Last Friday, Standard & Poor’s Rating Services (S&P) raised the rating outlook of Fifth Third Bancorp (FITB) to “Stable” from “Negative” on the back of improved credit quality. The rating agency has also affirmed its “BBB” long-term counterparty credit rating and “BBB+” rating on its banking subsidiaries.
Fifth Third has turned to profitability in the second quarter of 2010 after reporting losses in the last three quarters. The company reported a net income of $130 million or 16 cents per share, far ahead of the Zacks Consensus Estimate of 2 cents.
The better-than-expected results at Fifth Third were primarily driven by lower loan loss provisions as the credit metrics witnessed an improvement in the quarter. Provisions for loan losses were $325 million, down 45% sequentially and 69% year over year.
Fifth Third’s net charge-offs declined 25% sequentially to $434 million, representing the lowest level experienced since the first quarter of 2009. Net charge-offs were 226 basis points (bps) of average loans and leases, down 75 bps sequentially.
Overall loss experience continued to be driven by commercial and residential real estate loans in Michigan and Florida. Nonperforming assets as a percentage of related assets were 3.87%, down 15 bps sequentially.
The results at Fifth Third were in line with the overall industry, which witnessed big companies such as JPMorgan and Chase Company (JPM), Bank of America Corporation (BAC), Citigroup Inc. (C) and U.S. Bancorp (USB) reporting better-than-expected earnings on improved credit quality.
Expenses at Fifth Third remain controlled. However, the lack of loan demand and a drop in interest income thereby were on the downside during the reported quarter. Given the slow economic rebound, we expect the recovery on those fronts to be slower. Though credit quality trends are improving, delinquencies are still at elevated levels.
Nevertheless, the company’s diverse revenue stream, opportunistic expansions and cost containment measures are expected to support its earnings in the upcoming quarters.
We have a Zacks #3 Rank (Hold), implying no clear directional pressure on the stock over the next one to three months. The stock is also rated “Neutral” in the long term.
Read the full analyst report on “FITB”
Read the full analyst report on “JPM”
Read the full analyst report on “BAC”
Read the full analyst report on “C”
Read the full analyst report on “USB”
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