Aided by gains from the Vantiv Inc.‘s (VNTV) initial public offering, Fifth Third Bancorp (FITB) has posted improved earnings in the first quarter of 2012. The company reported net income of $421 million or 45 cents per share in the reported quarter, ahead of the prior quarter’s net income of $305 million or 33 cents per share and year-ago quarter’s net income of $88 million or 10 cents per share.
Results include a 9 cent per share positive impact from Vantiv. Excluding that, the company earned 36 cents per share in the reported quarter that fell short of the Zacks Consensus Estimate of 37 cents.
Quarterly results at Fifth Third reflect a better-than-expected revenue figure backed by improved non-interest income. Expenses showed a modest decline. However, a fall in net interest income coupled with higher loan loss provisions were the downsides.
Total revenue at Fifth Third was $1.67 billion in the first quarter, above the Zacks Consensus Estimate of $1.52 billion. Revenue also increased 14% both sequentially and year over year. The uptick primarily reflects a significant rise in non-interest income.
U.S.-based Vantiv was formerly known as Fifth Third Processing Solutions (“FTPS”). FTPS is a payment processing company dealing with more than 12.9 billion payment transactions valued at $426 billion annually.
Fifth Third had spun-off FTPS in 2009 after which a joint venture was initiated between Advent International and Fifth Third Bank, a subsidiary of Fifth Third. The company was named Vantiv in June 2011. Notably, Vantiv Inc. opted for an initial public offering of Class A shares on the company. The offering was completed on March 21, 2012.
Performance in Detail
Fifth Third’s net interest income fell 2% sequentially to $903 million. The figure was pulled down sequentially by lower yields on loans given the current interest rate environment, partially offset by balance growth in C&I, commercial lease, residential mortgage and auto loans. Net interest margin of 3.61% was down 6 basis points sequentially because of lower yields.
Excluding loans held-for-sale, average portfolio loan and lease balances inched up 2% sequentially and 5% year over year. Average core deposits climbed 1% sequentially and 5% year over year as transaction deposit growth was partially offset by continued run-off of other time deposits.
Fifth Third’s non-interest income moved up 40% sequentially to $769 million. Net benefit of Vantiv’s IPO, related debt refinancing, and warrant gains, lower charges on the Visa Inc. (V) total return swap, as well as higher mortgage banking and corporate banking net revenue led to the sequential increase.
Fifth Third’s non-interest expenses fell 2% sequentially to $973 million. Excluding $23 million of income from an agreement reached on certain outstanding disputes for non-income tax related assessments, $13 million in additions to litigation reserves, $9 million in debt termination charges, and $6 million in severance expense, non-interest expense inched down 1% sequentially.
Credit Quality
Credit metrics were somewhat mixed in the reported quarter at Fifth Third. Net charge-offs were $220 million or 108 bps of average loans and leases compared with a respective $239 million or 119 bps in the prior quarter. This marked the lowest level since the fourth quarter of 2007. Though provision for loans and leases increased 64% sequentially, it fell 46% year over year to $91 million.
Nonperforming assets held-for-investment were $1.7 billion or 2.03% of total loans, leases and OREO. It fell 8% from the prior quarter due to a fall in nonperforming loans and leases.
Capital Position
Growth in retained earnings attributed to Fifth Third’s improved capital ratios in the reported quarter. Sequentially, the Tier 1 common equity ratio increased 29 bps to 9.64%, while the tangible common equity to tangible assets ratio was 9.02% (excluding unrealized gains/losses) and 9.37% (including unrealized gains/losses).
The Tier 1 capital ratio advanced 28 bps to 12.19%. The Leverage ratio increased 21 bps to 11.31%. Notably, Fifth Third’s capital levels exceed the current U.S. “well-capitalized” standards and proposed Basel III capital standards.
Fifth Third posted an increase in both book value and tangible book value per share. As of March 31, 2012, book value per share was $14.30 and tangible book value per share was $11.64, up from $13.92 and $11.25, respectively, as of December 31, 2011.
Notably, in March 2012, the Federal Reserve declared that it does not have any objection to Fifth Third’s current common dividend level, plans to repurchase common shares in an amount equal to any after-tax gains on the sale of Vantiv shares, and the potential to redeem $1.4 billion in TruPS, and included an objection to other plans to increase the common dividend and initiate additional common share repurchases.
However, the Federal Reserve objected to other elements of its capital plan, including increases in its quarterly common dividend and the initiation of common share repurchases other than those described above. Fifth Third currently expects to resubmit its capital plan in late May or early June, using updated macroeconomic scenarios as of March 31, 2012.
Our Take
We believe that with a diversified traditional banking platform, Fifth Third remains well poised for future growth. However, a low interest rate environment as well as regulatory change remains a challenge. Yet, we expect the company’s proactive efforts to help navigate through the challenge comfortably. Nevertheless, the recent objection by the Fed to increase dividends and share buybacks somewhat weakens its competitive position.
Fifth Third retains a Zacks #3 Rank, which translates into a short-term Hold recommendation. Considering the fundamentals, we maintain a Neutral recommendation on the stock.
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