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Fifth Third Depicts Downtrend; High Expenses A Worry?

On Sep 23, 2015, we issued an updated research report on Fifth Third BancorpFITB . Shares of this major regional bank have recorded negative year-to-date return of 5.8%. Elevated non-interest expenses, despite efficiency initiatives remain a major concern for Fifth Third. Moreover, regulatory issues, given its potential impact on profitability through increased costs also pose as a headwind.

Fifth Third continues to encounter many investigations and lawsuits from investors and regulators, which are expected to lead to higher legal expenses and provisions in the near term. Notably, management anticipates expenses to rise in 2015, due to costs associated with increased headcount and EMV technology in the credit card business.

Notably, management continues to invest in businesses and infrastructure including cyber security and fraud areas, which in turn will increase employee expenses primarily in risk and compliance functions for the third quarter. For the second half of 2015, management expects total compensation expenses to be relatively stable including employee benefits and incentive comp for business activity. Moreover, payment processing expenses are expected to trend upward with an uptick in EMV related expenditures.

Management also expects IT expenses during the second half to be about 10% higher than the first half of 2015.

Overall, core expenses are expected to increase in the third quarter impacted by the seasonal uptick in the third quarter related to a planned campaign, excluding any one-time items in the second half such as the lease termination expenses related to the branch optimization announcement or other one-time expenses. Total expenses during the next two quarters are expected to be about 2.5% higher than first-half 2015 expenses.

Decline in the yield on average interest-earning assets coupled with an increase in these assets continue to negatively impact net interest margin (NIM). In the absence of a significant rise in rates, NIM is expected to remain under pressure attributed to lower yields on loans, thereby adversely affecting the company's top line in the quarters ahead.

Notably, NIM is predicted to remain stable at the second-quarter level in the third quarter. Further, during the second half of 2015, NIM is expected to be stable with the first half NIM of 2.88%.

The Zacks Consensus Estimate over the past 30 days remained stable at $1.63 for 2015, while it moved down a penny to $1.79 for 2016. Fifth Third currently carries a Zacks Rank #4 (Sell).

Key Picks from the Sector

Some better-ranked finance stocks include The PNC Financial Services Group, Inc. PNC , U.S. Bancorp USB and Wells Fargo & Company WFC . All three carry a Zacks Rank #2 (Buy).

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PNC FINL SVC CP (PNC): Free Stock Analysis Report

US BANCORP (USB): Free Stock Analysis Report

FIFTH THIRD BK (FITB): Free Stock Analysis Report

WELLS FARGO-NEW (WFC): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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