A month has gone by since the last earnings report for Fifth Third Bancorp (FITB). Shares have lost about 3.3% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Fifth Third due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Fifth Third Q1 Earnings Beat Estimates, Revenues Up Y/Y
Fifth Third delivered a notable positive earnings surprise of 6.8% in first-quarter 2019. Adjusted earnings per share of 63 cents surpassed the Zacks Consensus Estimate of 59 cents. Further, including certain one-time items, the bottom line came in at $1.12, up 17% year over year.
Increase in revenues, aided by rising loans and deposits were positive factors. Moreover, the company’s performance displays a strong capital position. However, escalating expenses and provisions were undermining factors.
Certain non-recurring items included in the first-quarter results were the impact of a $433-million gain on sale of Worldpay shares and $7 million of GreenSky equity securities gains, partly offset by $84-million merger-related items and $24-million related to valuation of Visa total return swap (post-tax).
Net income available to common shareholders climbed 11% year over year to $760 million.
Revenues Improve Y/Y, Costs Flare Up, Loans & Deposits Rise
Total adjusted revenues for the reported quarter came in at $1.65 billion, up 6.5% year over year, driven by higher net interest, as well as non-interest income.
Fifth Third’s net interest income (tax equivalent) came in at $1.09 billion, rising 8.7% year over year. This rise primarily reflects higher-yielding consumer loans growth and improved short-term market rates, partly offset by elevated funding costs and transformation from demand deposits into interest-bearing deposits.
Net interest margin expanded 10 basis points (bps) year over year to 3.28%, mainly due to improved short-term market rates.
Non-interest income escalated 21% year over year to $1.1 billion (including certain non-recurring items). Excluding significant items, non-interest income climbed 2.5% year over year, to $567 million. Mortgage banking revenues remained flat, year over year.
Non-interest expenses flared up 9% from the prior-year quarter to $1.1 billion. The upsurge chiefly resulted from higher compensation and benefits, card and processing expense, technology costs and other non-interest expense. Adjusted expenses flared up 1% year over year.
As of Mar 31, 2019, average loan and lease balances jumped 3% sequentially to $97.8 billion. This upswing mainly stemmed from increased commercial and consumer loans and leases. Average total deposits advanced 2% sequentially to $109.6 billion.
Credit Quality: A Mixed Bag
Provision for credit losses surged significantly year over year to $90 million. Net charge-offs for the reported quarter came in at $77 million or 32 bps of average loans and leases on an annualized basis compared with $81 million or 36 bps in the prior-year quarter.
However, total allowance for credit losses were $1.25 billion, down 3.1% from the prior-year quarter. Total non-performing assets, including loans held for sale, came in at $497 million, down 1.4% from the year-ago quarter.
Strong Capital Position
Fifth Third remained well capitalized during the Jan-Mar quarter. Tier 1 risk-based capital ratio was 10.72% compared with 11.95% posted at the end of the prior-year quarter. CET1 capital ratio (fully phased-in) was 9.65% as against 10.82% at the end of the year-ago quarter. Tier 1 leverage ratio was 9.94% as compared with 10.11% in the year-earlier quarter.
On Mar 27, Fifth Third came with a settlement of repurchase agreement under which the company would purchase common stock worth $913 million. Settlement of the forward contract associated with this agreement is likely to occur on or before Jun 28, 2019.
NII is expected to be up 12-13% sequentially, reflecting the benefits of high earning asset base and day counts, partially offset by continued deposit pricing pressures. NIM is expected to escalate 4 bps sequentially. Purchase accounting accretion is anticipated to have about a 4 basis point impact on the NIM this quarter.
The company expects non-interest income to be up 17-18% from the adjusted first-quarter 2019 figure. Corporate banking revenues are anticipated to grow about 20% compared with second-quarter 2018.
The company expects non-interest expenses to increase 10-12% sequentially on an adjusted basis, excluding the merger-related expenses and CDI amortization expense, due entirely to the impact of MB.
Commercial loans and leases are expected to grow 17% sequentially, while average consumer loans are likely to escalate 7%. The end-of-period portfolio in the second quarter is likely to increase 1.5- 2% sequentially.
Management expects provisions reflective of loan growth.
NIM is projected to be up 10 bps from 2018, excluding the purchase accounting benefit to NIM. Purchase accounting accretion is anticipated to have about 3 basis points on NIM.
NII will likely be up around 15-16% in absence of rate hikes and excluding purchase accounting accretion.
Non-interest income is expected to increase 16% year over year, assuming around $90 million attributable to MB operating lease revenue in 2019.
Non-interest expenses are predicted to be up 13%, year over year on adjusted basis, assuming around $75 million attributable to MB operating lease expense in 2019. This excludes merger-related expenses and the intangible amortization.
Commercial loans and leases are expected to grow 20% year over year, while average consumer loans are likely to escalate 7-8%. Full year 2019 average total loans are likely to increase around 15-16% compared to 2018.
The effective tax rate is projected to be about 22-23% in 2019.
Project North Star Initiatives
In September 2016, Fifth Third launched Project North Star, which laid down several long-term financial targets without expecting any improvement in the current economic conditions. The initiatives are expected to enhance revenue growth, lower expenses and optimize balance sheet position.
Management expects to generate an annualized return on average tangible common equity (non-GAAP) of above 17%, a return on average assets to be around 1.4% and an efficiency ratio of low 50% by the end of 2019. These targets include impact of MB Financial acquisition
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
At this time, Fifth Third has an average Growth Score of C, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Fifth Third has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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