Fifth Third Bank 2013 Annual Report Download - page 61

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
59 Fifth Third Bancorp
launching a new product or initiative. Significant risk policies
approved by the management governance committees are also
reviewed and approved by the Risk and Compliance Committee of
the Board of Directors.
Credit Risk Review is an independent function responsible for
evaluating the sufficiency of underwriting, documentation and
approval processes for consumer and commercial credits, the
accuracy of risk grades assigned to commercial credit exposure,
nonaccrual status, specific reserves and monitoring for charge-offs.
Credit Risk Review reports directly to the Risk and Compliance
Committee of the Board of Directors and administratively to the
Chief Auditor.
CREDIT RISK MANAGEMENT
The objective of the Bancorp’s credit risk management strategy is to
quantify and manage credit risk on an aggregate portfolio basis, as
well as to limit the risk of loss resulting from the failure of a
borrower or counterparty to honor its financial or contractual
obligations to the Bancorp. The Bancorp's credit risk management
strategy is based on three core principles: conservatism,
diversification and monitoring. The Bancorp believes that effective
credit risk management begins with conservative lending practices.
These practices include conservative exposure and counterparty
limits and conservative underwriting, documentation and collection
standards. The Bancorp's credit risk management strategy also
emphasizes diversification on a geographic, industry and customer
level as well as ongoing portfolio monitoring and timely
management reviews of large credit exposures and credits
experiencing deterioration of credit quality. Credit officers with the
authority to extend credit are delegated specific authority amounts,
the utilization of which is closely monitored. Underwriting activities
are centrally managed, and ERM manages the policy and the
authority delegation process directly. The Credit Risk Review
function provides objective assessments of the quality of
underwriting and documentation, the accuracy of risk grades and
the charge-off, nonaccrual and reserve analysis process. The
Bancorp’s credit review process and overall assessment of the
adequacy of the allowance for credit losses is based on quarterly
assessments of the probable estimated losses inherent in the loan
and lease portfolio. The Bancorp uses these assessments to
promptly identify potential problem loans or leases within the
portfolio, maintain an adequate reserve and take any necessary
charge-offs. The Bancorp defines potential problem loans as those
rated substandard that do not meet the definition of a
nonperforming asset or a restructured loan. See Note 6 of the
Notes to the Consolidated Financial Statements for further
information on the Bancorp’s credit grade categories, which are
derived from standard regulatory rating definitions.
The following tables provide a summary of potential problem loans as of December 31:
TABLE 29: POTENTIAL PROBLEM LOANS
Unpaid
Carrying Principal
2013 ($ in millions) Value Balance Exposure
Commercial and industrial $ 1,032 1,034 1,323
Commercial mortgage 517 520 520
Commercial construction 44 44 50
Commercial leases 18 18 18
Total $ 1,611 1,616 1,911
TABLE 30: POTENTIAL PROBLEM LOANS
Unpaid
Carrying Principal
2012 ($ in millions) Value Balance Exposure
Commercial and industrial $ 1,015 1,017 1,212
Commercial mortgage 848 849 851
Commercial construction 87 87 100
Commercial leases 9 9 9
Total $ 1,959 1,962 2,172
In addition to the individual review of larger commercial loans that
exhibit probable or observed credit weaknesses, the commercial
credit review process includes the use of two risk grading systems.
The risk grading system currently utilized for reserve analysis
purposes encompasses ten categories. The Bancorp also maintains a
dual risk rating system for credit approval and pricing, portfolio
monitoring and capital allocation that includes a “through-the-cycle”
rating philosophy for modeling expected losses. The dual risk rating
system includes thirteen probabilities of default grade categories and
an additional six grade categories for estimating losses given an
event of default. The probability of default and loss given default
evaluations are not separated in the ten-category risk rating system.
The Bancorp has completed significant validation and testing of the
dual risk rating system as a commercial credit risk management tool.
The Bancorp is assessing the necessary modifications to the dual
risk rating system outputs to develop a U.S. GAAP compliant
ALLL model and will make a decision on the use of modified dual
risk ratings for purposes of determining the Bancorp’s ALLL once
the FASB has issued a final standard regarding proposed
methodology changes to the determination of credit impairment as
outlined in the FASB’s proposed Accounting Standard Update—
Financial Instruments–Credit Losses (Subtopic 825-15) issued on
December 20, 2012. Scoring systems, various analytical tools and
portfolio performance monitoring are used to assess the credit risk
in the Bancorp’s homogenous consumer and small business loan
portfolios.