Fifth Third Bank 2013 Annual Report Download - page 81

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
79 Fifth Third Bancorp
equity certificates, with varying levels of credit subordination and
payment priority. The Bancorp does not hold any of the notes or
equity certificates issued by the trust, and the investors in these
securities have no credit recourse to the Bancorp’s assets for failure
of debtors to pay when due.
In August of 2013, the Bancorp transferred approximately $1.3
billion in fixed-rate consumer automobile loans to a bankruptcy
remote trust which was deemed to be a VIE. The Bancorp
concluded that it is the primary beneficiary of the VIE and,
therefore, has consolidated this VIE. The primary purposes for
which the VIE was created were to issue asset backed securities with
varying levels of credit subordination and payment priority and to
provide the Bancorp with access to liquidity for its originated loans.
The assets of the VIE are restricted to the settlement of the notes
and other obligations of the VIE. Third-party holders of the notes
do not have recourse to the general assets of the Bancorp.
Liquidity Coverage Ratio and Net Stable Funding Ratio
The BCBS’ key reform within the Basel III framework to strengthen
international liquidity standards was the introduction of the LCR
and NSFR. On January 7, 2013, the BCBS issued a final standard
for the LCR applicable to large internationally active banking
organizations, which would phase in the LCR beginning in 2015
with full implementation in 2019. The BCBS plans on introducing
the NSFR final standard in the next two years.
The BCBS’ LCR would promote the short-term resilience of a
bank's liquidity profile by ensuring an adequate level of
unencumbered high-quality liquid assets that can be converted into
cash easily and immediately in private markets to meet its liquidity
needs within 30 calendar days. Financial institutions subject to the
LCR generally would be expected to hold unencumbered high-
quality assets of at least 100% of net cash flows over the next 30
calendar days upon full implementation in 2019.
The BCBS’ NSFR is intended to promote medium and long-
term funding of the assets and activities of financial institutions.
This ratio would establish a minimum acceptable amount of stable
funding based on the liquidity characteristics of a financial
institution’s assets and activities over a one year horizon.
Management is currently monitoring the progress of the BCBS’
work on the NSFR.
Section 165 of the Dodd-Frank Act requires the FRB to
establish enhanced liquidity standards for BHCs with total assets of
$50 billion or greater. On October 24, 2013, the U.S. Banking
Agencies issued an NPR that would implement a LCR requirement
that is generally consistent with the international LCR standards
published by the BCBS for large internationally active banking
organizations, generally those with $250 billion or more in total
consolidated assets or $10 billion or more in on-balance sheet
foreign exposure. Additionally, a Modified LCR requirement was
proposed for BHC’s with total consolidated assets of at least $50
billion that are not large internationally active banking organizations,
like Fifth Third. The Modified LCR requirement incorporates a
shorter (21-calendar days) stress scenario for calculating total net
cash outflows than the LCR’s 30 calendar day requirement.
Therefore, the estimated net cash outflows for the Modified LCR
generally would be 70% of the LCR’s estimated net cash outflows.
The NPR’s transition period will begin on January 1, 2015 whereby
LCR and Modified LCR entities must comply with a minimum ratio
of 80%. On January 1, 2016 and 2017, the minimum ratio would
increase to 90% and 100%, respectively. The NPR was open for
public comment until January 31, 2014. Management is currently
reviewing the NPR and evaluating its impact upon the Bancorp’s
Consolidated Financial Statements.
Credit Ratings
The cost and availability of financing to the Bancorp are impacted
by its credit ratings. A downgrade to the Bancorp’s credit ratings
could affect its ability to access the credit markets and increase its
borrowing costs, thereby adversely impacting the Bancorp’s
financial condition and liquidity. Key factors in maintaining high
credit ratings include a stable and diverse earnings stream, strong
credit quality, strong capital ratios and diverse funding sources, in
addition to disciplined liquidity monitoring procedures.
The Bancorp’s credit ratings are summarized in Table 59. The
ratings reflect the ratings agencies view on the Bancorp’s capacity to
meet financial commitments. *
* As an investor, you should be aware that a security rating is not a
recommendation to buy, sell or hold securities, that it may be subject to revision
or withdrawal at any time by the assigning rating organization and that each
rating should be evaluated independently of any other rating. Additional
information on the credit rating ranking within the overall classification system is
located on the website of each credit rating agency.
TABLE 59: AGENCY RATINGS
A
s of February 24, 2014 Moody's Standard and Poor's Fitch DBRS
Fifth Third Bancorp:
Short-term No rating A-2 F1 R-1L
Senior debt Baa1 BBB+ A AL
Subordinated debt Baa2 BBB A- BBBH
Fifth Third Bank:
Short-term P-2 A-2 F1 R-1L
Long-term deposit A3 No rating A+ A
Senior debt A3 A- A A
Subordinated debt Baa1 BBB+ A- AL
CAPITAL MANAGEMENT
Management regularly reviews the Bancorp’s capital levels to help
ensure it is appropriately positioned under various operating
environments. The Bancorp has established a Capital Committee
which is responsible for making capital plan recommendations to
management. These recommendations are reviewed by the ERM
Committee and the capital plan is approved by the board. The
Capital Committee is responsible for execution oversight of the
capital actions of the capital plan.
Capital Ratios
The U.S banking agencies established quantitative measures that
assign risk weightings to assets and off-balance sheet items and also
define and set minimum regulatory capital requirements. The U.S.
banking agencies define “well capitalized” ratios for Tier I and total
risk-based capital as 6% and 10%, respectively. The Bancorp
exceeded these “well-capitalized” ratios for all periods presented.
The Basel II advanced approach framework was finalized by
U.S. banking agencies in 2007. Core banks, defined as those with
consolidated total assets in excess of $250 billion or on balance