The Cincinnati-based bank said the loss for common shareholders had narrowed to $160 million, or 20 cents a share, from $2.2 billion, or $3.78 a share, a year earlier.
Analysts on average expected a loss of 31 cents a share, according to Thomson Reuters I/B/E/S.
Fourth-quarter credit trends were better than expected and showed encouraging signs of improvement, Chief Executive Officer Kevin Kabat said in a statement.
Among the 10 largest U.S. banks, Fifth Third is exposed to some of the areas that have been hit hardest by the financial crisis, and its consumer lending business has suffered as unemployment has climbed.
Losses on loans in Florida and Michigan accounted for 53 percent of the bank's total charge-offs in the fourth quarter, according to the statement.
Total charge-offs -- loans the bank does not expect to be repaid -- fell to $708 million, from $1.6 billion a year earlier and $756 million in the third quarter.
Fifth Third increased its allowance for loan losses to $4 billion from $3.3 billion in the year-earlier quarter. But Kabat said: We do not expect further appreciable increases in our loan loss reserve levels to be necessary.
Although losses are easing, the bank said demand for new loans had fallen 10 percent from a year earlier.
Fifth Third shares fell 8 cents to $11.31 on Wednesday. The stock had climbed 16 percent since the start of the year.
(Reporting by Elinor Comlay; Editing by Lisa Von Ahn)