The rating outlook on Fifth Third Bancorp (FITB) has been raised to positive from stable by Standard & Poor’s Ratings Services. The revision results from the company’s improvement in credit quality.
According to the rating agency, Fifth Third’s financial condition has improved in terms of its asset quality, capital and earnings. During the past three quarters, the company’s net charge-off levels were low at less than 2%. The company did not experience an increase in non-performing asset levels and its total delinquencies trended downward.
The rating agency has affirmed its ratings of “BBB” for long-term counterparty credit and “BBB+” on Fifth Third’s banking subsidiaries.
Though the rating agency expects Fifth Third to experience higher-than-normal credit costs through 2011, it believes that these costs should be manageable.
Last month, Fifth Third reported second quarter 2011 net income of $328 million or 35 cents per share, outpacing the Zacks Consensus Estimate of 28 cents. Backed by fee income growth, Fifth Third also reported a better-than-expected revenue figure. Credit metrics improved significantly and operating expenses were low.
Net charge-offs in the second quarter were $304 million or 156 bps of average loans and leases compared with a respective $367 million or 192 bps in the prior quarter. Provision for loans and leases plummeted 33% sequentially and 65% year over year to $113 million.
Total nonperforming assets, including loans held-for-sale, were $2.3 billion, down 3% from the prior quarter. The decline was driven by the sale of assets from held-for-sale during the quarter and decreases in nonperforming loans and OREO in the held-for-investment portfolio.
Going forward, we believe that Fifth Third is well positioned to benefit from a revival in economic conditions along its footprint. Its diverse revenue mix and solid capital position also augur well. However, regulatory issues remain an overhang.
We would like to see substantial top-line improvement before becoming extremely positive on the stock. Yet, given the current economic environment and regulatory issues, such robust expansion remains elusive in the near term.
Fifth Third shares continue to have a Zacks #3 Rank, which translates into a short-term Hold recommendation. However, one of its closest peers, KeyCorp (KEY) has a Zacks #2 Rank, reflecting a short-term Buy recommendation.
