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 2011-2013 timeframe.

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.

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.