DBRS Confirms Fifth Third’s Senior Debt at A (low); Revises Trend to Positive

DBRS, Inc. (DBRS) has today confirmed the ratings of Fifth Third Bancorp (Fifth Third or the Company), including the Company’s Issuer & Senior Debt rating of A (low). At the same time, DBRS confirmed the ratings of its primary banking subsidiary, Fifth Third Bank (the Bank). The trend for all long-term ratings and the Short-Term Instruments rating at the Bank have been revised to Positive from Stable. The Short-Term Instruments rating at the Company remains Stable. The Intrinsic Assessment (IA) for the Bank is A, while its Support Assessment remains SA3. The Company’s Support Assessment is also SA3 and its Issuer & Senior Debt rating is positioned one notch below the Bank’s IA.

Fifth Third’s ratings 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 ten state footprint from Michigan to Florida. Supporting the franchise are a diversified earnings stream, including a large percentage of fee-based revenues, solid balance sheet fundamentals, with strong liquidity, a solid capital position, and sound and improved asset quality. Conversely, as with many banks, Fifth Third’s earnings generation has been negatively impacted by the low interest rate environment and muted loan demand. Meanwhile, fee income generation has been a bright spot with some growth experienced, although mortgage banking results have added 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 (Vantiv), which DBRS considers non-core, as it is being gradually monetized and divested.

The Positive trend reflects the progress that Fifth Third has realized over the last several years, including lowering its risk profile and optimizing its balance sheet. However, some of these initiatives have provided near-term revenue headwinds. DBRS believes that an improving operating environment combined with the Company’s efforts to control expenses and enhance revenues should bolster its profitability and operating efficiency, over the intermediate term. DBRS will look for the Company to successfully execute on its strategic priorities, including its NorthStar revenue and expense initiatives, to achieve progress towards identified improvements in key profitability metrics, including the ability to generate positive operating leverage.

DBRS notes that the Company has reduced its exposure to commercial real estate loans, slowed its origination of indirect auto loans and has been exiting individual commercial credits that do not fit its risk and return targets. While these actions have impeded loan and revenue growth, it has helped lower classified assets and should position Fifth Third better for the next credit cycle. Fifth Third’s recent asset quality trends have been favorable with declining levels of non-performing assets and moderate net charge-offs.

The Company’s funding and liquidity profiles remain strong, underscored by a large core deposit base that amply funds the loan portfolio. Additionally, Fifth Third maintains a strong modified liquidity coverage ratio, most recently at 119%, as of March 31, 2017, comfortably above regulatory minimums. Meanwhile, even after significant stock buybacks and dividends, Fifth Third’s capital position has grown, reflecting earnings retention. At March 31, 2017, the Company’s Basel III common equity Tier 1 (CET1) ratio was a healthy 10.8%. In addition, the Company’s 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 does anticipate that regulatory capital ratios will likely decline modestly from current levels from ongoing capital management activities. DBRS also notes that the substantial $1.7 billion (pre-tax) unrealized gain on the Company’s Vantiv holdings provides additional financial flexibility.

Fifth Third, a diversified financial services corporation headquartered in Cincinnati, reported $140 billion in consolidated assets as of March 31, 2017.

RATING DRIVERS
If the Company can demonstrate progress improving core profitability metrics, including the achievement of positive operating leverage, while maintaining its sound balance sheet and current risk profile, the ratings could be upgraded. DBRS does not see any near-term negative ratings pressure at present, but a failure to sustain improved profitability metrics, greater than peer weakening of credit metrics or perceived increase in risk appetite, operational missteps or charges could result in a negative rating action.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodologies are the Global Methodology for Rating Banks and Banking Organisations (July 2016), DBRS Criteria – Support Assessments for Banks and Banking Organisations (March 2017), and DBRS Criteria - Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2017), which can be found on our website under 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.

Lead Analyst: John Mackerey, Vice President – Global FIG
Rating Committee Chair: Michael Driscoll, Managing Director, Head of NA FIG – Global FIG
Initial Rating Date: 27 July 2005
Most Recent Rating Update: 18 May 2016

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.