Fifth Third Bancorp (FITB) reported third quarter net income of $175 million or 22 cents, ahead of the Zacks Consensus Estimate of 17 cents. Results also compare favorably with net income of $130 million or 16 cents per share in the prior quarter and a net loss of $159 million or 20 cents per in the prior-year quarter.
Results were driven by better-than-expected growth in revenues but were impacted substantially by Fifth Third’s strategic actions to reduce credit risk.
Total revenues at Fifth Third were $1.7 billion, up 16% sequentially and ahead of the Zacks Consensus Estimate of $1.5 billion, reflecting growth in interest income and non-interest income. However, Fifth Third’s results in the reported quarter included $127 million of pre-tax benefit, net of expenses from the settlement of litigation related to a bank-owned life insurance (BOLI) policy.
Behind the Headline Numbers
Fifth Third’s net interest income advanced 3% sequentially to $916 million while net interest margin grew 13 basis points to 3.70%. This improvement was driven by ongoing CD runoff and repricing, reduced securities premium amortization and a mix shift toward higher-yielding loans, primarily C&I and consumer loans.
However, lower investment portfolio balances and a flatter yield curve partially offset the positives. Though average portfolio loan and lease balances remained flat sequentially, average core deposits decreased 2% from the prior quarter.
Fifth Third’s non-interest income increased 33% sequentially to $827 million. The significant increase was due to the benefit from the litigation settlement. However, the company also experienced a growth in mortgage banking revenue and investment advisory fees, though partially offset by lower card and processing revenue, corporate banking revenue and service charges on deposits.
However, on the negative side, Fifth Third’s non-interest expense increased 5% sequentially to $979 million. The increase reflects legal expenses associated with the BOLI settlement and higher credit-related expenses.
Credit Quality
As a result of the strategic initiatives to reduce credit risk, Fifth Third has experienced an increase in charge-offs and loan loss provisions in the reported quarter. Credit risk reduction initiatives resulted in $510 million of additional charge-offs and a drop in the company’s allowance for loan and lease losses of around $337 million.
Fifth Third’s net charge-offs were 495 bps of average loans and leases, compared with 226 bps in the prior quarter. Provision for loans and leases increased to $457 million from $325 million in the prior quarter. However, such actions to reduce credit risk through selling of non-performing loans resulted in a drop in nonperforming assets which as a percentage of related assets were 2.72%, down 115 bps sequentially. The company also expects to reduce nonperforming loans significantly in the fourth quarter.
Capital Ratio
Fifth Third’s capital ratio improved in the quarter. On a sequential basis, the Tier 1 common equity ratio advanced 17 bps to 7.34%, while Tier 1 capital ratio grew 20 bps to 13.85% and total capital ratio was up 29 bps to 18.28%. As of September 30, 2010, book value per share was $12.86 and tangible book value per share was $9.74, compared with the prior-quarter book value per share of $12.65 and tangible book value per share of $9.51.
Our Take
Similar to Fifth Third, earlier in the day, Huntington Bancshares Incorporated (HBAN) reported impressive third quarter 2010 earnings of 10 cents per share, ahead of the Zacks Consensus Estimate of 6 cents. Like Fifth Third, Huntington also topped on revenue growth.
Going forward, we expect Fifth Third’s diverse revenue stream, opportunistic expansions and cost containment measures to support its earnings. However, challenging economic conditions along its footprint is expected to keep demand for loan restricted and credit costs elevated, though proactive measures by the company remains encouraging. Additionally, the recent regulatory issues are expected to affect both top and bottom lines of the company.
Fifth Third shares are maintaining a Zacks #3 Rank, which translates into a short-term Hold recommendation. We have a long-term Neutral recommendation on the stock.
FIFTH THIRD BK (FITB): Free Stock Analysis Report
Zacks Investment Research
