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Why Is Fifth Third Bancorp (FITB) Up 3% Since the Last Earnings Report?

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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 3% in the that time frame, outperforming the market.

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

Fifth Third Beats Q2 Earnings Estimates, Revenues Lag

Fifth Third reported second-quarter 2017 adjusted earnings per share of $0.46, surpassing the Zacks Consensus Estimate of $0.42. The adjusted figure excludes the impact of a non-recurring item.

Results reflected an increase in net interest income and lower provisions. Also, improved credit quality was a tailwind. However, lower non-interest income was an undermining factor.

Net income available to common shareholders decreased 13% year over year to $344 million.

Lower Non-interest Income Impacts Revenues, Expenses Decline

Total revenue for the quarter came in at $1.50 billion, lagging the Zacks Consensus Estimate of $1.53 billion. Reported revenues were stable year over year.

Fifth Third’s net interest income (tax equivalent) came in at $945 million, up 4% year over year. The rise was primarily driven by higher short-term market rates.

Net interest margin expanded 13 basis points (bps) year over year to 3.01%, mainly due to improved short-term market rates.

Non-interest income dropped 6% year over year to $564 million (including certain non-recurring items). Excluding significant items, non-interest income was down 5% year over year to $571 million. Notably, the quarter witnessed a fall in almost all components of income, partially offset by higher revenues from other income, service charges on deposits as well as wealth and asset management.

However, non-interest expenses decreased 3% year over year to $957 million. The fall was due to lower net occupancy expense, equipment, card and processing, and other expenses.

As of Jun 30, 2017, average loan and lease balances were almost stable sequentially at $92.7 billion. Average total deposits declined 1% from the previous quarter to $102.5 billion.

Credit Quality Improves

Provision for loan and lease losses declined 43% year over year to $52 million. Net losses charge-offs for the quarter came in at $95 million or 28 bps of average loans and leases on an annualized basis compared with $87 million or 37 bps in the prior-year quarter.

Total non-performing assets, including loans held for sale, were $670 million, down 19% from the year-ago quarter. Total allowance for credit losses was $1.39 billion, down 4% from the prior-year quarter.

Strong Capital Position

Fifth Third remained well capitalized in the quarter. Tier 1 risk-based capital ratio was 11.76% compared with 11.03% at the end of the prior-year quarter. CET1 capital ratio (fully phased-in) was 10.52% compared with 9.86% at the end of the year-ago quarter. Tier 1 leverage ratio was 10.07% compared with 9.64% in the prior-year quarter.

Outlook

Third-Quarter 2017


Compared with second-quarter 2017, NII is expected to grow 2% from the adjusted figure. NIM is expected to improve 2 bps in the third quarter from adjusted NIM on a sequential basis.

The company expects adjusted non-interest income to be up 2%, excluding mortgage.

Corporate banking fees are expected to increase 6% to 8% sequentially.

Management expects expenses to be up 1% year over year.

The effective tax rate is expected to be about 25.5%.

For Full-Year 2017

NII is expected to be up 5% in 2017.

NIM is expected to be in line with the second-quarter 2017, with the assumption of Fed interest rate hike in December.

Further, adjusted non-interest income is expected to grow 2%, excluding mortgage.

NCOs are projected to be range bound with potential quarter variability. Provisions for loans are expected to be dependent on the loan growth.

Also, tax rate is expected to be in 24.5%-25.5% range assuming no corporate tax reform takes place.

The company expects commercial loan growth to be 1% for 2017, including the impact of $600 million of remaining exits in 2017. Further, consumer and mortgage loan portfolio is expected to grow by low-to-mid-single digit, excluding auto balances.

Management projects expenses to be flat year-over-year, including incremental North Star expenses.

Fifth Third has planned to launch Insurance as a new initiative complementing commercial business. In the consumer business, the company is in the process of rolling out a new loan origination system with a correspond mortgage channel. In the fourth quarter of 2017, the new system will be implemented in direct and retail mortgage channels. During the first half of 2018, management will be working on integrating the new system with home equity platform.

Additionally, this initiative will create both NII, as well as fee income opportunities, while reducing cost to originate consumer mortgages for the company. Additionally, Fifth Third is in the process of digitizing branch operations for getting a paperless environment. Once completed, this initiative is anticipated to reduce paper count by 700 million pages per year. Therefore, with efficiency generated from reduced paper and transportation expenses, Fifth Third estimates to save $10 million annually.

Project North Star Initiatives

In Sep 2016, Fifth Third launched Project North Star, which laid down several long term financial targets without expecting any improvement in the present economic conditions. The initiatives are expected to enhance revenue growth, lower expenses and optimize balance sheet position.

Management expects to generate an ROA near 1.1% and ROTCE of roughly 11% by 2018. In addition, these initiatives are expected to record around $300 million of annualized pre-tax income growth by the end of 2019. The project also targets to achieve ROTCE of 12–14% and ROA of 1.1–1.3% by the end of 2019. Further, positive operating leverage is anticipated in 2017.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed an upward trend in fresh estimates. There have been three revisions higher for the current quarter compared to two lower.

Fifth Third Bancorp Price and Consensus

 

VGM Scores

At this time, the stock has a poor Growth Score of F, however its Momentum is doing a lot better with an A. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

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

Our style scores indicate that the stock is more suitable for momentum investors than value investors.

Outlook

While estimates have been moving upward, the magnitude of the revision is net zero. Notably, the stock has a Zacks Rank #3 (Hold). We are expecting an inline return from the stock in the next few months.


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