DBRS Confirms Fifth Third’s Senior Debt at A (low); Trend Stable

DBRS, Inc. (DBRS) has today confirmed all ratings of Fifth Third Bancorp (Fifth Third or the Company), including its Issuer & Senior Debt rating of A (low). At the same time, DBRS upgraded Fifth Third’s preferred stock rating to BB (high) from BB, which is consistent with DBRS’s base notching policy. The trend on all ratings remains Stable. The rating actions follow a detailed review of the Company’s operating results, financial fundamentals and future prospects.

Fifth Third’s ratings consider the Company’s solid banking franchise, which extends through twelve contiguous states from Michigan to Florida. Positively, with the majority of its lending and deposit relationships located in the Mid-west, Fifth Third has benefited from the economic resurgence in the region, driven by the revival of the automobile industry specifically and manufacturing in general. Nonetheless, DBRS notes that this region is highly competitive and heavily banked.

Ratings also reflect the Company’s resilient, yet pressured earnings generation capacity. As with most banks, earnings continue to be constrained by a slow growing economy and the low interest rate environment. Nonetheless, DBRS notes that Fifth Third’s core earnings, or adjusted income before provisions and taxes (IBPT), continue to benefit from elevated levels of mortgage banking income, sound loan growth, and well managed expenses. Core earnings also reflect stabilizing credit costs, driven by sound and improving asset quality.

Further underpinning the Company’s ratings are its solid capital and liquidity positions. Supporting assets is a sound capital profile, which reflects a high tangible common equity ratio of 9.1% (8.8% excluding unrealized securities gains/losses) and an estimated Basel III Tier I common ratio of 8.8%, which is comfortably above the buffered minimum of 7%. Meanwhile, the Company has a solid core deposit base that fully supports net loans. DBRS currently views Fifth Third as being well positioned within its rating category.

Given its deeply entrenched franchise with a well-rooted sales culture, the Company maintains solid revenue generation capacity. During 2012, Fifth Third’s core earnings reflected sustained quarterly improvement. Specifically, quarterly IBPT growth was primarily driven by improved levels of adjusted fee income, mostly attributable to elevated levels of mortgage banking revenues. Recently, higher fee income also reflected increased corporate banking revenue, driven by higher syndication and business lending fees. Importantly, on a DBRS adjusted basis, Fifth Third’s fee income represented a solid 46% of total revenues (4Q12); providing stability and diversity to earnings. Nonetheless, DBRS notes that mortgage banking income will likely decrease going forward, as levels of re-financings decline and gain-on-sale spreads narrow.

As with most banks, the Company’s net interest margin (NIM) remains pressured by the low interest rate environment, as decreasing earning asset yields continue to outpace declining funding costs. Fifth Thirds’ 4Q12 NIM of 3.49%, while solid, will likely contract through 2013. DBRS notes that the Company’s NIM will benefit from the recent retirement of higher cost funding, including the 4Q12 $1 billion prepayment of FHLB and the 3Q12 $1.4 billion redemption of Trups. Overall, management anticipates that NIM will narrow modestly in 2013 and range between 3.35% and 3.40%. Positively, loan growth helped offset margin pressure and led to relatively stable quarterly levels of spread income during 2012. Loan growth, a key to earnings growth, was led by higher levels of commercial & industrial (C&I) loans, residential mortgages and automobile loans, partially offset by lower levels of commercial real estate (CRE) exposure, construction loans, and home equity loans.

Despite the challenging business environment, Fifth Third’s asset quality is sound and improved, reflecting lower YoY levels of non-performing assets (NPAs) and net charge-offs (NCOs). Indeed, the Company’s credit metrics reflected broad-based improvements across all key loan categories. NPAs of $1.3 billion (including $29 million of held for sale loans) at YE12, declined $639 million, or 32.7%, from YE11, to a manageable 1.49% (3.71% including restructured loans) of total loans plus OREO, while NCOs for 2012 represented a modestly elevated 0.85% of average loans, down considerably from 1.49% for 2011. On a geographic basis, the Florida loan portfolio continues to underperform. Although the state represents only 7% of the Company’s total loans, it was responsible for an outsized 25% of its NPAs (at December 31, 2012) and 13% of its NCOs for 4Q12.

DBRS considers the Company to be well reserved, as its allowance for loan losses represented 2.16% of total loans and 144% of NPAs. Reflecting the Company’s healthy coverage of credit costs, Fifth Third’s 4Q12 provisions for loan loss reserves represented a moderate 11% of its adjusted IBPT. Furthermore, DBRS believes that Fifth Third's solid capitalization levels should enable it to absorb additional losses, if necessary.

Despite, stock buybacks, Fifth Third’s capital position is solid and provides for growth, both organically and through acquisition. DBRS notes that the Company’s regulatory capital metrics are comfortably above “well capitalized” levels as defined by the regulators. Further reflecting Fifth Third’s solid capital position, its 2013 CCAR results reflected the Company’s severely stressed Tier I common ratio at a 7.5% minimum, which is comfortably above the regulatory minimum requirement.

Finally, the ratings reflect the strength of the Company’s deposit shares in multiple markets and its position as the leading depository in the State of Ohio. Fifth Third has substantial available borrowing capacity at the FHLB and Fed. Furthermore, the Company has sufficient available liquidity at the holding company to satisfy its obligations without relying on up-streamed dividends from its subsidiaries for over 1.3 years (4Q12).

Fifth Third, a diversified financial services corporation headquartered in Cincinnati, Ohio, reported $122 billion in consolidated assets as of December 31, 2012.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other applicable methodologies include the DBRS Criteria: Intrinsic and Support Assessments, DBRS Criteria: Bank and Bank Holding Company Trust Preferred Securities, DBRS Criteria: Rating Bank Subordinated Debt & Hybrid Capital Instruments with Discretionary Payments, and DBRS Criteria: Rating Bank Preferred Shares & Equivalent Hybrids. These can be found at: http://www.dbrs.com/about/methodologies.

The sources of information used for this rating include the company documents, the Federal Reserve, 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.

[Amended on September 2, 2014, to reflect actual methodologies used.]

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