Balanced View on Fifth Third

On Mar 8, we reiterated our Neutral recommendation on Fifth Third Bancorp ( FITB - Analyst Report ) based on its rising revenues and healthy capital position. However, pressurized net interest margin, rising expenses and unsettling macro economic issues remain the major concerns. Moreover, Fifth Third retains a Zacks Rank #3 (Hold).

Why Neutral?

Fifth Third’s fourth quarter 2012 earnings came in at 45 cents per share, beating the Zacks Consensus Estimate by 3 cents. Total revenues came in at $1.78 billion, up 21% from the year-ago quarter. Moreover, revenues surpassed the Zacks Consensus Estimate of $1.64 billion. Further, Huntington has delivered an average earnings surprise of 12.5% last year.

Over the last 60 days, the Zacks Consensus Estimate for 2013 hiked by a nickel Moreover, for 2014, the Zacks Consensus Estimate moved up by a penny. Further, a diversified traditional banking platform, along with a diverse revenue base helped the company sustain the Neutral recommendation. Further, improving credit quality metrics are a positive for the stock. Extensive capital deployment activities also continue to reinforce investors’ confidence in the stock.

However, the low interest rate environment and changing regulatory landscape are expected to pressurize its net interest margin in the subsequent quarters. Further, given the sluggish market recovery, we expect any significant improvement in top line to remain elusive in the foreseeable future. In addition, we remain wary of the continuously rising regulatory expenses, which will lead to higher cost of compliance and may temper profitability in the near-to-mid term. In addition, we believe that the company’s flexibility with respect to its investments and lending volumes would be limited in the medium term, given the stricter capital norms.

Other Stocks to Consider

Banking stocks that are currently performing better than Fifth Third include First Defiance Financial Corp. ( FDEF - Snapshot Report ) , BankUnited, Inc. ( BKU - Analyst Report ) and Meta Financial Group, Inc. ( CASH - Snapshot Report ) . All these stocks carry a Zacks Rank #1 (Strong Buy).