The Mortgage Bankers Association expects U.S. mortgage loan originations to decline 20% this year, but Fifth Third has plenty of offsets to protect its earnings, according to UBS analyst Stephen Scinicariello.
"In our scenario analysis, a 50% decline in origination and gain on sale revenues translates into a $0.31 hit to EPS (17%); however, taking several offsets into account, we estimate only a potential net reduction to operating EPS of $0.13 or 7%," Scinicariello wrote. The offsets include a 40% efficiency ratio for Fifth Third's mortgage operations. The efficiency ratio is, essentially, the number of pennies of expense incurred for each dollar of revenue. An efficiency ratio below 50% is generally considered quite good for most banking businesses. Other offsets in the scenario of a 50% mortgage volume decline for Fifth Third include "a 15% increase in servicing fees, reinvestment of MBS cash flow at higher yield (45bps), and higher mortgage spreads of 40bps on incremental/repricing volume," according to Scinicariello. UBS's earnings forecasts for Fifth Third assume a 32% decline in quarterly mortgage loan origination volume through the first quarter of 2014. When factoring in "the potential revaluation of $77.3B of mortgage servicing rights," which will increase in value as refinancing activity slows, Scinicariello estimated that Fifth Third's GAAP earnings per share would be "more modestly impacted by only 2%." Scinicariello rates Fifth Third a "buy," with a 12-month price target of $19.00, estimating the company will earn $1.78 a share this year, with EPS rising to $2.29 in 2014. Fifth Thirds shares closed at $15.84 Thursday, returning 4% this year, following a 11.5% return during 2012. The shares trade for 1.3 times tangible book value, and for 9.4 times the consensus 2014 EPS estimate of $1.69, among analysts polled by Thomson Reuters. The consensus 2013 EPS estimate is $1.64. Based on a quarterly payout of 10 cents, the shares have a divided yield of 2.53%. FITB data by YCharts Interested in more on Fifth Third? See TheStreet Ratings' report card for this stock.-- Written by Philip van Doorn in Jupiter, Fla. >Contact by Email. Follow @PhilipvanDoorn