Fifth Third Bank 2012 Annual Report Download - page 29

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
27 Fifth Third Bancorp
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;
 News reports of trends, concerns and other issues related
to the financial services industry;
 Natural disasters;
 Geopolitical conditions such as acts or threats of terrorism
or military conflicts.
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.
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.
When Fifth Third lends money or commits to lend money the
Bancorp incurs credit risk or the risk of losses if borrowers do not
repay their loans. The credit performance of the loan portfolios
significantly affects the Bancorp’s financial results and condition. If
the current economic environment were to deteriorate, more
customers may have difficulty in repaying their loans or other
obligations which could result in a higher level of credit losses and
reserves for credit losses. Fifth Third reserves for credit losses by
establishing reserves through a charge to earnings. The amount of
these reserves is based on Fifth Third’s assessment of credit losses
inherent in the loan portfolio (including unfunded credit
commitments). The process for determining the amount of the
allowance for loan and lease losses and the reserve for unfunded
commitments is critical to Fifth Third’s financial results and
condition. It requires difficult, subjective and complex judgments
about the environment, including analysis of economic or market
conditions that might impair the ability of borrowers to repay their
loans.
Fifth Third might underestimate the credit losses inherent in its
loan portfolio and have credit losses in excess of the amount
reserved. Fifth Third might increase the reserve because of changing
economic conditions, including falling home prices or higher
unemployment, or other factors such as changes in borrower’s
behavior. As an example, borrowers may "strategically default," or
discontinue making payments on their real estate-secured loans if
the value of the real estate is less than what they owe, even if they
are still financially able to make the payments.
Fifth Third believes that both the allowance for loan and lease
losses and reserve for unfunded commitments are adequate to cover
inherent losses at December 31, 2012; however, there is no
assurance that they will be sufficient to cover future credit losses,
especially if housing and employment conditions worsen. In the
event of significant deterioration in economic conditions, Fifth
Third may be required to increase reserves in future periods, which
would reduce earnings.
For more information, refer to the "Risk Management - Credit
Risk Management," "Critical Accounting Policies - Allowance for
Loan and Leases,” and “Reserve for Unfunded Commitments” of
the MD&A.
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
primarily relies on bank deposits to be a low cost and stable source
of funding for the loans Fifth Third makes and the operations of
Fifth Third’s business. Core customer deposits, which include
transaction deposits and other time deposits, have historically
provided Fifth Third with a sizeable source of relatively stable and
low-cost funds (average core deposits funded 70% of average total
assets at December 31, 2012). In addition to customer deposits,
sources of liquidity include investments in the securities portfolio,
Fifth Third’s ability to sell or securitize loans in secondary markets
and to pledge loans to access secured borrowing facilities through
the FHLB and the FRB, and Fifth Third’s ability to raise funds in
domestic and international money and capital markets.
Fifth Third’s liquidity and ability to fund and run the business
could be materially adversely affected by a variety of conditions and
factors, including financial and credit market disruptions and
volatility or a lack of market or customer confidence in financial
markets in general similar to what occurred during the financial
crisis in 2008 and early 2009, which may result in a loss of customer
deposits or outflows of cash or collateral and/or ability to access
capital markets on favorable terms.
Other conditions and factors that could materially adversely
affect Fifth Third’s liquidity and funding include a lack of market or
customer confidence in Fifth Third or negative news about Fifth
Third or the financial services industry generally which also may
result in a loss of deposits and/or negatively affect the ability to
access the capital markets; the loss of customer deposits to
alternative investments; inability to sell or securitize loans or other
assets, and reductions in one or more of Fifth Third’s credit ratings.
A reduced credit rating could adversely affect Fifth Third’s ability to
borrow funds and raise the cost of borrowings substantially and
could cause creditors and business counterparties to raise collateral
requirements or take other actions that could adversely affect Fifth
Third’s ability to raise capital. Many of the above conditions and
factors may be caused by events over which Fifth Third has little or
no control such as what occurred during the financial crisis. While
market conditions have stabilized and, in many cases, improved,
there can be no assurance that significant disruption and volatility in
the financial markets will not occur in the future.