DBRS Comments on Fifth Third Bancorp’s 3Q13 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 3Q13 results. The trend on all ratings is Stable. The Company reported net income available to common shareholders of $421 million for the quarter, down from $582 million for 2Q13 and up from $354 million for 3Q12. Overall, earnings during 3Q13 equated to a 1.35% ROA as compared to 1.94% for 2Q13 and 1.23% for 3Q12. Fifth Third’s balance sheet fundamentals remained solid during 3Q13 reflecting sustained core deposit growth, improved asset quality, and a solid capital profile.

DBRS notes that Fifth Third’s current and linked quarter’s earnings reflected numerous material non-core-items including items related to sale of common shares of payment processor Vantiv, Inc. as well as the valuation of the warrant the Company holds to purchase additional shares of Vantiv. These items added approximately $59 million (after-tax) and $206 million (after-tax) to the bottom line in the current and linked quarters, respectively.

As with most banks, 3Q13 core earnings were negatively pressured by lower mortgage banking income. Specifically, the Company’s 3Q13 DBRS-calculated adjusted income before provisions and taxes decreased by 4.6% sequentially. The decrease was driven by a 5.8% decline in adjusted revenue, partially offset by a 6.6% decrease in adjusted expenses, generating positive operating leverage. Lower adjusted revenues mostly reflected a 14.5% decrease in adjusted non-interest income, which was attributable to a 48.1% decline in mortgage banking income. With higher interest rates, QoQ mortgage originations declined by $2.7 billion, or 36%, and gain on sales margins narrowed. Overall, the Company anticipates that 2013 adjusted fee income will remain consistent with 2012 adjusted fee income (adjusted to exclude Vantiv-related impacts in 2012 and 2013), despite an estimated 20% YoY decrease in mortgage banking income.

On an FTE basis, the Company’s spread income was up 1.5% QoQ, reflecting a 1.2% increase in average earning assets, partially offset by a 2 bps narrowing of net interest margin (NIM) to a still solid 3.31%. Although growth in higher yielding securities drove most of the increase in average earning assets, average loans (excluding loans held for sale) increased by 0.7% sequentially, led by higher levels of C&I, automobile, and residential mortgage loans. The Company anticipates 2013 average loan growth to be in the mid-single digit range, mostly due to C&I loan growth and continuing retention of residential mortgage production. Finally, the narrower NIM QoQ was mostly due to lower loan yields and the extra day in the quarter.

Core expenses remain well managed. Lower sequential adjusted expenses reflected a 3.7% decrease in salaries, wages and incentives, driven by lower mortgage production related costs. Overall, most other core expense categories were relatively stable. Fifth Third anticipates that 2013 non-interest expense will be fairly consistent with 2012 adjusted non-interest expense (adjusted to exclude debt extinguishment costs in 2012).

Fifth Third’s asset quality remained sound and continued to improve. Specifically, non-performing assets (NPAs, excluding nonaccrual loans held for sale) declined 11.8% QoQ to $1.0 billion and represented a manageable 1.16% of total loans plus OREO. Meanwhile, net charge-offs declined by $3 million to $109 million and represented a moderate 49 bps of average loans, the lowest level since 1Q07. Fifth Third remains well reserved, as its allowance for loan losses represented a solid 1.92% of total loans and 218% of nonperforming loans.

Fifth Third’s capitalization remains sound, providing it with ample loss absorption capacity and the ability to grow, either through organic means or acquisition. DBRS notes that 3Q13 capital metrics benefited from the recent conversion of $398 million of Series G convertible preferred stock. As of September 30, 2013, the Company’s estimated risk based capital ratios included Tier 1 Common equity of 9.89%, Tier 1 capital of 11.15%, and Total capital of 14.36%. The Company’s estimated Basel III Tier 1 common equity ratio is approximately 9.5% (assuming the Company excludes AOCI components in capital), solidly above minimum requirements.

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

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