Fifth Third Eyeing Higher Charge-offs

Fifth Third Bancorp (FITB - Analyst Report) expects its loan charge-offs to increase in the third quarter, primarily due to the increase in charge-offs associated with the Shared National Credit (SNC) examination that has been recently conducted by regulators.

"The company, which intends to release its third-quarter earnings results on Oct 22, also expects its non-performing assets to accelerate, though interest income and margins are expected to improve in the second half of 2009.

Fifth Third expects net charge-offs in the third quarter to be approximately $775 million, up from $626 million in the second quarter. This would include approximately $110 million in net charge-offs related to SNC credits, compared with $17 million in the second quarter. However, management expects SNC charge-offs to fall in the fourth quarter. Non-performing assets are also expected to increase 20%.

The weakness in the overall economy and in the real estate market, including specific weakness within Fifth Third's geographic footprint, has adversely affected the company. A significant portion of its residential mortgage and commercial real estate loan portfolios comprise borrowers in Michigan, Northern Ohio and Florida.

These markets have been particularly hurt by job losses, declines in real estate values, declines in home sale volumes and declines in new home building. As a result, delinquencies and charge-offs are increasing, and the company's earnings are adversely impacted. According to management, while the Michigan market has begun to stabilize, the Florida market remains stressed.

Fifth Third's second-quarter core loss of 27 cents per share was better than the Zacks Consensus Estimate for a loss of 30 cents per share. Competitive market conditions, continuing deterioration in credit quality and collateral values within the company's geographical footprint will weigh upon results for several quarters to come, in our view.

However, despite the dilutive impact, the recent capital bolstering initiatives are viewed positively, given the stressed economic environment. Also, the cost containment measures provide some relief. Hence, we have a Neutral recommendation on the shares.

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