DBRS: Fifth Third’s 3Q14 Core Earnings Up Slightly QoQ; Sustained Loan Growth & Lower Adj. Exp

Summary:
• Reflecting considerable noise, including the non-recurrence of a large 2Q14 Vantiv-related gain, Fifth Third reported net income available to common shareholders of $328 million, down from $416 million for 2Q14.
• Excluding non-core items, Fifth Third’s adjusted income before provisions and taxes (IBPT) was up slightly QoQ.
• DBRS, Inc. (DBRS) rates Fifth Third’s Issuer & Senior debt at A (low) with a Stable trend.

Fifth Third Bancorp’s (Fifth Third or the Company) 3Q14 earnings were down 21% quarter-over-quarter (QoQ), due to numerous non-core items, including a 3Q14 $53 million pre-tax negative valuation adjustment on its Vantiv warrant, as well as several large non-core items in 2Q14 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 operating basis, which excludes non-core items, Fifth Third’s 3Q14 adjusted IBPT improved 0.2% QoQ, reflecting a well-managed expense base and sustained loan growth, partially offset by lower mortgage banking income. Overall, DBRS views Fifth Third’s balance sheet fundamentals, including sound asset quality, sustained loan growth, and solid capital and liquidity profiles, as supporting its rating.

3Q14 results included a modest sequential improvement in spread income, reflecting the Company’s continued success in growing its loan portfolio, including commercial construction exposures, residential mortgages, and commercial and industrial loans. Higher QoQ spread income was also driven by a 4% increase in average securities and other short-term investments, most of which were purchased in 2Q14, along with a higher day count. Overall, management’s outlook is for stable to modest spread income growth in 2014.

Lower levels of mortgage banking income and corporate banking revenues drove a 2.1% decline in adjusted fee income. Mortgage banking income continued to be negatively impacted by pressured gain on sale margins. Moreover, the Company has increased its retention of certain originated mortgages, mostly shorter term or adjustable rate mortgages. Overall, including mortgage banking income, management anticipates fee income to decline by low double digits for 2014.

Positively, adjusted expenses remain well managed, and were down 1.1% sequentially, driven by lower compensation and benefits costs, attributable to changes to the Company’s mortgage and retail staffing. 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 3Q14, reflecting lower levels of non-performing assets, and low net charge-offs. Meanwhile, capital levels remain solid, despite share repurchase activity. Indeed, the Company estimates that its pro forma fully phased in Tier 1 common equity ratio under Basel III to be approximately 9.4%.

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.