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Fifth Third Shielded from Mortgage Decline: UBS

"In our scenario analysis, a 50% decline in origination and gain on sale revenues translates into a $0.31 hit to EPS (17%); however, taking several offsets into account, we estimate only a potential net reduction to operating EPS of $0.13 or 7%," Scinicariello wrote.

The offsets include a 40% efficiency ratio for Fifth Third's mortgage operations. The efficiency ratio is, essentially, the number of pennies of expense incurred for each dollar of revenue. An efficiency ratio below 50% is generally considered quite good for most banking businesses.

Other offsets in the scenario of a 50% mortgage volume decline for Fifth Third include "a 15% increase in servicing fees, reinvestment of MBS cash flow at higher yield (45bps), and higher mortgage spreads of 40bps on incremental/repricing volume," according to Scinicariello.

UBS's earnings forecasts for Fifth Third assume a 32% decline in quarterly mortgage loan origination volume through the first quarter of 2014. When factoring in "the potential revaluation of $77.3B of mortgage servicing rights," which will increase in value as refinancing activity slows, Scinicariello estimated that Fifth Third's GAAP earnings per share would be "more modestly impacted by only 2%."

Scinicariello rates Fifth Third a "buy," with a 12-month price target of $19.00, estimating the company will earn $1.78 a share this year, with EPS rising to $2.29 in 2014.

Fifth Thirds shares closed at $15.84 Thursday, returning 4% this year, following a 11.5% return during 2012. The shares trade for 1.3 times tangible book value, and for 9.4 times the consensus 2014 EPS estimate of $1.69, among analysts polled by Thomson Reuters. The consensus 2013 EPS estimate is $1.64.

Based on a quarterly payout of 10 cents, the shares have a divided yield of 2.53%.

FITB Chart FITB data by YCharts

Interested in more on Fifth Third? See TheStreet Ratings' report card for this stock.

-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.
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