DBRS Morningstar Confirms Fifth Third Bancorp at ‘A’, Trend Revised to Negative

DBRS, Inc. (DBRS Morningstar) confirmed the ratings of Fifth Third Bancorp (Fifth Third or the Company), including the Company’s Long-Term Issuer Rating of ‘A’. At the same time, DBRS Morningstar confirmed the ratings of its primary banking subsidiary, Fifth Third Bank NA (the Bank). The trend for all long-term ratings at the Company and all ratings at the Bank were revised to Negative from Stable. The Intrinsic Assessment (IA) for the Bank is A (high), while its Support Assessment remains SA1. The Company’s Support Assessment is SA3 and its Long-Term Issuer Rating is positioned one notch below the Bank’s IA.

KEY RATING CONSIDERATIONS
The Negative trend reflects the wide and growing scale of the economic disruption resulting from the Coronavirus Disease (COVID-19) pandemic, which is expected to pressure Fifth Third’s earnings and asset quality. Nevertheless, unprecedented support measures have been put in place through monetary and fiscal stimulus, as well as relaxed criteria from regulators, which in our view, could help mitigate some of the negative impact of the crisis. However, should the crisis be prolonged, or if the recovery is muted, additional ratings pressure is likely.

The ratings confirmation reflects Fifth Third’s strong balance sheet fundamentals, current risk profile and diversified earnings stream. The ratings also consider Fifth Third’s commercially-focused loan portfolio, which is less diversified into consumer loan categories than some peers. Fifth Third also has exposure to small businesses and other industries, including oil & gas, that may be adversely impacted during the downturn.

RATING DRIVERS
Given the Negative trend, an upgrade of the ratings is not currently anticipated. However, DBRS Morningstar would revise the trend back to Stable if the economic fallout from the coronavirus pandemic is not prolonged and the Company’s performance is aligned with similarly-rated peers. Over the longer term, if Fifth Third achieves better-than-peer core profitability metrics over a sustained period, while maintaining a sound balance sheet and risk profile, the ratings would be upgraded.

Conversely, a downgrade of ratings would arise from a sustained decline in profitability levels or significant deterioration in asset quality.

RATING RATIONALE
Fifth Third provides products and services to commercial and consumer customers, across its ten-state footprint from Michigan to Florida, as well as select products outside of these states. Supporting the franchise are a diversified earnings stream, including a sizable percentage of fee-based revenues, solid balance sheet fundamentals, including strong liquidity and a sound capital position, and sound asset quality going into the downturn.

Over the last few years, Fifth Third has been reducing its risk profile by exiting individual commercial credits that do not fit its risk and return targets, reducing exposure to commercial real estate and slowing its origination of indirect auto loans. These actions should better position Fifth Third during this credit cycle. However, Fifth Third has identified $14.0 billion (or 11.7% of total loans) of commercial loans, excluding oil & gas exposures, that may be more adversely impacted in the current environment. The Company has built reserves, reflecting the economic outlook, as well as the adoption of CECL. Fifth Third’s allowance for credit losses represented 2.13% of loans and leases at March 31, 2020, which was above the peer median.

The Company’s funding and liquidity profile remains strong, underpinned by a large core deposit base that amply funds the loan portfolio. Additionally, liquidity at the holding company remains robust, with sufficient liquidity to service debt and pay dividends for over two years. At March 31, 2020, the Company’s Common equity Tier 1 ratio was 9.4%, down from recent periods on earning asset growth and slightly below Company’s internal target of 9.5%. Consistent with peers, the Company suspended share repurchases in 1Q20.

Fifth Third, a diversified financial services corporation headquartered in Cincinnati, reported $185.3 billion in consolidated assets as of March 31, 2020.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

The Grid Summary Grades for Fifth Third are as follows: Franchise Strength – Strong; Earnings Power – Strong/Good; Risk Profile – Strong/Good; Funding & Liquidity – Strong; Capitalisation – Strong/Good.

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

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 11, 2019): https://www.dbrsmorningstar.com/research/346375/global-methodology-for-rating-banks-and-banking-organisations.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The primary sources of information used for this rating include Company Documents and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.

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