Fitch Affirms Fifth Third Bancorp's Inc. IDRs at 'A/F1'; Outlook Revised to Negative

CHICAGO--()--Fitch Ratings has affirmed Fifth Third Bancorp's (FITB) ratings at 'A/F1'. The Rating Outlook is revised to Negative from Stable. The affirmation reflects the company's conservative risk appetite, solid capital profile, and good liquidity levels. The Outlook revision reflects a financial profile, particularly earnings, that is no longer differentiated from its lower rated peers.

The rating action follows a periodic review of the large regional banking group, which includes BB&T Corporation (BBT), Capital One Finance Corporation (COF), Citizens Financial Group, Inc. (CFG), Comerica Incorporated (CMA), Fifth Third Bancorp (FITB), Huntington Bancshares Inc. (HBAN), Keycorp (KEY), M&T Bank Corporation (MTB), MUFG Americas Holding Corporation (MUAH), PNC Financial Services Group (PNC), Regions Financial Corporation (RF), SunTrust Banks Inc. (STI), US Bancorp (USB), Wells Fargo & Company (WFC), and Zions Bancorporation (ZION).

Company-specific rating rationales for the other banks are published separately, and for further discussion of the large regional bank sector in general, refer to the special report titled 'Large Regional Bank Periodic Review,' to be published shortly.

KEY RATING DRIVERS

IDRs, VRs, AND SENIOR DEBT

The affirmation reflects the company's conservative risk appetite, solid capital profile, and good liquidity levels. This is primarily offset by an earnings profile that has lost some momentum, and no longer outperforms peers. As such, Fitch has revised the Rating Outlook to Negative. Resolution of the Outlook will be contingent on an improved core earnings profile that is in line with similarly rated peers, and successful execution of ongoing strategic initiatives.

FITB's earnings, a key rating driver, have historically outpaced peer averages supported by strong efficiency levels, and good fee-based revenues sources. Fitch expects FITB's profitability may improve under a more normalized rate environment, along with its peer banks. In the meantime, FITB appears to have lost its earnings momentum, and is no longer differentiated from its peers. In second quarter 2016 (2Q16), FITB reported an ROA of 94bps, below the peer median of 100bps and below Fitch's long-term expectations for the bank. Excluding Vantiv-related gains, Fitch calculates an ROA of roughly 90bps in 2Q16, well below our expectations for FITB. The bank's earnings have been impacted by a slowdown in refinancing activities, changes to the deposit advance product, and increased regulatory and compliance-related spending over the past several years.

Fitch currently views the ownership stake in Vantiv (a payment processing and technology provider that was spun off from FITB in 2009) favorably, as it provides for revenue diversification and has provided a considerable level of earnings to the bank. In 2015, Vantiv contributed a significant 34% of pre-tax earnings in 2015. Excluding these gains, FITB's core earnings profile is considerably lower.

The carrying value of FITB's investment in Vantiv was just $390 million at most recent quarter-end, with a market value of $1.9 billion (based on Vantiv's share price on June 30, 2016). If FITB were to sell these shares in Vantiv, FITB would recognize a significant gain, and may also realize up to $1.2 billion in cash flows related to the dissolution of the existing tax receivable agreement (TRA). These potential gains are not included in FITB's equity or capital, though it could provide for a large buffer against unexpected losses if monetized, which is viewed favorably in the context of the company's capital profile. Offsetting this, FITB would no longer have the related gains and income to recognize through income, and its reported earnings would be lower, when holding revenues and expenses constant.

Fitch views FITB as a company in the midst of a transition, as the company attempts to pivot its culture and risk management appetite to targeting lower credit losses through a cycle. FITB, along with its other Ohio-based peers, performed poorly through the financial crisis with loan losses well in excess of large regional bank peers, primarily due to due to weak economic conditions in Michigan before the crisis started, and its exposure to Florida.

Since that time, FITB has taken numerous steps to improve its risk profile, and produce more consistent results in the future. As an example, FITB's loan growth has been well below the peer median, as the bank is targeting appropriate risk-adjusted returns. Reflecting the company's pricing discipline, FITB expects to grow loans, excluding held-for-sale, by only 2% for full-year 2016. Given the competitive lending environment and relatively weak economic growth, this is viewed as prudent.

Fitch views the company's strategic priorities favorably, which include growing fee revenue, streamlining processes to reduce expenses, improving the customer experience, and investing for the future to deliver strong consistent results through business cycles. Similar to peers, the bank is redeploying cost savings and gains into improving its technology as FITB adapts to changing customer behaviors, and refreshes its internal technological infrastructure. Fitch views FITB as well positioned to capitalize on the rapidly changing banking environment given its CEO's prior background in technology.

Underpinning today's rating affirmation, FITB's capital profile remains good with a Common Equity Tier 1 ratio under Basel III of approximately 9.9%. Although FITB's CET1 is below the peer median of roughly 10.8%, it is still viewed as acceptable in absolute terms, and above the fully phased-in requirement of 7%. Further, unlike some peers, FITB has been building capital, up 52bps from a year ago, as compared to the peer median of up 3bps. We also anticipate that FITB's long-term capital targets will be on the higher end as compared to peers. Fitch expects the large regional bank long-term capital targets to be generally between 8% and 9.5%, with the exception of WFC.

Fitch also notes that over the past three regulatory stress-testing exercises, FITB has performed better than the peer median in terms of capital erosion, or the starting capital ratios less the minimum capital ratios under the severely adverse scenario.

FITB maintains a solid core funding base. Core deposits (defined as total deposits less jumbo CDs) represented a sizable 97% of total deposits and 83% of total funding at June 30, 2016. Short-term wholesale funding now comprises just 3% of total funding. FITB's estimate of the modified LCR was 110% at June 30, 2016, well ahead of the 90% requirement on Jan. 1, 2016. Many of FITB's peers have yet to publicly disclose their LCR.

