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On Sep 5, 2013, we reaffirmed our long-term recommendation on Fifth Third Bancorp (FITB - Analyst Report) at Neutral based on its diversified traditional banking platform, organic growth and strong capital base. However, regulatory issues coupled with fundamental pressures on the banking sector might act as deterrents to the company’s fundamentals.

Why Neutral?

Fifth Third’s 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.

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 improvement and a strong capital position acted as the tailwinds. However, escalated non-interest expenses depicted undisciplined expense management, while increase in provision for loans and leases was a headwind.

As a significant capital market player, Fifth Third could benefit from the material growth of the global capital markets. Its strong consumer and commercial banking franchise and growing asset management business are also set to benefit from the cyclical recovery in the U.S. economy. Management’s preference for organic growth over acquisitions will be beneficial with respect to cost and execution risk, over the long term.

However, low short-term interest rates along with persistent narrow spreads at the short end of the yield curve continue to negatively impact net interest margin. Therefore, NIM reduced 21 basis points year over year to 1.13% in the first half of 2013. Though interest rates have started rising, attributed to lower yields on certain earning assets, NIM is expected to remain under pressure.

For Fifth Third, the Zacks Consensus Estimate for 2013 jumped 9.7% to $1.93 as 14 out of 18 estimates moved higher over the last 60 days. For 2014, 5 out of 20 estimates moved north, lifting the Zacks Consensus Estimate by 0.6% to $1.75 over the same time frame. Currently, Fifth Third carries a Zacks Rank #3 (Hold).

Other Major Banks to Consider

Some major regional banks that are worth considering include BankUnited, Inc. (BKU - Analyst Report) with a Zacks Rank #1 (Strong Buy), while M&T Bank Corporation (MTB - Analyst Report) and Wells Fargo & Company (WFC - Analyst Report) carry a Zacks Rank #2 (Buy).

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