(Adds information from earnings call, updated stock prices.)Fifth Third ( FITB) shares were soaring Thursday after the firm topped expectations for second-quarter results and indicated it is adequately prepared for escalating credit costs. Shares of the Cincinnati-based lender sailed 14.8% higher to $8.05 in recent trading. Fifth Third earned $856 million, or $1.15 per share, compared with a loss of $202 million, or 37 cents per share, a year earlier, largely due to a one-time gain. Excluding special items, the bank would have lost 27 cents per share, still 7 cents better than the average analyst's expectation, according to Thomson Reuters. Fifth Third's results included an after-tax gain of $1.1 billion on the sale of a majority stake in its processing business. The firm also said it has sold shares of Visa ( V) in the third quarter, for a post-tax gain of about $206 million. The bank's net charge-offs of bad loans climbed to $626 million, nearly double the $344 million it charged off a year ago and up 28% from the first quarter's $490 million. Its provision for loan and lease losses totaled $1 billion, or 4.28% of total loans at the end of the quarter. "Credit trends remain difficult and signals regarding future trends are somewhat mixed at this point," Chairman and CEO Kevin T. Kabat said in a statement. Though Fifth Third has exceeded the Federal Reserve's requirement that it boost Tier 1 capital levels by $1.1 billion, Kabat said on a conference call that the firm is not ready to repay bailout funds until there are tangible signs that economic conditions are improving.
Chief Risk Officer Mark Tuuk said Fifth Third will face higher charge-offs during the third quarter. As expected, problems have shifted from the residential and consumer loan book to a sharp deterioration of commercial loans. Problems in Fifth Third's commercial and industrial loan book have begun to accelerate, similar to
regional competitors like KeyCorp ( KEY), SunTrust ( STI), US Bancorp ( USB), Regions Financial ( RF) or M&T Bank ( MTB). Bigger competitors like Bank of America ( BAC), JPMorgan Chase ( JPM), Citigroup ( C) and Wells Fargo ( WFC) faced similar issues, but a more diversified asset mix helped offset such losses with improvements elsewhere. Commercial loans accounted for more than half of Fifth Third's charge-offs last quarter and 78%, or $2.2 billion worth, of nonperforming assets. Across all types of loans, those issued in Florida and Michigan continued to perform especially poorly. Florida has faced especially sharp declines in real-estate values, and Michigan is suffering from the fallout of the auto industry. "We are in the heart of the commercial cycle," Tuuk said, noting that executives expect further stress this quarter, with some moderation in problems with consumer real-estate loans. But because of Fifth Third's strong reserve levels and capital ratios, analysts on the call seemed not to be overly worried about those negative, but unsurprising, trends. Kabat noted that operating results and credit losses were better than the worst-case economic scenario that Federal Reserve examiners had used for the stress tests performed earlier this year. The Fed determined that Fifth Third would have to raise $1.1 billion to sustain a sharp economic downturn, a level the bank has exceeded by $650 million through a stock offering and the $206 million Visa gain. Including those two capital buffers, Fifth Third now has a Tier 1 common equity ratio of 7.2%, much higher than the 4% required under the stress test.
"We've got a good handle on credit," Kabat said.