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Organic Growth Supports Fifth Third (FITB) Amid High Costs
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Fifth Third Bancorp (FITB - Free Report) is well poised to benefit from diversified revenue sources. Also, rising deposits and loans are likely to keep supporting balance-sheet strength. However, escalating expenses are expected to hamper profitability to some extent. Also, high exposure to commercial loans remains a concern.
The company has been expanding its fee-income base over the years through its inorganic growth moves. In fact, FITB acquired Big Data LLC in May this year, enhancing its digital payments and managed services offerings. In the same month, it also acquired an embedded payment platform, Rize Money. Further, the acquisitions of Dividend Finance in 2022 and several past deals will continue to drive top-line growth in the upcoming period.
Though management expects adjusted total revenues to decline 2-4% in third-quarter 2023, it projects the metric to rise 3-4% in 2023. We suggest revenues to reflect a compound annual growth rate (CAGR) of 1.9% over the next three years.
FITB continues to focus on core deposit growth in its retail and commercial franchises on the back of branch expansions and digital initiatives. Thus, a strong deposit base along with solid loan growth provides balance sheet strength. Both metrics have been rising over the years.
The company is well-positioned to continue its organic growth, aided by a strong loan pipeline and new commitments. We estimate total deposit balances, and net portfolio loans and leases to increase 1.6% this year.
Fifth Third has a strong balance sheet. As of Jun 30, 2023, the company had total debt (comprising of long-term debt and other short-term borrowings) of $18.1 billion. Further, total liquidity was $100 billion as of the same date. Therefore, with a strong liquidity position and manageable debt levels, we believe Fifth Third will be able to meet debt obligations in the near term even if the economic situation worsens.
However, the company's expenses have been rising over the years mainly due to investments aimed at operational efficiencies and improvement in customer experience. Further, expenses are likely to escalate in the near term due to higher compensation and benefits, branch digitization initiatives, marketing costs and its ongoing strategic investments in several areas, including technology. We project total non-interest expenses to climb 5% in 2023. Our model estimates total non-interest expenses to grow at a CAGR of 1% over the next three years.
Fifth Third's loan portfolio comprises high exposure to commercial loans (63% of total loans and leases as of Jun 30, 2023). The current rapidly changing macroeconomic backdrop may put some strain on commercial lending. Moreover, in case of any economic downturn, the asset quality of these credit categories might deteriorate. Thus, a lack of loan portfolio diversification is likely to hurt the company’s financials if the economic situation worsens.
This Zacks Rank #3 (Hold) stock has gained 2.3% compared with the industry's 4.7% growth in the past three months.
The Zacks Consensus Estimate for JPM’s 2023 earnings has revised marginally upward over the past week. The stock has gained 7.7% over the past three months.
The consensus estimate for LOB’s 2023 earnings has revised 19.7% upward over the last 30 days. The company’s share price has increased 49.2% over the past three months.
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Organic Growth Supports Fifth Third (FITB) Amid High Costs
Fifth Third Bancorp (FITB - Free Report) is well poised to benefit from diversified revenue sources. Also, rising deposits and loans are likely to keep supporting balance-sheet strength. However, escalating expenses are expected to hamper profitability to some extent. Also, high exposure to commercial loans remains a concern.
The company has been expanding its fee-income base over the years through its inorganic growth moves. In fact, FITB acquired Big Data LLC in May this year, enhancing its digital payments and managed services offerings. In the same month, it also acquired an embedded payment platform, Rize Money. Further, the acquisitions of Dividend Finance in 2022 and several past deals will continue to drive top-line growth in the upcoming period.
Though management expects adjusted total revenues to decline 2-4% in third-quarter 2023, it projects the metric to rise 3-4% in 2023. We suggest revenues to reflect a compound annual growth rate (CAGR) of 1.9% over the next three years.
FITB continues to focus on core deposit growth in its retail and commercial franchises on the back of branch expansions and digital initiatives. Thus, a strong deposit base along with solid loan growth provides balance sheet strength. Both metrics have been rising over the years.
The company is well-positioned to continue its organic growth, aided by a strong loan pipeline and new commitments. We estimate total deposit balances, and net portfolio loans and leases to increase 1.6% this year.
Fifth Third has a strong balance sheet. As of Jun 30, 2023, the company had total debt (comprising of long-term debt and other short-term borrowings) of $18.1 billion. Further, total liquidity was $100 billion as of the same date. Therefore, with a strong liquidity position and manageable debt levels, we believe Fifth Third will be able to meet debt obligations in the near term even if the economic situation worsens.
However, the company's expenses have been rising over the years mainly due to investments aimed at operational efficiencies and improvement in customer experience. Further, expenses are likely to escalate in the near term due to higher compensation and benefits, branch digitization initiatives, marketing costs and its ongoing strategic investments in several areas, including technology. We project total non-interest expenses to climb 5% in 2023. Our model estimates total non-interest expenses to grow at a CAGR of 1% over the next three years.
Fifth Third's loan portfolio comprises high exposure to commercial loans (63% of total loans and leases as of Jun 30, 2023). The current rapidly changing macroeconomic backdrop may put some strain on commercial lending. Moreover, in case of any economic downturn, the asset quality of these credit categories might deteriorate. Thus, a lack of loan portfolio diversification is likely to hurt the company’s financials if the economic situation worsens.
This Zacks Rank #3 (Hold) stock has gained 2.3% compared with the industry's 4.7% growth in the past three months.
Image Source: Zacks Investment Research
Stocks Worth Considering
A couple of better-ranked stocks are JPMorgan Chase & Co. (JPM - Free Report) and Live Oak Bancshares, Inc. (LOB - Free Report) . JPM and LOB sport a Zacks Rank #1 (Strong Buy) each. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for JPM’s 2023 earnings has revised marginally upward over the past week. The stock has gained 7.7% over the past three months.
The consensus estimate for LOB’s 2023 earnings has revised 19.7% upward over the last 30 days. The company’s share price has increased 49.2% over the past three months.