We have reiterated our neutral recommendation on Fifth Third Bancorp (FITB), based on its fundamentals in the midst of the current operating environment and the recent share buybacks with the gains from the initial public offering (IPO) of Vantiv Inc. (VNTV).

First Quarter Results

Aided by gains from Vantiv Inc.’s IPO, Fifth Third Bancorp posted improved earnings in the first quarter of 2012. The company reported earnings of 45 cents per share, ahead of 33 cents per share earned in the prior quarter and 10 cents per share in the year-ago quarter.

Results include the positive impact of 9 cents per share from Vantiv. Excluding that, the company earned 36 cents per share in the reported quarter, which missed the Zacks Consensus Estimate by a penny.

Quarterly results at Fifth Third reflect a better-than-expected revenue figure backed by improved non-interest income. Expenses showed a modest decline. However, a drop in net interest income coupled with higher loan loss provisions were the downsides.

Share Buybacks

Fifth Third Bancorp recently bought back shares worth $75 million, according to its filing with the Securities and Exchange Commission. The share buybacks were made as per the regulatory approval that the company received in March and were supported by the realized gains from the Vantiv IPO.

Shares were bought back pursuant to an accelerated share repurchase transaction agreement that the company entered into with Goldman, Sachs & Co. (GS) in April. A total of around 5.5 million shares were bought back at an average price of $13.71.

The share repurchases were made as part of Fifth Third’s previously announced 30 million share buyback program. The company now has the remaining authorization to buyback around 14 million shares under this program.

Notably, according to the 2012 stress test results, Fifth Third was allowed to make this share buyback from the gains of the Vantiv IPO, formerly Fifth Third Processing Solutions, LLC. Moreover, the company got the permission to continue its quarterly common dividend at 8 cents per share and redeem up to $1.4 billion in certain trust preferred securities.

In Conclusion

We believe that with a diversified traditional banking platform, Fifth Third remains well poised to benefit from a recovering economy. Its traditional commercial banking franchise and solid market share in key markets will bode well going forward.

While an improving credit quality is encouraging, a low interest rate environment, regulatory issues and competitive pressures are the headwinds for the stock.

Moreover, the Fed’s objection to a number of elements in Fifth Third’s capital plan, including increase in its quarterly common dividend, puts the company on the back foot and weakens its competitive position to some extent.

The risk-reward profile for Fifth Third Bancorp is somewhat balanced and hence we have reaffirmed our Neutral recommendation on the stock.

Fifth Third shares currently retain a Zacks #3 Rank, which translates to a short-term Hold rating.

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