Fifth Third Bank 2004 Annual Report Download - page 28

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
26 Fifth Third Bancorp
Risk Committee, the Credit Risk Committee and the Operational
Risk Committee. There are also new products and new initiatives
processes applicable to every line of business to ensure an appropri-
ate standard readiness assessment is performed before launching a
new product or initiative.
Signifi cant risk policies approved by the management gover-
nance committees are also reviewed and approved by the Board of
Directors Risk and Compliance Committee.
CREDIT RISK MANAGEMENT
The objective of the Bancorp’s credit risk management strategy
is to quantify and manage credit risk on an aggregate portfolio
basis as well as to limit the risk of loss resulting from an individual
customer default. Credit risk is managed through a combination of
conservative exposure limits and underwriting, documentation and
collection standards and overall counterparty limits. The Bancorp’s
credit risk management strategy also emphasizes diversifi cation on
a geographic, industry and customer level, regular credit examina-
tions and monthly management reviews of large credit exposures
and credits experiencing deterioration of credit quality. Lending
offi cers with the authority to extend credit are delegated specifi c
authority amounts, the utilization of which is closely monitored.
Lending activities are largely decentralized, while the Enterprise
Risk Management division manages the policy process centrally.
The Credit Risk Review function, within the Enterprise Risk
Management division, provides objective assessments of the qual-
ity of underwriting and documentation, the accuracy of risk grades
and the charge-off and reserve analysis process.
The Bancorp’s credit review process and overall assessment of
required reserves is based on ongoing quarterly assessments of the
probable estimated losses inherent in the loan and lease portfolio.
In addition to the individual review of larger commercial loans that
exhibit probable or observed credit weaknesses, the commercial
credit review process includes the use of a risk grading system. The
Bancorp utilizes two risk grading systems for commercial loans and
leases. The current risk grading system utilized for reserve analysis
purposes encompasses ten categories. The Bancorp also maintains
a dual risk rating system that provides for 13 probability of default
grade categories and an additional six grade categories measuring
loss factors given an event of default. The probability of default and
loss given default analyses are not separated in the ten grade risk
rating system. The Bancorp is in the process of completing signifi -
cant validation and testing of the dual risk rating system prior to
implementation for reserve analysis purposes. The dual risk rating
system is consistent with Basel II expectations and allows for more
precision in the analysis of commercial credit risk. Scoring systems
and delinquency monitoring are used to assess the credit risk in the
Bancorp’s homogenous consumer loan portfolios.
The Bancorp’s credit risk management strategy includes mini-
mizing size risk and other concentrations of risk. Table 18 provides a
breakout of the commercial loan and lease portfolio, including held
for sale, by major industry classifi cation, by size of credit and by state,
TABLE 18: COMMERCIAL LOAN AND LEASE PORTFOLIO EXPOSURE (a)
2004 2003
As of December 31 ($ in millions) Outstanding Exposure Outstanding Exposure
By industry
Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,970 9,034 3,497 7,464
Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,287 8,620 6,303 7,289
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,654 5,823 3,121 4,896
Retail trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,957 4,903 2,449 4,060
Business services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,751 3,124 1,851 2,964
Wholesale trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,619 3,178 1,330 2,508
Individuals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,673 2,135 1,511 1,943
Financial services and insurance . . . . . . . . . . . . . . . . . . . . 744 2,348 602 1,938
Healthcare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,355 2,245 1,151 1,714
Transportation and warehousing . . . . . . . . . . . . . . . . . . . 1,382 1,678 1,222 1,434
Accommodation and food . . . . . . . . . . . . . . . . . . . . . . . . 850 1,237 861 1,144
Public administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . 796 911 862 965
Other services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 748 1,027 648 878
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 781 1,335 645 857
Communication and information . . . . . . . . . . . . . . . . . . 478 971 423 768
Entertainment and recreation . . . . . . . . . . . . . . . . . . . . . . 443 639 401 603
Agribusiness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 509 676 456 593
Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237 729 164 531
Mining . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234 413 188 278
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $31,468 51,026 27,685 42,827
By loan size
Less than $5 million . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62% 49 66 55
$5 million to $15 million . . . . . . . . . . . . . . . . . . . . . . . . . 25 26 24 26
$15 million to $25 million . . . . . . . . . . . . . . . . . . . . . . . . 913712
Greater than $25 million . . . . . . . . . . . . . . . . . . . . . . . . . 41237
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100% 100 100 100
By state
Ohio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30% 33 31 35
Michigan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 23 26 23
Indiana . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 10 10 10
Illinois . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 10 10 10
Kentucky . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6677
Tennessee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3211
Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2222
Pennsylvania . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11—1
West Virginia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —1——
Out-of-footprint . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 12 13 11
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100% 100 100 100
(a) Outstanding refl ects total commercial customer loan and lease balances, net of unearned income and exposure refl ects total commercial customer lending commitments.