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Fifth Third (FITB) Up 7.3% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Fifth Third Bancorp (FITB - Free Report) . Shares have added about 7.3% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Fifth Third due for a pullback? 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 drivers.

Fifth Third Q3 Earnings Beat Estimates on High Revenues

Fifth Third delivered a notable positive earnings surprise of 1.6% in third-quarter 2018. Adjusted earnings per share of 64 cents surpassed the Zacks Consensus Estimate by a penny. However, including certain one-time items, the bottom line came in at 61 cents, down 55% year over year.

Increase in revenues, aided by rising loans and deposits were positive factors. Moreover, a strong capital position has been depicted. However, escalating expenses and provisions were undermining factors.

Certain non-recurring items included in the third-quarter results were the impact of a $14 million related to valuation of Visa total return swap (post-tax) and $6 million of GreenSky equity securities losses.

Net income available to common shareholders slumped 58% year over year to $418 million.

Revenues Improve Y/Y, Costs Flare Up, Loans & Deposits Rise

Total adjusted revenues for the quarter came in at $1.63 billion, in line with the Zacks Consensus Estimate. However, the revenue figure was up 5.2% year over year, driven by higher net interest, as well as non-interest income.

Fifth Third’s net interest income (tax equivalent) came in at $1.05 billion, rising 7% year over year. This rise primarily reflects interest-earning assets growth and improved short-term market rates, partly offset by elevated funding costs.

Net interest margin expanded 16 basis points (bps) year over year to 3.23%, mainly due to improved short-term market rates.

Non-interest income plummeted 64% year over year to $7563 million (including certain non-recurring items). Excluding significant items, non-interest income climbed 3%, year over year, to $586 million. Mortgage banking revenues dipped 22% year over year.

Non-interest expenses flared up 3% from the prior-year quarter to $1 billion. The upsurge chiefly stemmed from higher salaries, employee benefits, equipment expense, technology costs and other non-interest expense.

As of Sep 30, 2018, average loan and lease balances inched up 1% year over year to $93.2 billion. The upswing mainly resulted from increased commercial and consumer loans and leases. Average total deposits advanced 3% year over year to $104.7 billion.

Credit Quality: A Mixed Bag

Provision for loan and lease losses surged 28.4% year over year to $86 million. Net charge-offs for the reported quarter came in at $72 million or 30 bps of average loans and leases on an annualized basis compared with $68 million or 29 bps in the prior-year quarter.

However, total allowance for credit losses were $1.2 billion, down 14.3% from the prior-year quarter. Total non-performing assets, including loans held for sale, came in at $448 million, down 19.3% from the year-ago quarter.

Strong Capital Position

Fifth Third remained well capitalized in the Jul-Sep quarter. Tier 1 risk-based capital ratio was 11.78% compared with 11.72% at the end of the prior-year quarter. CET1 capital ratio (fully phased-in) was 10.67% as against 10.59% at the end of the year-ago quarter. Tier 1 leverage ratio was 10.10% as compared with 9.97% in the prior-year quarter.

Share Repurchase

During the third quarter, Fifth Third repurchased 16.9 million shares, for a total cost of $500 million.

Outlook

NII is expected to be up around 2% sequentially in fourth-quarter 2018. NIM is projected to be up 2-3 bps sequentially. For 2018, NII will likely be up around 8%.

For the fourth quarter, the company expects non-interest income to be up nearly 2% from the adjusted figure reported of $586 million in third quarter, despite weak mortgage banking. Notably, corporate banking revenues are likely to be between $120 million and $130 million in the fourth quarter, subject to market conditions.

For the fourth quarter, the company expects non-interest expenses to increase 1% sequentially, assuming FDIC surcharge to persist and excluding MB merger-related expenses. For 2019, non-interest expenses are predicted to be up 1%.

Commercial loans and leases are expected to grow modestly in the fourth quarter sequentially.

In the fourth quarter, total end of period consumer loan balances is expected to be relatively flat sequentially, mostly reflecting a seasonal decline in the mortgage portfolio and continued runoff in home equity loans. Auto and credit card portfolio growth rates are likely to be similar to the third quarter.

Management expects provisions reflective of loan growth and net charge-offs to be stable sequentially in the fourth quarter.

The effective tax rate is projected to be about 16.75-17.25% in fourth-quarter 2018. Beyond 2018, the tax rate is anticipated to be about 15.25-15.75%, excluding impact of MB Financial.

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) of above 18%, a return on average assets in the range of 1.55% to 1.65% and an efficiency ratio of low 50% by the end of 2019. These targets include impact of MB Financial acquisition.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

At this time, Fifth Third has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Following the exact same course, 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 B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Fifth Third has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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