DBRS: Fifth Third’s Earnings Up QoQ, due to Vantiv Stock Gains; Solid Loan Growth & Lower Adj. Exp

Summary:
• For 2Q14, Fifth Third reported net income available to common shareholders of $416 million, up from $309 million for 1Q14, mostly driven by Vantiv-related gains.
• Excluding non-core items, Fifth Third’s 2Q14 DBRS calculated adjusted income before provisions and taxes (IBPT) improved 0.5% sequentially, mostly driven by solid commercial & industrial (C&I) loan growth and lower adjusted expenses.
• DBRS rates Fifth Third’s Issuer & Senior debt at A (low) with a Stable trend.

Fifth Third Bancorp’s (Fifth Third or the Company) earnings were up 35% quarter-over-quarter (QoQ), due to numerous non-core items, including a $125 million pre-tax gain related to Vantiv stock and a $63 million pre-tax positive valuation adjustment on the Vantiv warrant. On an adjusted basis, which excludes these items, Fifth Third’s 2Q14 IBPT improved 0.5% QoQ, reflecting flat adjusted revenues and modestly lower adjusted expenses. Overall, DBRS views Fifth Third’s sound asset quality, sustained loan growth, and solid capital and liquidity profiles as supportive of its rating level.

2Q14 results included modestly improved spread income, offset by lower adjusted fee income. The Company continued to have success in growing its commercial & industrial loan portfolio, as well as commercial construction exposures, which drove higher spread income, despite a seven bps narrowing of net interest margin to 3.15%. Overall, C&I loan growth was broad-based, with new loan production up 29% QoQ. Meanwhile, the narrower net interest margin resulted from lower loan re-pricing, debt issuances, and day count in the quarter. Overall, management’s outlook is for modest spread income growth for 2014.

On an adjusted basis, the Company’s fee income declined 1.2% due to lower mortgage banking income, which more than offset higher revenues across most other fee line items. Although 2Q14 residential mortgage originations were higher sequentially with relatively stable gains on sales, lower mortgage banking income reflected a sizable negative swing in net servicing asset valuation adjustments. Meanwhile, improved levels of deposit service charges, and card and processing revenues were driven by higher customer activity and transaction volumes, off of seasonally weaker 1Q14 results. Overall, including mortgage banking income, management anticipates fee income to decline by low double digits for 2014.

Adjusted expenses were well managed in 2Q14, despite higher salary costs, declining modestly sequentially. Going forward DBRS expects the Company to remain focused on expense management. Indeed, Fifth Third’s adjusted efficiency ratio of approximately 60% signals opportunity for improvement. Management’s outlook is for non-interest expenses to be down mid-single digits for 2014.

Fifth Third’s sound asset quality continued to improve in 2Q14, including lower levels of non-performing assets, and low net charge-offs.

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

Note:
All figures are in U.S. Dollars unless otherwise noted.