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Fifth Third Hit by Moody's Downgrade

Fifth Third was downgraded by Moody's Investor Services Tuesday, on concerns that increasing credit problems will take a toll on the bank's capital position.

Fifth Third Bancorp

(FITB) - Get Fifth Third Bancorp Report

was downgraded by Moody's Investor Services Tuesday, on concerns that increasing credit problems will take a toll on the bank's capital position.

The ratings agency lowered Fifth Third's senior debt two notches to Baa1 from A2. In addition, Fifth Third's short-term debt was lowered to Prime-2 from Prime-1.

It also lowered the ratings on the financial strength of the Cincinnati-based company's bank subsidiaries to C from B-, as was the long-term debt and deposit ratings of its bank subsidiaries, Moody's said.

The outlook on Fifth Third is negative, Moody's said.

Despite taking "sizable" loan-loss provisions last year, Fifth Third "faces continued elevated credit costs as real estate markets and the overall U.S. economy remain weak," Moody's said. "The additional credit costs will come from a range of consumer and commercial asset classes."

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In addition, although the company significantly increased loan-loss reserves last year, "poor underwriting and questionable expansion initiatives earlier this decade continue to weigh on its near-term outlook," Moody's says.

The company's primary markets, the Midwest and Florida, are areas which have been severely hurt during the economic/housing crisis. As a result, "credit challenges will negatively impact Fifth Third's near-term profitability and pressure its capital position," Moodys said.

Late last month, Moody's downgraded

US Bancorp (USB) - Get U.S. Bancorp Report

on similar concerns.

Still, Moody's approves of Fifth Third's decision to sell a majority stake in its processing business, since it will have a favorable impact on the company's capital position.

Moody's had already downgraded Fifth Third in January, but on Tuesday lowered its rating on the company further in conjunction with its initiative so that capital adequacy plays a more important role in the financial strength ratings of banks.

Fifth Third shares were shedding 8.1% to $3.99 in recent trading.