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Fifth Third Bancorp (FITB) Up 12.6% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Fifth Third Bancorp (FITB - Free Report) . Shares have added about 12.6% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Fifth Third Bancorp due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Fifth Third Q4 Earnings Top Estimates, Provisions Fall

Fifth Third reported fourth-quarter 2020 adjusted earnings of 88 cents per share, surpassing the Zacks Consensus Estimate of 69 cents. Also, the bottom line compared favorably with the prior-year quarter’s 68 cents per share.

The company’s performance displays a strong capital position, with rising deposits. Also, benefit from credit losses came as tailwinds. However, the results were largely affected by lower revenues. Also, decline in loans was an undermining factor.

Certain non-recurring items included in fourth-quarter results were the impact of the COVID-19 outbreak of $4 million and net business acquisition and disposition expenses of $21 million, $16 million of branch and non-branch real estate charges and $23 million related to the valuation of Visa total return swap.

After considering these, the company reported net income available to common shareholders of $569 million or 78 cents per share compared with $701 million or 96 cents in the prior-year quarter.

In full-year 2020, net income available to common shareholders totaled $1.32 billion or $1.83 per share, down from the prior year’s $2.42 billion or $3.33 per share.

Revenues & Loans Fall, Expenses Increase

In 2020, revenues were $7.63 billion, down 9% year over year. However, the top line beat the Zacks Consensus Estimate of $7.6 billion.

Total adjusted revenues in the reported quarter were $1.97 billion, down 13% year over year due to lower net interest as well as fee income. However, the figure surpassed the Zacks Consensus Estimate of $1.92 billion.

Fifth Third’s net interest income (tax equivalent) was $1.19 billion, down 4% year over year. The fall primarily reflects impacts of lower rates and fall in commercial loan balances, partly offset by low deposit costs. Net interest margin contracted 69 basis points (bps) to 2.58%.

Adjusted non-interest income climbed 12.4% year over year to $814 million. Including significant items, non-interest income slipped 24% to $787 million. Decline in mortgage banking, leasing business and other revenue were partly muted by higher commercial banking revenues, along with net securities gains.

Excluding merger-related expenses, non-interest expenses increased 3.4% from the prior-year quarter to $1.17 billion. The rise chiefly resulted from an increase in compensation and benefits expense, partially offset by lower marketing expense and other noninterest expense. Including merger expenses, costs rose 7%.

As of Dec 31, 2020, average loan and lease balances declined around 4% sequentially to $109.4 billion. The fall mainly stemmed from lower commercial loans and leases. Average total deposits advanced 2% from the prior quarter to $158.6 billion.

Credit Quality: A Mixed Bag

The company reported benefit from credit losses of $13 million compared with provisions of $162 million in the year-ago quarter.

However, net charge-offs for the fourth quarter were $118 million or 43 bps of average loans and leases on an annualized basis compared with $113 million or 41 bps in the prior-year quarter.

Further, total allowance for credit losses more than doubled to $2.63 billion from the prior-year quarter. Total non-performing assets, including loans held for sale, were $864 million, up 27.1% from the year-ago quarter.

Capital Position

Fifth Third was well capitalized during the October-December period. The Tier 1 risk-based capital ratio was 11.83% compared with 10.99% at the end of the prior-year quarter. The CET1 capital ratio (fully phased-in) was 10.34% compared with 9.75% recorded at the end of the year-ago quarter. The Tier 1 leverage ratio was 8.49% compared with the year-earlier quarter’s 9.54%.

Outlook

Fourth-Quarter 2020

Management expects NIM to contract 3-4 bps sequentially. First-quarter NII is expected to decline 3%, assuming no deployment of excess liquidity.

The company expects non-interest income to be down 9-10%, reflecting seasonal impacts such as the lack of TRA revenue and lighter other non-interest income partially offset by the seasonal uptick in wealth revenue from tax preparation fees in the first quarter, and significantly stronger mortgage revenue.

Mortgage revenues are expected to rise $30 million to $35 million in the first quarter from the fourth quarter.

On a sequential basis, excluding seasonal items, expenses are expected to be down 3% to 4%.

Average loans and leases are projected to be rise 2-3% sequentially, reflecting relative stability in the C&I portfolio, continued strength in the auto portfolio, and growth in residential mortgage and other consumer loans, partially offset by a 1% decline in commercial real estate loans.

Full-Year 2021

Total loans are expected to remain stable with 2020, on both an average and end-of-period basis reflecting the full year headwinds of commercial line utilization declines from the second half of 2020 and PPP forgiveness, offset by the benefit of the consumer loan added at the end of 2020. The company forecasts $2 billion of new PPP loan originations in 2021.

Average commercial balances are expected to decline in the low to mid-single-digits range compared to 2020, while consumer balances might increase in the mid to high-single-digits range.

NIM is expected to be around 3%, excluding all excess cash and PPP impacts. Given outlooks for NIM and loans, management expects NII to decline 3% in 2021.

Non-interest income are likely to to increase 2% to 3% in 2021, which includes the 1% headwind from lower TRA income. Excluding TRA impact, fee income might grow 3% to 4%, which includes the impact of approximately $40 million in foregone annual revenue associated with our business exits as part of our expense savings program.

Management expects to see high-single-digit growth in fees from treasury management and commercial banking, including the capital markets business. Mid-single-digits growth might be witnessed in consumer deposit fees, wealth and asset management, and card and processing businesses. Also, low single-digit growth is expected in mortgage revenues.

Non-interest expense are expected to decline about 1% relative to the adjusted 2020 expenses, driven by the impacts of expense reduction program, but partially offset by expenses associated with strong fee growth, servicing expenses associated with the consumer loan portfolio purchased in the fourth quarter, and continued investments to accelerate both digital transformation and sales force and branch expansion in growth markets.

Net charge offs is likely to be in the range of 45-55 bps.

Effective tax rate is expected to be between 22% and 23%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates revision.

VGM Scores

Currently, Fifth Third Bancorp has a poor Growth Score of F, however its Momentum Score is doing a lot better with an A. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Fifth Third Bancorp has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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