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-based set of products and services to commercial and consumer customers, primarily located across twelve states from Michigan to Florida. Supporting the franchise are its solid balance sheet fundamentals, including ample liquidity, a solid capital position, and relatively sound and improving asset quality.

Ratings also consider Fifth Third’s pressured earnings generation ability, which continues to be impacted by the difficult operating environment. Overall, DBRS considers Fifth Third to be well positioned within its rating category. DBRS notes that improvement in the Company’s core profitability, while maintaining solid balance sheet fundamentals, could result in positive rating actions. Conversely, lower core profitability, and/or deteriorating balance sheet fundamentals could result in negative rating actions.

As with many banks, Fifth Third’s earnings generation ability continues to be negatively impacted by lackluster economic growth and the low interest rate environment. Indeed, spread income remains constrained by the Company’s narrowing net interest margin, and tepid loan growth given the intense competition for quality loans. The Company’s pressured spread income also reflects the discontinuation of its deposit advance product which management estimates will result in approximately $100 million of lost revenues annually. Meanwhile, fee income generation remains challenged by the steep decline in mortgage banking revenues, due to the significant contraction in residential mortgage loan originations.

Positively, investments in resources in the commercial business, has translated into higher syndication fees, while an increase in the number of actively used cards and additional ATM locations support higher card processing fees. DBRS notes that in recent years, Fifth Third’s bottom line has been positively impacted by gains related to its ownership stake in Vantiv Holdings LLC, which DBRS considers as non-core as it is gradually monetized and divested. Finally, the Company remains focused on increasing its efficiencies of operations and restraining growth in its expense base.

Reflective of the difficult operating environment, the Company’s adjusted income before provisions and taxes (IBPT; DBRS’ adjusted core income metric excluding non-core items) for 2014, declined by a moderate 4.3%, linked-year, reflecting a 55.7% decrease in mortgage banking income, partially offset by higher levels of corporate banking revenues (up 7.5%), card and processing revenues (up 8.5%) and investment advisory revenues (up 3.6%). Adjusted expenses were well managed and down 5.1%, YoY. Facing additional headwinds, Fifth Third’s 1Q15 adjusted IBPT declined 15%, QoQ, reflecting several items, including the discontinuation of its deposit advance product, the lower day count in the quarter, as well as a decrease in syndication fees coming off of strong 4Q14 results.

Balance sheet fundamentals remain solid. Asset quality is relatively sound and continues to improve, reflecting lower levels of non-performing assets, which represented 0.75% of total loans and OREO, at March 31, 2015, along with a manageable level of net charge-offs which totaled 0.41% of average loans for 1Q15. DBRS notes that reserve coverage remains adequate at 1.42% of loans. The Company has a modestly sized energy portfolio, which is under some pressure. DBRS notes that the majority of production related clients have hedging in place through 2015, and many into 2016. DBRS anticipates that a continuation of low oil prices over an extended period of time would place further stress on the energy portfolio, but we expect losses to be manageable.

The Company’s funding and liquidity profiles remain strong, underscored by a large core deposit base that more than amply fund net loans, and a high liquidity coverage ratio of 108%, at March 31, 2015. Meanwhile, even after stock buybacks and other capital activities, Fifth Third’s capital position remains sound, providing solid loss absorption capacity and opportunity for growth. At March 31, 2015, the Company’ Basel III common equity Tier I ratio was a healthy 9.52% (9.41% fully phased-in). In March 2015, the Federal Reserve did not object to Fifth Third’s capital plan, which included a potential increase in the quarterly common stock dividend to $0.14 per share in 2016 and repurchase of $765 million in common shares. In addition, the capital plan incorporated Fifth Third’s potential repurchases of common shares in the amount of any after-tax gains from the sale of Vantiv stock.

Fifth Third, a diversified financial services corporation headquartered in Cincinnati, Ohio, reported $140 billion in consolidated assets as of March 31, 2015.

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 (June 2014). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organisations (March 2015), and DBRS Criteria - Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015). These can be found at http://www.dbrs.com/about/methodologies.

The primary sources of information used for this rating include company documents 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: 24 March 2014

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