Fifth Third Bancorp - Zacks Investment Research

[Pages:9]March 18, 2015

Fifth Third Bancorp

Current Recommendation Prior Recommendation Date of Last Change

Current Price (03/17/15) Target Price

NEUTRAL

Outperform 02/17/2011

$19.25 $20.00

SUMMARY DATA

52-Week High 52-Week Low One-Year Return (%) Beta Average Daily Volume (sh)

Shares Outstanding (mil) Market Capitalization ($mil) Short Interest Ratio (days) Institutional Ownership (%) Insider Ownership (%)

$23.39 $17.22 -12.79

1.45 7,836,491

815 $15,689

0.72 78 1

Annual Cash Dividend Dividend Yield (%)

5-Yr. Historical Growth Rates Sales (%) Earnings Per Share (%) Dividend (%)

$0.52 2.70

-1.4 43.2 73.0

P/E using TTM EPS

11.5

P/E using 2015 Estimate

11.7

P/E using 2016 Estimate

10.6

Zacks Rank *: Short Term 1 3 months outlook

* Definition / Disclosure on last page

4 - Sell

? 2015 Zacks Investment Research, All Rights reserved.

(FITB-NASDAQ)

SUMMARY

Fifth Third s reported fourth-quarter 2014 earnings beat the Zacks Consensus Estimate. Lower expenses depicted prudent expense management. Moreover, higher net interest income and growth in loans and deposits were positives. However, lower non-interest income reflected absence of credible improvement in the mortgage market. Going forward, with a diversified traditional banking platform, Fifth Third remains well poised to benefit from a recovering economy. Further, Federal Reserve s approval of Fifth Third s 2015 capital plan boosted shareholders confidence. However, a low interest-rate environment, regulatory issues, as well as competitive pressures remain looming concerns.

Risk Level *

Type of Stock Industry Zacks Industry Rank *

Below Avg.,

Large-Value Banks-Major Reg

116 out of 267

ZACKS CONSENSUS ESTIMATES

Revenue Estimates

(In millions of $)

Q1

Q2

(Mar)

(Jun)

2013 2014 2015 2016

1,636 A 1,462 A 1,455 E

1,945 A 1,641 A 1,489 E

Q3 (Sep)

1,619 A 1,428 A 1,506 E

Q4 (Dec)

1,608 A 1,541A 1,549 E

Year (Dec)

6,808 A 6,072 A 5,999 E 6,401 E

Earnings Per Share Estimates

(EPS is operating earnings before non-recurring items, but including employee stock options expenses)

Q1

Q2

Q3

Q4

Year

(Mar)

(Jun)

(Sep)

(Dec)

(Dec)

2013 2014 2015 2016

$0.44 A $0.36 A $0.37 E

$0.43 A $0.49 A $0.40 E

$0.41 A $0.39 A $0.42 E

$0.43 A $0.43 A $0.45 E

$1.71 A $1.67 A $1.64 E $1.82 E

Projected EPS Growth - Next 5 Years %

7



10 S. Riverside Plaza, Chicago IL 60606

OVERVIEW

With assets of $138.7 billion, Cincinnati-based Fifth Third Bancorp (FITB) operates 15 affiliates with 1,302 full-service banking centers including 101 Bank Mart locations and 2,638 ATMs in 12 states throughout the Midwestern and Southeastern regions of the U.S.

The company also has a 23% interest in Vantiv Holding, LLC. The carrying value of Fifth Third s investment in Vantiv Holding, LLC was $394 million as of Dec 31, 2014. As of Dec 31, 2014, Fifth Third continued to hold about 43 million Class B units of Vantiv and a warrant to purchase about 20.4 million Class C non-voting units of Vantiv, both of which may be exchanged for Class A Common Stock of Vantiv on a one-for-one basis or at Vantiv s option for cash. In addition, the company holds about 43 million Class B common shares of Vantiv. The Class B common shares give Fifth Third voting rights, but no economic interest in Vantiv.

Fifth Third classifies its operations into mainly four reportable segments:

Branch Banking provides deposit, loan and lease products, and credit cards to individuals and small businesses.

Consumer Lending includes mortgage and home equity lending, as well as other indirect lending activities.

Commercial Banking provides a range of financial services and products to large and middlemarket businesses, governments and professional customers.

Investment Advisors offers a range of investment alternatives to individuals, companies and non-profit organizations. These consist of proprietary mutual funds, securities brokerage and asset management services.

