DBRS Places Fifth Third’s Ratings Under Review with Negative Implications

DBRS has today placed the long- and short-term ratings of Fifth Third Bancorp and its operating bank subsidiaries (collectively Fifth Third or the Company), including Fifth Third’s Issuer & Senior Debt rating of ‘A’ and Fifth Third Bank subsidiary’s long and short-term ratings of A (high) and R-1 (middle) respectively, Under Review with Negative Implications.

The review reflects DBRS’s view that Fifth Third has experienced net losses over the past four quarters as it struggles with steepening credit costs from asset quality that has deteriorated for the past 2 years coupled with weaker core income before provisions and taxes (IBPT). Importantly, the $5.1 billion of loan loss provisions taken in the past four quarters (including $952 million in Q3 2009) was more than 2.3 times the Company’s adjusted income before taxes and provisions of roughly $2.2 billion. Rising credit losses, as reflected in net charge-offs of $756 million in Q3 2009, continue to be driven by Fifth Third’s commercial, commercial mortgage and construction loans as residential mortgage and home equity losses came off their Q2 2009 peaks.

The $2.9 billion in non-performing loans (NPLs) grew 13.9% in the quarter, but also do not include $1.28 billion of troubled debt restructured loans, up 19% from $1.07 billion in Q2 2009. NPLs continue to be dominated by commercial loans, commercial mortgages and construction loans that rose an aggregate 15% over the quarter but positively, consumer NPLs were stable. Additionally, near-term consumer delinquencies reflected moderation while commercial loans reported improvement.

While Fifth Third has already charged off a substantial amount of loans in this credit cycle, DBRS is concerned that significant amounts of potential losses remain embedded in its portfolios, especially given the current macroeconomic challenges, particularly rising unemployment and pressure on real estate valuations. Furthermore, DBRS is also aware that the difficult operating environment for financial institutions is likely to continue to constrain revenue growth and produce elevated expenses and charges in the near term for the Company. Positively, DBRS considers the 125% reserve coverage of non-performing loans to be above peer level although the ratio drops to a still respectable 83% for the total allowance for credits costs as a percentage of all non-performing assets (including loans held for sale and accruing restructured loans and leases). Moreover, Fifth Third has substantial capitalization levels both on a tangible and regulatory basis that should enable it to absorb additional losses.

DBRS remains mindful that Fifth Third has built capital, increased liquidity, grown deposits, reduced debt, and improved its funding profile over the past year. The capital increase included a second quarter $1.0 billion common equity raise, a $1.7 billion pre-tax ($1.0 billion after-tax) gain from the sale of 51% of its processing business and preferred stock exchanges that generated $441 million in Tier 1 Common Equity. At September 30, 2009, Tier 1 Common Equity rose to 7.03%, Tier 1 to 13.23%, Leverage to 12.34% and Tangible common equity to Tangible assets to 6.98%. DBRS notes that the regulatory capital ratios include $3.4 billion in TARP Capital.

DBRS’s review will focus on Fifth Third’s asset quality, financial performance and franchise value. The review will also consider the Company’s plans and projections for the near-to medium-term including IBPT, credit costs, reserve and capital levels. DBRS notes that the review could potentially result in a one notch downgrade, if the review of current performance and near- to medium-term trends reveals performance and metrics more appropriate for the next lower rating range: A (low). Conversely, confirmation of the current ratings could result, if the performance is expected to stabilize and return to profitability in the near-term.

Fifth Third, a diversified financial services corporation headquartered in Cincinnati, Ohio, reported $111 billion in consolidated assets as of September 30, 2009.

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

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.