Fifth Third Bank 2013 Annual Report Download - page 29

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
27 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
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. 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.
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.
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;