Further, the General Corporate and Other segment includes the unallocated portion of the investment securities portfolio, securities gains and losses, certain non-core deposit funding, unassigned equity, provision expense in excess of net charge-offs or a benefit from the reduction of the allowance for loan losses, representation and warranty expense in excess of actual losses or a benefit from the reduction of representation and warranty reserves, the payment of preferred stock dividends and certain additional activities and other items not attributed to the business segments.

As of Dec 31, 2014, Fifth Third had portfolio loans and leases of $91.3 billion, total deposits of $101.7 billion and shareholders' equity of approximately $15.6 billion.

REASONS TO BUY

Fifth Third s diverse revenue base should support its earnings growth. It has expanded its noninterest income base, which now represents over 40% of total revenues. Though pressure on net interest margin will continue, earnings asset growth is expected to push up the net interest income. While the regulatory moves adversely affected a number of fee income categories, the company s mitigation efforts are anticipated to partially offset the revenue losses. Moreover, the balance sheet optimizing efforts as well as liability cost reduction measures augur well going forward.

Moreover, with a diversified traditional banking platform, Fifth Third remains well poised to benefit from a recovering economy along its Midwest footprints. Its traditional commercial banking

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franchise built on customer-oriented localized operating model and solid market share in key markets with focus on further improving density augur well going forward. The company s expansion strategy involves a combination of de novo branching and acquisitions. With solid capital levels, further acquisition opportunities can be expected. Going forward, we expect strategic acquisitions to support the company s revenue stream.

We view Fifth Third as a sound asset for yield-seeking investors. The company remains focused on managing capital levels efficiently. This is well evident from the clearance of the 2015 stress test and Federal Reserve s approval for 2015 Capital Plan. Notably, in Jun 2014, Fifth Third increased its common stock dividend by 8%. We anticipate such capital deployment activities to boost investors confidence.

The company s deposit balances represent an important source of funding and revenue growth opportunity. Fifth Third continues to focus on core deposit growth in its retail and commercial franchises by improving customer satisfaction, building full relationships and offering competitive rates. Due to the overall sluggish economic environment, Fifth Third s total deposits recorded a 5year CAGR of 5.7% in 2014. Therefore, deposit balances are poised to rise in an improving economy.

As a significant capital market player, Fifth Third could benefit from the material growth of the global capital markets. Its strong consumer and commercial banking franchise and growing asset management business are also set to benefit from the cyclical recovery in the U.S. economy.

Proactive steps have been taken by Fifth Third to improve its credit quality. In the last few years, the company took aggressive actions to reduce credit risk. The after-effects of such encouraging initiatives have resulted in positive credit quality trends. There has been a substantial reduction in its exposure to commercial real estate (CRE) since the first quarter of 2009 and the company has a relatively low CRE exposure as compared with its peers. Going forward, we expect the overall improvement in the credit metrics trend to continue in the upcoming quarters given the modest economic recovery. Moreover, the company has relatively low exposure to areas of concern such as European financials.

REASONS TO SELL

Elevated non-interest expenses, despite efficiency initiatives remain a major concern for Fifth Third. Moreover, the company continues to encounter many investigations and lawsuits from investors and regulators. Though the company resolved certain litigations, many of the cases are yet to be resolved. All these factors are expected to lead to increased expenses and litigation provisions in the near term.

Decline in the yield on average interest-earning assets coupled with an increase in these assets continue to negatively impact net interest margin. Therefore, NIM reduced to 3.10% in 2014, from 3.32% in 2013, 3.55% in 2012 and 3.66% in 2011. Though interest rates have started rising, attributed to lower yields on loans, NIM is expected to remain under pressure, thereby adversely affecting the company s results in the quarters ahead.

According to management, government-sponsored enterprises toward the end of 2012 have started requesting files for any loan that is nonperforming. Therefore, a surge in repurchase claims and increase in repurchase expense are anticipated in the quarters ahead, which poses a risk to the company s profitability.

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Regulatory issues are a concern for Fifth Third, given its potential impact on the company s profitability through increased costs, limited fee generation opportunities as well as reduced flexibility with respect to its business. While the motive behind such measures is to enhance banks business models so that these become self-sufficient over the longer term, the cost of compliance will likely increase and temper profitability in the near-to-mid term. In addition, we believe that the company s flexibility with respect to its investments and lending volumes would be limited in the medium term, given the stricter capital norms and increased reserves that the regulators are proposing to align with the global standards.

RECENT NEWS

Fifth Third Bancorp Q4 Earnings Beat on Lower Expenses Jan 21, 2015

Fifth Third's fourth-quarter 2014 earnings per share came in at $0.43, marginally beating the Zacks Consensus Estimate of $0.42. The reported figure came in line with the prior-year quarter earnings.

