Fifth Third Bank 2013 Annual Report Download - page 31

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
29 Fifth Third Bancorp
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 deteriorate or future
investor repurchase demand and success at appealing repurchase
requests differ from past experience, Fifth Third could 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 to meet
liquidity objectives, 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.
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 its 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.
Fifth Third could suffer if it fails to attract and retain skilled
personnel.
Fifth Third’s success depends, in large part, on its ability to attract
and retain key individuals. Competition for qualified candidates in
the activities and markets that Fifth Third serves is great and Fifth
Third may not be able to hire these candidates and retain them. If
Fifth Third is not able to hire or retain these key individuals, Fifth
Third may be unable to execute its business strategies and may
suffer adverse consequences to its business, operations and financial
condition.
In June 2010, the federal banking agencies issued joint
guidance on executive compensation designed to help ensure that a
banking organization’s incentive compensation policies do not
encourage imprudent risk taking and are consistent with the safety
and soundness of the organization. In addition, the Dodd-Frank Act
requires those agencies, along with the SEC, to adopt rules to