust combined to form Truist on Dec. 6, 2019. Governance risk was generally well managed at legacy BB&T and SunTrust. Nonetheless, we view governance risks as elevated over the next two years, given the risks of executing the integration of two substantially sized regional banks. The transaction has been billed as a “merger of equals,” and it will be key for management to build a uniform culture with a team that does not have a shared history of working together. In addition, the Federal Reserve issued a consent order against SunTrust on Nov. 19, 2019, for unfair and deceptive practices related to misleading or inaccurate statements made between 2013 and 2017 to certain business customers about the operation and billing for certain add-on products. SunTrust corrected its practices and has repaid about $8.8 million in fees to customers since 2016. Truist will address the enforcement action by implementing policies to verify refunds and hand out additional refunds if necessary. We expect Truist’s indirect exposure to environmental risks through its lending activities will be well controlled, since neither of its legacy banks had a concentration in lending to environmentally sensitive industries such as resource extraction or power generation. Truist’s exposure to social risks is largely through its consumer finance activities, particularly its digital lending (legacy SunTrust) and subprime auto (legacy BB&T) platforms. Compliance risks associated with consumer product offerings have been historically well managed, and concentration in each of these products declined following the merger. | Pressman, Rian | |
| U.S. Bancorp(A+/Stable/A-1) | ||
| ESG credit factors for U.S. Bancorp (USB) are broadly in line with those of industry and U.S. peers. With respect to governance risk, in 2015 the company entered a consent order with the Office of the Comptroller of the Currency regarding its anti-money-laundering controls, and in 2018, USB settled with U.S. authorities. By year-end 2018, USB had the consent order lifted, and there have not been additional issues regarding the matter since. USB’s exposure to social risks is largely through its credit card and retail loan portfolios, which make up roughly 25% of its loan portfolio. Still, we believe USB’s customers are mainly prime, and they have multiple relationships with the bank and engage with the bank in other product lines as well. Also, compliance risks associated with consumer product offerings have been historically well managed. We view the company’s direct exposure to environmental risks as low and manageable and broadly similar to industry peers. USB has indirect exposure to environmental risks by virtue of its commercial lending activities. In particular, USB lends to companies in industries with higher environmental risks, including those in resource extraction and manufacturing. Nonetheless, we do not view the company’s exposure to these industries as outsize. | Plesser, Stuart | |
| Wells Fargo & Co.(A-/Negative/A-2) | ||
| We believe environmental credit factors for Wells Fargo & Co. (WFC) are broadly in line with those of industry peers. However, governance--and to some extent social--factors continue to weigh more negatively on the company's credit quality. Notably, compliance and control issues have surfaced in many facets of WFC’s business since the company disclosed in September 2016 that employees in the community banking segment had created over 2 million unauthorized accounts. Since February 2018, WFC has been operating under a consent order and asset cap of $1.95 trillion imposed by the Federal Reserve. The company has taken many steps to improve governance, including centralizing its operating structure, enhancing its risk management framework, revising employee incentives, and electing more independent directors to its board. Still, the company needs to have a plan approved by the Federal Reserve that demonstrates improvement in its risk management and governance practices, which has resulted in the asset cap remaining in place for longer than we had originally anticipated. The upper end of estimated reasonable and possible legal losses in excess of accrued liability was $3.6 billion as of Sept. 30, 2019, compared with historical earnings of approximately $18 billion to $20 billion. Governance challenges aside, the company has more limited investment banking and trading activity than some of its peers. However, it does finance a broad spectrum of industries and customers, some of which could expose the company to environmental and social risk. In addition to retail sales practices and auto loan insurance-related issues, we believe social risks at WFC could arise from its participation in consumer lending. Although the majority of its borrowers are prime or superprime, WFC has some exposure to subprime borrowers. WFC has indirect exposure to environmental risks through its commercial lending activities. In particular, WFC lends to companies in industries with higher environmental risks, including those in resource extraction and manufacturing. WFC’s commercial loan portfolio is highly diversified, and we do not view its exposure to these industries as outsize. (For example, its outstanding loans to oil and gas pipelines make up about 2.6% of total commercial loans outstanding.) | Plesser, Stuart | |
| Ratings as of Feb. 10, 2020. | ||
ESG Risks For Canadian Banks
| Canada: BICRA '2' | ||
|---|---|---|
| Company/Rating/Comments | Analyst | |
| Bank of Montreal(A+/Stable/A-1) | ||
