Fifth Third Bank 2012 Annual Report Download - page 30

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
28 Fifth Third Bancorp
Other material adverse effects could include a reduction in
Fifth Third’s credit ratings resulting from a further decrease in the
probability of government support for large financial institutions
such as Fifth Third assumed by the ratings agencies in their current
credit ratings.
If Fifth Third is unable to continue to fund assets through
customer bank deposits or access capital markets on favorable terms
or if Fifth Third suffers an increase in borrowing costs or otherwise
fails to manage liquidity effectively; liquidity, operating margins,
financial results and condition may be materially adversely affected.
As Fifth Third did during the financial crisis, it may also need to
raise additional capital through the issuance of stock, which could
dilute the ownership of existing stockholders, or reduce or even
eliminate common stock dividends to preserve capital.
Fifth Third may have more credit risk and higher credit losses
to the extent loans are concentrated by location of the
borrower or collateral.
Fifth Third’s credit risk and credit losses can increase if its loans are
concentrated to borrowers engaged in the same or similar activities
or to borrowers who as a group may be uniquely or
disproportionately affected by economic or market conditions.
Deterioration in economic conditions, housing conditions and real
estate values in these states and generally across the country could
result in materially higher credit losses.
Fifth Third may be required to repurchase residential
mortgage loans or reimburse investors and others as a result of
breaches in contractual representations and warranties.
Fifth Third sells residential mortgage loans to various parties,
including GSEs and other financial institutions that purchase
residential mortgage loans for investment or private label
securitization. Fifth Third may be required to repurchase residential
mortgage loans, indemnify the securitization trust, investor or
insurer, or reimburse the securitization trust, investor or insurer for
credit losses incurred on loans in the event of a breach of
contractual representations or warranties that is not remedied within
a period (usually 60 days or less) after Fifth Third receives notice of
the breach. Contracts for residential mortgage loan sales to the
GSEs include various types of specific remedies and penalties that
could be applied to inadequate responses to repurchase requests. If
economic conditions and the housing market do not recover or
future investor repurchase demand and success at appealing
repurchase requests differ from past experience, Fifth Third could
continue to have increased repurchase obligations and increased loss
severity on repurchases, requiring material additions to the
repurchase reserve.
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. Fifth Third competes with
banks and other financial services companies for deposits. If
competitors raise the rates they pay on deposits, Fifth Third’s
funding costs may increase, either because Fifth Third raises rates to
avoid losing deposits or because Fifth Third loses deposits and must
rely on more expensive sources of funding. Higher funding costs
reduce our net interest margin and net interest income. Fifth Third’s
bank customers could take their money out of the bank and put it in
alternative investments, causing Fifth Third to lose a lower cost
source of funding. Checking and savings account balances and other
forms of customer deposits may decrease when customers perceive
alternative investments, such as the stock market, as providing a
better risk/return tradeoff.
The Bancorp’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 the Bancorp’s
banking subsidiary and certain nonbank subsidiaries may pay.
Regulatory scrutiny of capital levels at bank holding companies and
insured depository institution subsidiaries has increased since the
financial crisis and has resulted in increased regulatory focus on all
aspects of capital planning, including dividends and other
distributions to shareholders of banks such as the parent bank
holding companies. 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 the Bancorp’s ability to receive dividends
from its subsidiaries could have a material adverse effect on its
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. 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.