Baird's Bearish Case For Fifth Third Bancorp Comes To An End After M&A Deal

Regional bank Fifth Third Bancorp FITB reached an agreement to buy MB Financial Inc MBFI for $4.7 billion which creates a "change in narrative" around the stock for the better, according to Baird.

The Analyst

Baird's David George upgraded Fifth Third Bancorp from Underperform to Neutral with an unchanged $32 price target.

The Thesis

Fifth Third agreed to buy MB Financial in a deal that values the company at 2.76x tangible book value and tangible book value dilution of 7.7 percent, George said in a note. Investors may have reason to be "struggling" with the TBV dilution and the new M&A deal puts at risk the improving pace of organic capital return. Moreover, the deal will also reduce the regional bank's CET1 ratio by around 45 basis points from 10.8 percent in the first quarter.

Fifth Third's management team, however, stressed the acquisition won't change its original 2018 capital plan while capital deployment is expected to proceed in line with recent levels, the analyst wrote. The incremental EPS lift from the deal could help offset a lower buyback assumption. Fifth Third expects the deal to generate upside to profitability goals and even increased its NorthStar efficiency targets.

Bottom line, investors should "respond more favorably" to deals like Fifth Third's acquisition with lower deal premiums, according to George, as this represents the "closest thing to a win-win outcome for all parties."

Price Action

Shares of Fifth Third were trading higher by more than 3.6 percent Tuesday after falling about 5 percent Monday.

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