Fifth Third BancorpFITB reported second-quarter 2016 earnings per share of 40 cents, beating the Zacks Consensus Estimate of 37 cents. The bottom-line improved 11% on a year over year basis. Notably, the reported quarter as well as the prior year quarter included certain one-time items.
Results were aided by higher revenues, partially offset by increased expenses as well as provisions. Notably, the quarter exhibited continued growth in loan balances as well as a strong capital position.
Certain non-recurring items included in the second-quarter results were the impact of 19 million pre-tax ($12 million after tax) positive valuation adjustment on the warrant in Vantiv, and an $11 million pre-tax ($7 million after-tax) gain tied with sale of Pennsylvania branches.
Net income available to common shareholders increased 6% year over year to $310 million.
Higher Net interest Income and Fee Income Drive Revenue Rise
Total revenue for the quarter came in at $1.51 billion, slightly below the Zacks Consensus Estimate of $1.52 billion. However, revenues improved 4% year over year, driven by higher net interest income as well as non-interest income.
Fifth Third's net interest income (tax equivalent) came in at $908 million, increasing 2% year over year. The rise primarily reflected the impact of higher investment securities balances and the December rate hike.
Net interest margin decreased 2 basis points (bps) year over year to 2.88%, mainly due to higher long-term debt balances, lower commercial loan yields, and reduced cash flow hedges.
Non-interest income increased 8% year over year to $599 million (including certain non-recurring items). Excluding significant items, non-interest income decreased 5% year over year. Notably, the quarter witnessed a rise in corporate banking revenue and card and processing revenue, while mortgage banking and wealth and asset management revenues declined.
However, non-interest expenses increased 4% from the prior-year quarter to $983 million. The rise was mainly due to higher costs related to salaries, wages & incentives and technology & communications, partially offset by lower card and processing expense and net occupancy expense.
As of Jun 30, 2016, excluding loans held-for-sale, average loan and lease balances inched up 2% year over year to $93.9 billion. The rise was driven by increased commercial and industrial, commercial construction and residential mortgage balances, partially offset by reduced home equity balances, credit card and automobile loans. Average total deposits edged down 1% year over year to $102.3 billion.
Weak Credit Quality
Fifth Third's credit quality deteriorated during the quarter. Provision for loan and lease losses increased 15% year over year to $91 million. Also, total nonperforming assets, including loans held for sale, were $825 million, up 32% from the year-ago quarter.
Net charge-offs for the quarter came in at $87 million or 37 bps of average loans and leases on an annualized basis, compared with $86 million or 37 bps in the prior-year quarter.
Strong Capital Position
Fifth Third remained well capitalized in the quarter. Tier 1 risk-based capital ratio was 11.03% compared with 10.51% at the end of the prior-year quarter. CET1 capital ratio was 9.94% as against 9.42% at the end of the prior-year quarter.
The settlement of the forward contract pertaining to Mar 4, 2016 share repurchase agreement of $240 million took place on Apr 11, 2016. Following the completion of the agreement, an additional 1.87 million shares were repurchased.
Also, on Jun 14, 2016, Fifth Third executed open market share repurchases totaling $26 million.
On Jul 27, 2016, Fifth Third Bancorp inked deal with Vantiv, Inc. under which a portion of its Tax Receivable Agreement ("TRA") with Vantiv was ended and settled in for a cash payment of $116 million from Vantiv.
Per the agreement, Fifth Third sold TRA cash flows totaling around $331 million. The company noted that the sale does not impact the TRA payment expected to be recognized in the fourth quarter of 2016 and the fourth quarter of 2017. FifthThird will also have the option to terminate and settle another $394 million of future cash flows for a $171 million payable to Fifth Third in 2017 and 2018.
Additionally, Fifth Third Bancorp extended the existing operating agreement with Vantiv to five and a half years, stating, "The new agreement will reflect reduced expenses for Fifth Third and enhanced revenue opportunities for both parties."
We believe the company, 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 steady improvement in loans highlights 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 Jun 2015 to consolidate or sell around 105 branches and around 31 other properties. The proposed actions are anticipated to result in $65 million in cost savings, annually.
However, several issues including a stringent regulatory landscape as well as competitive pressure remain matters of concern.
FIFTH THIRD BK Price, Consensus and EPS Surprise
Currently, Fifth Third carries a Zacks Rank #3 (Hold).
Performance of Other Major Firms
Among major banks, JPMorgan Chase & Co. JPM kick-started second-quarter earnings season on a positive note. Driven by improved trading revenues, the company reported earnings of $1.55 per share that handily outpaced the Zacks Consensus Estimate of $1.43. Also, the figure reflects a 1% rise from the year-ago period. Notably, the results included a legal benefit of $430 million.
Citigroup Inc. C came out with second-quarter 2016 earnings from continuing operations per share of $1.25, handily beating the Zacks Consensus Estimate of $1.09. Results were primarily aided by lower expenses, partially offset by reduced revenues.
Higher provisions and lower revenues led Bank of America Corp.'s BAC second-quarter 2016 earnings to decline 16% year over year to 36 cents per share. However, the earnings surpassed the Zacks Consensus Estimate of 34 cents. Results reflected improved fixed income trading revenues and efficient cost control.
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