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Fifth Third's Earnings Beat

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Fifth Third Bancorp’s (FITB) first-quarter 2013 adjusted earnings per share came in at 44 cents, beating the Zacks Consensus Estimate by a nickel. The results also came ahead of the year-ago earnings of 36 cents.

Including the benefit of $34 million pre-tax ($22 million after-tax, or 2 cents per share) on the valuation of the warrant which Fifth Third holds in Vantiv, the company reported net income of $413 million or 46 cents per share in the reported quarter. In the year-ago quarter, net income was reported at $421 million or 45 cents per share.
Improved credit quality aided by lower provision for loans and leases and strong capital position were the positives for the quarter. Moreover, increase in loans and deposits reflect the company’s organic growth. However, a decline in the top line and escalated non-interest expenses remain major concerns.
Total revenue for the quarter came in at $1.64 billion, higher than the Zacks Consensus Estimate of $1.59 billion. However, revenue dipped 2.2% year over year.
Quarter in Detail
Fifth Third’s net interest income came in at $893 million, down 1% year over year. The decline was due to lower asset yields, partially mitigated by higher average loan balances, lower long-term debt expense, run-off in higher-priced certificate of deposits along with mix shift to lower cost deposit products. Net-interest margin came in at 3.42%, down 19 basis points (bps) from the year-ago period.
Fifth Third’s non-interest income declined 3% year over year to $743 million. The decrease was largely attributable to lower other non-interest income, partially mitigated by higher mortgage banking and corporate banking revenues along with net securities gains.

Further, the company’s non-interest expenses escalated slightly from the year-ago quarter to $978 million. Expenses included a benefit of $9 million from the sale of affordable housing investments and a $9 million rise in litigation reserves.
In the year-ago quarter, expenses included $14 million charges due to increased litigation reserves, debt termination charges of $9 million, severance expenses of $6 million and $23 million in non-recurring benefit. Excluding these items, non-interest expenses advanced 1% from the prior-year period.  

Credit Quality
Fifth Third’s credit metrics witnessed a marked improvement in the reported quarter. Net charge-offs were $133 million or 63 bps of average loans and leases on an annualized basis compared with $147 million or 70 bps recorded in the prior quarter and $220 million or 108 bps in the prior-year quarter. This marked the lowest level since the third quarter of 2007.
Provision for loans and leases decreased 18% sequentially and 31% year over year to $62 million. Total nonperforming assets, including loans held-for-sale, were $1.23 billion or 1.41% of total loans, leases and other real estate owned (OREO). It fell 7% from the prior quarter and 31% from the prior-year quarter.
Capital Position
Fifth Third’s capital ratios were a mixed bag. The Tier 1 common equity ratio increased 7 bps year over year to 9.70%. The tangible common equity to tangible assets ratio was 9.03% (excluding unrealized gains/losses) and 9.28% (including unrealized gains/losses) compared with 8.83% and 9.10%, respectively, in the prior-year quarter.
However, the Tier 1 capital ratio declined 137 bps year over year to 10.83%. The leverage ratio decreased 128 bps to 10.03% and the total risk-based capital ratio declined 172 bps to 14.35% in the quarter.
Fifth Third posted an increase in both book value and tangible book value per share. As of Mar 31, 2013, book value per share was $15.42 and tangible book value per share was $12.62, up from $15.10 and $12.33, respectively, as of Dec 31, 2012.

Excluding loans held-for-sale, average loan and lease balances increased 5% year over year to $85.9 billion. Average core deposits climbed up 4% year over year to $84.9 billion.
Capital Deployment Activity
In Mar 2013, Fifth Third increased the quarterly cash dividend on common stock to 11 cents per share, reflecting a rise of 1 cent, or 10% over the prior dividend. The dividend was paid on Apr 18, 2013, to shareholders as of Mar 29, 2013.

Fifth Third’s 2013 capital plan under Comprehensive Capital Analysis and Review (CCARF) process, which got the Federal Reserve’s approval in Mar 2013 includes a further hike in the quarterly dividend to 12 cents per share in the second quarter of 2013 through the first quarter of 2014.

Moreover, the company’s board of directors approved a new share repurchase authorization of up to 100 million shares, which replaces the previous authorization from 2012 under which approximately 54 million shares remain.  Notably, Fifth Third’s capital plan included common share repurchases of up to $984 million through the first quarter of 2014, along with any incremental repurchases related to after-tax gains from the sale of Vantiv, Inc.’s stock.

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