DBRS: Fifth Third’s Adjusted Core Earnings Improved QoQ, Despite A Noisy Quarter

Summary:

• Fifth Third’s 4Q13 DBRS calculated adjusted earnings increased 3.3% sequentially (excluding numerous non-core items)
• The Company’s asset quality continued to stabilize, resulting in sustained reserve releases
• DBRS rates Fifth Third’s Issuer & Senior debt at A (low) with a Stable trend

DBRS, Inc. (DBRS) views Fifth Third Bancorp’s (Fifth Third or the Company) 4Q13 adjusted earnings as sound, despite continued narrowing of its net interest margin and pressured loan growth. DBRS views Fifth Third’s resilient yet pressured earnings generation, stabilizing asset quality and solid capital and liquidity profiles as supportive of its rating level.

Fifth Third’s 4Q13 DBRS calculated adjusted earnings (income before provisions and taxes), increased 3.3% sequentially (excluding numerous non-core items), reflecting a moderate decrease in adjusted expenses and a slight increase in spread income, partially offset by a moderate decline in adjusted fee income.

Core expenses were well managed in the quarter, reflecting an adjusted efficiency ratio of 61%, level with the prior quarter. The QoQ decrease in expenses mostly reflected lower credit-related costs. Importantly, management anticipates that 2014 expenses will decline by mid-single digits from reported 2013 levels, mostly in lower legal and personnel costs (primarily mortgage related).

Despite a 10 basis point narrowing of NIM, the Company’s spread income improved slightly, bolstered by higher levels of average securities and portfolio loan balances. The narrower NIM mostly reflected higher levels of lower yielding cash balances. Reflecting the difficult business environment, loans (excluding loans HFS) grew a modest 0.7% sequentially, driven by higher levels of C&I, commercial construction and residential mortgage loans.

Fifth Third’s asset quality continued to stabilize in 4Q13, driving sustained reserve releases that benefited earnings. Finally, DBRS views the Company’s loan loss reserves as solid at 1.8% of total loans.

Fifth Third’s funding profile remains sound and reflects a sizable core deposit base that mostly funds loans. Meanwhile, capital remains strong, providing solid loss absorption capacity. In light of stock repurchases, the redemption of trust preferred securities, and the issuance of preferred stock, Fifth Third’s capital metrics were moderately down QoQ.

DBRS rates Fifth Third Bancorp Incorporated Issuer & Senior debt at A (low) with a Stable trend.

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

[Amended on December 23th, 2014 to remove unnecessary disclosures.]