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On Dec 3, 2013, we reiterated 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, a low interest-rate environment, regulatory issues and competitive pressures remain concerns.

Why Neutral?

Fifth Third’s 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 per share.

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.

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.

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.

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 23 basis points year over year to 3.35% for the first nine months 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 rose 3.1% to $2.00 as 11 out of 18 estimates moved higher over the last 60 days. For 2014, 7 out of 19 estimates moved north, lifting the Zacks Consensus Estimate by 1.7% to $1.76 over the same time frame. Currently, Fifth Third carries a Zacks Rank #3 (Hold).

Other Banks to Consider

Some better-ranked stocks in the banking sector include First Interstate Bancsystem Inc. (FIBK - Snapshot Report), German American Bancorp Inc. (GABC - Snapshot Report) and PrivateBancorp, Inc. (PVTB - Snapshot Report). All these 3 companies carry a Zacks Rank #1 (Strong Buy).

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