Fourth-quarter results include the impact of positive valuation adjustment of $53 million on the Vantiv warrant, annual payment of $23 million received from Vantiv, charge of $19 million pertaining to the valuation of the total return swap entered into as part of the 2009 sale of Visa, Inc. Class B shares. Also, it included the impact of severance expense of $6 million, charges of $3 million in litigation reserve and $23 million as provision expense related to the transfer of residential mortgage loans classified as troubled debt restructurings to held-for-sale. The prior-year quarter also included certain non-recurring items.

Results were aided by lower expenses, partially offset by decreased revenues and higher provisions for loan and lease losses. Improved loan and deposit balances and a strong capital position were among the other positives.

Including the above mentioned items for the fourth quarter, net income available to common shareholders was $362 million, down 6% year over year.

Excluding the significant items mentioned, the company earned $0.40 per share in fourth quarter 2014.

For 2014, net income available to common shareholders was $1.41 billion, down 21% from the previous year.

Total revenue for the quarter came in at $1.54 billion, surpassing the Zacks Consensus Estimate of $1.51 billion. However, it decreased 4% year over year. The decline was due to lower net interest income as well as non-interest income.

For 2014, revenues were $6.07 billion, down 11% year over year. However, it surpassed the Zacks Consensus Estimate of $6.00 billion.

Quarter in Detail

Fifth Third s net interest income (tax equivalent) came in at $888 million, down 2% year over year. The decline was primarily due to the impact of loan repricing and higher interest expense owing to increased long-term debt balances partially offset by higher investment securities balances as well as loan balances. Net interest margin was 2.96%, down 25 basis points (bps) from the prior-year quarter, reflecting the effect of loan repricing.

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Non-interest income decreased 7% year over year to $653 million (including certain non-recurring items). The decline was largely owing to a fall in mortgage banking net revenue and other non-interest income. However, revenues from corporate banking, card and processing and investment advisory rose. Excluding significant items, non-interest income decreased 3% year over year.

Non-interest expenses declined 7% from the prior-year quarter to $918 million (including certain nonrecurring items). The decline reflected lower salaries, wages and incentives, card and processing expense and other non-interest expense as well. Excluding significant items, non-interest expenses increased 2% year over year.

As of Dec 31, 2014, excluding loans held-for-sale, average loan and lease balances increased 3% year over year to $91.6 billion. Average total deposits rose 3% from the prior-year quarter to $99.3 billion.

Credit Quality

Fifth Third s credit quality improved partially in the reported quarter. Total nonperforming assets including loans held for sale were $783 million, down 21% from the year-ago quarter. Allowance for loan and lease losses dropped 16% year over year to $1.5 billion.

However, provision for loans and leases increased 87% year over year to $99 million. Net charge-offs for the quarter stood at $191 million or 83 bps of average loans and leases on an annualized basis against $148 million or 67 bps in the prior-year quarter.

Capital Position

Fifth Third remained well capitalized in the quarter. Tier 1 risk-based capital ratio stood at 10.83% compared with 10.43% at the end of the prior-year quarter. Tier 1 Leverage ratio was 9.66% versus 9.73% at the end of the prior-year quarter.

As of Dec 31, 2014, under the final capital rule, pro-forma fully phased in Tier I common equity ratio was estimated at around 9.4%.

Outlook

Management expects full-year 2015 NII to decrease about 1% to 2% from the 2014 NII. The outlook includes $100 million reduction related to deposit advance product.

For NIM, including the impact of a $100 million decline in deposit advance related interest income, which is on an annual basis equivalent to about 8 basis points, management anticipates persistent contraction during the first half of 2015, but based on the rate assumptions NIM should recover by year end to fourthquarter 2014 levels.

However, if rates stay flat, management expects continued contraction during the second half of 2015 and end 2015 about 5 to 7 basis points below fourth-quarter 2014 levels excluding the impact of the deposit advance products.

For the first-quarter 2015, management anticipates the impact of the deposit advance product to be $20$25 million, including $12 million negative impact of day count. Further, NIM is expected to be lower during the first quarter due to elevated cash balances and ongoing pricing pressures.

Management anticipates credit performance to continue to improve, but ALLL releases in 2015 is expected to be significantly below the 2014 levels and loan growth will result in higher levels of provisioning.

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Non-interest income excluding Vantiv related gains of $155 million in 2014 is expected to continue to grow. Currently, an increase in the mid-single digits range is anticipated, driven by fee income related to commercial banking and investment advisory. Along with NII expectations, 2015 total revenues are expected to exceed 2014 core revenues.

