Last year, Fifth Third Bancorp (FITB 1.74%) experienced a roller-coaster stress test season. Based on the results of the Dodd-Frank annual stress tests that were revealed Thursday evening, the Cincinnati-based bank seems to still be standing on solid ground.
Good, but not good enough
At the end of 2011, Fifth Third marched into the Federal Reserve's stress tests sporting a robust 9.3% Tier 1 common ratio. Under the Fed's "severely adverse scenario," the bank saw that ratio trickle down to a minimum level of 7.7%, which put the bank in the top 25% of the 19 participating bank holding companies. However in March 2012, the Fed rejected Fifth Third's request to increase its quarterly dividend, disappointing investors who were expecting a boost in payout. The bank would later be given approval to increase its quarterly dividend in September, but the sting of the rejection remained.
Sources: Dodd-Frank Act Stress Test 2013: Supervisory Stress Test Methodology and Results. Comprehensive Capital Analysis and Review 2012.
Yesterday's results again showed strong actual capital ratios; however, unlike last year, the bank's projected minimum ratio under the Fed's doomsday scenario only trickled down to a robust minimum of 8.6%. The stressed ratios revealed in these tests assume that the institutions keep dividend payouts constant based on current levels and do not consider any proposed capital plans.
Weathering the storm
Next Thursday, the Fed will release Comprehensive Capital Analysis and Review (CCAR) results, which will look very similar to these results but will take into consideration each institution's proposed increased in dividends or share repurchases. Contributing to Fifth Third's strong capital ratios was the modest loss the bank would theoretically experience over the span of the nine-quarter test. Despite the drastic conditions in the severely adverse scenario, the Fed estimated the bank would only post a pre-tax loss of $300 million over the course of the scenario.
Source: Dodd-Frank Act Stress Test 2013: Supervisory Stress Test Methodology and Results.
Expecting another boost?
Considering Fifth Third's Tier 1 common capital ratio only dropped to 8.6% in a hypothetical scenario that included more than 12% unemployment and 20%-plus declines in real estate values, the bank should have ample evidence to suggest it is possibly ready to increase its dividend payout ratio from its current of 21.8% level. Although the bank grew revenue year over year and strengthened capital ratios, Fifth Third still trades only slightly above its tangible book value and may be well-positioned to continually return capital to shareholders.
