DBRS Comments on Fifth Third Bancorp’s 1Q13 Earnings – Senior at A (low); Ratings Unchanged

DBRS, Inc. (DBRS) has today commented that its 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 1Q13 results. The trend on all ratings is Stable. The Company reported net income attributable to common shareholders of $413 million for the quarter, up from $390 million for 4Q12. DBRS notes that Fifth Third’s sequential earnings reflected numerous material non-core-items which impacted earnings.

Overall, results for 1Q13 reflected sustained average loan and deposit growth, improved asset quality and a solid capital and liquidity profile. Results also evidenced continued core earnings pressure, due to the difficult operating environment.

As with most banks, Fifth Third’s core revenues remain pressured by the slow growth economic environment. Specifically, core revenues declined by 4.5%, sequentially, driven by an 8.3% decrease in core non-interest income and a 1.2% decline in net interest income. Lower core non-interest income mostly reflected a $38 million, or 14.7%, decrease in mortgage banking income, a $15 million, or 13.2%, decline in corporate banking revenue, and a $3 million, or 2.2%, decrease in service charges on deposits. Despite record originations in 1Q13, the Company’s lower mortgage banking income was negatively impacted by a decrease in gain on sale margins, while the decline in corporate banking revenue was driven by lower syndication fees, business lending fees and derivative fees. DBRS notes that in 4Q12, Fifth Third’s corporate banking revenue benefited from higher customer activity in anticipation of changes to tax rules. Meanwhile, the QoQ decrease in spread income (FTE basis) reflected two fewer days in the quarter.

Core expenses declined 1.4% sequentially. The decrease largely reflected a $17 million, or 4.1%, decrease in compensation related expenses, and lower OREO and other problem asset related expense. Additionally, lower core expenses were driven by a positive $14 million swing in provision for unfunded commitments to an $11 million benefit from a $3 million expense in 4Q12.

Importantly, the Company continued to exhibit loan growth. Specifically, average loans (excluding loans held for sale) grew by 2.3% sequentially, mostly reflecting a 6.1% increase in commercial & industrial loans, and a 2.1% increase in residential mortgage loans. Management anticipates mid-high single digit loan growth in 2013. Supporting loan growth, average deposits increased by 1.8%, sequentially, led by higher levels of money market, certificates over $100k, and interest checking deposits.

Despite the challenging business environment, Fifth Third’s asset quality remained sound and continued to improve. Specifically, non-performing assets (NPAs, excluding nonaccrual loans held for sale) declined 5.9% QoQ to $1.2 billion and represented a manageable 1.41% of total loans plus OREO. Lower NPA’s reflected decreases across all reported loan types. Meanwhile, NCOs declined $14 million to $133 million and represented a moderate 63 bps of average loans. The Company remains well reserved, as its allowance for loan losses represented 2.08% of total loans and 147% of NPAs.

In DBRS’s view, Fifth Third’s capitalization remains sound with an estimated Tier 1 Common equity ratio of 9.70%, a Tier 1 risk-based capital ratio of 10.83%, and a tangible common equity ratio of 9.03% (excluding unrealized gains on securities). DBRS notes that Fifth Third’s capitalization reflects the repurchase of approximately seven million of its common shares during 1Q13. The Company’s estimated Basel III Tier 1 common equity ratio is approximately 8.9% signaling its compliance with requirements which are scheduled to go into full effect in 2019. DBRS notes that the Federal Reserve did not object to Fifth Third’s 2013 CCAR capital plan, which includes the potential for an increase in the quarterly common stock dividend and stock buybacks.

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

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]