| Environmental factors are less material to our credit analysis of large banks such as the Bank of Montreal (BMO) than social and governance ones. Overall, ESG credit factors are high and in line with those of industry and Canadian peers. We believe BMO’s corporate governance structure and practices are high and comparable to local norms. We view the quality of BMO’s information disclosures, board oversight and independence, and internal controls as aiding the company’s execution of its business strategy. We believe BMO has control mechanisms in place to manage its exposure to social credit factors, including human capital management, sales practices, and compensation policies. After a cyber breach of customer data was reported in 2018, BMO enhanced its financial crime investigation and privacy protection capabilities. Appropriate sales practices have become a greater priority to the bank after the Financial Consumer Agency of Canada's (FCAC’s) review of the domestic retail sales practices of Canada’s six largest banks, including BMO. Following the review, the FCAC recommended that the large Canadian banks tighten their sales practices. It did not find widespread misselling during its review. We believe BMO has enhanced its oversight and management of sales practice risks. We view environmental factors as neutral to our rating on BMO, both in terms of its own carbon footprint and the indirect environmental risks from the company’s counterparties or industry concentrations in loans or securities portfolios. The contribution of business and commercial lending is meaningfully higher at BMO than at any other Canadian domestic systemically important bank. While this potentially increases its indirect exposure to environmental factors, notably via sectors exposed to energy transition risks and in particular evolving environmental norms and legislation, we believe good loan diversity by borrower and by industry provides some offset. The bank’s lending to the environmentally sensitive natural resources sectors (forest, mining, utilities, oil and gas, and agriculture) is not outsize compared with peers, at approximately $35.2 billion, or 7.8% of total lending. | Bandeally, Shameer | |
| The Bank of Nova Scotia(A+/Stable/A-1) | ||
| Environmental factors are less material to our credit analysis of large banks such as the Bank of Nova Scotia (BNS) than social and governance ones. Overall, ESG credit factors are broadly in line with those of industry and Canadian peers. We view BNS’ corporate governance standards as high and in line with its large domestic peers. We believe that BNS adheres to strict corporate governance practices, which permeate its organization and numerous international jurisdictions. The bank, in our view, maintains a conservative culture, and certain risks, such as economic, political, and operational risks, in its international businesses have somewhat lessened through a tighter and more focused international footprint. We believe the tighter international footprint will help diminish volatility in operating performance and losses that the bank has experienced through its exposure to less developed countries. Its effective governance also is reflected in its compensation programs. From a social perspective, the bank is focused on privacy issues and appropriate investment and sales practices. BNS also is focused on operational resilience, cybersecurity, and financial crime as digital channels grow to accommodate its clients. In 2018, BNS undertook initiatives to protect customer data and privacy and to ensure that it uses customer data responsibly. Appropriate sales practices have become a greater priority to the bank after the Financial Consumer Agency of Canada's (FCAC's) review of the domestic retail sales practices of Canada’s six largest banks, including BNS. Following the review, the FCAC recommended that the large Canadian banks tighten their sales practices. It did not find widespread misselling during its review. In 2018, BNS strengthened its policies and processes through an enterprise sales conduct framework. The bank monitors and enhances its sales practices and processes on an ongoing basis to ensure they consistently meet customers’ needs. We view environmental factors as neutral to our rating on BNS, both in terms of its own carbon footprint and the indirect environmental risks from the company’s counterparties or industry concentrations in loans or securities portfolios. The bank’s lending to the environmentally sensitive natural resources sectors (such as energy, auto, agriculture, and metals and mining) is not outsize compared with peers, at less than 9% of total lending. | Parfeniuk, Lidia | |
| Canadian Imperial Bank of Commerce(A+/Stable/A-1) | ||
| Environmental factors are less material to our credit analysis of large banks such as the Canadian Imperial Bank of Commerce (CIBC) than social and governance ones. Overall, ESG credit factors are high and in line with those of industry and Canadian peers. We view CIBC’s corporate governance standards as generally comparable with its large domestic peers. We also believe that the bank appropriately manages its culture and mandates, as well as compensation programs. It appears that risk behavior expectations are in place to promote a risk-aware culture of conservatism. The more conservative culture has been in place for several years. Prior to that, CIBC experienced a number of strategic missteps, including material exposure to structured products that led to significant losses. CIBC has since considerably reduced risk, with an emphasis on growing more stable businesses such as retail banking and wealth