Fifth Third Upped to Outperform - Analyst Blog

We are upgrading our recommendation on Fifth Third Bancorp (FITB) to Outperform from Neutral. We are encouraged to see the aggressive credit management efforts by the company and expect an improvement in its credit quality in the upcoming quarters.

Fifth Third's capital and reserve levels remain solid. Its reserve coverage is strong relative to problem assets and losses. This, along with an improvement in earnings would provide the company ample opportunity to register growth in the next few quarters.

The company's third quarter 2010 earnings of 22 cents per share were a nickel ahead of the Zacks Consensus Estimate. Results were driven by better-than-expected growth in revenues though partially affected by the company's strategic actions to reduce credit risk.Total revenue was $1.7 billion, up 16% sequentially and ahead of the Zacks Consensus Estimate of $1.5 billion, reflecting growth in interest income and non-interest income.

Proactive steps have been taken by Fifth Third to improve its credit quality. Throughout 2009 and into the 2010, the company continued to aggressively engage in loss mitigation strategies.

During the third quarter of 2010, the company actively tried to reduce credit risk. Almost $228 million of residential mortgage loans, largely nonperforming, were sold for $105 million, while the company also transferred $961 million of commercial loans to loans held-for-sale, a majority of which were nonperforming.

The company intends to sell a significant portion of these loans in the fourth quarter. These steps to improve the risk profile should reduce the headwinds to credit quality.

Though challenging economic conditions along its footprint and the recent regulatory issues are expected to remain an overhang, we expect the company's diverse revenue stream, opportunistic expansions and cost containment measures to support its earnings in the upcoming quarters.

Fifth Third's peer group consists of companies such as U.S. Bancorp (USB) and BB&T Corp. (BBT). The company is scheduled to report its fourth quarter 2010 financial results prior to the market opening on January 20, 2011. It is expected to report earnings of 24 cents for the fourth quarter, according to the Zacks Consensus Estimate.

Fifth Third shares are carrying a Zacks #1 Rank, which translates into a short-term Strong Buy recommendation.