Fifth Third Bank 2013 Annual Report Download - page 78

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
76 Fifth Third Bancorp
simulated results due to timing, magnitude and frequency of interest
rate changes as well as changes in market conditions and
management strategies.
The Bancorp’s interest rate risk exposure is currently evaluated
by measuring the anticipated change in net interest income over 12-
month and 24-month horizons assuming 100 bps and 200 bps
parallel ramped increases in interest rates. The analysis would
typically include 100 bps and 200 bps parallel ramped decreases in
interest rates; however, this analysis is currently omitted due to the
current low levels of short-term interest rates. Applying the ramps
would result in certain short-term interest rates becoming negative
in the parallel ramped decrease scenarios. In accordance with the
current policy, the rate movements are assumed to occur over one
year and are sustained thereafter.
The following table shows the Bancorp’s estimated net interest income sensitivity profile and ALCO policy limits as of December 31:
TABLE 55: ESTIMATED NII SENSITIVITY PROFILE
2013 2012
Percent Change in NII
(FTE) ALCO Policy Limits
Percent Change in NII
(FTE) ALCO Policy Limits
12 Months
13 to 24
Months 12 Months
13 to 24
Months 12 Months
13 to 24
Months 12 Months
13 to 24
Months Change in Interest Rates (bps)
+200 1.73 %6.89 (4.00) (6.00) 1.78 % 7.75 (4.00) (6.00)
+100 0.77 3.37 - - 0.90 3.78 - -
At December 31, 2013, the Bancorp’s net interest income would
benefit modestly in year one and year two due to these parallel ramp
increases. The benefit is attributable to the combination of floating-
rate assets, including our predominantly floating-rate commercial
loan portfolio, and certain intermediate-term fixed rate liabilities.
The benefit is down modestly when compared to December 31,
2012. The lower net interest income benefit is attributable to an
increase in fixed-rate securities balances and the realization of
slower prepayments on the available-for-sale security portfolio in
2013. At December 31, 2012, prepayments speeds on certain
available-for-sale securities were projected to slow in a rising rate
environment, which provided a benefit to net interest income
sensitivity at that time. During 2013, these slowing prepayments
were realized as a result of an increase in the level of market interest
rates and mortgage rates. Further increases in interest rates will not
have the same impact on net interest income, which results in a
modest reduction in the benefit. The impacts of the slowing
prepayments and the increase in the fixed-rate securities portfolio
were partly offset by an increase in core deposit balances and an
increase in actual and projected fixed-rate borrowings and
shareholder’s equity.
Economic Value of Equity Sensitivity
The Bancorp also utilizes EVE as a measurement tool in managing
interest rate risk. Whereas the net interest income sensitivity analysis
highlights the impact on forecasted NII over 1- and 2-year time
horizons, the EVE analysis is a point in time analysis of the current
positions and incorporates all cash flows over their estimated
remaining lives. The EVE of the balance sheet is defined as the
discounted present value of all remaining asset and net derivative
cash flows less the discounted value of all remaining liability cash
flows. Due to this longer horizon, the sensitivity of EVE to changes
in the level of interest rates is a measure of longer-term interest rate
risk. EVE values only the current balance sheet and does not
incorporate the growth assumptions used in the NII sensitivity
analysis. As with the NII simulation model, assumptions about the
timing and variability of existing balance sheet cash flows are critical
in the EVE analysis. Particularly important are assumptions driving
loan and security prepayments and the expected balance attrition
and pricing of transaction deposits.
The following table shows the Bancorp’s EVE sensitivity profile as of December 31:
TABLE 56: ESTIMATED EVE SENSITIVITY PROFILE
2013 2012
Change in Interest Rates (bps) Change in EVE ALCO Policy Limit Change in EVE ALCO Policy Limit
+200 (5.78)%(12.00) 2.16 %(12.00)
+100 (2.91) 1.50
+25 (0.70) 0.43
-25 0.63 (0.52)
At December 31, 2013, the EVE sensitivity was modestly negative,
compared to a small benefit at December 31, 2012. The primary
factors contributing to the change are an increase in the average life
of mortgage loan and securities positions as a result of slowing
prepayments due to increases in the levels of market interest rates
and mortgage rates, growth in fixed-rate securities balances, and a
decreased benefit related to MSRs. At December 31, 2012, the MSR
valuation was projected to benefit from slowing prepayments that
would occur with rising interest rates. Slowing prepayments were
realized during 2013 due to increased market rates, and
consequently, future increases in interest rates will have a smaller
benefit to the MSR valuation.
While an instantaneous shift in interest rates is used in this
analysis to provide an estimate of exposure, the Bancorp believes
that a gradual shift in interest rates would have a much more modest
impact. Since EVE measures the discounted present value of cash
flows over the estimated lives of instruments, the change in EVE
does not directly correlate to the degree that earnings would be
impacted over a shorter time horizon (e.g., the current fiscal year).
Further, EVE does not take into account factors such as future
balance sheet growth, changes in product mix, changes in yield
curve relationships and changing product spreads that could
mitigate or exacerbate the impact of changes in interest rates. The
NII simulations and EVE analyses do not necessarily include certain