Fifth Third Bancorp’s (FITB) and its subsidiary’s long-term Issuer Default Ratings (IDR) of ‘A-‘ were affirmed by Fitch Ratings earlier this week. The rating agency has also revised the rating outlook to Stable from Negative and assigned a Positive Rating Watch to the Individual rating, which is currently ‘C.’
The upward revision to the rating outlook reflects the Fifth Third Bancorp’s solid liquidity position, strong capital ratios and improving credit quality. The assignment of the Positive Rating Watch to the Individual rating is primarily due to the company’s solid core earnings performance.
The weakness in the overall economy and in the real estate market, including specific weakness within Fifth Third’s geographic footprint, has adversely affected the company. A significant portion of the company’s residential mortgage and commercial real estate loan portfolios comprises borrowers in Michigan, Northern Ohio and Florida. These markets have been particularly hurt by job losses, declines in real estate values, declines in home sale volumes and declines in new home building.
However, of late, the company is witnessing an improvement in credit trends, driven by early signs of economic rebound and strategic efforts. Nonperforming assets have declined in the past two quarters. The current trend in credit metrics suggests a drop in loan loss provisions in the upcoming quarters.
Following the $1 billion common stock issuance, the sale of its processing solutions business, sale of VISA shares and the exchange of preferred stock for common stock, Fifth Third’s capital ratios have become stronger.
Fifth Third, which received $3.4 billion in bailout money in 2008, is also expected to repay it in the second half of 2010. While we expect the company to raise capital for paying back this money, this will eventually lead to earnings dilution. However, considering the current credit environment and the necessity to maintain a sound capital position, the additional common equity raise by Fifth Third is a strategic necessity.
The other positive attribute of Fifth Third includes its solid core funding base. As of March 31, 2010, over 90% of the company’s total deposits represent core deposits which exclude jumbo CDs from total deposits.
Last month, Fifth Third reported a first quarter loss of 9 cents per share. Results were well ahead of the Zacks Consensus Estimate of a loss of 18 cents, primarily driven by an improvement in credit trends. However, loan demand remains weak reflecting continuing challenges emanating from the tough economic environment.
Nevertheless, some early signs of economic recovery are noticeable and we expect Fifth Third to experience improvements in core earnings in the upcoming quarters. As of now, we have a Neutral recommendation on the shares.
Read the full analyst report on “FITB”
Zacks Investment Research
