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Fifth Third (FITB) Q4 Earnings Miss Estimates, Costs Rise

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Fifth Third Bancorp (FITB - Free Report) reported fourth-quarter 2019 adjusted earnings per share of 68 cents, lagging the Zacks Consensus Estimate of 73 cents. However, including certain one-time items, the bottom line came in at 96 cents, up 50% year over year.

Higher expenses and provisions were the key undermining factors. Also, deterioration of credit quality was a headwind. However, increase in revenues, aided by higher interest income and fee income, was a positive factor. Further, the company witnessed growth in deposits balance.

Certain non-recurring items included in the results were the negative impact of $7-million merger-related items and $34 million related to the valuation of Visa total return swap (post-tax). Also, a $250 million positive impact of gains recognized from Worldpay TRA transaction was included.

Net income available to common shareholders increased 62% year over year to $701 million.

For full-year 2019, the company reported net income available to common shareholders of $2.42 billion or $3.33 compared with $2.12 billion or $3.06 in the prior year.

Revenues & Deposits Rise, Costs Up

Total revenues for the quarter came in at $2.27 billion, up 37% year over year, driven by higher non-interest income. Also, the top line surpassed the Zacks Consensus Estimate of $1.94 billion. Adjusted revenues were up 15%.

For 2019, the company reported total revenues of $8.36 billion, up 20% year over year. Also, the figure surpassed the Zacks Consensus Estimate of $8.08 billion.

Fifth Third’s NII (tax equivalent) came in at $1.23 billion, rising 14% year over year. This rise primarily reflects increase in interest earning assets. On an adjusted basis, NII rose 12%. However, net interest margin contracted 2 basis points (bps) to 3.27%.

Non-interest income surged 80% year over year to $1.04 billion. Excluding certain items, non-interest income rose 20.7% to $724 million. The rise was mainly due to higher mortgage and corporate and mortgage banking revenues.

Non-interest expenses flared up 19% from the prior-year quarter to $1.16 billion. The upsurge chiefly resulted from higher compensation and benefits, card and processing expenses, technology costs and other non-interest expenses. Adjusted expenses jumped 21%.

As of Dec 31, 2019, average loan and lease balances were stable sequentially at $109.8 billion. Average total deposits inched up 1% from the prior quarter to $126.1 billion.

Credit Quality Worsens

Provision for credit losses surged 67% year over year to $162 million. Total allowance for credit losses was $1.35 billion, up 9.1%. Total non-performing assets, including loans held for sale, were $680 million, up 72%.

Net charge-offs for the reported quarter were $113 million or 41 bps of average loans and leases on an annualized basis compared with $83 million or 35 bps a year ago.

Capital Position

Fifth Third remained well capitalized during the fourth quarter. Tier 1 risk-based capital ratio was 10.99% compared with 11.32% at the end of the prior-year quarter. CET1 capital ratio (fully phased-in) was 9.75% compared with 10.24% on Dec 31, 2018. Tier 1 leverage ratio was 9.54%, down from 9.72%.

Our Viewpoint

Higher interest income, despite lower interest rates, along with robust growth in fee income seems impressive. However, the bottom line was marred by higher expenses and provisions.

We believe the company, with a diversified traditional banking platform, is well positioned to benefit from recovery in the economies where it has footprint. Steady improvement in loans and deposits highlights Fifth Third’s efficient organic growth strategy.

Though several issues, including escalating expenses and competitive pressure, persist, we expect the company to benefit from its strategic initiatives.

Fifth Third Bancorp Price, Consensus and EPS Surprise

 

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.

Performance of Other Banks

Comerica CMA delivered positive earnings surprise of 6.3% in fourth-quarter 2019 on high interest income. Earnings per share of $1.85 surpassed the Zacks Consensus Estimate of $1.74. Earnings, however, came in lower than the prior-year quarter figure of $1.95.

State Street’s STT fourth-quarter 2019 adjusted earnings of $1.98 per share outpaced the Zacks Consensus Estimate of $1.70. Also, the figure was 18.6% above the prior-year quarter level.

Riding on higher mortgage banking fees, Citizens Financial Group CFG delivered a positive earnings surprise of 3.1% in fourth-quarter 2019. Adjusted earnings per share came in at 99 cents, beating the Zacks Consensus Estimate of 96 cents. Also, the bottom line rose 1% year over year.

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