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Will Fee Income Growth Buoy Fifth Third's (FITB) Q3 Earnings?

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Fifth Third Bancorp (FITB - Free Report) is scheduled to report third-quarter 2021 results on Oct 19, before the opening bell. The company’s earnings and revenues are expected to have risen year over year.

In the last reported quarter, the bank’s earnings surpassed the Zacks Consensus Estimate.The company’s performance displays a solid capital position along with rising revenues, aided by fee income. Also, benefits from credit losses were tailwinds. However, marginally higher expenses and muted loan growth played spoilsports.

The Cincinnati, OH-based lender has an impressive earnings surprise history. It topped on earnings in all of the trailing four quarters, the average surprise being 29.9%.

Fifth Third Bancorp Price and EPS Surprise

Fifth Third Bancorp Price and EPS Surprise

Fifth Third Bancorp price-eps-surprise | Fifth Third Bancorp Quote

Here are the factors that are expected to have influenced the company’s quarterly performance:

Net Interest Income (NII):  In the third quarter, the yield curve spread widened, with the 10-year Treasury yield rising significantly at the quarter end, thereby, likely propelling NII. Overall growth in loans was moderate in the third quarter. Per the Fed’s latest data, real estate, consumer loan, auto loan and card loan portfolio growth has supported the lending business. Additionally, the deposit balance is likely to have been stable or grown modestly, supported by government stimulus. This too is likely to have aided NII.

The consensus mark of $1.19 billion for NII indicates an improvement from $1.17 billion reported a year ago. Management expects interest income to rise $7 million in the third quarter.

Conversely, commercial and industrial loan portfolio remained weak as the low-interest rate environment has made borrowing through other avenues like capital markets more attractive. Hence, Fifth Third’s interest income is expected to have received lesser support from this avenue in the quarter under review, as 62% of its loan portfolio consists of commercial loans.

High levels of pay downs and payoffs as well as uncertainty surrounding tax, regulatory and economic backdrop have also likely been dampeners for a recovery in the lending space. Management expects average loans and leases to be down 1%, and NII to be down 1-2% sequentially.

Non-Interest Revenues: The company has been focusing to grow and diversify its fee revenues over the past few quarters on the back of acquisitions and partnerships to support commercial verticals. This is likely to have enhanced its fee-based abilities and offset some interest-rate headwinds in the third quarter.

Digital adoption and enhanced capital market capabilities have likely bumped up its presence in league table rankings and improved capital market fees.

Deposit service charges should have continued to normalize as the pandemic-related concessions continue to retract. The consensus estimate of $152 million for the same suggests an improvement from the prior-year quarter’s reported figure of $144 million.

The Zacks Consensus Estimate for non-interest income is pegged at $782 million, suggesting an 8.3% year-over-year increase.

The company expects non-interest income to increase 2% on a sequential basis.This excludes pre-tax gain of approximately $60 million associated with the sale of the company’s HSA business, which it expected to close in the third quarter.

However, mortgage originations, both purchase and refinancing, continued to normalize in the third quarter. Mortgage banking revenues have been facing tough comps from the origination boom in 2020, which was driven by then ultra-low mortgage rates.

In the quarter under review, mortgage rates increased sequentially. Mortgage origination activities are estimated to have decreased dramatically, with rising rates discouraging refinancing activity. Nonetheless, given the strong housing market conditions, homebuying activities continued in the quarter under review. Hence, purchase originations are likely to have offered some relief. The factors are expected to have limited Fifth Third’s mortgage banking fee growth in the to-be-reported quarter.

Expenses: Fifth Third’s ongoing investments in areas like technology are expected to have escalated expenses. Nonetheless, the company is anticipated to have been successful in offsetting the rise through branch network optimization, continued business and corporate real estate rationalization efforts.

On a sequential basis, management expects non-interest expenses to remain flat.

Share Buyback Activities: In third-quarter 2021, Fifth Third repurchased 14.5 million shares per a SEC filing as of Sep 28, 2021. Such share repurchases are expected to have propelled the company’s bottom-line growth.

Key Developments During the Quarter

In early August, Fifth Third completed the buyout of Provide, a fintech company that specializes in handling lending and banking for healthcare providers. The acquisition advances Fifth Third’s efforts in the digital innovation front and expands its focus on the healthcare sector by providing a digital platform for healthcare practices, and catering to the lending and banking needs of retail healthcare providers.

The transaction is a strategic fit as it will enable Fifth Third to offer new clients its range of banking solutions and will facilitate it to capture growth opportunities. Moreover, it offers scope to diversify and increase fee revenues.

Let’s have a look at what our quantitative model predicts:

Fifth Third has the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: The Earnings ESP for Fifth Third is +0.46%.

Zacks Rank: Fifth Third currently carries a Zacks Rank of 2 (Buy).

Prior to the third-quarter earnings release, Fifth Third’s quarterly activities were adequate to gain adequate analyst confidence. The Zacks Consensus Estimate for third-quarter earnings has been revised marginally upward to 91 cents over the past week. It suggests a 7.1% year-over-year increase.

The consensus mark for third-quarter revenues is pegged at $2 billion, indicating a year-over-year rise of 5.3%.

Other Bank Stocks Worth a Look

Here are a few other bank stocks that you may want to consider, as our model shows that these too have the right combination of elements to post an earnings beat this time around:

KeyCorp (KEY - Free Report) is slated to report quarterly results on Oct 21. The company has an Earnings ESP of +1.43% and a Zacks Rank of 3, currently. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

BankUnited, Inc. (BKU - Free Report) is scheduled to release third-quarter results on Oct 21. The company currently carries a Zacks Rank #3 and has an Earnings ESP of +1.90%.

M&T Bank Corporation (MTB - Free Report) is slated to report quarterly results on oct 20. The company has an Earnings ESP of +1.89% and a Zacks Rank of 3, currently.

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