For the first-quarter 2015 fee income, most fee revenue lines including deposit fees, card and processing revenue and corporate fees tend to be seasonally low and management expects corporate banking fees to be additionally impacted by the current market environment.

For 2015, under the revenue assumptions, management expects to achieve efficiency ratio in the low 60s. The year-over-year increase in compliance related expenses is expected to be in $25 million range, mainly headcount related. Additionally, about $15 million in expenses during the second half of 2015 is expected, related to the EMV technology in credit card business.

For first-quarter 2015, higher expenses primarily due to seasonally higher FICA and unemployment expense is expected. In addition, marketing expenses is anticipated to be seasonally higher.

Share Repurchase

During the quarter, Fifth Third repurchased 10 million common shares.

Fifth Third entered into an accelerated share repurchase agreement with a counterparty and purchased 8.5 million shares or about $180 million, of its outstanding common stock on Jan 27, 2015. The company repurchased the shares of its common stock as part of its board approved 100 million share repurchase program previously announced on Mar 18, 2014. The company expects the settlement of the transaction to occur on or before Apr 23, 2015.

Previously, Fifth Third entered into a share repurchase agreement with a counterparty on Oct 20, 2014, according to which the bank is to purchase around $180 million of its outstanding common stock. The company settled this forward contract on Jan 5, 2015 and an additional 0.79 million shares were repurchased following completion of the agreement.

Further, the settlement of the forward contract pertaining to the Jul 21, 2014 share repurchase agreement of $225 million occurred on Oct 14, 2014. Following completion of the agreement, an additional 1.90 million shares were repurchased.

2015 Capital Plan Approval Mar 11, 2015

Fifth Third announced the Federal Reserve s no objection to its proposed potential capital actions from Apr 1, 2015 through Jun 30, 2016 included in its capital plan submitted in January under the Comprehensive Capital Analysis and Review (CCAR) process.

Fifth Third s capital plan included certain capital actions related to common dividends and share repurchases. The plan includes increase in the quarterly common stock dividend to $0.14 in 2016, repurchase of common shares up to $765 million, which includes repurchases related to share issuances under employee benefit plans and the additional ability to repurchase shares in the amount of any aftertax gains from the sale of Vantiv stock, if realized.

Dividend Update

On Mar 18, 2015, Fifth Third declared cash dividend on its common shares of $0.13 per share. The cash dividend will be paid on Apr 21, 2015 to shareholders of record as of Mar 31.

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VALUATION

On price to earnings (P/E) basis, Fifth Third shares currently trade at 11.7x the Zacks Consensus Estimate for 2015, a 15.2% discount to the industry average. On a price-to-book (P/B) basis, shares trade at 1.1x, a 15.4% discount to the industry average.

Moreover, Fifth Third has a trailing 12-month ROE of 10.7%, compared with the industry average of 9.6%. This implies that the company reinvests its earnings more efficiently than its industry peers.

Our six-month target price of $20.00 equates to 12.2x the Zacks Consensus Estimate for 2015. Combined with a quarterly dividend of $0.13 per share, this price target implies an expected total return of 5.2% over that period. This is consistent with our Neutral recommendation on the shares.

Fifth Third currently carries a Zacks Rank #4 (Sell).

Key Indicators

Fifth Third Bancorp (FITB)

P/E F1

11.7

P/E F2

10.6

Est. 5-Yr EPS Gr%

7.0

P/CF (TTM)

8.3

P/E (TTM)

11.5

P/E 5-Yr

High (TTM)

139.6

P/E 5-Yr Low (TTM)

8.6

Industry Average S&P 500

13.8 12.1 16.5 15.4

9.2

11.2

15.6

35.5

9.0

10.7

14.5

18.1

18.4

12.0

SunTrust Banks, Inc. (STI)

13.3 12.0

16.4

9.1

13.3

56.5

7.7

BB&T Corporation (BBT)

13.3 11.7

9.5

10.7

13.8

34.3

10.6

M&T Bank Corporation (MTB)

15.1 13.1

9.3

13.0

16.7

23.9

10.3

Northern Trust Corporation (NTRS)

19.4 16.5

9.9

13.5

21.2

22.2

13.5

TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow

Fifth Third Bancorp (FITB)

P/B Last Qtr.

1.1

P/B 5-Yr High

1.4

P/B 5-Yr Low

0.7

ROE (TTM)

10.7

D/E Last Qtr.

1.0

Div Yield Last Qtr.

2.7

EV/EBITDA (TTM)

7.2

Industry Average

1.3

1.3

1.3

9.6

0.9

2.0

3.8

S&P 500

6.2

9.8

3.2

25.4

2.0

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Earnings Surprise and Estimate Revision History

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