Zacks_Analysts' Blog : Fifth Third Misses Ests, Revs Down - Analyst Blog

Fifth Third Bancorp’s (FITB) fourth-quarter 2011 net income of $305 million or 33 cents per share missed the Zacks Consensus Estimate of 35 cents. The results compare unfavorably with net income of $373 million or 40 cents per share in the prior quarter.

Quarterly results at Fifth Third reflect a lower-than-expected revenue figure backed by lower securities gains and other non-interest income. However, credit metrics improved significantly, but higher operating expenses were on the downside.

For the full year, net income applicable to common shareholders was $1.1 billion or $1.18 per share, significantly below the Zacks Consensus Estimate of $1.35 per share. However, results surpassed the prior-year earnings of $503 million or 63 cents per share.

Results included $153 million, or 17 cents per share of discount accretion mainly related to the repayment of TARP preferred stock in the first quarter of 2011, coupled with $15 million, or 2 cents per share of contractual dividend payments on the TARP preferred stock.

Performance in Detail

Total revenue at Fifth Third was $1.47 billion in the fourth quarter, below the Zacks Consensus Estimate of $1.54 billion. Revenue also decreased 6.2% sequentially and 6.7% from the prior-year quarter. The decreases in revenue primarily reflect a significant decline in non-interest income.

For the full year, revenue was $6.0 billion, down 1.5% from $6.1 billion in 2010. Moreover, this also compared unfavorably with the Zacks Consensus Estimate of $6.1 billion.

Fifth Third’s net interest income climbed 2% sequentially and was modestly flat year over year at $920 million. Net interest margin surged 2 basis points (bps) sequentially but plunged 8 bps year over year to 3.67%.

The sequential increase in income and margin during the reported quarter reflected loan growth. The increase in income more than offset the lower yields on loans and securities given the current interest rate environment.

On a year-over-year basis, net interest income remained approximately flat and margin decreased mainly due to lower loan and investment securities yields, partly offset by higher average loan balances, run-off in higher-priced CDs, and mix shift to lower cost deposit products.

Average portfolio loan and lease balances inched up 2% sequentially and 5% year over year. Average core deposits climbed 3% sequentially and 5% year over year as transaction deposit growth was partially offset by continued runoff of other time deposits.

Fifth Third’s non-interest income plummeted 17% sequentially and 16% year over year to $550 million. The sequential and year-over-year decline was attributable to lower securities gains, low corporate banking and card and processing revenue and decreased other non-interest income.

Fifth Third’s non-interest expenses increased 5% sequentially and 1% year over year to $993 million. Excluding $14 million addition to litigation reserves related to bankcard association membership and $5 million other litigation reserve additions in the fourth quarter, non-interest expense inched up 6% sequentially, attributed to increase in compensation and benefits expense.

Credit Quality

Credit metrics improved in the reported quarter at Fifth Third. Net charge-offs were $239 million or 119 bps of average loans and leases compared with a respective $262 million or 132 bps in the prior quarter. Provision for loans and leases plummeted 37% sequentially and 67% year over year to $55 million.

Total nonperforming assets, including loans held-for-sale, were $2.0 billion, a decline of 5% from the prior quarter. The decline was driven by the sale of assets from held-for-sale during the quarter and by decreases in nonperforming loans and OREO in the held-for-investment portfolio.

Capital Ratios

Fifth Third’s capital ratios were mixed during the quarter. Sequentially, the Tier 1 common equity ratio increased 1 bp to 9.34% while Tier 1 capital ratio decreased 5 bps to 11.91%, Total capital ratio declined 17 bps to 16.08%, and leverage ratio climbed 2 bps to 11.10%.  Moreover, the tangible common equity to tangible assets ratio inched up 5 bps to 8.68%, excluding unrealized gains/losses.

Ratios reflected retained earnings and asset growth, including the effect of the redemption of TRUPs during the quarter.

Fifth Third posted an increase in both book value and tangible book value per share. As of December 31, 2011, book value per share was $13.92 and tangible book value per share was $11.25, up from $13.73 and $11.05, respectively, as of September 30, 2011.

However, Return on assets was 1.10% and return on average common equity was 9.5%, down from 1.34% and 11.9%, respectively, in the prior quarter.

Our Take

We believe Fifth Third is well positioned to benefit from a rebound in economic conditions along its footprint. Its diverse revenue mix is expected to augur well.  Improved credit metrics are encouraging.

This has been a trend in this quarter, and many of the Wall Street biggies such as Bank of America Corporation (BAC), Citigroup Inc. (C) and JPMorgan Chase & Company (JPM) have similarly missed the Zacks Consensus earnings estimates buckled under the weakness in the wider economy and the fundamental pressures on the banking sector.

Fifth Third retains a Zacks #2 Rank, which translates into a short-term Buy recommendation. However, considering the fundamentals, we maintain a Neutral recommendation on the stock.