Fifth Third Bancorp : 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 CREDIT RATING CONSIDERATIONS

The ratings confirmation and Stable trends reflect Fifth Third’s diversified franchise, conservative risk profile and consistent earnings. Earnings levels have been solid in recent periods benefiting from revenue growth and an improved net interest margin compared to last year. 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 the more challenging operating environment, including a more costly and competitive funding environment, and the expectation that funding costs and asset quality metrics will likely worsen from their current levels, pressuring earnings. While DBRS Morningstar expects some credit deterioration as the credit cycle normalizes, these are expected to be manageable, and the Company has been building reserve levels.

CREDIT 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, funding challenges or a significant deterioration in asset quality.

CREDIT 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 over $500 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 three main businesses: Commercial Banking, Consumer and Small Business Banking 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. Earnings in 1H23 have shown resilience with revenue growth partially offset by higher operating expenses and provisions for loan and lease losses. Returns in 1H23 included a 1.14% ROA, an 13.8% ROACE and an efficiency ratio below 60%. The Company has an active hedging program which helps insulate the Company for a variety of interest rate risk scenarios.

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. The Company has exhibited strong credit performance in recent periods. Fifth Third’s allowance for credit losses represented a sound 2.08% of loans and leases at June 30, 2023.

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.

Capitalization 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, 2023, the Company’s Common Equity Tier 1 (CET1) ratio was 9.49%, improved from the year earlier period, largely reflecting earnings retention. The Company has paused share repurchases until more clarity is achieved on revised regulatory capital requirements.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/419100

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/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (July 4, 2023).

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 22, 2023): https://www.dbrsmorningstar.com/research/415978/global-methodology-for-rating-banks-and-banking-organisations.
In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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. DBRS Morningstar 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.
DBRS Morningstar did have 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. DBRS Morningstar’s outlooks and credit ratings are under regular surveillance.

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