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Fifth Third Misses Earnings on Legal Charges

Zacks Equity Research

Fifth Third Bancorp’s (FITB) first-quarter 2014 earnings per share came in at 36 cents, missing the Zacks Consensus Estimate by a nickel. Further, the figure compared unfavorably with 46 cents earned in the prior-year quarter.

Our proven model predicted that Fifth Third may not post an earnings beat as it did not have the right combination of two key ingredients – positive Earnings ESP and a Zacks Rank #3 (Hold) or better. It had a Zacks Rank #3 (Hold), but the Earnings ESP was 0.00%.

Results were primarily impacted by lower non-interest income and higher provisions for credit losses. Further, capital ratios failed to improve. However, lower expenses and increase in loan and deposit balances were the positives for the quarter.

Net income available to common shareholders was $309 million, down 25% year over year. Notably, results included a negative valuation adjustment amount of $36 million on the Vantiv warrant, litigation reserve charges of $51 million and certain other non-recurring items.  

Quarter in Detail

Total revenue for the quarter stood at $1.6 billion, down 10% year over year, primarily due to lower non-interest income. However, it came in ahead of the Zacks Consensus Estimate of $1.5 billion.

Fifth Third’s net interest income came in at $898 million, up 1% year over year. However, net interest margin was 3.22%, down 20 basis points (bps) from the prior-year quarter due to lower asset yields. This was, however, partially offset by rise in average loan balances, lower long-term debt expense resulting from fall in higher cost average long-term debt and run-off in higher-priced CDs.

Non-interest income decreased 24% year over year to $564 million (including certain non-recurring items). The decline was largely owing to fall in mortgage banking net revenue and other non-interest income.

Non-interest expenses declined 3% from the prior-year quarter to $950 million. Expenses included $51 million in charges made to litigation reserves and $4 million in severance expense. Looking back, first-quarter 2013 expenses had included a $9 million gain from the sale of affordable housing investments, $9 million in charges to increase litigation reserves, severance expense of $3 million and an amount of $3 million made to the Fifth Third Foundation. Excluding these items, the year-over-year decline in expenses reflected decreases in compensation-related expense and benefits expenses (primarily in the mortgage and retail business).

As of Mar 31, 2014, excluding loans held-for-sale, average loan and lease balances increased 4% year over year to $89.5 billion. Average total deposits rose 9% from the prior-year quarter to $97.1 billion.
Credit Quality

Fifth Third’s credit metrics was a mixed bag in the reported quarter. Total nonperforming assets including loans held for sale was $949 billion, down 23% from the year-ago quarter. Further, allowance for loan and lease losses dropped nearly 17% year over year to $1.5 billion.

However, net charge-offs stood at $168 million or 76 bps of average loans and leases on an annualized basis, up from $133 million or 63 bps in the prior-year quarter. Moreover, provision for loans and leases increased 12% year over year to $69 million.

Capital Position

Fifth Third’s capital ratios deteriorated in the quarter. Its Tier 1 common equity ratio decreased 19 bps years over year to 9.51%.

Further, the Tier 1 risk-based capital ratio fell 38 bps from the year-earlier quarter to 10.45%. Additionally, on a year-over-year basis, the leverage ratio declined 5 bps to 9.65% while the total risk-based capital ratio decreased 33 bps to 14.02% in the quarter.

Capital Deployment Activity

During the quarter, Fifth Third repurchased 8 million common shares.

Fifth Third entered into a share repurchase agreement with a counterparty on Jan 28, 2014, according to which the bank is to purchase approximately $99 million of its outstanding common stock. For the quarter, this transaction reduced Fifth Third’s share count by 3.95 million shares on the initial transaction date. The company settled this forward contract on Mar 31, 2014 along with further repurchase of 602,000 shares

Moreover, the settlement of the forward contract related to Nov 21, 2013 and Dec 10, 2013 share repurchase agreements materialized on Mar 5, 2014 and Mar 31, 2014, respectively and an additional 3.4 million shares were bought back upon completion of the agreement.

During the quarter, the company successfully cleared the stress test and subsequently its capital plan got approved by the Federal Reserve under the 2014 Comprehensive Capital Analysis and Review (CCARF).

Under its 2014 capital plan, Fifth Third is allowed to hike its quarterly common stock dividend to 13 cents per share. Also, the company got approval for share repurchase of up to $669 million of its common stock in the period between Apr 2014 and Mar 2015.

Further, if Fifth Third reaps any after-tax gains owing to the sale of  Vantiv, Inc (VNTV), it can undertake additional share repurchase.

Our Viewpoint

Though Fifth Third started 2014 on a disappointing note, we remain encouraged owing to a number of decent fundamentals.

Going forward, with a diversified traditional banking platform, Fifth Third remains well poised to benefit from a recovery in the economy of regions where it has a footprint. Moreover, the company’s efforts in reducing its nonperforming assets and operating expenses will serve as catalysts for growth. Also, the continuous growth in loans and deposits enhance its organic growth strategy. Further, we believe that Fifth Third’s capital deployment activities will boost shareholders’ confidence.

However, continuous decline in non-interest income, a low interest-rate environment, regulatory issues as well as competitive pressure remain matters of concern.

Performance of Other Banking Giants

The first-quarter earnings season kick started with Wall Street biggies such as Wells Fargo & Co. (WFC) and JPMorgan Chase & Co. (JPM). Wells Fargo achieved the seventeenth consecutive quarter of earnings growth by reporting earnings of $1.05 per share. Results improved from $1.00 earned in the prior quarter and 92 cents in the year-ago quarter. Also, results beat the Zacks Consensus Estimate by 8 cents.

However, JPMorgan failed to override the tough backdrop that banks have been enduring since the year started and delivered a negative earnings surprise of 9.2%. The banking giant came out with earnings of $1.28 per share, missing the Zacks Consensus Estimate of $1.41 by a wide margin. This is also a massive deterioration from the year- ago number of $1.59.

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