Fitch Affirms Fifth Third Bancorp's Inc. LT IDR at 'A' Following Large Regional Bank Review
The rating action follows a periodic review of the large regional banking group, which includes BB&T Corporation (BBT), Capital One Finance Corporation (COF), 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 solid liquidity levels, moderating credit trends, and good capital profile. This is somewhat offset by a weaker relative earnings profile than historical measures for the company.
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 will improve under a more normalized rate environment. In the meantime, FITB appears to have lost some earnings momentum, and the company no longer outperforms peers. During the first half of 2015 (1H15), FITB reported an ROA of 98bps, slightly below the peer median of 106bps. Current earnings are below Fitch's expectations for FITB. FITB's earnings are impacted by a slowdown in refinancing activities, changes to the deposit advance product, and a general tightening in credit spreads over the past several years.
Earnings were also impacted by a \\$97 million impairment charge related to branch network changes. FITB will consolidate or sell approximately 100 branches and approximately 30 other properties that were purchased earlier for future branch expansion, which represents a relatively large 8% reduction in the branch network. FITB anticipates cost savings over the long run related to this initiative, which may aid earnings in the long term.
FITB's capital profile remains good with an estimated Common Equity Tier 1 ratio under Basel III of approximately 9.4%, approximately 110bps below the large regional peer median. Although FITB's estimated CET1 is below peer levels, it is still viewed as acceptable in absolute terms and above the fully phased-in requirement of 7%. Further, continual enhancements to the risk management infrastructure may help to mitigate future loan losses.
Fitch currently views the ownership stake in Vantiv favorably, which contributed approximately 11% of FITB's pre-tax earnings in 2014. Vantiv is a payment processing and technology provider that was spun off from FITB in 2009. The carrying value of FITB's investment in Vantiv was \\$415 million at most recent quarter-end, with a market value of \\$1.6 billion (based on Vantiv's share price on June 30, 2015). The significant \\$1.2 billion pre-tax unrealized gain in Vantiv is not included in FITB's equity or capital. However, this unrealized gain could provide for a large buffer against unexpected losses, which is viewed favorably in the context of the company's capital profile. If monetized, an additional \\$1 billion in gains would contribute to an increase of approximately 100bps to the CET1.
FITB maintains a solid core funding base. Core deposits (defined as total deposits less jumbo CDs) represented a sizable 97% of total deposits and 84% of total funding at June 30, 2015. Short-term wholesale funding now comprises a modest 5% of total funding. FITB's estimate of the modified LCR was 108% at June 30, 2015, well ahead of the 90% requirement on Jan. 1, 2016. Many of FITB's peers have yet to publicly disclose their LCR.
FITB's asset quality continues to improve, with NCOs dropping to 37bps in 2Q15, its lowest level in years. Fitch views credit losses for the industry as unsustainably low and likely to deteriorate over the near term, especially under a higher interest rate environment.
FITB reported higher crisis-era losses than its peers, due to weak economic conditions in Michigan before the crisis started, and its exposure to Florida. FITB did make some needed decisions early on to mitigate risk, including some early exits of homebuilder or developer lending, and brokered home equity, as well as suspending non-owner-occupied CRE lending for a time. FITB's loan growth, particularly in C&I and auto, has been modest as compared to its peers, which is viewed favorably by Fitch given the competitive pricing environment, as well as industry-wide weakening terms and structures.
FITB disclosed the results of the SNC review were included in 2Q15 asset quality ratios. The SNC portfolio totals \\$25 billion or a relatively high 27% of total loans, though not all banks publicly disclose SNC outstandings. In the past, the SNC portfolio has performed better than the overall commercial book. Fitch expects that the industry will begin to build loan loss reserves, after several years of releasing significant amounts, as loan growth increases and the benign credit environment shows some deterioration, particularly in sectors such as energy.
As previously discussed, FITB's earnings should improve under a higher interest rate environment. That said, its asset sensitivity, as disclosed in its own internal results, suggest a more modest balance sheet positioning relative to peers. FITB appears to be one of the more conservative banks in its modelling assumptions, with very good public disclosures. As a result, FITB's actual earnings under a higher rate environment may perform better than current estimates, or conversely, some of its peers may not necessarily be as levered to higher rates as their disclosures suggest.
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
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.
More broadly, a lack of a sustainable improvement in FITB's earnings profile could pressure the company's ratings over time as they represented a key rating strength historically, and its performance has been relatively average over the past couple years.
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 hence, ratings could be adversely impacted, should it not be able to offset the associated decline.
In addition, a reversal in FITB's asset quality trends, combined with a material deterioration in the liquidity and capital profile could pressure FITB's earnings. FITB has recently announced strategic initiatives to increase its capital market offerings, in line with efforts at a couple 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.
In July 2015, FITB has announced several executive management changes, including a new CEO and new COO. This follows other key executive management changes over the past couple years including, but not limited to, a new CRO, CCO, CFO, and Treasurer. While Fitch does not anticipate a material departure in strategy related to the most recent management changes, the agency expects a certain level of management stability going forward given the significant amount of changes in senior management since 2013. Further key material changes in the executive management team may have negative ratings implications.
While considered less likely, further upward ratings movement would be predicated on a material decline in overall problem asset levels, combined with an above earnings profile. Further, while FITB's capital profile is currently considered adequate in light of its risk profile, any upgrade in ratings would likely also be dependent on an above average capital profile which would provide more than ample loss cushion for unexpected losses.
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.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
Fifth Third Bancorp
--Long-term IDR at 'A'; Outlook Stable;
--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 Stable;
--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'.
Комментарии