DBRS Downgrades Fifth Third Bancorp Senior Debt to “A”; Trend Negative

DBRS has today downgraded the long-term ratings of Fifth Third Bancorp (Fifth Third or the Company) to “A” from AA (low) and its short-term rating to R-1 (low) from R-1 (middle). At the same time, DBRS downgraded the long-term ratings of Fifth Third’s subsidiary banks to A (high) from AA and their short term ratings to R-1 (middle) from R-1 (high). The trend for all long-term ratings and the Short-Term Instruments rating for Fifth Third Bank subsidiaries are Negative.

Today’s rating action concludes a Review with Negative Implications initiated by DBRS in January 2009. The downgrade is driven by DBRS’s view that Fifth Third has struggled with steepening credit costs from deteriorating asset quality for over a year. The $5.3 billion of loan loss provisions taken in the past 5 quarters ($2.4 billion in 4Q08 alone) were 1.6 times the Company’s income before taxes and provisions of roughly $3.3 billion (excluding $965 million in goodwill impairment). The weakening in loan quality continues as nonaccrual loans rose over 31% (not including restructured loans) in the first quarter, while 90 day past due loans increased nearly 11%. Moreover, the reserve coverage of nonperforming loans and leases fell to 128% in the quarter from 157% in Q4 2008 despite a $283 million reserve build.

The ratings of Fifth Third are underpinned by a core-funded predominantly Midwest retail and small/middle market super-regional banking franchise with a strong sales culture and a recurrent revenue generating ability. The ratings also reflect the strength of the Company’s strong deposit shares in many markets.

The negative trend on Fifth Third’s ratings reflects DBRS’s perception that significant amounts of potential losses remain embedded in the Company’s loan portfolios. Despite having already charged-off a substantial amount of loans in this credit cycle, DBRS believes that Fifth Third faces further economic challenges from falling real estate values and rising unemployment given the Company’s footprint (including sizable exposures in Ohio, Michigan and Florida). Although Fifth Third has significantly tightened its lending criteria and underwriting, DBRS expects rising credit costs in the coming quarters from legacy credit in the Company’s $17.3 billion book of commercial real estate and construction loans (3.4 times tangible common equity) and $28.6 billion C&I book. In addition to the asset quality pressure on capital, the extremely difficult operating environment for financial institutions is likely to constrain revenue growth and produce elevated expenses and charges in the near-term.

Although Fifth Third has been proactive in its capital planning efforts, the extent and depth of credit deterioration continue to challenge the Company. In late March, Fifth Third announced an agreement to sell a 51% stake in its processing business to Advent International. DBRS views the proposed transaction positively as an important capital building step. The transaction is expected to generate approximately $1.2 billion or an additional 90 basis points to the Company’s capital ratios which will help in absorbing additional credit losses, but will also reduce pre-tax pre-provision income by approximately 4.5% or $130 million.

Tier 1 capital included $4.3 billion in preferred shares that account for 35% of total shareholders equity and $2.8 billion in qualifying trust preferred securities. Regulatory capital ratios have strong cushions above the well-capitalized regulatory definitions with Tier 1 capital at 10.93% and Total Capital at 15.13% as of March 31, 2009 (before the Advent transaction). Tangible Common Equity to Tangible Assets was a weaker 4.35% (including unrealized gains/losses).

Continued credit deterioration and losses beyond income before provisions and taxes, weakening capitalization including the inability to close the transaction with Advent and/or significant revenue declines could result in negative rating actions.

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

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.