Shares of Fifth Third Bancorp (FITB) plunged over 4% in Tuesday’s trading following a disclosure made by the company about a U.S. Securities and Exchange Commission’s (SEC) investigation.
The disclosure was made in its annual report filed on February 28. As per this report, the SEC had requested several information, even by subpoena, for investigation related to accounting and reporting matters of certain commercial loans. The company further said that such investigation may result in an enforcement proceeding by the SEC that might have adverse effects on the company.
Post financial crisis, regulators are actively supervising companies to try and stop any fraudulent activities, mis-statement of results or any wrong doings associated with investors or financial markets. We believe such steps would save us from another crisis in future.
Ex-director at Goldman Sachs Group Inc. (GS), Rajat Gupta, was also charged by the SEC on Tuesday with insider trading. Mr. Gupta had allegedly passed inside information to Raj Rajaratnam, a hedge-fund manager.
Fourth Quarter Earnings
Fifth Third’s fourth quarter 2010 earnings of 33 cents per share came in 8 cents ahead of the Zacks Consensus Estimate, primarily driven by a better-than-expected improvement in credit metrics. The company reported a drop in delinquencies and provisions for loan losses. The quarter’s revenue also came in satisfactorily.
Fifth Third had received $3.4 billion in bailout money in 2008, as part of the Treasury’s Troubled Asset Relief Program (TARP). Following the fourth quarter earnings release, Fifth Third also cleared its TARP dues. This is essentially a positive as it frees the company of restrictions on both financial and executives’ pay package flexibility that it was subject to upon being a TARP receiver. Last December, Huntington Bancshares Inc. (HBAN) and First Horizon National Corp. (FHN) also reimbursed their TARP loans.
Our Take
We are encouraged by Fifth Third’s aggressive credit management efforts, the recent repayment of the bailout money and better-than-expected fourth quarter earnings. While the repayment of TARP dues is a positive as it removes government overhang, the dilutive impact from the stock offering cannot be ignored.
Additionally, concerns over new regulations persist. Yet, Fifth Third’s diverse revenue mix and credit quality improvement augur well. But we would like to see substantial top-line improvement before becoming extremely positive on the stock. Moreover, considering the current economic environment along its footprint, such expansion remains elusive in the near term. We believe that any enforcement proceeding by the SEC would be a concern for the company.
Fifth Third shares are maintaining a Zacks #3 Rank, which translates into a short-term ‘Hold’ recommendation. Considering the fundamentals, our current recommendation is “Neutral” on the stock.
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