Fifth Third Bancorp’s (FITB) second quarter 2011 net income of $328 million or 35 cents per share outpaced the Zacks Consensus Estimate of 27 cents.
The results compare favorably with net income of $88 million or 10 cents per share in the prior quarter and $130 million or 16 cents per share in the prior-year quarter.
Quarterly results at Fifth Third reflect a better-than-expected revenue figure backed by fee income growth. Credit metrics improved significantly and operating expenses were low.
Notably, Fifth Third’s first quarter 2011 net income was restricted by $153 million or 17 cents per share of discount accretion recorded in preferred dividends, which increased due to the repurchase of $3.4 billion in Treasury’s Troubled Asset Relief Program Capital Purchase Program Preferred Stock in February.
Performance in Detail
Total revenue at Fifth Third was $1.53 billion in the second quarter, comfortably ahead of the Zacks Consensus Estimate of $1.48 billion. Revenue also increased 4% sequentially and 1% from the prior-year quarter. The increase in revenue primarily reflects a significant increase in non-interest income, partially offset by a drop in net interest income.
Fifth Third’s net interest income was down 2% both sequentially and year-over-year at $869 million. Net interest margin fell 9 basis points (bps) sequentially to 3.62%. The decline in income and margin during the reported quarter reflected a flatter yield curve and heightened loan pricing competition. Fifth Third’s management, however, expects both measures to improve in the third and fourth quarters.
Average portfolio loan and lease balances inched up 0.4% sequentially and 1% year over year. Average core deposits increased 1% sequentially and 2% year over year as transaction deposit growth was partially offset by continued runoff of consumer time deposits (CDs).
However, on the positive side, Fifth Third’s non-interest income advanced 12% sequentially and 6% year over year to $656 million. The sequential progress was attributable to higher mortgage-related revenue, corporate banking revenue and card and processing revenue. The year-over-year growth resulted from increased mortgage-related revenue partially offset by reduced deposit service charges based on the effect of the Regulation E implementation in August 2010.
Fifth Third’s non-interest expenses dropped 2% sequentially and 4% year over year to $901 million. Excluding $6 million of debt extinguishment gains in the second quarter and $3 million in the first quarter, noninterest expense fell $14 million sequentially and $28 million year over year.
The sequential decline in costs was primarily driven by lower employee benefits expense due to a decrease in FICA and unemployment costs from seasonally high first quarter levels, coupled with improvements in other noninterest expense. This was partially offset by higher salaries, wages, and incentives. The year-over-year decline reflected substantially lower credit-related expenses.
Credit Quality
Credit metrics improved in the reported quarter at Fifth Third. Net charge-offs were $304 million or 156 bps of average loans and leases compared with a respective $367 million or 192 bps in the prior quarter. Provision for loans and leases plummeted 33% sequentially and 65% year over year to $113 million.
Total nonperforming assets, including loans held-for-sale, were $2.3 billion, a decline of 3% from the prior quarter. The decline was driven by the sale of assets from held-for-sale during the quarter and by decreases in nonperforming loans and OREO in the held-for-investment portfolio.
Capital Ratios
Fifth Third’s capital ratios were mixed during the quarter. Sequentially, the Tier 1 common equity ratio increased 21 bps to 9.20% while the tangible common equity to tangible assets ratio increased 25 bps to 8.64%, excluding unrealized gains/losses. The increase in these ratios was attributable to higher retained earnings.
However, compared with the prior quarter, Fifth Third’s Tier 1 capital ratio dropped 27 bps to 11.93%, total capital ratio decreased 24 bps to 16.03%, and leverage ratio declined 18 bps to 11.03%. The fall in these ratios was brought about by the redemption of $452 million in Trust Preferred Securities, partially mitigated by higher retained earnings.
Fifth Third posted an increase in both book value and tangible book value per share. As of June 30, 2011, book value per share was $13.23 and tangible book value per share was $10.55, up from $12.80 and $10.11, respectively, as of March 31, 2011.
Return on assets was 1.22% and return on average common equity was 11.0%, up from 0.97% and 3.1%, respectively, in the prior quarter.
Our Take
We believe Fifth Third is well positioned to benefit from a rebound in economic conditions along its footprint. Its diverse revenue mix augurs well. Improved credit metrics are encouraging. This has been a trend in this quarter and many of the Wall Street biggies such as U.S. Bancorp (USB), Citigroup Inc. (C) and Wells Fargo & Co. (WFC) have similarly posted better-than-expected results on lower loan loss provisions. However, regulatory issues remain an overhang.
Fifth Third shares continue to have a Zacks #3 Rank, which translates into a short-term ‘Hold’ recommendation.
