We are reiterating our Neutral stance on
Fifth Third Bancorp
(
FITB
) following a detailed analysis of the company's fundamentals and
its recent announcement regarding the
Vantiv Inc.
(
VNTV
) stake sale as well as balance sheet optimizing efforts and
liability cost reduction moves.
Fifth Third came up with decent third-quarter adjusted
earnings of 42 cents per share, exceeding the Zacks Consensus
Estimate of 39 cents. Results also came in ahead of the year-ago
quarter earnings of 40 cents. Better-than-expected results
reflect improved net interest and non-interest income. Moreover,
enhanced credit quality was a positive. However, higher expenses
were the dampeners.
Last week, Fifth Third announced that it is likely to
recognize a pre-tax gain of approximately $140 million (around
$91 million after-tax) in the fourth quarter of 2012 from the
sale of its 15% stake in Vantiv Inc. The proceeds would help
Fifth Third buy back its own common shares.
Further, Fifth Third decided to prepay $1 billion of FHLB term
debt as part of its efforts to optimize balance sheet and
liability costs. The maturity date of the debt was January 5,
2016.
It would lead to a prepayment charge of around $135 million
pre-tax, while net interest savings through the maturity date is
likely to be around the same amount. This would reflect a benefit
of around $40-45 million in annual net interest income and a gain
of about 4 basis points in net interest margin.
Going forward, we believe that with a diversified traditional
banking platform, Fifth Third remains well poised to benefit from
a recovering economy along its footprints. Its traditional
commercial banking franchise, diverse revenue mix, improved
credit quality and enhanced capital position serve as positive
catalysts for the stock. Further, we believe that its capital
deployment activities will boost shareholders' confidence in the
stock.
However, the tepid economic growth and low interest rate
environment are the concerns for Fifth Third's top-line
expansion. The low rates will create asset pricing pressure, and
hence growth in net interest margin is expected to remain
moderate. Additionally, in the midst of a protracted economic
recovery and regulatory changes, growth in fee income is likely
to bear the brunt in the forthcoming quarters. However,
mitigation efforts are expected to help recoup some losses.
Also, regulatory issues are a concern for Fifth Third, given
its potential impact on the company's profitability through
increased costs, limited fee generation opportunities as well as
reduced flexibility with respect to its business. While the
motive behind such measures is to enhance banks' business models
so that these become self-sufficient over the longer term, the
cost of compliance will likely increase and temper profitability
in the near-to-mid term.
In addition, we believe that the company's flexibility with
respect to its investments and lending volumes would be limited
in the medium term, given the stricter capital norms and
increased reserves that the regulators are proposing to align
with the Global standards.
Therefore, we believe that the risk-reward profile for Fifth
Third is currently balanced. Hence, we have reaffirmed our
Neutral recommendation on the stock. Also, Fifth Third currently
retains its Zacks #3 Rank, which translates into a short-term
Hold rating. Among its peers,
Comerica Inc.
(
CMA
) and
KeyCorp
(
KEY
) also have a Zacks #3 Rank.
COMERICA INC (CMA): Free Stock Analysis
Report
FIFTH THIRD BK (FITB): Free Stock Analysis
Report
KEYCORP NEW (KEY): Free Stock Analysis Report
VANTIV INC-A (VNTV): Free Stock Analysis
Report
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