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Fifth Third Bancorp’s (FITB - Analyst Report) fourth-quarter 2013 earnings per share came in at 43 cents, in line with both the Zacks Consensus Estimate and the prior-year quarter figure.

For 2013, earnings per share came in at $2.02, which beat the Zacks Consensus Estimate of $2.00 and was up from $1.66 in 2012.

Lower expenses and improved provisions for loan losses primarily drove Fifth Third’s results. Moreover, increase in loans and deposits reflected the company’s organic growth. However, fall in the top line remained a concern.

Net income for the quarter available to common shareholders was $383 million, down from $390 million in the year-ago quarter. Results included a benefit from the mortgage repurchase provision of $28.0 million primarily related to Fifth Third’s settlement with Freddie Mac and certain other non-recurring items.  

For 2013, net income available to common shareholders was $1.8 billion, up 17% from the previous year.
 
Total revenue for the quarter came in at $1.6 billion, which was ahead of the Zacks Consensus Estimate of $1.5 billion. However, revenues were down 10% year over year owing to higher net interest income.

For 2013, revenues were $6.8 billion, up 3% year over year. Further, it surpassed the Zacks Consensus Estimate of $6.5 billion.
 
Quarter in Detail
 
Fifth Third’s net interest income came in at $905 million, up marginally year over year. However, net interest margin was 3.21%, down 28 basis points (bps) from the prior-year quarter due to lower asset yields. This was, however, partially offset by rise in average loan balances, lower long-term debt expense resulting from reduction in higher cost average long-term debt and run-off in higher-priced CDs.
 
Non-interest income decreased 20% year over year to $703 million. The decline was largely owing to fall in mortgage banking net revenue and other non-interest income.

Non-interest expenses declined 15% from the prior-year quarter to $989 million. Expenses included $69 million in charges to increase litigation reserves, $8 million of debt extinguishment costs related to the redemption of Fifth Third Capital Trust IV, an $8 million contribution to Fifth Third Foundation and $8 million in severance expense.

Looking back, fourth-quarter 2012 expenses had included $134 million of debt extinguishment costs pertaining to the termination of $1 billion of FHLB debt, charges of $13 million to increase litigation reserves and $3 million in severance expense.

Excluding these items, the year-over-year decline reflected lower credit-related costs, including the benefit of a reduction in the mortgage representation and warranty reserve in the fourth quarter and decreases in compensation-related expense and benefits expense (primarily in the mortgage business) – as well as marketing-related expense.

Credit Quality
 
Fifth Third’s credit metrics generally improved in the reported quarter. Net charge-offs were $148 million or 67 bps of average loans and leases on an annualized basis, compared with $147 million or 70 bps in the prior-year quarter.

Moreover, provision for loans and leases decreased 30% year over year to $53 million. Total nonperforming assets including loans held for sale was $1.0 billion, down from $1.3 billion from the year-ago quarter.

Capital Position
 
Fifth Third’s capital ratios were a mixed bag. Its Tier 1 common equity ratio decreased 13 bps year over year to 9.38%.
 
Further, the Tier 1 risk-based capital ratio fell 30 bps from the year-earlier quarter to 10.35%. Additionally, on a year-over-year basis, the leverage ratio declined 41 bps to 9.64% while the total risk-based capital ratio decreased 35 bps to 14.07% in the quarter.
 
Excluding loans held-for-sale, average loan and lease balances increased 5% year over year to $87.9 billion. Average total deposits rose 11% from the prior-year quarter to $96.7 billion.
 
Capital Deployment Activity
 
Fifth Third entered into a share repurchase agreement with a counterparty on Nov 13, 2013, according to which the bank is to purchase approximately $200 million of its outstanding common stock. For the quarter, this transaction reduced Fifth Third’s share count by 8.5 million shares on the initial transaction date. The company expects the settlement of the forward contract to occur on or before Feb 28, 2014.

Additionally, Fifth Third entered into another share repurchase agreement with a counterparty on Dec 10, 2013, whereby the bank is to purchase approximately $456 million of its outstanding common stock. For the quarter, this transaction reduced Fifth Third’s share count by 19.1 million shares on the initial transaction date. The bank expects the settlement of the forward contract to occur on or before Mar 26, 2014.

Moreover, the settlement of the forward contract related to the May 21, 2013 share repurchase agreement occurred on Oct 1, 2013, and an additional 4.3 million shares were bought back upon completion of the agreement.

Competitive Scenario

Among other banking giants, JPMorgan Chase & Co. (JPM - Analyst Report), Wells Fargo & Co. (WFC - Analyst Report) and Morgan Stanley (MS - Analyst Report) reported better-than-expected fourth-quarter results, upholding the image of the banking sector.

Our Viewpoint
 
Going forward, with a diversified traditional banking platform, Fifth Third remains well poised to benefit from a recovery in the economy of regions where it has a footprint. Moreover, the bank’s traditional commercial banking franchise, diverse revenue mix, decline in nonperforming assets and enhanced capital position will serve as catalysts for growth. Further, we believe that Fifth Third’s capital deployment activities will boost shareholders’ confidence.
 
However, a low interest-rate environment, regulatory issues as well as competitive pressure remain matters of concern. Currently, Fifth Third carries a Zacks Rank #2 (Buy).

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