DBRS Comments on Fifth Third Bancorp’s 2Q12 Earnings – Senior at A (low); Ratings Unchanged

DBRS, Inc. (DBRS) has today commented that the ratings for Fifth Third Bancorp (Fifth Third or the Company), including its Issuer & Senior Debt rating of A (low), remain unchanged following the release of 2Q12 results. The trend on all ratings is Stable.

Despite considerable noise, Fifth Third’s 2Q12 results reflected sustained core operating revenues and well managed expenses. The Company reported net income available to common shareholders of $376 million, as compared to $421 million for 1Q12. Much of the swing in earnings reflected the impact of the non-recurrence of Fifth Third’s 1Q12 $115 million gain related to the Vantiv, LLC (Vantiv) initial public offering (IPO). DBRS notes that Fifth Third Bank still owns roughly 39% interest in Vantiv Holding, LLC, formerly Fifth Third Processing Solutions LLC.

DBRS comments that the last two quarters reflected numerous non-core items. In 2Q12, Fifth Third reported a $56 million positive valuation adjustment on Vantiv warrants, $17 million in negative valuation adjustments on bank premises held for sale, a $17 million valuation reduction associated with its Visa related total return swap, $3 million in net gains on investment securities and $8 million in benefits related to affordable housing investments.

On a core basis, excluding the above mentioned items, Fifth Third’s DBRS calculated adjusted income before provision and taxes (IBPT) moderately improved QoQ, which DBRS views positively.

Second quarter net interest income was essentially flat to the prior quarter, declining $4 million to $899 million, driven by a 5 bps narrowing of net interest margin (NIM) to 3.56%, mostly offset by a $1.2 billion or 1.2% increase in average earning assets. As with most banks, the Company’s NIM remains challenged by the flat yield curve, as loans continue to re-price at lower rates and securities reinvestment rates decline. Higher earning assets mostly reflected loan growth, the bulk of which was commercial & industrial (up 4.3%) and residential mortgages (up 4.1%).

Noninterest income of $678 million declined 12% sequentially from $769 million. Excluding non-core items, core fee income of $653 million improved marginally, up $1 million from the prior quarter. During the quarter, deposit service charges increased by 1%, card and processing revenue increased by 9%, and corporate banking revenue increased by 5%. Of note, mortgage banking income declined 10% to $183 million, from $204 million in 1Q12, primarily due to a $37 million decline in hedge income. DBRS anticipates that mortgage banking revenues will remain solid, but volatile over the intermediate term.

Expenses improved from the prior quarter, down 4% to $937 million. Salaries and employee benefit expense declined by a combined 6.7% to $477 million. Most other expense categories were in line with the prior quarter. DBRS notes that Fifth Third’s mortgage repurchases remain manageable, although mortgage repurchase expense was up a modest $3 million QoQ to $18 million.

Despite the difficult business environment, Fifth Third’s asset quality continues to improve. Specifically, 2Q12 NCOs totaled $181 million or 0.88% of average loans, down from 1.08% for 1Q12. Meanwhile, NPAs of $1.7 billion contracted to an improved 1.96% of total loans plus OREO from 2.03%, at March 31, 2012. DBRS notes that improving asset quality allowed the Company to release reserves of $110 million, and the allowance for loan losses to decline by 5% to $2.0 billion. Providing a sizable cushion, the allowance represented 2.45% of total loans and 125% of NPAs.

Capitalization remains sound with a Tier 1 risk-based capital ratio of 12.3% and a tangible common equity ratio (excluding unrealized gains on securities) of 9.2%. In the quarter, the Company repurchased $75 million of common shares under its share repurchase program, which had a 7 bps impact on capital during the quarter. Lastly, Fifth Third did not disclose its estimated Basel III Tier 1 Capital, as it is still studying the most recent proposal. DBRS does not expect compliance with the Basel III capital proposals to be an issue for the Company.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organizations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating include company documents, the Federal Deposit Insurance Corporation and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Mark Nolan
Approver: Alan Reid
Initial Rating Date: 27 July 2005
Most Recent Rating Update: 9 December 2011

For additional information on this rating, please refer to the linking document under Related Research.