Fifth Third Bank 2009 Annual Report Download - page 24

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
22 Fifth Third Bancorp
RISKS RELATING TO OUR GENERAL BUSINESS
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
credit conditions and the performance of its loan portfolio could
deteriorate in the future. The downturn 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 dependent 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 must maintain adequate sources of funding and
liquidity.
Fifth Third must maintain adequate funding sources in the normal
course of business to support its operations and fund outstanding
liabilities. Fifth Third’s ability to maintain 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.
If Fifth Third does not adjust to rapid changes in the
financial services industry, its financial performance may
suffer.
Fifth Third’s ability to deliver strong financial performance and
returns on investment to shareholders will depend in part on its
ability to expand the scope of available financial services to meet
the needs and demands of its customers. In addition to the
challenge of competing against other banks in attracting and
retaining customers for traditional banking services, Fifth Third’s
competitors also include securities dealers, brokers, mortgage
bankers, investment advisors, specialty finance and insurance
companies who seek to offer one-stop financial services that may
include services that banks have not been able or allowed to offer
to their customers in the past or may not be currently able or
allowed to offer. This increasingly competitive environment is
primarily a result of changes in regulation, changes in technology
and product delivery systems, as well as the accelerating pace of
consolidation among financial service providers.
If Fifth Third is unable to grow its deposits, it may be
subject to paying higher funding costs.
The total amount that Fifth Third pays for funding costs is
dependent, in part, on Fifth Third’s ability to grow its deposits. If
Fifth Third is unable to sufficiently grow its deposits, it may be
subject to paying higher funding costs. This could materially
adversely affect Fifth Third’s earnings and results of operations.
Fifth Third’s ability to receive dividends from its subsidiaries
accounts for most of its revenue and could affect its liquidity
and ability to pay dividends.
Fifth Third Bancorp is a separate and distinct legal entity from its
subsidiaries. Fifth Third Bancorp typically receives substantially all
of its revenue from dividends from its subsidiaries. These
dividends are the principal source of funds to pay dividends on
Fifth Third Bancorp’s stock and interest and principal on its debt.
Various federal and/or state laws and regulations limit the amount
of dividends that Fifth Third’s bank and certain nonbank
subsidiaries may pay. Also, Fifth Third Bancorp’s right to
participate in a distribution of assets upon a subsidiary’s
liquidation or reorganization is subject to the prior claims of that
subsidiary’s creditors. Limitations on Fifth Third Bancorp’s ability
to receive dividends from its subsidiaries could have a material
adverse effect on Fifth Third Bancorp’s liquidity and ability to pay
dividends on stock or interest and principal on its debt.
The financial services industry is highly competitive and
creates competitive pressures that could adversely affect
Fifth Third’s revenue and profitability.
The financial services industry in which Fifth Third operates is
highly competitive. Fifth Third competes not only with
commercial banks, but also with insurance companies, mutual
funds, hedge funds, and other companies offering financial
services in the U.S., globally and over the internet. Fifth Third
competes on the basis of several factors, including capital, access
to capital, revenue generation, products, services, transaction
execution, innovation, reputation and price. Over time, certain
sectors of the financial services industry have become more
concentrated, as institutions involved in a broad range of financial
services have been acquired by or merged into other firms.
Recently, this trend accelerated considerably, as several major U.S.
financial institutions consolidated, were forced to merge, received
substantial government assistance or were placed into
conservatorship by the U.S. Government. These developments
could result in Fifth Third’s competitors gaining greater capital
and other resources, such as a broader range of products and
services and geographic diversity. Fifth Third may experience
pricing pressures as a result of these factors and as some of its
competitors seek to increase market share by reducing prices.
The Bancorp and/or the holders of its securities could be
adversely affected by unfavorable ratings from rating
agencies.
The Bancorp’s ability to access the capital markets is important to
its overall funding profile. This access is affected by the ratings
assigned by rating agencies to the Bancorp, certain of its
subsidiaries and particular classes of securities they issue. The
interest rates that the Bancorp pays on its securities are also
influenced by, among other things, the credit ratings that it, its
subsidiaries and/or its securities receive from recognized rating
agencies. A downgrade to the Bancorp’s, or its subsidiaries’, credit
rating could affect its ability to access the capital markets, increase
its borrowing costs and negatively impact its profitability. A
ratings downgrade to the Bancorp, its subsidiaries or their
securities could also create obligations or liabilities to the Bancorp
under the terms of its outstanding securities that could increase
the Bancorp’s costs or otherwise have a negative effect on the
Bancorp’s results of operations or financial condition.
Additionally, a downgrade of the credit rating of any particular
security issued by the Bancorp or its subsidiaries could negatively
affect the ability of the holders of that security to sell the securities
and the prices at which any such securities may be sold. During
2009, Moody's Investors Service downgraded the Bancorp’s issuer
rating to “Baa1” from “A2” and downgraded the long term debt
rating and deposit ratings for the Bancorp’s bank subsidiary to
“A2” from “A1.” Standard & Poor's Investors Service
downgraded the Bancorp’s issuer rating to “BBB” from “A-” and
downgraded the long term debt rating and deposit ratings for the
Bancorp’s bank subsidiary to “BBB+” from “A.” DBRS Investors
Service downgraded the Bancorp’s issuer rating to “A” from
“AAL” and downgraded the long term debt rating and deposit
ratings for the Bancorp’s bank subsidiary to “AH” from “AA.”
Fifth Third could suffer if it fails to attract and retain skilled
personnel.
As Fifth Third continues to grow, its success depends, in large
part, on its ability to attract and retain key individuals.
Competition for qualified candidates in the activities and markets
that Fifth Third serves is great and Fifth Third may not be able to