management. From a social perspective, the bank focuses on privacy issues and appropriate investment and sales practices. CIBC also is focused on operational resilience, cybersecurity, and financial crime as digital channels grow to accommodate its clients. Appropriate sales practices have become a greater priority to the bank after the Financial Consumer Agency of Canada's (FCAC's) review of the domestic retail sales practices of Canada’s six largest banks, including CIBC. Following the review, the FCAC recommended that the large Canadian banks tighten their sales practices. It did not find widespread misselling during its review. We believe CIBC has enhanced its oversight and management of sales practice risks. From an environmental perspective, as a domestic systemically important bank, CIBC has a loan portfolio that includes some exposure to environmentally sensitive sectors (just over 5% of total lending), including oil and gas, agriculture, and utilities, although we do not consider the exposure to be outsize. | Parfeniuk, Lidia | |
| Federation des Caisses Desjardins du Quebec(A+/Stable/A-1) | ||
| ESG credit factors for the Federation des Caisses Desjardins du Quebec, the core issuing entity for the Desjardins Group, are broadly in line with those of industry and domestic peers. Social and governance factors feature prominently in our credit analysis of the Desjardins Group, while environmental factors are less of a focus because the cooperative is not a large corporate lender. We believe Desjardins, as the largest cooperative in Canada and largest federation of credit unions in North America, adheres to stronger social responsibilities than other financial institutions. Nonetheless, certain weaknesses have been reported in Desjardins’ corporate governance, particularly in the area of privacy protection. In 2019, Desjardins reported a significant data breach as a result of a rogue employee that affected about 4.2 million Desjardins customers and over 170,000 businesses. Desjardins has taken swift action to address the issue and is strengthening its controls around privacy issues. We believe these actions will lead to corporate governance more on par with its domestic peers and that the financial impact will be manageable. We consider the cooperative's risk appetite to be conservative, with lending mostly in residential mortgages, and risk management controls to be strong. From a social perspective, Desjardins also is focused on appropriate investment and sales practices, as well as operational resilience, cybersecurity, and financial crime as digital channels grow to accommodate its clients. Desjardins’ higher-than-peers’ exposure to residential mortgages and other consumer lending increases its exposure to social risks, in our view. However, Desjardins has had a long history of good risk management, which we view positively. We don’t view Desjardins' exposure to environmental risks as a significant ratings factor. | Parfeniuk, Lidia | |
| Home Capital Group Inc.(BB-/Stable/B) | ||
| We view ESG factors as somewhat weighing on our assessment of Home Capital Group Inc.'s (HCG's) credit analysis relative to Canadian peers. Specifically, governance and social factors are more material than environmental ones for our credit analysis of HCG. As an alternative or nonprime lender, HCG issues mortgages to people underserved by traditional banks, such as the self-employed or new Canadians with limited credit history. Governance risks were particularly elevated several years ago, following reports that a number of brokers were originating fraudulent mortgage applications to HCG. Following a management overhaul, we view HCG’s governance structure as evolving and strengthening. Since 2017, we believe that HCG has reestablished its franchise and relationships with brokers, stabilized its funding, and improved its liquidity position. It also has shown consistent growth (through mortgages) and improving profitability. We believe that increased stability in HCG’s senior leadership is helping support continued business growth in a conservative and measured way, which also has restored client and investor confidence. Nevertheless, HCG’s business model's dependence on brokers for loans and deposits adds a key risk to our assessment of the company’s credit risk. From a social perspective, HCG is focused on privacy issues for its clients and improving external transparency following the broker fraud issue. We believe the company has strengthened its controls and policies for ensuring appropriate investments for clients and sales practices through better vetting of brokers. HCG also is focused on cybersecurity and financial crime as digital channels grow to accommodate its clients. Environmental risks are very limited because the majority of HCG’s loans are mortgage-related and the bank is not exposed to carbon-intensive sectors, unlike its large Canadian bank peers. | Parfeniuk, Lidia | |
| Laurentian Bank of Canada(BBB/Negative/A-2) | ||
