DBRS: Fifth Third’s 4Q Core Earnings Down Moderately on Higher Adj. Exp & Modest Avg. Loan Growth

Summary:
• Reflecting several non-core items, Fifth Third reported net income available to common shareholders of $362 million, up 10.4% from $328 million for 3Q14.
• Excluding non-core items, Fifth Third’s adjusted income before provisions and taxes (IBPT; DBRS’ core income metric) was down moderately, QoQ, reflecting higher adjusted expenses and moderately lower spread income. Partially offsetting these headwinds, adjusted fee income rose solidly linked-quarter.
• DBRS, Inc. (DBRS) rates Fifth Third’s Issuer & Senior debt at A (low) with a Stable trend.

DBRS, Inc. (DBRS) considers Fifth Third Bancorp’s (Fifth Third or the Company) 4Q14 financial results as solid, despite sustained net interest margin (NIM) pressure and significant competition for quality loans. Overall, 4Q14, earnings were up 10.4%, linked-quarter, reflecting several non-core items, including a $56 million (pre-tax) positive valuation adjustment on the Company’s Vantiv warrant. Excluding non-core items, 4Q14 IBPT slipped 2.4%, reflecting higher adjusted expenses and moderately lower spread income, partially offset by improved adjusted fee income. Overall, DBRS views Fifth Third’s balance sheet fundamentals, including sound asset quality, sustained yet pressured average loan growth, and solid capital and liquidity profiles, as supporting its ratings.

4Q14 results included a 2.2% sequential decrease in spread income, reflecting a 14 bps narrowing of NIM to 2.96%, partially offset by a modest increase in average loans, as well as a jump in average cash held at the Federal Reserve Bank. Higher sequential average loans mostly reflected growth in residential mortgage and commercial construction loans. DBRS notes that future spread income will be negatively impacted by the discontinuation of the Company’s deposit advance product, which is expected to result in the loss of about $100 million of revenue annually. To potentially offset this loss of revenue, Fifth Third is designing new products that might appeal to this customer base. Finally, core adjusted fee income rose solidly, QoQ, driven by higher corporate banking income, spurred by improved levels of syndication, business lending and foreign exchange fees.

Adjusted expenses were up 3.7%, due to increased levels of higher compensation, and credit related expenses. The Company’s adjusted efficiency ratio inched up to 61.2% (DBRS calculated) for 4Q14, reflecting room for improvement in both expenses and revenues.

Fifth Third’s sound asset quality continued to improve in 4Q14, reflecting lower levels of non-performing assets. Net charge-offs climbed 33 bps to 0.83% of average loans, QoQ, due to the placement of $720 million of troubled debt restructurings (residential mortgage loans) into loans held for sale, as market pricing has improved. Meanwhile, capital levels remain solid, despite share repurchase activity. Indeed, the Company estimates 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.