DBRS Confirms Fifth Third Bancorp at AA (low)

Dominion Bond Rating Service (DBRS) has today confirmed the ratings of Fifth Third Bancorp (Fifth Third or the Company) as follows: Issuer & Senior Debt at AA (low), Subordinated Debt at A (high), and Short -Term Instruments at R-1 (middle).

DBRS has also confirmed the Deposit & Senior Debt and Short-Term Instruments ratings of Fifth Third Bank and Fifth Third Bank (Michigan) at AA and R-1 (high), respectively, and the Subordinated Debt of Fifth Third Bank at AA (low). In addition, DBRS has assigned new Trust Preferred Securities ratings for Fifth Third Capital Trust I at A (high) and for Old Kent Capital Trust I at AA (low).

The ratings of Fifth Third are underpinned by a predominantly U.S. Midwest retail and small/middle market super-regional banking franchise with consistent quality earnings and solid financial fundamentals including recurrent core and net profitability, improved risk management, superior asset quality through the credit cycle and superior capitalization levels. Also incorporated in the assigned ratings levels is a multi-year decline in operating performance to peer average level and an underperforming share price that now makes acquisitions more expensive for Fifth Third than they have been historically, necessitating a de novo branch growth strategy.

In the past 18 months, Fifth Third has continued to grow its loan portfolio and core deposit base marking solid progress in defending its core franchise. The processing solutions line outperformed all other business lines with double-digit growth rates. Earnings have been pressured by significant margin compression from increased wholesale funding, elevated deposit costs and a higher-than-historical expense burden from de novo branching and investment in infrastructure. Furthermore, Fifth Third has been managing down its large wholesale funded fixed-rate securities portfolio that was a primary contributor to its margin woes. The Company’s mostly new senior management team is currently assessing potential changes to align its de novo branching plans along with its indirect auto, residential mortgage loan and credit card businesses with its comprehensive corporate strategy.

Fifth Third has a robust deposit share in its legacy U.S. Midwest footprint but only a developing presence in the Detroit, Nashville and Florida markets. Small- to middle-sized businesses contribute to substantial volumes of transactional deposits, loans and demand for the banks’ business services. The U.S. Midwest markets are characterized as extremely competitive in challenging economies while the Florida market has strong population and employment growth trends that are favorable to deposit gathering and new business relationships.

Fifth Third earnings are strengthened by strong operating leverage via good expense control and above-peer asset quality in a highly granular loan portfolio. Expense levels have increased over the past few years, however, as a result of the Company’s de novo branching strategy. While underwriting standards appear robust and existing loan granularity remains high, rapid loan growth brings an additional set of risks and challenges. DBRS notes that the Company also maintains higher-than-peer capitalization levels which provide additional financial flexibility and an extra safety cushion. DBRS also observes, however, that Fifth Third’s liquidity at the parent company level trails its peers.

The Company operates a “community” retail, commercial and consumer banking business that is managed via 19 geographically specific regional areas or “affiliates”; each with its own CEO/President to provide localized customer service. Fifth Third’s diversified earnings are dominated by a strong retail franchise with a significant commercial component and material fee contributions from its growing processing and investment businesses. The nearly 1,200-branch network that spans the U.S. Midwest, including 194 stores added over the past three years, provides a stable core funding base for the Company. Increasing interest rates, competition and a change to its “everyday great rate” strategy, however, have dramatically increased funding costs for the Company.

Traditionally a high performer, Fifth Third is trying to regain momentum and return to its superior performance levels of a few years ago. In March 2003, the Company signed an agreement with the Cleveland Federal Reserve Bank and the State of Ohio to strengthen internal controls and risk management from which it has been fully released. With its acquisition ability disrupted, the resulting slowdown in deposit growth undermined management’s interest rate assumptions, precipitating a December 2004 balance sheet restructuring at a pre-tax cost of $340 million. DBRS believes that the Company has put a more robust risk framework and infrastructure in place under the management of a Chief Risk Officer - a newly created position as of May 2003. The regulatory event, subsequent shareholder lawsuits, and restructuring have depressed the Company’s share price 45% from its Q1 2002 high, which has put most acquisitions out of reach for the company and has compelled Fifth Third to replace acquired growth with de novo growth, a core competence.

Fifth Third’s strategic transition under suboptimal conditions has been reflected in their underperformance relative to historical levels. De novo expansion is typically a slower growth strategy with front-loaded expenses that when combined with the current competitive environment and economic cycle, does not lead DBRS to expect Fifth Third’s high performance levels to return in the near to medium term.

Headquartered in Cincinnati, Ohio, Fifth Third Bancorp is a diversified financial services company engaged in commercial and retail banking, electronic payment processing services, and investment advisory services. The banking business primarily operates under two bank charters, Fifth Third Bank, Cincinnati, Ohio, and Fifth Third Bank, Grand Rapids, Michigan. With over $106 billion assets and $21 billion market capitalization as of June 30, 2006, the Company is the 13-largest bank holding company in the United States. Fifth Third had 21,230 employees and 1,138 banking centers (including 130 Bank Mart® locations) as of June 30, 2006.

Note:
All figures are in U.S. dollars unless otherwise noted.