We are downgrading our recommendation on Fifth Third Bancorp (FITB) shares to Neutral. We are encouraged by the company’s aggressive credit management efforts, the recent repayment of the bailout money and better-than-expected fourth quarter earnings. However, we believe that the positives have already been factored in the current price.

Fifth Third’s fourth quarter 2010 earnings came in 8 cents ahead of the Zacks Consensus Estimate at 33 cents per share, primarily driven by 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.

For full-year 2010, Fifth Third reported earnings of 63 cents per share, which flew past the Zacks Consensus Estimate of 53 cents. However, results came in slightly below the prior year’s earnings of 67 cents.

On a separate note, 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 and full-year 2010 earnings release, Fifth Third also cleared its TARP dues. This is essentially a positive for the company, removing restrictions on both financial and executives’ pay package flexibility that the company 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.

Fifth Third repaid the bailout money through capital infusion from stock and debt offering. It opted for a $1.7 billion stock offering in January 2011 and used the proceeds to purchase all of the Series F preferred stock issued to the Treasury as part of TARP. While the repayment of TARP dues is a positive removing government overhang, the dilutive impact from the stock offering cannot be ignored.

Additionally, concerns over new regulations persist. Yet, its 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. Therefore, our current recommendation is Neutral.

Fifth Third shares are maintaining a Zacks #3 Rank, which translates into a short-term ‘Hold’ recommendation.

 
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