Fifth Third Bank 2010 Annual Report Download - page 25

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
23 Fifth Third Bancorp
RISK FACTORS
The risks listed here are not the only risks that Fifth Third faces.
Additional risks that are not presently known or that Fifth Third
presently deems to be immaterial could also have a material,
adverse impact on its financial condition, the results of its
operations, or its business.
RISKS RELATING TO ECONOMIC AND MARKET
CONDITIONS
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
declines or does not improve in a reasonable time frame, 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 ALLL and in the receipt of
lower proceeds from the sale of loans and foreclosed properties.
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,
greater charge-offs and increased losses on the sale of foreclosed
real estate in future periods, which could materially adversely
affect Fifth Third’s financial condition and results of operations.
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.
Changes and trends in the capital markets may affect Fifth
Third’s income and cash flows.
Fifth Third enters into and maintains trading and investment
positions in the capital markets on its own behalf and manages
investment positions on behalf of its customers. These investment
positions include derivative financial instruments. The revenues
and profits Fifth Third derives from managing proprietary and
customer trading and investment positions are dependent on
market prices. If Fifth Third does not correctly anticipate market
changes and trends, Fifth Third may experience a decline in
investment advisory revenue or investment or trading losses that
may materially affect Fifth Third. Losses on behalf of its
customers could expose Fifth Third to litigation, credit risks or
loss of revenue from those customers. Additionally, substantial
losses in Fifth Third’s trading and investment positions could lead
to a loss with respect to those investments and may adversely
affect cash flows and funding costs.
The removal or reduction in stimulus activities sponsored by
the Federal Government and its agents may have a negative
impact on Fifth Third’s results and operations.
The Federal Government has intervened in an unprecedented
manner to stimulate economic growth. Some of these activities
have included the following:
• Target fed funds rates which have remained close to
zero percent;
• Mortgage rates that have remained at historical lows in
part due to the Federal Reserve Bank of New York’s
$1.25 trillion mortgage-backed securities purchase
program;
• Bank funding that has remained stable through an
increase in FDIC deposit insurance to a covered limit
of $250,000 per account from the previous coverage
limit of $100,000; and
• Housing demand that has been stimulated by
homebuyer tax credits.
The expiration or rescission of any of these programs may
have an adverse impact on Fifth Third’s operating results by
increasing interest rates, increasing the cost of funding, and
reducing the demand for loan products, including mortgage loans.
Problems encountered by financial institutions larger than or
similar to Fifth Third could adversely affect financial
markets generally and have indirect adverse effects on Fifth
Third.
The commercial soundness of many financial institutions may be
closely interrelated as a result of credit, trading, clearing or other
relationships between the institutions. As a result, concerns about,
or a default or threatened default by, one institution could lead to
significant market-wide liquidity and credit problems, losses or
defaults by other institutions. This is sometimes referred to as
“systemic risk” and may adversely affect financial intermediaries,
such as clearing agencies, clearing houses, banks, securities firms
and exchanges, with which the Bancorp interacts on a daily basis,
and therefore could adversely affect Fifth Third.
Fifth Third’s stock price is volatile.
Fifth Third’s stock price has been volatile in the past and several
factors could cause the price to fluctuate substantially in the
future. These factors include:
• Actual or anticipated variations in earnings;
• Changes in analysts’ recommendations or projections;
• Fifth Third’s announcements of developments related to
its businesses;
• Operating and stock performance of other companies
deemed to be peers;
• Actions by government regulators;
• New technology used or services offered by traditional
and non-traditional competitors; and
• News reports of trends, concerns and other issues
related to the financial services industry.
The price for shares of Fifth Third’s common stock may fluctuate
significantly in the future, and these fluctuations may be unrelated
to Fifth Third’s performance. General market price declines or
market volatility in the future could adversely affect the price for
shares of Fifth Third’s common stock, and the current market
price of such shares may not be indicative of future market prices.