Fifth Third Beats as Expenses Decline (Update 2)

  • Fifth Third reports second-quarter earnings of 40 cents a share, beating the consensus estimate by a nickel.
  • Results include $36 million after-tax gain on sale of Vantiv shares.
  • Net interest income flat; noninterest expense down 4% sequentially.

Updated with comment from Jefferies analyst Ken Usdin and FBR analyst Paul Miller and market close information.

NEW YORK ( TheStreet) -- Fifth Third Bancorp ( FITB) of Cincinnati on Thursday reported second-quarter earnings available to common shareholders of $376 million, or 40 cents a share, beating the 35-cent share consensus estimate, among analysts polled by Thomson Reuters.

The second-quarter results included after-tax gains of roughly $36 million, or four cents a share, on the sale of shares in Vantiv ( VNTV), Fifth Third's former payment processing subsidiary, which was spun-off during the first quarter.

Earnings declined from $421 million, or 46 cents a share, during the first quarter, when the company saw after-tax benefits of roughly $82 million, or nine cents a share, from the Vantiv spinoff, but increased slightly from $328 million, or 35 cents a share, in the second quarter of 2011.

Fifth Third's shares rose slightly to close at $13.80.

Second-quarter net interest income declined to $899 million from $903 million the previous quarter, while increasing from $869 million a year earlier. Fifth Third's net interest margin -- the difference between the average yield on loans and investments and the average cost for deposits and borrowings -- narrowed by five basis points during the second quarter, to 3.56%, in line with the industry trend in the prolonged low-rate environment.

Second-quarter noninterest income totaled $678 million, declining from $769 million during the first quarter, again mainly reflecting the Vantiv spinoff, and increased from $656 million during the second quarter of 2011. During the second quarter, mortgage banking income totaled $183 million, declining from $204 million the previous quarter, but increasing from $162 million a year earlier.

Second-quarter noninterest expenses totaled 937 million and were "reduced by $17 million related to affordable housing investments and FDIC insurance." Noninterest expenses were $973 million the previous quarter, which included a seasonal spike in compensation and employee benefits and $901 million in the second quarter of 2011.

The second-quarter bottom line was boosted by a $110 million release of loan loss reserves.

The company's second-quarter return on average assets was 1.32%, declining from 1.49% in the first quarter, but increasing from 1.22% in the second quarter of 2011. The second-quarter return on average common equity was 11.4%, declining from 13.1% the previous quarter, and increasing from 11.0% a year earlier.

Fifth Third's second-quarter income taxes totaled $180 million, and "were seasonally higher by $19 million due to the seasonal expiration of employee stock options expense."

Period-end commercial loans grew 1% sequentially and 16% year-over-year, to $32.6 billion as of June 30. Total portfolio loans were up slightly during the second quarter, to $82.4 billion, increasing 6% from a year earlier.

Fifth Third estimated that under federal regulators' recent proposals to implement Basel III capital standards, its ratio of Tier 1 common equity to risk-weighted assets would be 9.8%.

Fifth Third's shares have now returned 10% year-to-date, following an 11% decline during 2011.

FITB Chart FITB data by YCharts

The shares trade for 1.2 times their reported June 30 tangible book value of $11.89, and for nine times the consensus 2013 earnings estimate of $1.51 a share. The consensus 2012 EPS estimate is also $1.51.

Based on a quarterly payout of eight cents, the shares have a dividend yield of 2.32%.

Stifel Nicolaus analyst Christopher Mutascio rates Fifth Third a "Buy," with a $17 price target, and said following the earnings release that "although we expected 2Q12 expenses to fall due to the seasonality of employee benefit expense typically recorded in 1Q, the drop was more than we had expected and was the primary driver of the quarterly beat."

Mutascio said "total loan yields decreased 8 basis points sequentially with the commercial loan and auto loan portfolios bearing the brunt of the decrease," which was "only partially offset by a 6 basis point decrease in liability costs," but Fifth Third's "management expects net interest income to be relatively stable in 3Q12 and the net interest margin to compress another 2-3 basis points."

Jefferies analyst Ken Usdin also rates Fifth Third a buy, with a lower target of $16, and said on Thursday that "forward guidance for 3Q (pre-provision of $585mm) is solid, with most of the strength likely related to mortgage."

Usdin also said that "third quarter net interest income guidance ($900mm) looks a little light as earning asset growth is lower-than-expected," and "could be a result of lackluster loan growth as end-of-period loans were only up 0.3%."

The analyst said that Fifth Third's forward guidance of "$970mm-$975mm of expenses... is higher-than-expected, perhaps the result of potential expense related to better mortgage banking."

FBR analyst Paul Miller rates Fifth Third "Outperform," with a $17 price target, and said on Thursday that the company's "capital position is well above Basel III requirements, and management has been vocal about its intention to return capital to shareholders." Fifth Third has resubmitted its capital plan to regulators, proposing "a dividend hike and share repurchase increase above what it had requested and had rejected by the Federal Reserve last time and should hear back in mid August," and FBR believes "that this could add significant value to shares and will position the company to outperform peers."

Miller raised his 2012 EPS estimate for Fifth Third to $1.51 from $1.40, and raised his 2013 EPS estimate to $1.55 from $1.48. The analyst said that "should the company use the majority of its excess capital to repurchase shares or complete an acquisition, we estimate that it could grow its return on equity to roughly 15% from 11.5% this quarter."

Interested in more on Fifth Third Bancorp? See TheStreet Ratings' report card for this stock.


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

>Contact by Email.

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 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.

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