Fifth Third's CRA Downgrade Could Restrict M&A
It may be a while before Fifth Third Bancorp in Cincinnati ends its eight-year dealmaking drought.
The $140 billion-asset company disclosed Thursday in a regulatory filing that the Federal Reserve Board downgraded its Community Reinvestment Act rating to "needs to improve." The rating applied to a 2011-13 time frame.
The downgrade reflects "legacy issues" that have since been addressed, Fifth Third said in its filing. The company earlier this year pledged to provide $28 billion in loans and other services to underserved communities in its regions.
BBVA Compass will likely face restrictions on M&A and branching after issues turned up in its recent CRA exam. Though a CRA rating downgrade is bad, some believe the foreign-owned bank is better off than banks that have had compliance issues arise after submitting a merger application.
Regions Financial in Birmingham, Ala., has been restricted from acquiring other banks or opening new branches after it received a Community Reinvestment Act downgrade.
Some are looking at buying banks or counting on recently announced acquisitions to diversify revenue streams. Others are investing in fee-based businesses and new technologies and all, of course, are trying to keep a lid on expenses.
Still, the rating could hamper Fifth Third's plans to get back into bank acquisitions, John Pancari, an analyst at Evercore, wrote in a July 14 note to clients.
During a conference call in April, Chief Executive Greg Carmichael expressed an interest in bank deals — particularly in the Carolinas, Tennessee and the Chicago area. Fifth Third's last acquisition was in 2008, when it bought the $4.8 billion-asset First Charter Bank in Charlotte, N.C.
The timing of the company's next evaluation, for the 2014-2016 time period, has not yet been disclosed, Pancari said. It's likely that the rating will remain in place until then.
Regions Financial also received a "needs to improve" rating earlier this year, and, as a result, was restricted from buying banks.
Fifth Third is set to report its second-quarter earnings on July 28.