We are reaffirming our long-term Neutral recommendation on
Fifth Third Bancorp
), based on its fundamentals and capital redeployment measures
amidst the current macroeconomic environment.
Aided by gains on the valuation of warrant that it holds in
), Fifth Third posted improved earnings in the second quarter of
2012. Fifth Third reported net income of $376 million or 40 cents
per share in the reported quarter, compared with $328 million or 35
cents in the year-ago quarter. Excluding that gain, earnings came
in at 36 cents per share, a penny ahead of the Zacks Consensus
Fifth Third experienced a year-over-year increase in mortgage
banking income while provisions for loan losses reported a decline.
Revenue was better than expected, credit metrics improved while
growth in retained earnings attributed to Fifth Third's enhanced
Fifth Third has recently declared a 25% hike in its quarterly
dividend. Moreover, last month the company announced a new share
buyback authorization of 100 million shares subsequent to the Fed's
approval after a review of its resubmitted capital plan. This
justifies its capital strength.
As a matter of fact, in March this year, the Fed's objection to a
number of elements in Fifth Third's capital plan, including
increases in its quarterly common dividend and the initiation of
common share repurchases, had put the company on the back foot and
weakened its competitive position to some extent. Therefore, a
positive development on that front is encouraging and will inspire
investors' confidence in the stock.
Though a number of Wall Street biggies such as
Wells Fargo & Co.
), passed the stress test with their proposed capital plans earlier
this year, companies such as Fifth Third and
) faced a setback as the Fed objected to their capital plans.
Also, Fifth Third's traditional commercial banking franchise,
diverse revenue mix and improved asset quality serve as positive
catalysts. However, pressure on net interest margin amidst a low
interest rate environment, regulatory headwinds, competitive
pressure and anticipated rise in repurchase expense would temper
any robust improvement in profitability.
Hence, the risk-reward profile seems balanced for Fifth Third and
therefore our long-term Neutral recommendation is reiterated.
However, Fifth Third currently retains its Zacks #2 Rank, which
translates into a short-term Buy rating.
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