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Fitch Downgrades Fifth Third Bancorp to 'A-'; Outlook Stable
October 3, 2017 / 8:41 PM / 20 days ago

Fitch Downgrades Fifth Third Bancorp to 'A-'; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, October 03 (Fitch) Fitch Ratings has downgraded the long-term Issuer Default Ratings (IDRs) of Fifth Third Bancorp and Fifth Third Bank to 'A-' from 'A'. Fitch has also affirmed the companies' short-term IDRs at 'F1'. The Rating Outlook is Stable. A full list of rating actions follows at the end of this release. The rating action reflects an earnings profile that Fitch believes is more consistent with an 'A-' rating. Fitch still views FITB as a high quality bank and as in line with the large regional bank peer group average. 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), and Wells Fargo & Company (WFC). 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 FITB's downgrade was largely driven by the acceleration of the Vantiv divestiture, which was unexpected during our last rating review. FITB announced in August 2017, an agreement to sell its stake following Vantiv's acquisition of WorldPay Group plc. Vantiv is a payment processing and technology provider that FITB spun off in 2009. The share sale is expected to result in a $650 million after-tax gain in 3Q17, which will be used for common share repurchases in a like amount. While FITB has been clear in its intent to divest of its ownership of Vantiv, the acceleration of the sale was outside of Fitch's expectations. As indicated in Fitch's last rating review, a redeployment of related gains into share repurchases would likely result in negative rating action since a complete divestiture would lessen some earnings volatility; however, without reinvestment or other organic opportunities, FITB's earnings profile would no longer benefit from Vantiv-related income and gains, and the bank's earnings profile could be adversely affected should it not be able to offset the associated decline. Despite today's rating action, Fitch continues to view FITB as a high credit quality bank, underpinned by a conservative risk appetite, solid capital profile, and good liquidity levels. FITB also continues to execute on its project North Star, launched in September 2016, which includes various initiatives to improve revenues, reduce expenses and optimize the balance sheet. In July 2017, FITB indicated that it expects to 1.1% ROA and ROTCE in excess of 11% in 2018, assuming a December rate increase and two rate increases next year. FITB's longer-term targets remain unchanged with a 1.1% to 1.3% ROA, 12% to 14% ROTCE ratio, and an efficiency ratio below 60%, all to be achieved by the end of 2019. While these targets reflect an improvement from recent levels, FITB's earnings profile is no longer expected to be a positive outlier relative to peers. During 1H17, FITB earned an ROA of 97bps relative to the peer median (excluding FITB) of 105bps. Historically, FITB's earnings were a key rating driver, outpacing peer averages supported by strong efficiency levels, and good fee-based revenues sources. Fitch now believes FITB's expected earnings and ratings to be in line with the large regional bank peer average. Fitch acknowledges that FITB's strategic priority to have a more consistent performance through the cycle has likely also impacted earnings. FITB's loan growth has been well below peer levels for some time now. Most recently, FITB reported lower loan balances in 2Q17 than a year ago. The year-over-year decrease was primarily attributable to lower C&I and auto balances. The decline in C&I balances reflected planned C&I exits from relationships that did not meet required return targets or credit metrics, while the declines in auto reflect the company's desire to reduce lower-returns originations to improve returns on capital, a decision that was made two years ago. Underpinning FITB's ratings, it capital profile is consistent with its ratings, with a CET1 under Basel III of 10.6%, still below the peer median, but viewed as adequate and roughly 70bps higher than a a year ago. Over the long term, FITB disclosed that given its risk profile, the bank could be operated with a CET1 of between 8.5% to 9%, though the company added this was not a target. Further, FITB's liquidity profile remains solid. The company's modified LCR remains good at 115% at quarter-end. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES FITB's subordinated debt is notched one level below its VR 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. 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 the bank'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 VR is equalized with those of its operating companies and banks, 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. The ratings are also equalized reflecting the very close correlation between holding company and subsidiary failure and default probabilities. SUPPORT RATING AND SUPPORT RATING FLOOR FITB has a Support Rating (SR) of '5' and Support Rating Floor (SRF) of 'NF'. In Fitch's view, the probability of support is unlikely. IDRs and VRs do not incorporate any support. RATING SENSITIVITIES VR, IDRs, AND SENIOR DEBT At their new levels, Fitch views limited downside risk to FITB's ratings. However, the ratings could be upgraded if FITB is able to improve its earnings profile such that it consistently outperforms peers. 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. To the extent that FITB is able to successfully execute on its strategy of consistently performing better than peers, ratings could be upgraded. 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 the 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 IDRs. 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 potential that Fitch could notch the holding company 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: Fifth Third Bancorp --Long-term IDR downgraded to 'A-' from 'A'; Outlook Revised to Stable; --Viability Rating downgraded to 'a-' from 'a'; --Preferred stock downgraded to 'BB' from 'BB+'; --Senior debt downgraded to A-' from 'A'; --Subordinated debt downgraded to 'BBB+' from 'A-'; --Short-term IDR affirmed at 'F1'; --Short-term debt affirmed at 'F1'; --Support affirmed at '5'; --Support floor affirmed at 'NF'. Fifth Third Bank --Long-term IDR downgraded to 'A-' from 'A'; Outlook Revised to Stable; --Viability Rating downgraded to 'a-' from 'a'; --Senior debt downgraded to A-' from 'A'; --Subordinated debt downgraded to 'BBB+' from 'A-'; --Long-term deposits downgraded to 'A' from 'A+'; --Short-term deposits affirmed at 'F1'; --Short-term IDR affirmed at 'F1'; --Short-term debt affirmed at 'F1'; --Support affirmed at '5'; --Support floor affirmed at 'NF'. Contact: Primary Analyst Julie Solar Senior Director +1-312-368-5472 Fitch Ratings, Inc. 70 West Madison St. Chicago, IL 60602 Secondary Analyst Bain Rumohr Director +1-312-368-3153 Committee Chairperson Joo-Yung Lee Managing Director +1-212-908-0560 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. 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