DBRS Morningstar Confirms Fifth Third Bancorp at ‘A’, Trend Stable

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 trends for all 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 RATING CONSIDERATIONS

The ratings confirmation and Stable trends reflects Fifth Third’s strong balance sheet fundamentals, risk profile and diversified earnings stream. Earnings have been solid in recent periods benefiting from loan growth, the reinvestment of short-term investments, an improving net interest margin and expense controls. 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 the credit cycle normalizes, these are expected to be manageable, and current reserve levels appear adequate to absorb any potential losses.

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

With approximately $207 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 $512 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. The Company operates four main businesses: Commercial Banking, Branch Banking, Consumer Lending and Wealth & Asset Management.

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

Fifth Third’s earnings are diverse and results have been solid in recent periods. While earnings in 2021 benefited from reserve releases, results in 1H22 have shown the benefit of higher rates and growth in loans which helped to boost net interest income, offsetting a decline in non-interest income. Additionally, expenses remain well controlled and the Company reported positive operating leverage for 1H22. Returns in 1H22 included a 1.03% ROA, an 11.1% ROACE and an efficiency ratio below 60%. The Company has an active hedging program and the net interest margin has benefitted from this program.

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

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. The Company has exhibited strong credit performance in recent periods. Fifth Third’s allowance for credit losses represented a sound 1.85% of loans and leases at June 30, 2022.

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/Good

DBRS Morningstar views Fifth Third’s capital as sound with strong levels of internal capital generation. At June 30, 2022, the Company’s Common Equity Tier 1 (CET1) ratio was 8.95%, dropping from 9.54% at YE21 reflecting organic growth in risk weighted assets and the impact of an acquisition. The Company has paused share repurchases until capital is rebuilt closer to its 9.25% target level.

Further details on the Scorecard Indicators and Building Block Assessments can be found at dbrsmorningstar.com/research/401301.

ENVIRONMENTAL, SOCIAL, 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 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/396929/dbrs-morningstar-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 Banks and Banking Organisations (June 23, 2022): https://www.dbrsmorningstar.com/research/398692/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 (May 17, 2022): https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

The primary sources of information used for this rating include Morningstar, Inc. and Company Documents. 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.

The conditions that lead to the assignment of a Negative or Positive trend are generally 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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