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Fifth Third Bancorp’s (FITB - Analyst Report) third-quarter 2013 adjusted earnings per share came in at 41 cents, missing the Zacks Consensus Estimate by a penny. However, results surpassed the prior-year quarter earnings of 39 cents.

Including the benefit of $85 million pre-tax ($55 million after-tax, or 6 cents per share) on the sale of shares of Vantiv and $6 million pre-tax ($4 million after-tax) on the valuation of the warrant which Fifth Third holds in Vantiv, the company reported net income of $421 million or 47 cents per share in the reported quarter. In the prior-year quarter, net income was reported at $354 million or 38 cents per share.
 
Though earnings missed expectations, 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 the tailwinds. Additionally, lower non-interest expenses depict prudent expense management.

Total revenue for the quarter came in at $1.6 billion, higher than the Zacks Consensus Estimate of $1.5 billion. Moreover, revenue surged 2.6% year over year, aided by higher non-interest income.
 
Quarter in Detail
 
Fifth Third’s net interest income came in at $898 million, down 1% year over year. Moreover, net interest margin came in at 3.31%, down 25 basis points from the prior-year quarter. These declines were primarily driven by reduced asset yields, partially mitigated by elevated average loan balances, lower long-term debt expense along with run-off in higher-priced CDs.
 
Non-interest income jumped 7% year over year to $721 million. The increase was largely attributable to the benefit on the sale of Vantiv shares and a higher valuation adjustment on the Vantiv warrant, partially offset by reduced mortgage banking net revenue.

Non-interest expenses declined 5% from the prior-year quarter to $959 million. Expenses included a $30 million rise in litigation reserves, $5 million in severance expense and $5 million in large bank assessment fees.

Credit Quality
 
Fifth Third’s credit metrics improved in the reported quarter. Net charge-offs were $109 million or 49 basis points of average loans and leases on an annualized basis compared with $156 million or 75 basis points recorded in the prior-year quarter.
 
Total nonperforming assets, including loans held-for-sale, were $1.0 billion or 1.16% of total loans, leases and other real estate owned (OREO). It fell 33.3% from the prior-year quarter. Moreover, provision for loans and leases decreased 22% year over year to $51 million.
Capital Position
 
Fifth Third’s capital ratios were a mixed bag. The Tier 1 common equity ratio increased 22 basis points year over year to 9.89%. The tangible common equity to tangible assets ratio was 9.27% (excluding unrealized gains/losses) and 9.42% (including unrealized gains/losses) compared with 9.10% and 9.45%, respectively, in the prior-year quarter.
 
Further, the Tier 1 capital ratio increased 30 basis points year over year to 11.15%. The leverage ratio surged 49 basis points year over year to 10.58% while the total risk-based capital ratio declined 40 basis points year over year to 14.36% in the quarter.
 
Fifth Third posted an increase in both book value and tangible book value per share. As of Sep 30, 2013, book value per share was $15.84 and tangible book value per share was $13.09, up from $14.84 and $12.12, respectively, as of Sep 30, 2012.

Excluding loans held-for-sale, average loan and lease balances increased 5% year over year to $87.3 billion. Average total deposits rose 11% year over year to $94.3 billion.
 
Capital Deployment Activity
 
Fifth Third entered into a share repurchase agreement with a counterparty on May 21, 2013, whereby it was scheduled to purchase around $539 million of its outstanding common stock. On completing the agreement in Oct 2013, an additional 4.3 million shares were repurchased. In the reported quarter, this transaction lessened Fifth Third’s average share count by 15 million shares.

Competitive Landscape

Among other banking giants, U.S. Bancorp (USB - Analyst Report), Wells Fargo & Company (WFC - Analyst Report) and Bank of America Corporation (BAC - Analyst Report) reported better-than-expected third-quarter results, upholding the image of the banking sector.

Banks have been reporting strong results, primarily on the back of favorable macroeconomic elements. Reduced non-interest expenses 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 its footprints. Its traditional commercial banking franchise, diverse revenue mix, declining nonperforming assets and an enhanced capital position serve as positive catalysts for the stock. Further, we believe that its capital deployment activities will boost shareholders’ confidence.
 
However, a low interest-rate environment, regulatory issues as well as competitive pressures remain looming concerns. Fifth Third currently carries a Zacks Rank #3 (Hold).

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