DBRS Comments on Fifth Third Bancorp’s 2Q13 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 2Q13 results. The trend on all ratings is Stable. The Company reported net income attributable to common shareholders of $594 million for the quarter, up from $413 million for 1Q13 and $376 million for 2Q12. DBRS notes that Fifth Third’s QoQ earnings reflected numerous material non-core-items.

Fifth Third’s balance sheet fundamentals remained solid during 2Q13 reflecting sustained average loan and deposit growth, improved asset quality, and a solid capital and liquidity profile. Positively, the Company has reported ten consecutive quarters of average loan portfolio growth through 2Q13.

On an adjusted core basis, the Company’s 2Q13 DBRS calculated adjusted income before provisions and taxes, increased by 4.6% sequentially to $656 million, driven by a 2.3% increase in adjusted revenue, partially offset by a 0.8% increase in adjusted expenses. Higher adjusted revenues reflected a solid 6.5% increase in adjusted non-interest income, which more than offset a modest 0.9% decline in net interest income. Improved sequential adjusted non-interest income was driven by higher levels of mortgage banking revenues (up $13 million, or 5.9%), corporate banking revenues (up $7 million, or 7.1%), and service charges on deposits (up $5 million, or 3.8%). The increase in mortgage banking revenue was due to a positive $31 million swing in the MSR valuation. Meanwhile, higher corporate banking revenues reflected an increase in syndication fees, interest rate derivatives, foreign exchange fees, and business lending fees. Overall, the Company anticipates fee income for 2013 to be fairly consistent with 2012, on an adjusted basis.

In 2Q13, the Company reported several non-core items including a $242 million gain on the sale of Vantiv shares, a $76 million positive valuation adjustment on the Vantiv warrant, a $10 million benefit from a settlement on a previously surrendered BOLI policy, a $5 million charge related to the valuation of the Visa total return swap, and $33 million charge to increase the Company’s litigation reserves. Non-core items for 1Q13, included a $34 million positive valuation adjustment on the Vantiv warrant, a $7 million gain on the sale of certain Fifth Third Asset Management advisory contracts, a $7 million charge related to the valuation of the Visa total return swap, securities gains of $17 million, and $9 million in charges to increase litigation reserves.

Lower QoQ spread income was driven by a 9 basis point (bps) narrowing of net interest margin (NIM) to 3.33%, despite a 0.7% increase in average earning assets. The narrower NIM reflected lower loan yields, and the maturities of interest rate floors. Meanwhile, a 0.9% increase in average portfolio loans drove higher average earning assets. Higher QoQ loans reflected continued growth in average commercial & industrial loans (up $1.2 billion, or 3.4%), and residential mortgage loans (up $164 million, or 1.4%). DBRS notes that commercial & industrial loan growth was broad-based across industries, and included contributions from healthcare, energy, and manufacturing. Supporting loan growth, average deposits increased by $3.1 billion, or 3.5%, sequentially, mostly reflecting higher demand deposits (up $1.1 billion, or 3.9%) and money markets (up $986 million, or 12.4%). Fifth Third expects 2013 net interest income to be fairly consistent with 2012.

Core expenses remain well managed. Higher sequential adjusted expenses were attributable to a 1.3% increase in salaries/wages/incentives, and a 6.5% increase in card and processing expense. Management anticipates 2013 expenses to be fairly consistent with 2012 levels.

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 5.0% QoQ to $1.2 billion and represented a manageable 1.32% of total loans plus OREO. Meanwhile, net charge-offs declined by $21 million to $112 million and represented a moderate 51 bps of average loans. Fifth Third remains well reserved, as its allowance for loan losses represented a solid 1.99% of total loans and 151% of NPAs.

Fifth Third’s capitalization remains sound, providing it with ample loss absorption capacity and ability to grow, either through organic means or acquisition. As of June 30, 2013, the Company’s estimated risk based capital ratios included Tier 1 Common equity of 9.44%, Tier 1 capital of 11.07%, and Total capital of 14.35%. The Company’s estimated Basel III Tier 1 common equity ratio is approximately 9.1% (assuming the Company maintains the current treatment of AOCI components in capital), which is above the minimum. DBRS notes that Fifth Third’s 2Q13 capitalization reflects retained earnings, the May 16th issuance of $593 million of non-cumulative perpetual preferred stock and the repurchase of 26 million common shares.

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

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