Updated from 8:49 a.m. EDTFifth Third Bancorp's ( FITB) shares soared on Thursday after first-quarter results beat expectations and management issued bullish statements for improving margin trends in upcoming quarters. However, Fifth Third's major exposure to regions of the country with severe economic conditions, combined with its book of deteriorating commercial loans and competition to gain deposits, may stand to give investors pause. The Cincinnati-based bank posted a first-quarter loss of $26 million, or 4 cents per share, compared with a profit of $286 million, or 54 cents per share, a year earlier. The results beat expectations by a long shot, with the average analyst predicting a loss of 27 cents per share. Fifth Third stock surged 12.5% in premarket trading after the report was released, but more recently eased to a 7.6% lift at $3.97. Fifth Third attributed its loss mostly to preferred dividends it was required to pay on the government's $3.4 billion preferred stake in the company. Excluding $76 million in preferred dividend payments, the bank would have posted a profit of $50 million. But results were also hindered by exposure to commercial and residential loans in areas of the U.S. that have faced relentless economic headwinds. Fifth Third posted $490 million in net charge-offs, down sequentially, but up78% over the past year. The bank also added $319 million to its allowance for future losses during the first quarter as nonperforming assets climbed to 3.19% of its loan book, from 1.81% a year ago and 2.38% at the end of 2008. The company's losses and risk of future losses lie mostly in commercial and residential loans in Michigan and Florida, as well as other states in the Midwest.
"While the environment remains challenging, our results were in line with our expectations," Chairman and CEO Kevin Kabat said in a statement. Fifth Third also posted pre-tax items of $1.04 billion in impairment charges, as well as in $24 million on securities losses and $8 million in severance expenses. Other special items related to taxes boosted results by $101 million, or 18 cents per share. Those included a settlement with the Internal Revenue Service regarding leveraged leases, as well as a decision to surrender bank-owned life insurance (BOLI) policies. In terms of core operations, lower interest rates have been a boon for many banks, as the industry benefited from cheaper borrowing and a mortgage refinancing explosion. A heightened risk environment has also allowed banks to charge higher rates on some types of loans, particularly unsecured consumer debt like credit cards. The trends helped first-quarter results at banking bulwarks like Wells Fargo ( WFC), Bank of America ( BAC), JPMorgan Chase ( JPM) and Citigroup ( C). But while net interest margins -- or the difference between the cost of bank borrowing and the income from lending -- rose at some competitors, Fifth Third's margin declined to 3.06%, down 40 basis points sequentially and 35 basis points over the past year. Kabat said the bank's asset yields simply repriced more rapidly than its interest payments, but that Fifth Third is seeing "substantial margin improvement," which he expects to continue through the rest of 2009. Fifth Third did benefit from higher fees on mortgage banking, corporate banking and payment processing compared with the previous quarter. Kabat said fee growth "continues to be strong" as the firm also works to manage expenses.
Fifth Third's average core deposits grew 4% over the quarter, with a special lift in checking accounts. Competition to gain new business and keep existing customers remains an issue, however, Kabat assured analysts that the bank is keeping rates as rational as possible. "We continue to offer competitive rates but do not seek to be the market leader," he said. Kabat later added that the bank is focused on bringing in new creditworthy customers for loans, while extending lines of credit to existing customers as well. Fifth Third issued nearly $8 billion of consumer credit and $10 billion of commercial credit to customers during the first quarter. Capital metrics improved as the ever-scrutinized tangible common equity ratio climbed to 4.35% from 4.31% at the end of last year, while the Tier 1 capital ratio reached 10.93% from 10.59%. The company says its agreement to sell a 51% stake in its processing business will further boost capital ratios by 90 basis points. Those capital metrics have become ever more important as investors await impending consequences of the stress tests that banking regulators are set to release on Friday. The results will be seen as separating healthy banks from weak ones, telling which will require more capital to struggle through the economic crisis, which will fail, and which will survive as-is. On a conference call, Kabat said participating banks "have all been asked not to discuss the progress of the stress tests," but offered some thoughts on the alphabet soup of other government programs. He said the Public-Private Investment Program, or PPIP, as well as the Term Asset-Backed Securities Loan Facility, or TALF, will help restore liquidity to the financial markets.
"But probably not Fifth Third," he added, "given the nature of