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Additional legal expenses have led Fifth Third Bancorp (FITB - Analyst Report) to record a reduction in second-quarter earnings. Recently, the company lowered its earnings per share by a cent from the figure reported on Jul 18.

In the latest 8-K filing with the Securities and Exchange Commission (SEC), Fifth Third recorded earnings attributable to common shareholders of $582 million or 65 cents per share. This is lower than $594 million or 66 cents per share reported on Jul 18.

Additionally, Fifth Third’s net income, which was $603 million, was reduced to $591 million. Further, non-interest expenses, which were initially $1,017 million increased to $1,035 million.

The primary reason behind the company lowering the earnings was due to its maintenance of a buffer for legal costs. Subsequent to its earnings release, Fifth Third increased the reserve by $18 million, anticipating possible losses related to legal issues.

Fifth Third is not the only U.S. bank plagued with rising litigation expenses. Among other U.S. banks, Bank of America Corp. (BAC - Analyst Report) announced a comprehensive plan to settle its legal dispute with MBIA Inc. in July. As a result of the settlement agreement, the litigation charge lowered BofA’s first-quarter net income to $1.5 billion or 10 cents per share. On Apr 17, while announcing first-quarter results, the company had reported net income of $2.6 billion or 20 cents per share.

Moreover, in the same month, Morgan Stanley (MS - Analyst Report) reduced its first-quarter earnings per share by a cent from the earlier projection on Apr 18. Additional legal expenses related to the settlement deals with Abu Dhabi Commercial Bank and King County, Washington, due to the sale of structured investment vehicles at the time of financial crisis, was the primary reason for the revision.

Our Viewpoint
 
Though the litigation charges has lowered Fifth Third’s second-quarter earnings, it is a positive step for the company. This will help reduce the company’s litigation headwinds in the future.

Going forward, with a diversified traditional banking platform, Fifth Third remains well poised to benefit from a recovering economy. Its traditional commercial banking franchise, diverse revenue mix, declining nonperforming assets and enhanced capital position serve as catalysts for its stock. Further, we believe that its capital deployment activities will boost shareholders’ confidence.
 
However, rising expenses, stringent regulations and intense competition will likely be headwinds.
 
Fifth Third currently carries a Zacks Rank #3 (Hold).

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