Fifth Third Bancorp
shares retreated Thursday after a Citigroup analyst downgraded the Midwest bank to a hold rating based on valuation.
Analyst Keith Horowitz told clients that credit-sensitive bank stocks, including Fifth Third, have rallied so far this year, and he decided to move to hold from buy with the stock bumping up against his $13 target price. Year-to-date, based on Wednesday's close, Fifth Third's shares were up 30% vs. an 11% gain for the Keefe Bruyette & Woods bank index, Horowitz noted.
Fifth Third shares were off 5.2% to $12.03 in recent trades on volume of 11.8 million.
"While we view FITB as having made good progress getting ahead of credit issues, recognizing approximately 70% of estimated total cycle credit costs via net charge-offs and reserves so far (vs. 65% on average for peers), we believe at current prices, risk and rewards are now relatively balanced," Horowitz writes in the note.
"At current prices, we see better values in large caps
Bank of America
(our top pick) and
, which have more diversified earnings and have underperformed recently on renewed regulatory worries," he writes.
Fifth Third will also likely have to issue more common equity as regulators seem to be targeting a 8% Tier-1 common ratio coming out of the cycle for
Horowitz estimates that Fifth Third will have to raise about $1.7 billion of new capital (50% of its outstanding TARP preferred shares) in order to repay the government. He expects this event to occur in the fourth quarter.
Horowitz also lowered his 2010 earnings estimates by 5 cents to a loss of 10 cents a share and 2011 earnings estimates by 15 cents to a profit of $1.10 a share. The current average estimates of analysts polled by Thomson Reuters is for a loss of 23 cents a share in fiscal 2010, and earnings of 85 cents a share for fiscal 2011.
Bank stocks in general including Bank of America,
PNC Financial Services
were slumping on Thursday.
Written by Laurie Kulikowski in New York