DBRS Confirms Fifth Third Bancorp at AA (low), Changes Trend to Negative

Dominion Bond Rating Service (DBRS) has today confirmed the ratings of Fifth Third Bancorp (Fifth Third or the Company) and has changed the trend to Negative from Stable, as listed below. The rating action follows the Company’s announcement that its board of directors has approved a significant balance sheet restructuring.

DBRS said that the restructuring is expected to result in a reduction of interest rate risk as well as improved liquidity and earnings. However, the need for restructuring, the second major restructuring of this type in less than two years, raises concerns about the Company’s management skills and systems capabilities to adequately control risks attendant to its businesses.

The restructuring involves the sale of $11.5 billion in securities and the purchase of $2.8 billion in securities that are both higher yielding and serve as better collateral. The proceeds from the sale will be used to reduce wholesale borrowings by $8.7 billion and to terminate $1.1 billion of repurchase and reverse repurchase agreements. The net proceeds from these actions are expected to result in a $325 million after-tax loss in the fourth quarter of 2006 that the Company can readily absorb from earnings. The actions, however, are expected to result in a $110 million to $120 million increase in net interest income in 2007 along with a 35 to 40 basis point gain in net interest margin as well as a significantly improved interest rate risk profile.

In addition to uncertainties relating to the Company’s ability to control its risks sufficiently, the Negative trend reflects DBRS’s concern that the mostly new senior management team has not yet had enough time to work together cohesively. This could present problems in sustaining acceptable performance in a very difficult operating environment and in continuing the costly strategy of de novo branch expansion. Hence, DBRS believes that Fifth Third’s near-term earnings and profitability prospects are constrained.

DBRS noted that sustained low exposure to interest rate risk, the absence of further operating systems or risk-related problems and improved core profitability metrics would potentially restore a Stable trend. By contrast, further unexpected problems and weakening operating performance could prompt negative rating action.

Fifth Third Bancorp, a bank holding company with its headquarters in Cincinnati, Ohio, had $106 billion in assets as of September 30, 2006.

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