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Fitch Ratings has maintained its Issuer Default Rating (IDR) of “A-” on Fifth Third Bancorp (FITB - Analyst Report) last week, but with a positive outlook.

According to the rating agency, the positive outlook on the rating is a reflection of Fifth Third’s comparatively stronger earnings profile though, to some extent, this is marred by the company’s elevated credit risk.

Over the near term, the elevated level of problem assets that is reflected in Fifth Third’s weaker asset quality ratios is a concern and a hindrance to an upgrade in its rating.  Encouragingly, however, the positive outlook implies that if Fifth Third can achieve improvements in its asset quality ratios along with continuation of better-than-average earnings as well as strong capital and liquidity profile, the rating could be upgraded a notch higher.

Moreover, the rating agency recognized that in spite of having elevated levels of nonperforming assets, which are ahead of the peer levels, losses are manageable at Fifth Third and lie close to the peer averages over the past year.  

As a matter of fact, the rating is a testament of the company’s financial strength and its ability to pay back its borrowings. Therefore, enjoying higher ratings enable the company to issue debt at a lesser cost and hence are a positive for the company.

In addition, IDRs on 13 other large regional banks were reaffirmed by Fitch following a thorough review of the peer group. The list includes the likes of Comerica Incorporated (CMA - Analyst Report), Huntington Bancshares Incorporated (HBAN - Analyst Report) and M&T Bank Corporation (MTB - Analyst Report).

Fifth Third currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we also maintain a long-term Neutral recommendation on the stock.

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