At June 30, 2016, FITB reported holding company cash totaled $2.4 billion, more than enough to cover $750 million of remaining holding company maturities in 2016 and 2017, as well as dividends, interest and other expenses over the next year.

In July 2016, FITB was assigned a 'needs to improve' CRA rating, which means the bank will be unable to pursue bank acquisitions until the rating is upgraded. FITB expects its next CRA exam in 4Q16, and is hopeful that the 'needs to improve' rating will be upgraded. Despite this rating, which prevents bank M&A, FITB reiterated that bank acquisitions remain a low priority.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

FITB's subordinated debt is notched one level below its VR of 'a' for loss severity. FITB's preferred stock is notched five levels below its VR, two times for loss severity and three times for non-performance, while FITB's trust preferred securities are notched two times from the VR for loss severity and two times for non-performance. These ratings are in accordance with Fitch's criteria and assessment of the instruments non-performance and loss severity risk profiles and have thus been affirmed due to the affirmation of the VR.

LONG- AND SHORT-TERM DEPOSIT RATINGS

The uninsured deposit ratings of Fifth Third Bank are rated one notch higher than FITB's IDR and senior unsecured debt because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default.

HOLDING COMPANY

FITB's IDR and VR are equalized with those of its bank, reflecting its role as the bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries. Ratings are also equalized reflecting the very close correlation between holding company and subsidiary failure and default probabilities.

SUPPORT RATING AND SUPPORT RATING FLOOR

Since FITB's Support and Support Rating Floors are '5' and 'NF', respectively, there is limited likelihood that these ratings will change over the foreseeable future.

RATING SENSITIVITIES

VR, IDRs, AND SENIOR DEBT

A lack of a sustainable improvement in FITB's earnings profile (without Vantiv ownership) may lead to a downgrade in FITB's ratings as they have represented a key rating strength historically, and its performance has been relatively average over the past couple years. Furthermore, a lack of demonstrated execution on its strategic initiatives will also lead to downward ratings pressure. Fitch expects resolution of the Rating Outlook will be at the outer end of the 12 to 24 month Outlook horizon period.

FITB's longer-term targets remain unchanged with a 12% to 14% ROTCE ratio and a 1.1% to 1.3% ROA. If FITB successfully executes on its current strategic investments, and produces improved earnings - in line with the bank's internal ROA target, the Outlook could be revised back to Stable.

Fitch expects FITB to continue to monetize its ownership stake in Vantiv over the intermediate term. A complete divestiture would lessen some volatility in earnings; however, without reinvestment or other organic opportunities, FITB's earnings profile would no longer benefit from Vantiv-related income and gains, and ratings could be adversely affected should it not be able to offset the associated decline.

Fitch anticipates that given its M&A related restrictions, there may not be a way to efficiently use proceeds from any material sale of the Vantiv ownership. As such, if FITB were to redeploy a majority of related gains into share repurchases, this would likely impact FITB's ratings.

FITB has recently announced strategic initiatives to increase its capital market offerings, in line with efforts at a couple of other large regional banks. Although Fitch expects securities business will remain relatively low relative to overall revenues for FITB and the other large regional banks, an outsized reliance on this more volatile income stream could be viewed negatively from a ratings perspective.

Given FITB's ratings are at the higher end of the ratings spectrum for the large regional banks, Fitch does not anticipate any further ratings upward momentum given the high absolute levels. Fitch currently views more downside risk in FITB's ratings than upside, as reflected in the Negative Outlook.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

The ratings for FITB and its operating companies' subordinated debt and preferred stock are sensitive to any change to FITB's VR.

LONG- AND SHORT-TERM DEPOSIT RATINGS

The long- and short-term deposit ratings are sensitive to any change to FITB's long- and short-term IDR.

HOLDING COMPANY

Should FITB's holding company begin to exhibit signs of weakness, demonstrate trouble accessing the capital markets, or have inadequate cash flow coverage to meet near-term obligations, there is the potential that Fitch could notch the holding company IDR and VR from the ratings of the operating companies.

SUPPORT RATING AND SUPPORT RATING FLOOR

Since FITB's Support and Support Rating Floors are '5' and 'NF', respectively, there is limited likelihood that these ratings will change over the foreseeable future.

The rating actions are as follows:

Fitch has affirmed the following ratings:

Fifth Third Bancorp

--Long-term IDR at 'A'; Outlook Revised to Negative;

--Viability Rating at 'a';

--Preferred stock at 'BB+';

--Senior debt at 'A';

--Subordinated debt at 'A-';

--Short-term IDR at 'F1';

--Short-term debt at 'F1';

--Support at '5';

--Support floor at 'NF'.

Fifth Third Bank

--Long-term IDR at 'A'; Outlook Revised to Negative;

--Viability Rating at 'a';

--Senior debt at 'A';

--Subordinated debt at 'A-';

--Long-term deposits at 'A+';

--Short-term IDR at 'F1';

--Short-term deposits at 'F1';

--Support at '5';

Support floor at 'NF'.

Additional information is available on www.fitchratings.com

Applicable Criteria

Global Bank Rating Criteria (pub. 15 Jul 2016)

https://www.fitchratings.com/site/re/884135

Additional Disclosures

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012640

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Julie Solar
Senior Director
+1 312-368-5472
Fitch Ratings, Inc.
70 West Madison
Chicago, IL 60602
or
Secondary Analyst
Doriana Gamboa
Senior Director
+1 212-908-1865
or
Committee Chairperson
Christopher Wolfe
Managing Director
+1 212-908-0771
or
Media Relations, New York
Hannah James, + 1 646-582-4947
hannah.james@fitchratings.com