Fifth Third Bank 2010 Annual Report Download - page 26

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
24 Fifth Third Bancorp
RISKS RELATING TO FIFTH THIRD’S 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 ALLL, 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 continue to improve and/or stabilize,
additional increases in the ALLL 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, as well as meet regulatory expectations. 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, as well as
regulatory expectations, 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’s ability to receive dividends from its subsidiaries
could have a material adverse effect on Fifth Third’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.
Fifth Third and/or the holders of its securities could be
adversely affected by unfavorable ratings from rating
agencies.
Fifth Third’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 Fifth Third, certain of its
subsidiaries and particular classes of securities they issue. The
interest rates that Fifth Third 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 Fifth Third 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 Fifth Third, its subsidiaries or their securities
could also create obligations or liabilities to Fifth Third under the
terms of its outstanding securities that could increase Fifth Third’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 Fifth Third 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. On November 1, 2010, citing their view
that the likelihood of government support in the future for larger
regional banks had declined, Moody’s downgraded ten large
regional banks, including Fifth Third’s subsidiary bank, Fifth
Third Bank. Fifth Third Bank’s credit ratings for short-term
obligations, long-term deposit and senior debt were downgraded
to P2, A3 and A3, respectively, from P1, A2 and A2, respectively.
During 2010, DBRS Investors Service downgraded Fifth Third’s
issuer rating to “AL” from “A” and downgraded the long term
debt rating and deposit ratings for Fifth Third’s bank subsidiary to
“A” from “AH.”