Fifth Third's (FITB) Q4 Earnings Beat, Provisions Fall

Fifth Third BancorpFITB delivered a notable positive earnings surprise of 11.6% in fourth-quarter 2016. Earnings per share of 48 cents surpassed the Zacks Consensus Estimate of 43 cents. However, including certain one-time items the bottom line declined 38% on a year-over-year basis.

Lower expenses reflected prudent expense management. Further, increase in net interest income and lower provisions were positive factors. However, lower fee income was an undermining factor.

Certain non-recurring items included in the fourth-quarter results were the impact of an $16 million pre-tax (approximately $10 million after-tax) reduction to net interest income for refunds provided to some bankcard customers and a $9-million (approximately $6-million after-tax) gain from the net exercise of the Vantiv warrant. Additionally, a $6-million pre-tax (about $4 million after-tax) gain associated with the valuation of the Visa total return swap and a $6-million tax benefit from the early adoption of an accounting standard were also included in the fourth-quarter results.

Net income available to common shareholders plummeted 41% year over year to $372 million.

For 2016, net income available to common shareholders was $1.5 billion or $1.93 per share compared with $1.6 billion or $2.01 per share in 2015. The Zacks Consensus Estimate was $1.89.

Lower Non-interest Income Impacted Revenue

Total revenue for the quarter came in at $1.53 billion, almost in line with the Zacks Consensus Estimate. Revenues plunged 23.9% year over year, driven by lower non-interest income.

Fifth Third's net interest income (tax equivalent) came in at $909 million, inching up 1% year over year. The rise primarily reflected the effect of higher investment securities balances and improved short-term market rates, partially mitigated by card refunds.

Net interest margin expanded 1 basis point (bp) year over year to 2.86%, mainly due to improved short-term market rates, partially mitigated by card refunds.

Non-interest income slumped 44% year over year to $620 million (including certain non-recurring items). Excluding significant items, non-interest income was down 2% year over year to $608 million. Notably, the quarter witnessed fall in almost all components of income, partially offset by higher card and processing revenue.

However, non-interest expenses decreased slightly from the prior-year quarter to $960 million. The fall was chiefly stemmed by lower net occupancy expense, along with card and processing expense, partially offset by higher compensation expense and other non-interest expense.

As of Dec 31, 2016, average loan and lease balances edged down 1% year over year to $93.0 billion. The fall was mainly due to decreased consumer loans and leases. Average total deposits advanced 1% year over year to $103.6 billion.

Credit Quality: A Mixed Bag

Provision for loan and lease losses tanked 41% year over year to $54 million. Net charge-offs for the quarter came in at $73 million or 31 bps of average loans and leases on an annualized basis, compared with $80 million or 34 bps in the prior-year quarter.

However, total non-performing assets, including loans held for sale, were $751 million, up 14% from the year-ago quarter. Total allowance for credit losses were $1.41 billion, slightly up from the prior-year quarter.

Strong Capital Position

Fifth Third remained well capitalized in the quarter. Tier 1 risk-based capital ratio was 11.51% compared with 10.93% at the end of the prior-year quarter. CET1 capital ratio (fully phased-in) was 10.30% as against 9.72% at the end of the year-ago quarter. Tier 1 leverage ratio was 9.90% as compared with 9.54% in the prior-year quarter.

Share Repurchase

On Nov 7, 2016, Fifth Third settled the forward contract associated with the $240-million share repurchase agreements ended in Aug 2016. Further, an additional 1.1 million shares were repurchased related to the completion of this agreement.

On Dec 20, 2016, Fifth Third initially settled a share repurchase agreement under which the company would buy $155 million of its outstanding common stock.

Our Viewpoint

We believe that 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 and deposits highlights its efficient organic growth strategy. Further, we remain optimistic it remains focused on several strategic initiatives to boost performance.

However, several issues, including a stringent regulatory landscape, reduced fee income as well as competitive pressure, remain matters of concern.

Fifth Third Bancorp Price, Consensus and EPS Surprise

Fifth Third Bancorp Price, Consensus and EPS Surprise | Fifth Third Bancorp Quote

Currently, Fifth Third carries a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

Performance of other Banks

Bank of America Corporation BAC reported fourth-quarter 2016 earnings. Rise in trading revenue as well as mortgage banking fees led to earnings of 40 cents per share, which surpassed the Zacks Consensus Estimate of 38 cents. Further, the figure was 48% higher than the year-ago quarter number.

Driven by interest income, Wells Fargo & Company's WFC fourth-quarter 2016 earnings recorded a positive surprise of about 3%. Adjusted earnings of $1.03 per share outpaced the Zacks Consensus Estimate by 3 cents. Moreover, it compared favorably with the prior-year quarter's earnings of $1.00 per share. Including net hedge ineffectiveness accounting impact of 7 cents, earnings came in at 96 cents per share.

Comerica Inc. CMA delivered a positive earnings surprise of 4.2% in fourth-quarter 2016. Adjusted earnings per share of 99 cents came ahead of the Zacks Consensus Estimate of 95 cents. The adjusted figure excludes a restructuring charge of 7 cents per share. Also, earnings increased 43.8% year over year.

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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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