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Earnings Slip at Fifth Third

The bank does battle with the flattening yield curve.

Second quarter profits at Midwestern regional lender

Fifth Third

(FITB) - Get Fifth Third Bancorp Report

fell 7% from a year ago, hurt by a tricky interest rate environment and disappointing growth in customer deposits.

In the quarter, Fifth Third earned from $417 million, or 75 cents a share, compared to $448 million, or 79 cents a share, a year ago. Wall Street analysts, as surveyed by Thomson Financial, were expecting earnings of 74 cents a share.

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The bank's net interest margin, a way of measuring the profitability of a bank's investment and lending operation, got squeezed in the quarter due to the unusual combination of rising short-term interest rates and falling long-term ones. Compared with a year ago, Fifth Third's net interest margin fell 7% to 3.29%.

The margin squeeze led to a 2% decline in net interest income to $750 million in the quarter.

In its earnings release, the bank described the impact of the margin compression on its earnings as its "largest source of frustration and greatest opportunity for improved performance in the near term.''

Earnings growth for the banking sector is expected to be anemic in the second quarter as lenders such as Fifth Third feel the pain of a flattening yield curve. The phenomenon limits the profitability of loans and crimps investment returns.

One thing that aided Fifth Third's bank earnings in the quarter was $30 million reduction in its provision for loan losses. Compared with a year ago, the bank set aside $60 million in the quarter for loan and lease losses, compared with $90 million a year ago.

In premarket trading, shares of Fifth Third were trading lower, down 44 cents, or 1%, to $43.