Fifth Third Bancorp (FITB) reported a first quarter loss of 9 cents per share. Results were well ahead of the Zacks Consensus Estimate of a loss of 18 cents. The company had incurred a loss of 20 cents in the prior quarter and a loss of 4 cents in the year-ago quarter.

The results were driven by an improvement in credit trends. Charge-offs and provisions for loan losses were down during the quarter. There was also an improvement in interest margin. However, loan demand continues to be weak and non-interest income reported a slight decrease.

The prior-year quarter results included a 21 cents per share benefit related to the surrender of one of its bank-owned life insurance policies and an agreement with the Internal Revenue Service to settle all of Fifth Third’s disputed leveraged leases for all open years.

Credit Quality

Fifth Third’s credit metrics continued to improve during the quarter. Net charge-offs declined 18% sequentially to $582 million, representing the lowest level experienced since the first quarter of 2009. Net charge-offs were 301 basis points (bps) of average loans and leases, down 61 bps sequentially but up 63 bps year-over-year. Overall loss experience continues to be driven by commercial and residential real estate loans in Michigan and Florida.

Non-performing loans dropped 7% sequentially. Non-performing assets as a percentage of related assets were 4.02%, down 20 bps sequentially but up 82 bps year-over-year. Provisions for loan losses were $590 million, down 24% both sequentially and year-over-year.

Fifth Third’s management expects credit metrics to improve in the second quarter. Delinquencies and non-performing assets are expected to remain relatively stable, while charge-offs are anticipated to fall by approximately another $100 million. Loan loss reserves are also projected to begin to slump next quarter. The company expects full-year charge-offs to be substantially down from the 2009 levels.

Capital Ratios

Capital ratios were mixed. Compared with the prior quarter, the Tier 1 common equity ratio decreased 3 bps to 6.97%, while the Tier 1 capital ratio increased 9 bps to 13.40% and the total capital ratio increased 7 bps to 17.55%. As of March 31, 2010, book value per share was $12.31 and tangible book value per share was $9.16, compared with the prior quarter book value per share of $12.44 and tangible book value per share of $9.26.

Behind the Headline Numbers

Net interest income was up 2% sequentially and 15% year-over-year to $901 million. Net interest margin improved 8 bps sequentially and 57 bps year-over-year. The improvement in interest margin and income primarily reflects the reduced funding costs and deposit mix shift to lower cost core deposits from higher priced term deposits.

However, the company continued to experience a weak loan demand and excess liquidity. Average portfolio loan and lease balances remained flat sequentially and decreased 7% year-over-year. Nevertheless, average core deposits increased 6% sequentially and 14% year-over-year.

Fifth Third’s non-interest income of $627 million was down 4% sequentially and 10% from a year ago. While the sequential decline reflects a drop in corporate banking revenue, service charges on deposits, and other non-interest income, the year-over-year decrease was driven by the effect of processing business sale. Non-interest expense decreased 1% both sequentially and year over year to $956 million.

Going forward, Fifth Third’s diverse revenue stream, opportunity expansions and cost containment measures should support its earnings. However, considering the stressed economic conditions along its geographic footprints, we expect demand for loan to remain restricted and credit costs to remain elevated.
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