Standard & Poor's Ratings Services said that it revised its outlook on Fifth Third Bancorp to stable from negative.

At the same time S&P affirmed its 'BBB' long-term counterparty credit ratings on Fifth Third, and the 'BBB+' ratings on its banking subsidiaries.

"The rating action reflects our opinion that Fifth Third's credit quality is improving, with sequential declines in net charge-offs (NCOs), nonperforming assets (NPAs), and total delinquencies since September 2009," said Standard & Poor's credit analyst Dan Teclaw.

Strong pretax, preprovision earnings of about $2.2 billion annually, a robust loan-loss reserve of 4.85% of loans, and a satisfactory tangible capital equity-to-tangible assets ratio of 6.55% (excluding unrealized gains and losses in accumulated other comprehensive income) support the company's financial condition.

The company's NCO, NPA, and delinquency levels, however, are still elevated compared to historical norms and to peers' at 2.26%, 6.49% (including accruing restructured loans), and 1.43%, respectively. Weak demand for loans has also caused balance-sheet shrinkage (average loans as of June 30, 2010, decreased 5.6% to $77.0 billion compared with June 2009), which put some pressure on asset-quality ratios.

The company consistently generates $2.2 billion of pretax, preprovision income. Thus far in 2010, Fifth Third has recorded $1.02 billion in NCOs.

"Although we believe elevated credit costs will persist in the second half of the year, we believe the company may recognize a profit for 2010," S&P said. "The company also has $3.7 billion (4.85% of loans) in its allowance for credit losses to buffer capital. We expect some decline in the reserve if asset-quality trends and economic expectations further improve."

The outlook is stable. S&P said it expects that the company's earnings fundamentals and financial condition will remain positive.

"If we recognize that asset-quality improvement is not sustainable, we could revise the outlook to negative," the ratings agency said. "Conversely, we could revise the outlook to positive after more quarterly improvements in asset quality, earnings, and capital when compared to similarly rated peers."

Previously on monitordaily.com:

7/22/2010 - Fifth Third Q2/10 Earnings Boosted by Further Reductions in Credit Costs