FITB Fifth Third Bancorp

Fifth Third Bancorp’s (FITB) third-quarter 2011 net income of $373 million or 40 cents per share outpaced the Zacks Consensus Estimate of 33 cents.

The results compare favorably with net income of $328 million or 35 cents per share in the prior quarter and $175 million or 22 cents per share in the prior-year quarter.

Quarterly results at Fifth Third reflect a better-than-expected revenue figure backed by fee income growth sequentially. Credit metrics also improved significantly. However, higher operating expenses were on the downside.

Performance in Detail

Total revenue at Fifth Third was $1.57 billion in the third quarter, comfortably ahead of the Zacks Consensus Estimate of $1.48 billion. Revenue also increased 2.8% sequentially but declined 10% from the prior-year quarter. The sequential increase in revenue primarily reflects a significant increase in non-interest income and net interest income. However, both net interest and non-interest income declined on a year-over- year basis.

Fifth Third’s net interest income was up 4% sequentially but down 2% year over year to $902 million. Net interest margin surged 3 basis points (bps) sequentially but plunged 5 bps year over year to 3.65%.

The sequential increase in income and margin during the reported quarter reflected growth in C&I, residential mortgage, auto, and bankcard loan balances, as well as in investment securities. These increases more than offset lower yields on loans and securities given the current interest rate environment.

On a year-over-year basis, both net interest income and margin decreased mainly due to lower loan and investment securities yields, partly offset by higher average loan balances, run-off in higher-priced CDs, and mix shift to lower cost deposit products.

Average portfolio loan and lease balances inched up 1% sequentially and 3% year over year. Average core deposits were flat sequentially and climbed 4% year over year as transaction deposit growth was partially offset by continued runoff of consumer time deposits (CDs).

Fifth Third’s non-interest income upped 1% sequentially but plummeted 20% year over year to $665 million. The sequential progress was attributable to securities gains, higher mortgage-related revenue and deposit service charges. However, the year-over-year decline resulted from decreased mortgage-related revenue, reduced deposit service charges and other non-interest income.

Fifth Third’s non-interest expenses increased 5% sequentially but dropped 3% year over year to $946 million. Excluding $28 million of costs related to the termination of certain FHLB borrowings and hedging transactions in the third quarter, non-interest expense inched up 2% sequentially, attributed to increase in credit-related costs and card and processing expense.

These were partly offset by lower housing investments impairment expense. The year-over-year decline reflected substantially lower credit-related expenses.

Credit Quality

Credit metrics improved in the reported quarter at Fifth Third. Net charge-offs were $262 million or 132 bps of average loans and leases compared with a respective $304 million or 156 bps in the prior quarter. Provision for loans and leases plummeted 23% sequentially and 81% year over year to $87 million.

Total nonperforming assets, including loans held-for-sale, were $2.1 billion, a decline of 5% from the prior quarter. The decline was driven by the sale of assets from held-for-sale during the quarter and by decreases in nonperforming loans and OREO in the held-for-investment portfolio.

Capital Ratios

Fifth Third’s capital ratios were mixed during the quarter. Sequentially, the Tier 1 common equity ratio increased 13 bps to 9.33% while Tier 1 capital ratio increased 3 bps to 11.96%, reflecting retained earnings growth offset by the redemption of TRUPs during the quarter. Total capital ratio improved 22 bps to 16.25%, and leverage ratio climbed 5 bps to 11.08%.

However, the tangible common equity to tangible assets ratio inched down 1 bps to 8.63%, excluding unrealized gains/losses.

Fifth Third posted an increase in both book value and tangible book value per share. As of September 30, 2011, book value per share was $13.73 and tangible book value per share was $11.05, up from $13.23 and $10.55, respectively, as of June 30, 2011.

Return on assets was 1.34% and return on average common equity was 11.9%, up from 1.22% and 11.0%, respectively, in the prior quarter.

Our Take

We believe Fifth Third is well positioned to benefit from a rebound in economic conditions along its footprint. Its diverse revenue mix augurs well.  Improved credit metrics are encouraging. This has been a trend in this quarter and many of the Wall Street biggies such as U.S. Bancorp (USB), Citigroup Inc. (C) and JPMorgan Chase & Company (JPM) have similarly posted better-than-expected results on lower loan loss provisions. However, regulatory issues remain an overhang.

Fifth Third retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ recommendation. Moreover, considering the fundamentals, we have maintained a “Neutral” recommendation on the stock

 
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