Fifth Third Stays Neutral

We are reaffirming our Neutral recommendation on Fifth Third Bancorp ( FITB - Analyst Report ) following a detailed analysis of the company fundamentals in light of the current economic and regulatory environment and post the stress test results.

Fifth Third Bancorp’s fourth-quarter 2011 net income of $305 million or 33 cents per share trailed the Zacks Consensus Estimate of 35 cents. The results also compared unfavorably with net income of $373 million or 40 cents per share in the prior quarter.

Quarterly results at Fifth Third reflect a lower-than-expected revenue figure due to lower securities gain and other non-interest income. However, credit metrics improved significantly, but higher operating expenses were the downside.

Moreover, recently, the Federal Reserve declared that it does not have any objection to the capital actions of Fifth Third including a continuation of its quarterly common dividend of 8 cents per share per quarter and the redemption of up to $1.4 billion in certain trust preferred securities.

The Fed also did not object to the repurchase of common shares in an amount equal to any after-tax gain realized by Fifth Third from the sale of Vantiv Inc. common shares by either Fifth Third or Vantiv. Notably, Vantiv has made preliminary filings related to a potential initial public offering.

However, some of the other elements of its capital plan, such as increases in its quarterly common dividend and the initiation of common share repurchases faced Fed’s objection. Besides Fifth Third, Citigroup Inc. ( C - Analyst Report ) has also encountered Fed’s objection to its plan to deploy capital to shareholders.

We believe that with a diversified traditional banking platform, Fifth Third remains well poised for future growth. A protracted economic recovery with a low interest rate environment as well as regulatory change remains a challenge. Yet, we expect the company's proactive efforts to help navigate through the challenge comfortably. An improving credit metrics trend also augurs well.

Nevertheless, the recent objection by the Fed to increase dividends and share buybacks weakens its competitive position to some extent. Hence, the risk-reward profile seems balanced for Fifth Third and therefore, we have reiterated our Neutral recommendation on the stock.

Additionally, Fifth Third shares maintain a Zacks #3 Rank, which translates into a short-term Hold recommendation.