US Fed rates Fifth Third's compliance 'needs to improve'
Cincinnati regional bank, Fifth Third's compliance rating has been downgraded to the second-lowest level by the US Federal Reserve under the Community Reinvestment Act, with evidence of discriminatory and illegal credit practices cited as reasons for the downgrade. The rating signals that the bank is unable to meet the credit needs of the communities in which it operates, making it one of only two banks in the US with more than $100bn in assets and such a low rating. While Fifth Third claims the downgraded rating in this area is based on legacy issues, it admits it could create headwinds for the bank to grow its business. 

Alexander Coolidge

acoolidge@enquirer.com

Regulators slapped Fifth Third with their second-lowest compliance rating under the Community Reinvestment Act, adding a new hurdle to potential acquisitions.

The Federal Reserve Thursday gave a "needs to improve" rating to the Cincinnati-based regional bank in its latest assessment covering its operations from 2011 to 2013. The federal Community Reinvestment Act, passed in 1977, encourages banks to help meet the credit needs of the communities in which they operate, including economically-distressed or historically underserved communities.

A "needs to improve" is one step above "substantial noncompliance" and a downgrade from Fifth Third's previous "satisfactory" rating. Fifth Third and Birmingham, Alabama-based Regions Bank are the only two U.S. banks with more than $100 billion in assets with such a low rating.

The Fed said it gave lowered Fifth Third's rating over "evidence of discriminatory and other illegal credit practices noted during the review period." Specifically, regulators cited settlements Fifth Third made last fall to resolve previous regulatory actions: the bank agreed to pay $18 million to consumers affected by the bank's indirect auto lending program; the bank also paid $3 million to consumers and paid a $500,000 civil penalty over a credit card add-on debt protection product sold from 2007 to 2013.

"Substantive violations of the Equal Credit Opportunity Act, the Consumer Financial Protection Act, and the Fair Housing Act caused Fifth Third’s CRA rating to be adjusted downward," The Fed wrote in its assessment.

The Fed otherwise rated Fifth Third's lending and service performance "high satisfactory" and gave the bank its top grade "outstanding" for investment practices.

Fifth Third officials said the low rating stems from "legacy issues" that have already been corrected, but they also acknowledged the low grade could hamper attempts to grow its business.

"There will be limitations on both mergers and bank openings until a higher rating is received," said Fifth Third spokesman Larry Magnesen.

The decision could weigh on Fifth Third's growth efforts as it seeks to increase revenues amid low-interest rates and sluggish economic growth. With lending revenue down or flat, many regional banks are eyeing acquisitions to boost financial results, such as Cleveland-based Key Bank, which is acquiring Buffalo-based First Niagara Bank.

Still, analysts are skeptical Fifth Third is in the running to make a major takeover given its lagging stock price. Banks frequently use their stock to make acquisitions if their shares are trading at a premium relative to peers. But the Cincinnati bank's shares trade at a discount to most major regional banks.

"This doesn't help their position to make acquisitions," said Richard Bove, an analyst with Rafferty Capital.

The Fed's move comes as Fifth Third is wrapping up the closure or divestitures of 105 retail branches by next month, reducing the branch network by 8 percent and exiting Pennsylvania and Missouri. CEO Greg Carmichael also is trimming costs with an employee buyout that 160 workers accepted this year.