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 its 11 state footprint from Michigan to Florida. Supporting the franchise are its solid balance sheet fundamentals, including ample liquidity, a solid capital position, and sound asset quality.

Ratings also consider Fifth Third’s somewhat pressured core earnings generation ability, which continues to be impacted by the challenging interest rate environment. Overall, DBRS considers Fifth Third to be well positioned within its rating category, although there is the potential for higher ratings. DBRS notes that improvement in the Company’s core profitability, while maintaining solid balance sheet fundamentals, could result in positive rating actions. Conversely, sustained negative operating leverage and/or increased risk appetite could result in negative rating actions.

As with many banks, Fifth Third’s earnings generation ability continues to be negatively impacted by the low interest rate environment. Indeed, spread income remains constrained by the Company’s still narrowing net interest margin and modest, although improving, loan growth. Meanwhile, fee income generation has been a bright spot with some growth experienced, although mortgage banking results have provided some volatility.

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 non-core, as it is being gradually monetized and divested. Finally, the Company remains focused on increasing its efficiencies of operations and restraining growth in its expense base.

Balance sheet fundamentals remain solid. Asset quality is relatively sound, although nonperforming loans (NPLs) have worsened, reflecting weakening in the energy portfolio. The Company’s exposure to energy is fairly modest, representing approximately $1.7 billion, or just 2% of total loans. The Company increased its reserves to this sector to 6.20% at the end of 1Q16. Nonetheless, net charge-offs, which totaled 0.42% of average loans for 1Q16, remain manageable and in line with recent performance.

The Company’s funding and liquidity profiles remain strong, underscored by a large core deposit base that amply funds the loan portfolio, and a liquidity coverage ratio of 118%, at March 31, 2016. Meanwhile, even after significant stock buybacks and dividends, Fifth Third’s capital position has grown reflecting earnings retention. At March 31, 2016, the Company’ Basel III common equity Tier I ratio was a healthy 9.81%. 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. DBRS notes that the substantial $1.9 billion unrealized gain on the Company’s Vantiv holdings provide additional financial flexibility.

Fifth Third, a diversified financial services corporation headquartered in Cincinnati, reported $142 billion in consolidated assets as of March 31, 2016.

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 (December 2015). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organisations (March 2016), and DBRS Criteria - Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016). 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: John Mackerey
Rating Committee Chair: Michael Driscoll
Initial Rating Date: 27 July 2005
Most Recent Rating Update: 18 May 2015

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