DBRS: Fifth Third’s 3Q Net Income Up on Vantiv Warrant Valuation; Adjusted Earnings Lower

Summary:
• Largely reflective of a $130 million positive adjustment to the Vantiv warrant valuation, Fifth Third reported net income available to common shareholders of $366 million, up 25% from 2Q15.
• The Company’s adjusted IBPT (income before provisions and taxes, excluding non-core items; DBRS’ core income metric) declined 4.3% quarter-on-quarter (QoQ), reflecting lower mortgage banking net revenue.
• 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) 3Q15 results as sound, although the quarter was somewhat noisy. Overall, earnings to common shareholders were up 25% QoQ, reflecting a number of non-core items in both this quarter and the linked quarter. Items this quarter included a $130 million positive valuation adjustment on the Vantiv warrant partially offset by a $35 million provision expense related to restructuring of a student loan-backed commercial credit, a $9.0 million charge associated with executive retirements and severance and an $8.0 million charge related to a valuation of the Visa total return swap. Excluding non-core items, Fifth Third’s adjusted quarterly IBPT declined sequentially, as higher levels of spread income were not sufficient to offset a drop in mortgage banking. Importantly, Fifth Third continues to maintain solid balance sheet fundamentals, including sound asset quality, and solid capital and funding profiles.

Spread income improved sequentially, reflecting loan growth, partially offset by a higher interest expense associated with debt issuance this quarter. Meanwhile, fee income on an adjusted basis, was lower on seasonally lower mortgage banking net revenue and corporate banking revenue partially offset by higher deposit service charges. Finally, the Company’s expenses were flat sequentially, although lower on an adjusted basis. The reversal of litigation reserves drove the improvement in expenses.

Balance sheet fundamentals remain sound. However, during the quarter Fifth Third’s asset quality was adversely impacted by a restructuring of a student loan-backed commercial credit, which boosted net charge-offs and provision expenses. However, non-performing assets continued to improve in 3Q15. Meanwhile, capital levels remain sound. Indeed, the Company estimates its Basel III common equity Tier 1 ratio to be 9.30% (fully phased-in basis), at September 30, 2015, similar to the linked-quarter despite the completion of approximately $455 million of stock repurchases during 3Q15.

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.