Market Overview

Fifth Third Beats on Earnings and Revenues, Results Dip Y/Y

Driven by prudent expense management and better-than-expected revenue, Fifth Third Bancorp (NASDAQ: FITB) managed to deliver a positive earnings surprise of nearly 9% in second-quarter 2014. Earnings per share came in at 49 cents, beating the Zacks Consensus Estimate by 4 cents. However, the figure compared unfavorably with 65 cents earned in the prior-year quarter.

Our proven model predicted that Fifth Third was likely to post an earnings beat as it did have the right combination of two key ingredients – positive Earnings ESP and a Zacks Rank #3 (Hold) or better. It had a Zacks Rank #3 (Hold) and an Earnings ESP of +2.22%.

Results were supported by lower expenses and increased net interest income, partially offset by lower non-interest income and higher provision for credit losses. Improved loan and deposit balances, and a strong capital position were also among the positives.

Net income available to common shareholders was $416 million, down 29% year over year. Notably, results included a $125 million gain on the sale of Vantiv shares, positive valuation adjustment of $63 million on the Vantiv warrant and certain other non-recurring items.  

Quarter in Detail

Total revenue for the quarter stood at $1.7 billion, coming ahead of the Zacks Consensus Estimate of $1.5 billion. However, it was down 15% year over year, primarily due to lower non-interest income.

Fifth Third's net interest income (tax equivalent) came in at $905 million, up 2% year over year. The increase was primarily due to higher balances and yields on investment securities as well as loan balances, partially offset by the effect of loan repricing. However, net interest margin was 3.15%, down 18 basis points (bps) from the prior-year quarter, reflecting the impact of loan repricing.

Non-interest income decreased 31% year over year to $736 million (including certain non-recurring items). The decline was largely owing to fall in mortgage banking net revenue and other non-interest income.

Non-interest expenses declined 8% from the prior-year quarter to $954 million. Expenses included $61 million in charges for litigation reserves against $51 million in first-quarter 2013. Excluding these items, the year-over-year decline in expenses reflected decreases in compensation-related expense and benefits expenses.

As of Jun 30, 2014, excluding loans held-for-sale, average loan and lease balances increased 4% year over year to $90.5 billion. Average total deposits rose 5% from the prior-year quarter to $96.7 billion.
 
Credit Quality

Fifth Third's credit quality improved partially in the reported quarter. Total nonperforming assets including loans held for sale were $837 million, down 28% from the year-ago quarter. Further, allowance for loan and lease losses dropped nearly 16% year over year to $1.5 billion. Net charge-offs stood at $101 million or 45 bps of average loans and leases on an annualized basis against $112 million or 51 bps in the prior-year quarter.

However, provision for loans and leases increased 20% year over year to $76 million.

Capital Position

Fifth Third remained well-capitalized in the quarter. Tier 1 common equity ratio increased 12 bps years over year to 9.61%.

Tier 1 risk-based capital ratio stood at 10.80% compared with 11.14% at the end of the prior-year quarter. Leverage ratio was 9.86% versus 10.45% at the end of prior-year quarter.

Capital Deployment Activities

During the quarter, Fifth Third repurchased 6 million common shares.

Fifth Third entered into a share repurchase agreement with a counterparty on Apr 28, 2014, according to which the bank is to purchase around $150 million of its outstanding common stock. The company is expected to settle this forward contract on or before Jul 28, 2014. For first-quarter 2014, this transaction reduced Fifth Third's share count by 6.22 million shares on May 1, 2014 while the incremental impact to the average diluted share count in the second-quarter 2014 was around 9 million shares.

Our Viewpoint

Results reflect a strong quarter for Fifth Third. Going forward, with a diversified traditional banking platform, Fifth Third remains well poised to benefit from a recovery in the economy of regions where it has a footprint. Moreover, the company's efforts in reducing its nonperforming assets and operating expenses will serve as growth drivers. Also, the continuous improvement in loans and deposits reflects its efficient organic growth strategy.

However, continuous decline in non-interest income, a low interest-rate environment, regulatory issues as well as competitive pressure remain matters of concern.

Performance of Other Banking Giants

This earnings season kick started with Wall Street banking giants like Wells Fargo & Company (NYSE: WFC). The company's second-quarter 2014 earning per share of $1.01 came in line with the Zacks Consensus Estimate. However, it showed year-over-year improvement.

Citigroup Inc. (NYSE: C) reported yet another impressive quarter with adjusted earnings per share of $1.24 in second-quarter 2014, outpacing the Zacks Consensus Estimate of $1.08.  JPMorgan Chase & Co. (NYSE: JPM) also came out with earnings of $1.59 per share, beating the Zacks Consensus Estimate of $1.30.


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