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Fifth Third (FITB) Q3 Earnings Beat, Expenses Up Y/Y

Driven by higher non-interest income, Fifth Third BancorpFITB delivered a positive earnings surprise of 12.5% in third-quarter 2015. Earnings per share of 45 cents easily beat the Zacks Consensus Estimate of 40 cents. Further, the reported figure compared favorably with the prior-year quarter earnings of 39 cents.

Results reflected higher revenues, partially offset by an increase in provisions for loan and lease losses and higher expenses. Also, the quarter witnessed continued growth in loan and deposit balances and exhibited a strong capital position.

Third-quarter results include the impact of $130 million pre-tax ($84 million after tax) positive valuation adjustment on the warrant Fifth Third holds in Vantiv, provision expense of $35 million pre-tax ($23 million after tax) related to the restructuring of a student loan backed commercial credit, a charge of $9 million pre-tax ($6 million after tax) tied with executive retirement and severance costs, and an $8 million pre-tax ($5 million after tax) charge pertaining to the valuation of the Visa total return swap, leading to a positive after-tax impact of 6 cents on earnings per share. The prior-year quarter also included certain non-recurring items.

Excluding such one-time items, earnings per share would have been 39 cents in the third quarter 2015.

Net income available to common shareholders increased 12% year over year to $366 million in the reported quarter.

Quarter in Detail

Total revenue for the quarter came in at $1.62 billion, surpassing the Zacks Consensus Estimate of $1.50 billion. Also, it compared favorably with the year-ago number of $1.43 billion. The rise was mainly attributable to higher non-interest income.

Non-interest income increased 37% year over year to $713 million (including certain non-recurring items). Excluding significant items, non-interest income increased 3% year over year, primarily reflecting a rise in mortgage banking net revenue.

However, Fifth Third's net interest income (tax equivalent) came in at $906 million, declining slightly year over year. The decline was primarily due to changes in the company's deposit advance product, higher interest expense along with continued loan re-pricing. Net interest margin was 2.89%, down 21 basis points (bps) from the prior-year quarter, reflecting impact of the changes to the deposit advance product and loan repricing.

Further, non-interest expenses increased 6% from the prior-year quarter to $943 million. The rise was mainly due to higher costs related to compensation, technology and communications and card and processing expense.

As of Sep 30, 2015, excluding loans held-for-sale, average loan and lease balances inched up 3% year over year to $93.4 billion. The rise was driven by increased commercial and industrial (C&I), commercial construction, and residential mortgage balances, partially offset by reduced home equity balances and automobile loans. Average total deposits rose 6% from the prior-year quarter to $101.9 billion.

Credit Quality

Fifth Third's credit quality exhibited partial improvement during the quarter. Total nonperforming assets, including loans held for sale, were $608 million, down 24% from the year-ago quarter. Allowance for loan and lease losses dropped 11% year over year to $1.3 billion.

However, net charge-offs for the quarter stood at $188 million or 80 bps of average loans and leases on an annualized basis, up from $115 million or 50 bps in the prior-year quarter. Further, provision for loans and leases increased significantly year over year to $156 million.

Capital Position

Fifth Third remained well capitalized in the quarter. Tier 1 risk-based capital ratio stood at 10.49% compared with 10.83% at the end of the prior-year quarter. Tier 1 Leverage ratio was 9.38% versus 9.82% at the end of the prior-year quarter.

As of Sep 30, 2015, common equity Tier I ratio was estimated at 9.30%.

Share Repurchase

The settlement of the forward contract pertaining to the Apr 27, 2015 share repurchase agreement of $155 million took place on Jul 31, 2015. Following completion of the agreement, an additional 0.84 million shares were repurchased.

Fifth Third entered into a share repurchase agreement on Jul 29, 2015, according to which the bank is scheduled to purchase around $150 million of its outstanding common stock.

The settlement of the forward contract pertaining to the Jul 29, 2015 share repurchase agreement of $150 million took place on Aug 31, 2015. Following completion of the agreement, an additional 1.35 million shares were repurchased.

Fifth Third entered into a share repurchase agreement on Sep 3, 2015, according to which the bank is scheduled to purchase around $150 million of its outstanding common stock. The settlement of the forward contract related to this agreement is slated to occur on or prior to Dec 4, 2015.

Our Viewpoint

We believe Fifth Third, with a diversified traditional banking platform, remains well poised to benefit from a recovery in the economies where it has a footprint. The company's efforts toward reducing its nonperforming assets and maintaining a strong capital position will continue to serve as growth drivers. Moreover, steady improvement in loans and deposits highlight its efficient organic growth strategy.

Further, we remain optimistic as the Ohio-based bank continues with its restructuring measures as part of the plans announced in June 2015 to consolidate or sell around 105 branches and around 31 other properties. The proposed actions are likely to be completed by mid-2016 and are expected to result in $65 million in cost savings annually.

However, a low interest-rate environment, regulatory issues as well as competitive pressure remain matters of concern.

Currently, Fifth Third carries a Zacks Rank #3 (Hold).

Performance of Other Major Firms

JPMorgan Chase & Co. JPM , which kick-started the third-quarter earnings season, missed the Zacks Consensus Estimate. The bank came up with adjusted earnings of $1.32 per share, delivering a negative surprise of 4.3%. The bottom line also declined 2.9% from the year-ago earnings of $1.36 per share. Weak trading activities primarily led to a decline in the overall profit for JPMorgan this time around. Revenues from trading fixed income, currencies and commodities fell 23%to $2.93 billion.

Driven by top-line growth, Wells Fargo & Company's WFC earnings of $1.05 per share in third-quarter 2015 beat the Zacks Consensus Estimate by a penny. Moreover, results were above the year-ago quarter earnings of $1.02 per share. The company reflected organic growth aided by higher revenues along with strong loans and deposit balances. Moreover, a strong capital position and returns on assets and equity acted as the positives. However, higher non-interest expenses and provisions were a concern.

Lower operating expenses and negligible legal costs drove Bank of America Corporation BAC third-quarter 2015 earnings of 37 cents per share, surpassing the Zacks Consensus Estimate of 34 cents. Further, the bottom line witnessed a significant improvement from net loss of 4 cents incurred in the prior-year quarter. Weakness in fixed income trading and lower equity investment income were the undermining factors. Also, a rise in provision for loan losses added to the concerns. Nevertheless, the company benefitted from lower expenses and a rise in mortgage banking income, asset management fees and card fees.

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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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