Fifth Third Bank 2012 Annual Report Download - page 28

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
26 Fifth Third Bancorp
RISK FACTORS
The risks listed below present risks that could have a material
impact on the Bancorp’s financial condition, the results of its
operations, or its business.
RISKS RELATING TO ECONOMIC AND MARKET
CONDITIONS
Weakness in the U.S. 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 or 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 portion of Fifth Third’s
residential mortgage and commercial real estate loan portfolios are
comprised of borrowers in Florida, whose 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 foreclosed real estate in future
periods, which could materially adversely affect Fifth Third’s
financial condition and results of operations.
The global financial markets continue to be strained as a
result of economic slowdowns and concerns, especially about
the creditworthiness of the European Union member states
and financial institutions in the European Union. These
factors could have international implications, which could
hinder the U.S. economic recovery and affect the stability of
global financial markets.
Certain European Union member states have fiscal obligations
greater than their fiscal revenue, which has caused investor concern
over such countries’ ability to continue to service their debt and
foster economic growth in their economies. During 2011, the
European debt crisis caused spreads to widen in the fixed income
debt markets and liquidity to be less abundant. The European debt
crisis and measures adopted to address it have significantly
weakened European economies. A weaker European economy may
cause investors to lose confidence in the safety and soundness of
European financial institutions and the stability of European
member economies. A failure to adequately address sovereign debt
concerns in Europe could hamper economic recovery or contribute
to recessionary economic conditions and severe stress in the
financial markets, including in the United States. Should the U.S.
economic recovery be adversely impacted by these factors, the
likelihood for loan and asset growth at U.S. financial institutions,
like Fifth Third, may deteriorate.
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.
Potential changes in determining LIBOR could affect Fifth
Third’s debt securities and other financial obligations.
Beginning in 2008, concerns have been raised about the accuracy of
the calculation of the daily LIBOR, which is currently overseen by
the BBA. Fifth Third was not and is not a LIBOR panelist surveyed
for LIBOR estimates. The BBA has taken steps to change the
process for determining LIBOR by increasing the number of banks
surveyed to set LIBOR and to strengthen the oversight of the
process. In addition a report published in September 2012, set forth
recommendations relating to the setting and administration of
LIBOR, and the United Kingdom government has announced that
it intends to incorporate these recommendations in the new
legislation.
At the present time, it is uncertain what changes, if any, may be
required or made by the United Kingdom government or other
governmental or regulatory authorities in the method for
determining LIBOR. Accordingly, it is not apparent whether or to
what extent any such changes would have an adverse impact on the
value of any LIBOR-linked debt securities issued by Fifth Third or
any loans, derivatives and other financial obligations or extensions
of credit for which Fifth Third is an obligor, or whether or to what
extent any such changes would have an adverse effect on the value
of any LIBOR-linked securities, loans, derivatives and other
financial obligations or extensions of credit held by or due to Fifth
Third or on Fifth Third’s financial condition or results of
operations.
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.
Market changes and trends may result in 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. The expiration or rescission
of any of these programs and actions 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.