Oct 18 - Standard & Poor's Ratings Services today said its ratings on Fifth Third Bancorp (BBB/Positive/A-2) are not affected by the company's third-quarter earnings, which we view as decent though slightly below our expectations. Fifth Third reported Standard & Poor's-adjusted net income of $383 million, up from $349 million in the second quarter and $378 million in third-quarter 2011. For third-quarter 2012, we adjusted reported earnings by adding back a $17 million charge on the redemption of trust preferred securities (TruPS) and a $10 million charge related to the valuation of Vantiv warrants. We also excluded an $8 million gain on the sale of certain Fifth Third funds. All previous periods used for comparison exclude Vantiv-related benefits and charges. Earnings benefited from improved funding costs, strong mortgage income, and positive credit leverage. Noninterest expense was elevated in the third quarter because of $26 million in debt extinguishment costs and a higher-than-expected $39 million net addition to mortgage repurchase reserves. The net interest margin (NIM) remained flat at 3.56% as yield compression in the loan and securities portfolios offset the benefits of the TruPS redemption (2 bps) and other nonrecurring items. We expect the NIM will decline in the fourth quarter given increased pressures on loan and securities yields. Fifth Third's average loan portfolio (excluding loans held for sale) remained essentially flat over the previous quarter as higher commercial and industrial (C&I) and residential mortgage balances were partially offset by declines in commercial real estate (down 4%) and home equity. Mortgage revenues increased 9% from the second quarter, reflecting a wider gain on sale margins, even as originations declined marginally. Credit trends remained positive, with further declines in net charge-offs (NCOs) and nonperforming assets (NPAs). Annualized NCOs declined 13 bps to 0.75%--the lowest level since the third quarter of 2007--reflecting continued improvements in credit, particularly for commercial loans. Fifth Third released reserves for the 10th consecutive quarter, albeit at a more moderate level than past quarters. NPAs (including all restructured loans) declined largely as a result of improving trends in commercial real estate and C&I. We expect NPAs will continue to decline further, though at a slower pace in 2013, with most of the improvement stemming from better performance within the commercial portfolio. Regulatory capital remained flat, with a Tier 1 common ratio of 9.7% and a tangible common equity ratio of 9.1% (excluding unrealized gains and losses). We believe capital ratios may improve slightly over the next year, in part because of continued organic capital accretion. The positive outlook on Fifth Third reflects our expectation that asset quality will continue to improve as the bank reduces its exposure to troubled real estate markets in the Southeast and Midwest. It also reflects our expectation that Fifth Third will sustain a risk-adjusted capital (RAC) ratio, based on our measurement, of approximately 8%-8.5% over the next 18-24 months, comfortably within the "adequate" category (7%-10%), based on our criteria. We could raise our ratings on Fifth Third if the bank's Standard & Poor's-adjusted NPA ratio declines and remains below mid-4% over at least six to 12 months. (Our adjusted NPA ratio includes accruing troubled debt restructurings and loans past due 90 days.) Other conditions for an upgrade would include NCOs remaining below 1% on a sustained basis and further evidence of satisfactory performance of accruing restructured loans.