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Here's Why You Should Hold Fifth Third (FITB) Stock for Now

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Fifth Third Bancorp (FITB - Free Report) remains well-positioned for growth on its diversified revenue sources along with the rising deposit and loan base that poise it well to pursue inorganic growth moves. Strong liquidity also poses a tailwind. However, significant exposure to commercial loans, pressure on margins and the rising cost base remain concerns.

Over the past year, shares of Fifth Third have gained 8.2% against the 4.5% fall recorded by the industry.

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Fifth Third’s diverse revenue base will likely support its earnings growth. In addition to strong organic growth, FITB has expanded its fee-income base over the years on strategic acquisitions, thereby enhancing its digital bank product offering. Additionally, FITB is focused on executing other measures, including branch optimization to enhance presence in high-growth markets. FITB is re-allocating its branch network to enhance presence in the Southeast and reduce footprint in the Midwest.

FITB’s deposit balances represent an important source of funding and revenue growth opportunity. Fifth Third continues focusing on core deposit growth in its retail and commercial franchises on the back of branch expansions and digital initiatives.

Fifth Third’s total deposits recorded a compound annual growth rate (CAGR) of 13.2% over the last five years ending 2021. While total loan and lease balance declined marginally in 2020, the same witnessed a CAGR of 5.1% over the same period. FITB is well-positioned to strengthen its organic growth, aided by a strong pipeline, new commitment growth, contributions from the Provide acquisition, economic growth and an improving consumer spending trend.

Fifth Third has a strong balance sheet. As of Dec 31, 2021, FITB had a long-term debt of $11.8 billion, which declined from the previous-year level. Total liquidity stood at $112 billion as of the same date. Its fourth-quarter 2021 times interest earned ratio of 10.2 increased over the last few quarters with some volatility. Therefore, with a strong liquidity position and manageable debt, we believe, Fifth Third has a lesser likelihood of defaulting interest and debt repayments in the near term even if the economic situation worsens.

However, elevated non-interest expenses due to investments aimed at operational efficiencies and improvement in customer experience might hinder Fifth Third’s bottom-line expansion in the upcoming period. Also, given its ongoing strategic investments in several areas, including technology, expenses might escalate in the near term. The same recorded a five-year CAGR (ended 2021) of 6.3%.

The loan portfolio of Fifth Third comprises majorly commercial loans (63% as of 2021 end). Such a high exposure can be risky for FITB amid uncertain and competitive markets.

Fifth Third is expected to continue witnessing pressure on the net interest margin (NIM) due to an accommodative monetary policy stance and near-zero interest rates. After recording an improving trend over the last several years, NIM shrank in 2020 and 2021. Hence, lower interest rates are expected to hurt FITB’s financials in the near term.

Currently, Fifth Third carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Stocks to Consider

Some better-ranked stocks in the banking space are First Business Financial Services (FBIZ - Free Report) , Bancolombia S.A. (CIB - Free Report) and PCB Bancorp (PCB - Free Report) . At present, both CIB and FBIZ flaunt a Zacks Rank #1, while PCB carries a Zacks Rank #2 (Buy).

Over the past year, shares of First Business have jumped 26.2%, while the stocks of CIB and PCB have rallied 10.7% and 35.1%, respectively.

Over the past 30 days, the Zacks Consensus Estimate for First Business’ current-year earnings has been revised 3.1% upward, while the same for CIB has moved 21.7% north. Moreover, current-year earnings estimates for PCB Bancorp have moved 14.4% up from the past two months’ level.

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