Morningstar DBRS Confirms Fifth Third Bancorp at "A," Trend Stable

DBRS, Inc. (Morningstar DBRS) confirmed the credit ratings of Fifth Third Bancorp (Fifth Third or the Company), including the Company's Long-Term Issuer Rating of "A." At the same time, Morningstar DBRS confirmed the credit ratings of its banking subsidiary, Fifth Third Bank (the Bank). The trends for all credit ratings remain 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 CREDIT RATING CONSIDERATIONS

The credit ratings confirmation and Stable trend reflect Fifth Third's diversified franchise and revenue streams, conservative risk profile and consistent and resilient earnings. Earnings levels have been solid in recent periods, benefiting from a lower provision for credit losses and well contained expenses. Additionally, Fifth Third's earnings are highly diversified, with a large component of earnings derived from non-interest income.

The credit ratings also consider the still challenging operating environment, including stagnating revenue growth and a more costly and competitive funding environment. Additionally, asset quality metrics may worsen from current levels, but the Company's reserves remain substantial.

CREDIT RATING DRIVERS

If Fifth Third maintains better-than-peer core profitability metrics over a sustained period, while maintaining a sound balance sheet and risk profile, the credit ratings would be upgraded. Conversely, a downgrade of credit ratings would arise from a sustained decline in profitability levels or a significant deterioration in asset quality.

CREDIT RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Strong/Good

With approximately $213 billion in assets (as of June 30, 2024), Fifth Third provides products and services to commercial customers and consumers across its eleven-state footprint from Michigan to Florida, as well as select products outside of these states. Additionally, the Company has a large money management business, with approximately $631 billion in assets under administration and $65 billion in assets under management. Fifth Third has been investing to build its banking business outside its core Midwest footprint, especially in the Southeast where it has been growing its branch footprint and hiring bankers.

Earnings Combined Building Block (BB) Assessment: Strong/ Good

Fifth Third's earnings power remains solid. With its broad product set, the Company generates a high level of fee income, which represents about one-third of total revenue, providing some stability and diversity to its bottom line. Fifth Third's net income for 2Q24 was $601 million, up 16% linked quarter but flat year-on-year. Recent returns have equated to strong performance metrics, including an adjusted ROA of 1.21% and ROE of 14.5%, in 2Q24.

Risk Combined Building Block (BB) Assessment: Strong

Fifth Third previously improved 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. At just 14% of total loans (as of June 30, 2024), the Company's exposure to commercial real estate loans is highly manageable and at the low end of regional peers. While asset quality metrics have weakened somewhat, the Company has exhibited strong credit performance in recent periods. Additionally, Fifth Third's allowance for credit losses represented a sound 2.08% of loans and leases at June 30, 2024.

Funding and Liquidity Combined Building Block (BB) Assessment: Very Strong / Strong

The Company's funding and liquidity profile remains strong, underpinned by a large core deposit base that amply funds the loan portfolio, as well as ready access to other funding sources. As of June 30, 2024, Fifth Third had access to approximately $107 billion of additional liquidity sources. The Company is fully compliant with the LCR requirement for larger institutions and performs monthly liquidity stress tests. Additionally, liquidity at the holding company remains robust, with sufficient liquidity to service debt and pay dividends for approximately 34 months.

Capitalization Combined Building Block (BB) Assessment: Strong/Good

Morningstar DBRS views Fifth Third's capital as sound, with strong levels of internal capital generation. At June 30, 2024, the Company's Common Equity Tier 1 (CET1) ratio was 10.6%, improved from the year earlier period (9.5%), largely reflecting earnings retention. Fifth Third has resumed buybacks and repurchased $125 million of its outstanding stock during 2Q24. The Company's preliminary stress capital buffer increased to 3.2% (effective October 1, 2024) from 2.5%, following the recent Federal Reserve stress tests. This equates to a regulatory minimum CET1 requirement of 7.7%. Fifth Third has a comfortable 290 basis points buffer from the new requirement.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/437641.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at (January 23, 2024) at https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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

The principal methodology is the Global Methodology for Rating Global Methodology for Rating Banks and Banking Organisations https://dbrs.morningstar.com/research/431155/global-methodology-for-rating-banks-and-banking-organisations (April 15, 2024). In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

The primary sources of information used for this credit rating include Morningstar, Inc. and company documents, Morningstar DBRS considers the information available to it for the purposes of providing this credit rating was of satisfactory quality.

The credit rating was not initiated at the request of the rated entity.

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

This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are under regular surveillance.

For more information on this credit or on this industry, visit dbrs.morningstar.com.

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