DBRS Confirms Fifth Third Bancorp at ‘A’; Stable Trend

DBRS, Inc. (DBRS) 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 confirmed the ratings of its primary banking subsidiary, Fifth Third Bank (the Bank). The trend for all ratings is 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 ratings and Stable trend consider the progress Fifth Third has realized improving its credit fundamentals, including lowering its risk profile, optimizing its balance sheet and improving efficiency and core profitability levels. Additionally, DBRS believes that the Company’s ongoing efforts to control expenses and enhance revenues should continue to bolster profitability and lead to the generation of positive operating leverage. The ratings also consider Fifth Third’s commercially-focused loan portfolio, which is less diversified into consumer loan categories than some peers. DBRS also acknowledges that Fifth Third recently completed its acquisition of MB Financial, Inc. (MBFI), a Chicago-based banking company, which raises the potential for integration risk as it works to realize the projected cost savings from that transaction.

RATING DRIVERS
If Fifth Third achieves better-than-peer core profitability metrics over a sustained period, while maintaining its sound balance sheet and current risk profile, the ratings could be upgraded. Conversely, a greater-than-peer weakening of credit metrics or perceived increase in risk appetite, could result in a negative rating action.

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, a solid capital position, and sound asset quality. DBRS notes that in recent years, Fifth Third’s bottom line has been positively impacted by gains related to its ownership stake in Vantiv/Worldpay, which has now been fully divested, eliminating this as an additional source of future earnings and capital generation.

Excluding the sizeable gains associated with Vantiv/Worldpay, Fifth Third has made steady progress towards its long-term financial goals. The Company generated positive operating leverage and achieved improving level of returns in 2018. On an adjusted basis, Fifth Third’s return on assets was 1.21% in 1Q19.

In 1Q19, the acquisition of MBFI added approximately $20 billion in assets. DBRS views the acquisition positively, as it improves Fifth Third’s Chicago franchise by adding scale and expertise in the highly competitive, but attractive Chicago market. Specifically, Fifth Third now has the third largest retail network and retail deposit market share and second largest middle-market lending market share in the Chicago area. With the integration well underway, the Company is targeting fully-phased-in cost savings of $255 million (pre-tax), which represents about 45% of the expense base with expected restructuring costs of $300 million (after-tax). While this is a large cut in expenses, DBRS views this as achievable given the significant level of branch overlap. There are also potential revenue synergies as Fifth Third overlays its deeper product set. Additionally, MBFI also has some capabilities, including asset-based lending, that Fifth Third could potentially deploy across its franchise.

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 have helped lower classified assets and should better position Fifth Third for the next credit cycle. Fifth Third’s recent asset quality trends have been favorable, with declining levels of classified loans and moderate net charge-offs.

The Company’s funding and liquidity profiles remain strong, underpinned by a large core deposit base that amply funds the loan portfolio. Meanwhile, even after significant stock buybacks and dividends, Fifth Third’s capital position has remained solid, although lower than previous periods, following the MBFI acquisition. At March 31, 2019, the Company’s Basel III common equity Tier 1 ratio was 9.6%, still above the Company’s internal target of 9.0%.

Fifth Third, a diversified financial services corporation headquartered in Cincinnati, reported $167.9 billion in consolidated assets as of March 31, 2019.

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.

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

The applicable methodology is Global Methodology for Rating Banks and Banking Organisations (July 2018), 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.

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

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

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