| ESG credit factors slightly weigh on our credit assessment of the Laurentian Bank of Canada (LBC). Specifically, governance and, to a lesser extent, social risks are more meaningful in our credit analysis of LBC than environmental factors. We believe that LBC has a less complex organization than its larger domestic bank peers. Still, our credit analysis considers some potential for elevated governance risk as the bank implements its ambitious multiyear transformation plan. The bank is pursuing a strategy that diversifies its Quebec-based retail network by becoming a more significant niche player in the retail financial advisory and commercial banking space. We also consider historical weaknesses in the bank’s 2017 mortgage documentation and client representation issues in connection with mortgages sold to a third-party purchaser. The company has since tackled the issue, which we view positively, and further reports of widespread underwriting lapses have not emerged. We also believe governance is embedded in the bank’s culture and compensation programs. From a social perspective, the bank is focused on privacy issues and appropriate investment and sales practices. We note that LBC’s wealth management and capital markets operations are significantly smaller than its large peers’, and thus the social aspect is less of a consideration. The bank has made progress in mitigating social risks pertaining to its unionized workforce. It achieved this through its successful union contract renegotiation, which will help increase profitability in the retail bank. Even though the company has strategically identified corporate loans as an area of growth, we believe environmental risks are limited, given that LBC’s loan portfolio includes very small exposures to carbon-intensive sectors, including oil and gas, chemicals, and autos. | Parfeniuk, Lidia | |
| Royal Bank of Canada(AA-/Stable/A-1+) | ||
| ESG credit factors for the Royal Bank of Canada (RBC) are broadly in line with those of industry and other Canadian peers. As one of the two largest Canada-domiciled banks and a complex organization, RBC has high corporate governance standards, in our view, and we believe they compare well with large peers. As a federally regulated and officially designated global systemically important bank based in Canada, RBC is subject to the highest level of scrutiny by Canada’s primary financial services regulator, the Office of the Superintendent of Financial Institutions (OSFI). We believe this is embedded in the bank’s culture and mandates as well as compensation programs. In addition, we think risk behavior expectations are in place to promote a risk-aware culture of conservatism. There have been no major reported governance-related issues through at least the last credit cycle. From a social perspective, the bank is focused on privacy issues and appropriate investment and sales practices. RBC also is focused on operational resilience, cybersecurity, and financial crime as digital channels grow to accommodate its clients. Appropriate sales practices have become a greater priority to the bank after the Financial Consumer Agency of Canada's (FCAC's) review of the domestic retail sales practices of Canada’s six largest banks, including RBC. Following the review, the FCAC recommended that the large Canadian banks tighten their sales practices. It did not find widespread misselling during its review. We believe RBC has enhanced its oversight and management of sales practices risks. From an environmental perspective, as a large and complex bank, RBC has a loan portfolio that includes exposures to carbon-intensive sectors ($40 billion, or just over 4.5% of total lending), including oil and gas, chemicals, and autos. One of the most carbon-intensive industries, thermal coal power generation, makes up a small percentage (0.1%) of RBC’s total lending. | Parfeniuk, Lidia | |
| The Toronto-Dominion Bank(AA-/Stable/A-1+) | ||
| ESG credit factors for the Toronto-Dominion Bank (TD) are broadly in line with those of industry and domestic peers. As with most banks, the ESG factor that tends to matter most in our credit analysis is governance. As a federally regulated and officially designated global systemically important bank based in Canada, TD is subject to the highest level of scrutiny by the Office of the Superintendent of Financial Institutions. We believe TD’s governance framework, with a particular focus on integrity, is strong, articulated well from top to bottom, and evident in its business conduct. TD and its Canadian domestic systemically important bank (DSIB) peers have, to date, managed to avoid reputation-damaging governance problems. The company manages social risks relatively well, despite its large base of retail customers in Canada and the U.S. The bank is appropriately focused on privacy issues and investment and sales practices, as well as operational resilience, cybersecurity, and financial crime. Appropriate sales practices have become a greater priority to the bank after the Financial Consumer Agency of Canada's review of the domestic retail sales practices of Canada’s six largest banks, including TD. Although 2017 media reports alleged aggressive and potentially illegal sales practices by customer-facing retail TD staff, these allegations later broadened to all Canadian DSIB peers, and the subsequent regulatory investigation found no evidence of widespread misselling. Direct environmental risks for the banking sector balance the low use of physical infrastructure and facilities needed to operate against the material indirect exposure from its lending and investment activities. Nonetheless, indirect environmental risks in TD’s loan portfolio include exposures to carbon-intensive sectors, including 1.8% of total lending to oil and gas pipelines and power and utilities. | Parfeniuk, Lidia | |
| Ratings as of Feb. 10, 2020. | ||
This report does not constitute a rating action.
| Primary Credit Analyst: | Rian M Pressman, CFA, New York + 1 (212) 438 2574; rian.pressman@spglobal.com |
| Secondary Contact: | Devi Aurora, New York (1) 212-438-3055; devi.aurora@spglobal.com |
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