Fifth Third Bank 2008 Annual Report Download - page 22

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
20 Fifth Third Bancorp
RISK FACTORS
Weakness in the economy and in the real estate market,
including specific weakness within Fifth Third’s geographic
footprint, has adversely affected Fifth Third and may
continue to adversely affect Fifth Third.
If the strength of the U.S. economy in general and the strength of
the local economies in which Fifth Third conducts operations
continues to decline, this could result in, among other things, a
deterioration in credit quality or a reduced demand for credit,
including a resultant effect on Fifth Third’s loan portfolio and
allowance for loan and lease losses. A significant portion of Fifth
Third’s residential mortgage and commercial real estate loan
portfolios are comprised of borrowers in Michigan, Northern
Ohio and Florida, which markets have been particularly adversely
affected by job losses, declines in real estate value, declines in
home sale volumes, and declines in new home building. These
factors could result in higher delinquencies and greater charge-offs
in future periods, which would materially adversely affect Fifth
Third’s financial condition and results of operations.
Deteriorating credit quality, particularly in real estate loans,
has adversely impacted Fifth Third and may continue to
adversely impact Fifth Third.
Fifth Third has experienced a downturn in credit performance and
expects credit conditions and the performance of its loan
portfolio to continue to deteriorate in the near term. This caused
Fifth Third to increase its allowance for loan and lease losses,
driven primarily by higher allocations related to residential
mortgage and home equity loans, commercial real estate loans and
loans of entities related to or dependant upon the real estate
industry. If the performance of Fifth Third’s loan portfolio does
not improve or stabilize, additional increases in the allowance for
loan and lease losses may be necessary in the future. Accordingly,
a decrease in the quality of Fifth Third’s credit portfolio could
have a material adverse effect on earnings and results of
operations.
Fifth Third’s results depend on general economic conditions
within its operating markets.
The revenues of FTPS are dependent on the transaction volume
generated by its merchant and financial institution customers.
This transaction volume is largely dependent on consumer and
corporate spending. If consumer confidence suffers and retail
sales decline, FTPS will be negatively impacted. Similarly, if an
economic downturn results in a decrease in the overall volume of
corporate transactions, FTPS will be negatively impacted. FTPS is
also impacted by the financial stability of its merchant customers.
FTPS assumes certain contingent liabilities related to the
processing of Visa® and MasterCard® merchant card
transactions. These liabilities typically arise from billing disputes
between the merchant and the cardholder that are ultimately
resolved in favor of the cardholder. These transactions are
charged back to the merchant and disputed amounts are returned
to the cardholder. If FTPS is unable to collect these amounts
from the merchant, FTPS will bear the loss.
The fee revenue of Investment Advisors is largely dependent
on the fair market value of assets under care and trading volumes
in the brokerage business. General economic conditions and their
effect on the securities markets tend to act in correlation. When
general economic conditions deteriorate, consumer and corporate
confidence in securities markets erodes, and Investment Advisors’
revenues are negatively impacted as asset values and trading
volumes decrease. Neutral economic conditions can also
negatively impact revenue when stagnant securities markets fail to
attract investors.
Changes in interest rates could affect Fifth Third’s income
and cash flows.
Fifth Third’s income and cash flows depend to a great extent on
the difference between the interest rates earned on interest-
earning assets such as loans and investment securities, and the
interest rates paid on interest-bearing liabilities such as deposits
and borrowings. These rates are highly sensitive to many factors
that are beyond Fifth Third’s control, including general economic
conditions and the policies of various governmental and
regulatory agencies (in particular, the FRB). Changes in monetary
policy, including changes in interest rates, will influence the
origination of loans, the prepayment speed of loans, the purchase
of investments, the generation of deposits and the rates received
on loans and investment securities and paid on deposits or other
sources of funding. The impact of these changes may be
magnified if Fifth Third does not effectively manage the relative
sensitivity of its assets and liabilities to changes in market interest
rates. Fluctuations in these areas may adversely affect Fifth Third
and its shareholders.
Fifth Third’s ability to maintain required capital levels and
adequate sources of funding and liquidity.
Fifth Third is required to maintain certain capital levels in
accordance with banking regulations. Fifth Third must also
maintain adequate funding sources in the normal course of
business to support its operations and fund outstanding liabilities.
Fifth Third’s ability to maintain capital levels, sources of funding
and liquidity could be impacted by changes in the capital markets
in which it operates. Additionally, if Fifth Third sought additional
sources of capital, liquidity or funding, those additional sources
could dilute current shareholders’ ownership interests.
Each of Fifth Third’s subsidiary banks must remain well-
capitalized for Fifth Third to retain its status as a financial holding
company. In addition, failure by Fifth Third’s bank subsidiaries to
meet applicable capital guidelines could subject the bank to a
variety of enforcement remedies available to the federal regulatory
authorities. These include limitations on the ability to pay
dividends, the issuance by the regulatory authority of a capital
directive to increase capital, and the termination of deposit
insurance by the FDIC.
As a regulated entity, Fifth Third must maintain certain
capital requirements that may limit its operations and
potential growth.
Fifth Third is a bank holding company and a financial holding
company. As such, Fifth Third is subject to the comprehensive,
consolidated supervision and regulation of the Board of
Governors of the Federal Reserve System, including risk-based
and leverage capital requirements. Fifth Third must maintain
certain risk-based and leverage capital ratios as required by its
banking regulators and which can change depending upon general
economic conditions and Fifth Third’s particular condition, risk
profile and growth plans. Compliance with the capital
requirements, including leverage ratios, may limit operations that
require the intensive use of capital and could adversely affect Fifth
Third’s ability to expand or maintain present business levels.