Fifth Third expects further interest income weakness after quarterly profit falls

(Reuters) - Fifth Third Bancorp said on Thursday it expects interest income (NII) to decline again in the current quarter after posting a 1.3% fall in third-quarter profit.

Funding costs of lenders have come into focus in the higher-for-longer interest rate environment where assets such as money market funds are turning better returns for customers than banks, who are now raising rates to hold clients.

The bank's net interest margin in the quarter contracted to 2.98% from 3.22% a year earlier.

Cincinnati, Ohio-based Fifth Third sees net interest income - the difference between the interest banks earn on loans and pay out on deposits - down roughly between 1% and 2% in the fourth quarter.

Fifth Third's third-quarter NII fell 4% from a year earlier to $1.44 billion.

In a bright spot, a rise in non-interest income helped Fifth Third earn 92 cents per share, excluding one-time costs in the three months ended Sept. 30, beating analysts estimates of 82 cents per share, per LSEG data.

Shares of the lender were up 1.6% in premarket trading.

"We generated strong fee growth compared to the year-ago quarter while maintaining expense discipline," said CEO Tim Spence.

Meanwhile, bank deposits have also stabilized in recent months following a sector-wide crisis of confidence in March, which saw customers divert funds away from smaller banks and toward larger "too-big-to-fail" rivals.

Average deposits at Fifth Third were up 4% at $165.64 billion in the third quarter compared with a year earlier.

(Reporting by Pritam Biswas in Bengaluru; Editing by Krishna Chandra Eluri)