Fifth Third Bancorp: Financial Loser

NEW YORK ( TheStreet) -- Fifth Third Bancorp ( FITB) was the loser among the nation's largest banks Wednesday, with shares declining 3% to close at $16.11.

The broad indices ended mixed after the U.S. Census Bureau said retail sales rose by 0.1% in January after increasing 0.5% in December. Excluding the auto sales, retail sales were up 0.2%, compared with a 0.3% gain in December. The increase in total sales matched the consensus estimate among economists, according to Zacks, while sales growth excluding auto sales came in ahead of the 0.1% increase expected by economists.

There had been some concern among economists that the rise in payroll taxes in January would damp consumer sales. The tax increase has certainly had a major effect, with the U.S. Treasury reporting on Tuesday that the federal government operated with a $3 billion budget surplus during January. Deutsche Bank analyst Dominic Konstam said in a report early on Wednesday that "the anecdotal evidence suggests that consumers have been more resilient than we had anticipated. At present, we anticipate +1.5% real GDP growth in the current quarter and this assumes consumer spending rises just 1%."

Bank stocks took a breather from a rally. The KBW Bank Index ( I:BKX) was down 1% to close at 55.37.

Fifth Third Bancorp


Shares of Fifth Third Bancorp of Cincinnati have returned 6% this year, following a 23% return during 2012. The shares trade for 1.3 times their reported Dec. 31 tangible book value of $12.33, and for 9.5 times the consensus 2014 earnings estimate of $1.69 a share, among analysts polled by Thomson Reuters. The consensus 2013 EPS estimate is $1.65.

Based on a quarterly payout of 10 cents, the shares have a dividend yield of 2.48%.

During the fourth quarter, Fifth Third continued to grow its mortgage revenue, which totaled $258 million, increasing from $200 million the previous quarter and $156 million a year earlier, as the company continued to enjoy robust volume amid the refinancing boom. (Please see TheStreet's earnings coverage for a detailed discussion of the company's fourth-quarter results.)

But at this point in the economic cycle, investors are concerned over how much of a decline in profitability the large mortgage lenders will see from lower gains on the sale of newly originated loans. With the market rate on 10-year U.S. Treasury bonds rising by about 40 basis points to roughly 2% over the past two months, mortgage-backed securities are also seeing higher yields.

Atlantic Equities analyst Richard Staite said in a report Jan. 29 that the increase in MBS yields had led to a contraction in the primary secondary mortgage spread to 82 basis points from an average of 123 basis points during the fourth quarter. This means smaller gains on the sale of loans to government-sponsored enterprises, including Fannie Mae ( FNMA) and Freddie Mac ( FMCC).

During a presentation at the Credit Suisse Financial Services Forum on Wednesday, Fifth Third CEO Kevin Kabat said it was too early to comment on how much mortgage loan gain-on-sale margins had declined during the first quarter, but he did say that the declining mortgage spreads would affect the "industry as a whole."

Stifel Nicolaus analyst Christopher Mutascio on Monday downgraded Fifth Third to "hold" from "outperform," saying the move was "purely a valuation call as the shares are now within 2% of our $17 target price." The analyst also said "we still like it over other Midwest banks like Comerica and KeyCorp," which he downgraded to "sell" the same day.

Mutascio estimates that Fifth Third will earn $1.66 a share this year, with earnings growing to $1.73 a share in 2014.

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

FITB Chart FITB data by YCharts

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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.

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