Arthur J. Gallagher's Buyout to Solidify California Foothold
Fifth Third Bancorp FITB delivered a notable positive earnings surprise of 10.5% in second-quarter 2018. Adjusted earnings per share of 63 cents surpassed the Zacks Consensus Estimate of 57 cents. However, including certain one-time items, the bottom line came in at 80 cents, surging 78% year over year.
Increase in net interest income and lower provisions were positive factors. Moreover, credit quality improved and a strong capital position was depicted. However, lower fee income and escalating expenses were undermining factors.
Certain non-recurring items included in the second-quarter results were the impact of a $205 million pre-tax (approximately $162 million after-tax) gain related to the sale of Worldpay shares and others.
Net income available to common shareholders escalated 64% year over year to $563 million.
Revenue Improve Y/Y, Costs Flare Up, Loans & Deposits Rise
Total adjusted revenues for the quarter came in at $1.59 billion, lagging the Zacks Consensus Estimate of $1.61 billion. However, the revenue figure was up 4.6% year over year, driven by higher net interest income.
Fifth Third’s net interest income (tax equivalent) came in at $1.02 billion, rising 8% year over year. This rise primarily reflected the impact of higher investment securities balances and improved short-term market rates.
Net interest margin expanded 20 basis points (bps) year over year to 2.86%, mainly due to improved short-term market rates.
Non-interest income surged 32% year over year to $743 million (including certain non-recurring items). Excluding significant items, non-interest income edged down, 1% year over year, to $567 million. Notably, the quarter witnessed gain on sale of Worldpay shares. Mortgage banking revenues dipped 4% year over year.
Non-interest expenses flared up 8% from the prior-year quarter to $1.04 billion. The upsurge chiefly stemmed from higher salaries, wages and incentives, net occupancy expense, technology costs, along with equipment expense and other non-interest expense.
As of Jun 30, 2018, average loan and lease balances inched up 1% year over year to $92.6 billion. The upswing mainly resulted from increased commercial loans and leases. Average total deposits advanced 1% year over year to $103.9 billion.
Credit Quality Improves
Credit metrics during the quarter marked a significant improvement. Provision for loan and lease losses plunged 37% year over year to $33 million. Net charge-offs for the quarter came in at $94 million or 41 bps of average loans and leases on an annualized basis compared with $64 million or 28 bps in the prior-year quarter.
Total allowance for credit losses were $1.2 billion, down 14.3% from the prior-year quarter. Total non-performing assets, including loans held for sale, came in at $503 million, down 24.9% from the year-ago quarter.
Strong Capital Position
Fifth Third remained well capitalized in the April-June quarter. Tier 1 risk-based capital ratio was 12.02% compared with 11.76% at the end of the prior-year quarter. CET1 capital ratio (fully phased-in) was 10.91% as against 10.63% at the end of the year-ago quarter. Tier 1 leverage ratio was 10.24% as compared with 10.07% in the prior-year quarter.
On May 25, 2018, Fifth Third initially settled a share repurchase agreement under which the company would buy $235 million of its outstanding common stock.
On Jun 15, 2018, Fifth Third settled the forward contract. Further, an additional 1.2 million shares were repurchased related to the completion of this agreement.
We believe the company, with a diversified traditional banking platform, remains well poised to benefit from a recovery in the economies where it has a footprint. The company’s steady improvement in loans and deposits highlights its efficient organic growth strategy. Further, we remain optimistic with its focus on several strategic initiatives to boost performance.
Nevertheless, several issues, including a stringent regulatory landscape, reduced fee income as well as competitive pressure, remain matters of concern.
Fifth Third Bancorp Price, Consensus and EPS Surprise
Fifth Third Bancorp Price, Consensus and EPS Surprise | Fifth Third Bancorp Quote
Currently, Fifth Third carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Performance of Other Banks
Driven by top-line strength, Northern Trust Corporation’s NTRS second-quarter 2018 adjusted earnings per share of $1.72 surpassed the Zacks Consensus Estimate of $1.63. Earnings compared favorably with $1.12 recorded in the year-ago quarter. Results exclude certain one-time items. Higher revenues and strong capital position were positives. In addition, the second quarter witnessed a rise in assets under custody, as well as assets under management. Moreover, mostly credit metrics marked a significant improvement. However, escalating operating expenses remained an undermining factor.
Wells Fargo WFC recorded negative earnings surprise of 3.6% in the second quarter. Adjusted earnings of $1.08 per share missed the Zacks Consensus Estimate of $1.12. Results came in line with the prior-year quarter earnings. Notably, results exclude net discrete income tax expense of 10 cents per share. Including non-recurring items, net income came in at $5.2 billion or 98 cents per share compared with $5.9 billion or $1.08 per share in the prior-year quarter.
Reflecting top-line strength and lower provisions, U.S. Bancorp’s USB second-quarter earnings per share of $1.02 outpaced the Zacks Consensus Estimate by a penny. Also, results came ahead of the prior-year quarter earnings of 85 cents. Easing margin pressure on rising rates was witnessed in the quarter. Moreover, revenues improved, aided by rise in net interest, as well as fee income. Further, elevated average loans and deposits balances, along with lower provisions, were tailwinds. Nevertheless, escalating expenses and lower mortgage banking revenues were major drags.
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