Fifth Third Beats Consensus

The Cincinnati bank saw shares rise, despite a slide in profits on a shaky loan portfolio.
By Debra Borchardt ,

Fifth Third Bancorp

(FITB) - Get Report

on Tuesday beat Wall Street's profit expectations, despite posting a slide in first-quarter profit fueled by a deteriorating residential real estate market.

The Cincinnati-based bank posted a profit of $292 million, 55 cents a diluted share, vs. $359 million, or 65 cents a diluted share, in the year-ago period. Analysts polled by Thomson Financial had expected a profit of 48 cents a share on revenue of $1.52 billion.

Fifth Third shares were jumping 7.1% to $20.75 in recent trading.

"Strong operating performance continues to be offset by higher credit costs, primarily reflecting further deterioration of residential real estate, homebuilder and residential development loans," President and CEO Kevin Kabat said in a company statement.

Kabat said the bank's shaky loan portfolio led it to increase its provision for loan and lease losses to $544 million, from $84 million in the year-ago period.

Net charge-offs increased to $276 million, vs. $71 million in the year-ago period, driven by $72 million in bad commercial construction loans and $41 million in home equity loans. Residential consumer and commercial real estate loans in Michigan and Florida represented approximately 57% of total first-quarter net charge-offs, the bank said.

Nonperforming assets increased to $1.6 billion, vs. $494 million in the year-ago period. The bad loans were also driven by residential real estate. The bank also took losses in auto loans and credit cards as consumers struggled to pay the bills. Credit cards, however, saw usage volumes drive solid revenue growth of 6% vs. the first quarter a year ago.

The bank posted a sequential decline in various revenue areas such as electronic payment processing, which was down 5%, and service charges on deposits, which decreased 8% from the fourth quarter. Investment advisory revenue was down 1% vs. the fourth quarter. Hedges on mortgage servicing rights had dropped 56% from the fourth quarter.

On the positive side, the bank reported a $273 million pretax gain related to

Visa's

(V) - Get Report

initial public offering. The bank also said it benefited from the reversal of $152 million pretax in expenses from a portion of a previously recorded litigation reserve related to the Visa offering.

But the bank offered a grim near-term outlook. "We expect credit conditions to continue to deteriorate in the near term, and to experience higher nonperforming assets and credit losses during this period," it said in its press release.

Bank earnings this season seem to be a broken record, with many posting Visa-related gains to mitigate deteriorating loan portfolios. Arizona-based

TCF Financial

(TCB)

posted an $8 million gain from Visa when it reported its earnings on Tuesday and hit analyst estimates, but earnings fell 43% also impacted by the depressed housing market.

First-quarter results at

Regions Financial

(RF) - Get Report

,

SunTrust Bank

(STI) - Get Report

and

National City

(NCC)

followed similar themes. Fifth Third was one of the banks rumored to be evaluating a purchase of Nat City, before that bank decided to raise $7 billion through an equity investment.

Fifth Third has not repurchased any shares, even though it is authorized to pick up another 19 million shares. Its acquisition of

First Charter Bank

(FCTR) - Get Report

is expected to be completed in the second quarter and last month it finalized an agreement with

First Horizon

(FHN) - Get Report

to pick up nine Atlanta branches.

The bank's Tier-1 capital ratio slipped to 7.71% in the first quarter, vs. 8.71% a year ago. It said it hopes to raise the ratio to between 7.5% and 8% in 2008.

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