FITB Fifth Third Bancorp

Fifth Third Bancorp (FITB) reported  first quarter net income available to common shareholders of $88 million or 10 cents per share, significantly below the Zacks Consensus Estimate of 27 cents. The results also compared unfavorably with net income of $270 million or 33 cents per share in the prior quarter, but compared favorably with net loss of $72 million or 9 cents in the prior-year quarter.

The results were negatively affected by lower net interest income and non-interest income, partially offset by better-than-expected improvement in credit metrics and lower operating expenses.

Net income reduced by $153 million or 17 cents per share of discount accretion recorded in preferred dividends, which increased due to February repurchase of $3.4 billion in TARP.

Performance in Detail

Total revenue at Fifth Third was $1.5 billion in the first quarter, in line with the Zacks Consensus Estimate but down 6% sequentially. However, revenue was also in line with the prior-year quarter’s figure. The sequential decrease in revenues primarily reflects the significant drop in non-interest income.

Net interest income was down $33 million from the prior quarter to $884 million. Net interest margin inched down 4 basis points (bps) sequentially to 3.71%.The sequential decline in income and margin reflected full-quarter effect of the refinancing of FTPS, LLC loan, lower mortgage warehouse balances in loans held-for-sale and the effect of $1 billion fixed-rate debt issuance related to TARP repayment.

Income was down $17 million from the prior-year quarter due to lower average loan balances. However, net interest margin was up 8 bps year over year, driven by deposit growth and shift in mix from higher cost term deposits to lower cost deposit products.

Although average portfolio loan and lease balances inched up 2% sequentially and inched down 1% year over year, average core deposits increased both 1% sequentially and 2% year over year. The company reported growth across all transaction deposit account categories, which offset both sequential and year-over-year declines in consumer CDs.

On the flip side, Fifth Third’s non-interest income decreased 11% sequentially and 7% year over year to $584 million. The sequential decline reflected lower mortgage-related revenue, investment securities gains, and seasonally lower corporate banking revenue and deposit service charges, partially offset by lower credit-related costs realized in other noninterest income. The year-over-year decline was driven by lower mortgage-related revenue and deposit service charges based on the effect of August implementation of Regulation E.

Non-interest expense inched down 7% sequentially to $918 million. The figure includes $17 million of expenses associated with the termination of $1 billion in FHLB funding in the prior quarter.Excluding one-time items, Fifth Third’s non-interest expense came in at $935 million in the reported quarter. The remaining sequential decline reflected lower revenue-based compensation as well as lower credit-related expenses, partially offset by seasonal increase in FICA and unemployment costs.

Credit Quality

Credit metrics showed mixed trend in the reported quarter. Net charge-offs were $367 million or 192 bps of average loans and leases compared with $356 million or 186 bps of average loans and leases in the prior quarter. Provision for loans and leases increased 1% sequentially but plummeted 72% year over year to $168 million. Total nonperforming assets, including loans held-for-sale, were $2.3 billion, a decline of 5% from the prior quarter reflecting sale of assets from held-for-sale during the quarter and decreases in NPLs and OREO in the held-for-investment portfolio.

Capital Ratios

Capital ratios were strong during the quarter. On a sequential basis, the Tier 1 common equity ratio advanced 150 bps to 9.00%, while Tier 1 capital ratio decreased 173 bps to 12.21%. As of March 31, 2011, book value per share and tangible book value per share were $12.80 and $10.11 compared with $13.06 and $9.94 per share, respectively, reported in the prior quarter. Though book value and tangible book value per share increased due to higher retained earnings and the issuance of common stock at a premium, they were largely offset by the effect of the repurchase of the TARP warrant from the U.S. Treasury.

Return on assets (ROA) was 1.0% and return on average common equity (ROE) was 3.1%, down from 1.18% and 10.4%, respectively, in the prior quarter. Over the long term, ROE and ROA are expected to improve based on balance sheet growth, related efficiencies, lower credit costs, and overall economic environment.

Competitor’s Performance

In Fifth Third’s peer group, BB&T Corporation (BBT) reported first-quarter 2011 earnings of 32 cents per share compared with the prior-year quarter’s earnings of 27 cents. The earnings were just a penny ahead of the Zacks Consensus Estimate of 31 cents. BB&T’s results reflected higher net interest margin and lower non-interest expenses. The company also achieved an improvement in the credit quality and provision expenses were down in the quarter. Moreover, the capital ratios enhanced during the quarter. However, a decline in the top line slightly dampened the quarter’s results.

Our Take

For Fifth Third, we are encouraged to see the credit management efforts and expect it to experience an improvement in credit quality in the upcoming quarters. Though challenging economic conditions along its footprint and the recent regulatory issues are expected to remain an overhang, going forward, we expect Fifth Third’s diverse revenue stream, opportunistic expansions and cost containment measures to support its earnings.

Fifth Third shares are maintaining a Zacks #3 Rank, which translates into a short-term ‘Hold’ recommendation. Also, considering the fundamentals, we are maintaining a ‘Neutral’ rating on the stock.

 
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