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 was revised to Stable from Negative. 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 confirmation and revision of the trend to Stable reflects Fifth Third’s strong balance sheet fundamentals, risk profile and diversified earnings stream. Earnings, which were adversely affected by reserve building in 2020, have been fairly resilient in 1H21, benefiting from reserve releases. However, the Company has also been able to report positive operating leverage, despite the still challenging operating environment. Additionally, Fifth Third’s earnings are highly diversified with a large component of earnings derived from non-interest income, reducing its reliance on spread income.
The ratings also consider Fifth Third’s commercially-focused loan portfolio, which is less diversified into consumer loan categories than some peers. While DBRS Morningstar expects some credit deterioration as stimulus measures abate, these are expected to be manageable, and current reserve levels appear adequate to absorb any potential losses.
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.
Franchise Combined Building Block (BB) Assessment: Strong/Good
With over $200 billion in assets, 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 $483 billion in assets under administration. Fifth Third has been investing to grow its banking business outside its core Midwest franchise, especially in the Southeast where it has been growing its branch footprint.
Earnings Combined Building Block (BB) Assessment: Strong/Good
Fifth Third’s earnings are diverse and have been resilient in the current operating environment. Earnings have benefited in recent periods from reserve releases, but the Company has also achieved positive operating leverage for 1H21. Expenses remain well-controlled and the Company’s spread income will benefit from rising interest rates.
Risk Combined Building Block (BB) Assessment: Strong/Good
Fifth Third reduced its risk profile prior to the current downturn 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. The Company has exhibited strong credit performance in recent periods. However, Fifth Third has identified $10.3 billion (or 9% of total loans) of commercial loans that may be more adversely impacted by the fallout from COVID-19. Fifth Third’s allowance for credit losses represented 2.06% of loans and leases at June 30, 2021, and appear adequate given current and expected loss rates. The Company has an active hedging program and the net interest margin has benefitted from this program. Fifth Third is asset sensitive and will experience higher net interest income in a rising rate environment.
Funding and Liquidity Combined Building Block (BB) Assessment: Strong
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.
Capitalisation Combined Building Block (BB) Assessment: Strong
DBRS Morningstar views Fifth Third’s capital as sound with strong levels of internal capital generation. At June 30, 2021, the Company’s Common Equity Tier 1 (CET1) ratio was 10.4%, higher than the Company’s internal target of 9.5%. Consistent with peers, the Company has resumed share repurchases and is expected to request a dividend increase in the September board meeting. With planned capital actions, including $850 million of share repurchases in 2H21, and the impact of an acquisition, the Company is expected to meet its targeted CET1 ratio of 9.5% by June 2022.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/382944.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
All figures are in U.S. dollars unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (July 19, 2021): https://www.dbrsmorningstar.com/research/381742/global-methodology-for-rating-banks-and-banking-organisations. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021): https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
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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