Fifth Third Continues Mortgage Streak (Update 1)

• Fourth-quarter EPS of 43 cents beats the consensus estimate of a 41-cent profit.
• Mortgage revenue rises 38% sequentially.
• Period-end total commercial loans increase by 5% sequentially; C&I loans by 8%.
• Net interest income declines; net interest margin narrows.
• Fourth quarter ROA of 1.33%, ROTCE of 14.1%, both increasing sequentially and year-over-year.

Updated with midday market action and comments from Jefferies analyst Ken Usdin.

NEW YORK (TheStreet) -- Fifth Third Bancorp (FITB) of Cincinnati on Thursday announced another quarter of very strong mortgage revenue growth and solid increases in commercial and industrial loan balances.

The company reported fourth-quarter net earnings available to common shareholders of $390 million, or 43 cents a share, increasing from $354 million, or 38 cents a share in the third quarter, and $305 million, or 33 cents a share, in the fourth quarter of 2011.

For all of 2012, Fifth Third reported earnings available to common shares of $1.541 billion, or $1.66 a share, increasing from $1.094 billion, or $1.18 a share, in 2011.

The fourth-quarter results beat the consensus estimate of a 41-cent profit, among analyst polled by Thomson Reuters. The fourth-quarter results reflected a number of one-time items, including a $157 million gain on the sale of Vantiv (VNTV) shares, which amounted to $102 million after taxes, adding 11 cents a share to earnings. Fifth Third's former payment processing subsidiary completed its initial public offering in March. Fifth Third held a 33% stake in Vantiv as of Dec. 31.

Negative after-tax one-time items for the fourth-quarter included:

• $87 million, or nine cents a share, for debt extinguishment.
• $12 million, or a penny a share, on a reduced valuation for a warrant to purchase Vantiv shares.
• $10 million, or a penny a share, "related to the valuation of a Visa total return swap."
• $19 million, or two cents a share, to increase mortgage putback reserves, "due to new Freddie Mac (FMCC) guidance for potential 2004-06 repurchase claims."

The net effect of the one-time items was a two-cent reduction in earnings, underlining a solid quarter for Fifth Third.

Fifth Third's shares were up 5% in midday trading, to $16.26, while the KBW Bank Index (I:BKX) was up slightly to 53.60, with all 24 index components showing gains, except for five, including Bank of America (BAC), which was down 4% to $11.33, and Citigroup (C), which was down 3% to $41.25.

Bank of America reported a fourth-quarter profit of $700 million or $.03 a share, beating the consensus EPS estimate by a penny, after the company pre-announced a large mortgage putback settlement with Fannie Mae (FNMA) and a major contribution to the $8.5 billion foreclosure settlement between federal regulators and the nation's largest loan servicers.

Citigroup reported fourth-quarter earnings of $1.2 billion, or 38 cents a share. Excluding credit valuation and debit valuation adjustments, Citi earned $2.2 billion or 69 cents a share, missing the consensus estimate of 96 cents. Citigroup's earnings were lowered by charges related to its restructuring announced in the fourth quarter, as well as a declining release of loan loss reserves.

Fifth Third's net interest income declined to $903 million during the fourth quarter, from $907 million in the third quarter and $920 million in the fourth quarter of 2011, as the net interest margin -- the spread between the average yield on loans and investments and the average cost for deposits and borrowings -- narrowed to 3.49% from 3.56% the previous quarter and 3.67% a year earlier.

Fifth Third said that "The decline in net interest income was driven by the effect of approximately $10 million in non-recurring benefits recorded in the third quarter. Otherwise, net interest income benefited from a decline in interest expense driven by higher demand deposit balances and continued runoff in consumer CD balances." Fourth-quarter net interest income also benefitted from reduced expenses on borrowings.

Fifth Third CEO Kevin Kabat said that "every caption in fee income was up for the quarter, including mortgage banking revenue up 29 percent and corporate banking revenue up 13 percent sequentially. Net interest income was consistent with third quarter results and stronger than expected."

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