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Why Is Fifth Third (FITB) Down 4.1% Since its Last Earnings Report?

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A month has gone by since the last earnings report for Fifth Third Bancorp (FITB - Free Report) . Shares have lost about 4.1% in that time frame.

Will the recent negative trend continue leading up to its next earnings release, or is FITB due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Fifth Third Beats on Q1 Earnings, Provisions Decline

Fifth Third reported first-quarter 2018 adjusted earnings per share of 57 cents beating the Zacks Consensus Estimate of 48 cents. The adjusted figure excludes the net positive impact of gains from the Vantiv merger with WorldPay and charges related to the valuation of the Visa total return swap and adjustment to litigation reserves.

Results reflect increase in revenues along with significant decline in provisions. Expanding net interest margin and rising loans balance remain key positives. Strong capital position acted as a tailwind. However, increase in expenses was an undermining factor.

Net income available to common shareholders came in at $689 million or 97 cents per share compared with $290 million or 38 cents per share as of Mar 31, 2017.

Higher Revenues Partly Offset by Rise in Expenses

Total adjusted revenues for the quarter came in at $1.55 billion. The reported figure was up 5.2% year over year.

Fifth Third’s net interest income (tax equivalent) came in at $999 million, up 6% year over year. The rise was primarily driven by higher short-term market rates and an increase in investment portfolio balances.
Net interest margin expanded 16 basis points (bps) to 3.18%, mainly due to improved short-term market rates.

However, non-interest income increased 74% year over year to $909 million (including certain non-recurring items). Excluding significant items, non-interest income was up 3% to $553 million. Notably, the quarter witnessed a rise in corporate banking, card and processing fees and mortgage banking revenues.

Also, non-interest expenses climbed 6% year over year to $1.05 billion. Higher compensation expenses, technology and equipment expenses were offset by lower card processing expenses.

As of Mar 31, 2018, average loan and lease balances were almost stable sequentially at $92.3 billion. Average total deposits increased slightly from the previous quarter to $103.5 billion.

Credit Quality Improves

Total non-performing assets, including loans held for sale, were $528 million, down 27.7% from the year-ago quarter. Further, total allowance for credit losses was $1.29 billion, down 7.7% from the prior-year quarter.

Moreover, provision for loan and lease losses decreased 69% year over year to $23 million. Net losses charge-offs for the quarter came in at $81 million or 36 bps of average loans and leases on an annualized basis compared with $89 million or 40 bps in the prior-year quarter.

Strong Capital Position

Fifth Third remained well capitalized in the quarter. Tier 1 risk-based capital ratio was 11.95% compared with 11.90% at the end of the prior-year quarter. CET1 capital ratio (fully phased-in) was 10.82% compared with 10.76% at the end of the year-ago quarter. However, tier 1 leverage ratio was 10.11% compared with 10.15% in the prior-year quarter.

Outlook

NII is expected to be in the range of $1.025-$1.030 billion in second-quarter 2018. NIM is projected to rise 3-5 bps, sequentially. For 2018, NII will likely be in the range of $4.14-$4.16 billion. NIM is anticipated to be between 3.22% and 3.24%, with two rate hikes (June and December).

For the second quarter, the company expects non-interest income to be $575-585 million, up nearly 5% from the first quarter. Notably, corporate banking revenues are likely to increase 20-25% sequentially. For 2018, non-interest income is anticipated to be $2.35 billion, excluding Worldpay step-up gain.

For the second quarter, the company expects non-interest expenses to decline 2% sequentially. For 2018, non-interest expenses are predicted to be $4-$4.1 billion, including the impact of the minimum wage increase and the impact of lower taxes on LIH amortization. Further, positive operating leverage is expected again in 2018.

Commercial loans and leases are expected to inch up 1-1.5% in the second quarter and around 4% year over year in 2018, including the impact of the run-off of national leasing business. Around 1-1.5% year-over-year growth and 3% growth (excluding auto balances) is projected for consumer loans in 2018. Moreover, in the second quarter, consumer loans are expected to rise 1% sequentially.

Investment portfolio balances are estimated to remain relatively stable in the second quarter.

Notably, end-of-period commercial leases will likely decline $400 million by the end of 2018. Also, management expects total loan production to be around $4 billion by the end of 2018.

Management continues to expect card balances to grow in the mid- to high single-digits in 2018. Further, personal lending balances are likely to grow to $2 billion by fourth-quarter 2019 from around $1 billion at the end of first-quarter 2018.

Management expects provision reflective of loan growth and net charge-offs to be range-bound with some quarterly volatility.

The effective tax rate is projected to be about 16.25-16.75% in 2018, including the impact from the Worldpay step-up gain. Beyond 2018, the tax rate is anticipated to be about 15.5%.

Project North Star Initiatives

In September 2016, Fifth Third launched Project North Star, which laid down several long-term financial targets without expecting any improvement in the current economic conditions. The initiatives are expected to enhance revenue growth, lower expenses and optimize balance sheet position.

Management expects to generate an annualized return on average tangible common equity (non-GAAP) at the upper end of a range of 14% to 16%, a return on average assets at the mid to upper end of a range of 1.35% to 1.45% and an efficiency ratio below 60% by the end of 2019.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There have been five revisions higher for the current quarter compared to three lower.

Fifth Third Bancorp Price and Consensus

VGM Scores

At this time, FITB has a subpar Growth Score of D, however its Momentum is doing a lot better with an A. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Our style scores indicate that the stock is more suitable for momentum investors than value investors.

Outlook

Estimates have been broadly trending upward for the stock and the magnitude of these revisions looks promising. Interestingly, FITB has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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