Fifth Third Beats as Loan Loss Provisions Decline

  • Third-quarter EPS of 40 cents, increasing 14% from second quarter.
  • Credit costs drop.
  • Capital already exceeds fully phased-in Basel III standards.

Cincinnati ( TheStreet) -- Fifth Third Bancorp ( FITB) on Thursday reported third-quarter net income available to common shareholders of $373 million, or 40 cents a share, beating the consensus analyst estimate for profit of 33 cents.

Earnings to common shareholders increased from $328 million, or 35 cents a share, in the second quarter, and $175 million, or 22 cents a share, in the third quarter of 2010.

A major factor in the earnings improvement was a decline in the provision for loan losses to $87 million in the third quarter from $113 million the previous quarter and $457 million a year earlier. The company released $175 million in loan loss reserves, directly boosting earnings.

Third-quarter net interest income was $902 million, increasing from $869 million in the second quarter, but declining from $916 million in the third quarter of 2010. The net interest margin -- the difference between a bank's average yield on loans and investments and its average cost for deposits and borrowings -- rose slightly from 3.62% the previous quarter but was down from 3.70% a year earlier.

Fifth Third said that net interest income grew during the third quarter because "higher interest income results reflected growth in C&I, residential mortgage, auto, and bankcard loan balances, as well as in investment securities ... more than offset lower yields on loans and securities given the current interest rate environment."

Average loans increased 1% quarter-over-quarter and 3% year-over-year, to $78.6 billion during the third quarter, with steady growth in average commercial and industrial loan balances to $28.8 billion, and strong growth in residential mortgage loans, to $10 billion.

Total average deposits were up slightly year-over-year, to $81.6 billion in the third quarter, but low-cost demand deposits were up 7% quarter-over-quarter and 22% year-over-year, to $23.7 billion in the third quarter.

Third-quarter noninterest income totaled $665 million, increasing from $656 million in the second quarter, but declining from $827 million in the third quarter of 2010, when the company booked $127 million in income from the settlement of litigation over a bank-owned life insurance policy.

The third-quarter return on average assets was 0.84%, while the return on average common equity was 6.8%.

The company reported a Tier 1 common equity ratio of 9.33% as of Sept. 30, increasing from 9.20% the previous quarter and 7.34% a year earlier, saying that its pro forma Basel III capital ratio was 9.80% as of Sept. 30, which Fifth Third said was "highest among large cap U.S. Banks," and exceeded "fully phased-in Basel III proposed standards."

Fifth Third's shares are down 26% year to date through Wednesday's close at $10.66. Based on a quarterly payout of 8 cents, the shares have a dividend yield of 3%.

Out of 22 analysts covering Fifth Third Bancorp, 14 rate the shares a buy, seven have neutral ratings, and one analyst recommends selling the shares.

The median 12-month price target among analysts polled by Thomson Reuters is $15.00, implying 41% upside for the shares.

RELATED STORIES:










-- Written by Philip van Doorn in Jupiter, Fla.

To contact the writer, click here: Philip van Doorn.

To follow the writer on Twitter, go to http://twitter.com/PhilipvanDoorn.
Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.