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Fifth Third Bancorp’s (FITB - Analyst Report) second-quarter 2013 adjusted earnings per share came in at 44 cents, in line with the Zacks Consensus Estimate. Moreover, the results were in line with the prior-quarter earnings.

Including the benefit of $76 million pre-tax ($49 million after-tax, or 5 cents per share) on the valuation of the warrant which Fifth Third holds in Vantiv and $242 million pre-tax ($157 million after-tax, or 17 cents per share) on the sale of shares of Vantiv, the company reported net income of $594 million or 66 cents per share in the reported quarter. In the prior quarter, net income was reported at $413 million or 46 cents per share.
 
Lower net charge-offs and reduced nonperforming assets were the positives for the quarter. Moreover, increase in loans and deposits reflect the company’s organic growth. Further, top-line growth and a strong capital position acted as tailwinds. However, escalated non-interest expenses depicted undisciplined expense management, while increase in provision for loans and leases was a headwind.

Total revenue for the quarter came in at $1.9 billion, higher than the Zacks Consensus Estimate of $1.6 billion. Moreover, revenue surged 18.9% sequentially, aided by higher non-interest income.
 
Quarter in Detail
 
Fifth Third’s net interest income came in at $885 million, down 1% sequentially. Excluding the impact of day count, the decline in net interest income was primarily due to loan repricing and maturities of interest rate floors, partially mitigated by net loan growth and the gain of elevated yields on investment securities. Net-interest margin came in at 3.33%, down 9 basis points from the prior quarter.
 
Non-interest income jumped 43% sequentially to $1.1 billion. The increase was largely attributable to the benefit on the sale of Vantiv shares and a higher valuation adjustment on the Vantiv warrant.

Non-interest expenses escalated 4% from the prior quarter to $1.0 billion. Expenses included a benefit of $2 million from the sale of affordable housing investments and a $33 million rise in litigation reserves.

Credit Quality
 
Fifth Third’s credit metrics were a mixed bag in the reported quarter. Net charge-offs were $112 million or 51 basis points of average loans and leases on an annualized basis compared with $133 million or 63 basis points recorded in the prior quarter. This marked the lowest level since the first quarter of 2007.
 
Total nonperforming assets, including loans held-for-sale, were $1.2 billion or 1.32% of total loans, leases and other real estate owned (OREO). It fell 5.2% from the prior quarter. However, provision for loans and leases increased 2% sequentially to $64 million.
 
Capital Position
 
Fifth Third’s capital ratios were a mixed bag. The Tier 1 common equity ratio decreased 26 basis points sequentially to 9.44%. The tangible common equity to tangible assets ratio was 8.83% (excluding unrealized gains/losses) and 8.95% (including unrealized gains/losses) compared with 9.03% and 9.28%, respectively, in the prior quarter.
 
However, the Tier 1 capital ratio increased 24 basis points sequentially to 11.07%. The leverage ratio surged 38 basis points sequentially to 10.41% and the total risk-based capital ratio remained stable at 14.35% in the quarter.
 
Fifth Third posted an increase in both book value and tangible book value per share. As of Jun 30, 2013, book value per share was $15.57 and tangible book value per share was $12.71, up from $15.42 and $12.62, respectively, as of Mar 31, 2013.

Excluding loans held-for-sale, average loan and lease balances increased 1% sequentially to $86.7 billion. Average core deposits climbed up 1% sequentially to $85.5 billion.
 
Capital Deployment Activity
 
Following Fifth Third’s 2013 capital plan under the Comprehensive Capital Analysis and Review (CCAR) process, which got the Federal Reserve’s approval in Mar 2013, the company increased the quarterly cash dividend on common stock to 12 cents per share in June. This reflected a rise of 1 cent or 9% over the prior dividend. The dividend is scheduled to be paid on Jul 18, 2013, to shareholders as of Jun 28, 2013.

Fifth Third entered into a share repurchase agreement with a counterparty on Jan 28, 2013, whereby it was scheduled to purchase around $125 million of its outstanding common stock. On completing the agreement in Apr 2013, an additional 849,037 shares were repurchased. In the reported quarter, this transaction lessened Fifth Third’s average share count by 2 million shares.

Additionally, on May 21, 2013, Fifth Third entered into another share repurchase agreement with a counterparty, whereby it would purchase about $539 million of its outstanding common stock. In the quarter under review, this transaction reduced Fifth Third’s share count by 25 million shares on the initial transaction date. The settlement of this forward contract is anticipated to take place on or before Oct 21, 2013.
 
Competitive Landscape

Among other banking giants, JPMorgan Chase & Co. (JPM - Analyst Report), Wells Fargo & Company (WFC - Analyst Report) and The Goldman Sachs Group Inc. (GS - Analyst Report) have already reported better-than-expected second-quarter results, upholding the image of the banking sector.

Banks have been reporting strong results, primarily on the back of favorable macroeconomic elements. Top-line growth and lower provision have been the primary growth drivers for banks this time around.
 
Our Viewpoint
 
Going forward, with a diversified traditional banking platform, Fifth Third remains well poised to benefit from a recovering economy along with its footprints. Its traditional commercial banking franchise, diverse revenue mix, declining nonperforming assets and enhanced capital position serve as positive catalysts for its stock. Further, we believe that its capital deployment activities will boost shareholders’ confidence.
 
However, a low interest-rate environment, rising expenses, regulatory issues as well as competitive pressures are the headwinds.
 
Fifth Third currently carries a Zacks Rank #3 (Hold).

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