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). 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 and Stable trend consider the Company’s strong banking franchise, which provides a broad-range of products and services to commercial and consumer customers, primarily located across twelve states from Michigan to Florida. Importantly, Fifth Third’s commercial banking business, which generates the bulk of the Company’s earnings, continues to benefit from the revival of manufacturing in its markets. As with most banks, core earnings generation remains pressured due to net interest margin contraction and lower levels of mortgage banking income. Nonetheless, the Company’s bottom line continues to benefit from solid loan growth, lower credit costs and a well-managed expense base.

Ratings are also underpinned by Fifth Third’s solid balance sheet, which includes ample liquidity, a solid capital position, and sound and improving asset quality. Overall, DBRS considers Fifth Third to be well positioned within its rating category. If the Company is able to increase its core profitability, sustain asset quality improvement, and maintain solid balance sheet fundamentals, ratings could be upgraded. Conversely, lower core earnings, along with deteriorating balance sheet fundamentals could result in negative rating action.

For 2013, Fifth Third reported net income available to common shareholders of $1.8 billion, up from $1.6 billion for 2012. Improved earnings included sizable gains related to the Company’s 25% ownership stake in Vantiv Holding, LLC (formerly known as Fifth Third Processing Solutions). Excluding these gains and other non-core items, Fifth Third’s 2013 adjusted income before provisions and taxes (IBPT: DBRS calculated) increased by 2.1%, YoY, driven by positive operating leverage, as adjusted expenses declined more than adjusted revenues. The decrease in non-interest expense mostly reflected lower personnel related cost. Meanwhile, the decline in total revenues was primarily attributable to lower mortgage banking income and net interest margin contraction. Going forward, DBRS anticipates that adjusted IBPT will remain pressured, due to expectations of sustained, albeit moderate margin contraction and lower mortgage banking income.

Overall, the Company’s balance sheet fundamentals remained sound. During the year, average loans grew 5.1% driven by higher levels of commercial & industrial and residential mortgage loans. Furthermore, average deposit growth outpaced average loan growth, bolstering the Company’s solid funding and liquidity profiles and benefiting spread income.

Asset quality continued to improve, reflecting lower levels of non-performing assets (NPAs) and net charge-offs (NCOs). The decrease in NPAs was broad-based across most key loan categories. Overall, NPAs represented 1.1% of total loans and leases (3.8% including performing troubled debt restructurings (TDRs)) at December 31, 2013, as compared to 1.5% (3.7% including performing TDRs) at December 31, 2012. Meanwhile NCOs for 2013 represented a manageable 0.58% of average loans, down from 0.85% for 2012. Importantly, criticized loans declined during the year, likely signaling continuing improvement in asset quality. DBRS notes that Fifth Third’s NCOs have exceeded provisions over the last four years, albeit at decreasing levels. However, DBRS considers the Company’s reserve coverage to be sound at 1.79% of total loans and 161% of NPAs, at December 31, 2013.

Despite stock buybacks and other capital activities, Fifth Third’s capital position remains sound, providing solid loss absorption capacity and opportunity for growth. At December 31, 2013, the Company’s Basel III Tier I common ratio was a sound 8.99%, solidly above the buffered minimum of 7.0%.

Fifth Third, a diversified financial services corporation headquartered in Cincinnati, Ohio, reported $130 billion in consolidated assets as of December 31, 2013.

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 methodologies used include the DBRS Criteria: Support Assessment for Banks and Banking Organisations and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities. All DBRS methodologies and criteria can be found on DBRS website under 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.

Lead Analyst: Mark Nolan
Rating Committee Chair: Roger Lister
Initial Rating Date: 27 July 2005
Most Recent Rating Update: 22 March 2013

For additional information on this rating, please refer to the linking document under Related Research.