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Fifth Third (FITB) Q1 Earnings Beat on Revenue Growth

Fifth Third Bancorp FITB reported adjusted earnings of 37 cents per share, beating the Zacks Consensus Estimate of 34 cents.

Including certain one-time items, the company reported earnings per share of 40 cents, compared with 42 cents in the prior-year quarter.

Results were aided by higher revenues, partially offset by increased expenses as well as provisions. Notably, the quarter exhibited consistent growth in loan and deposit balances as well as a strong capital position.

Certain non-recurring items included in the first-quarter results were the impact of 47 million pre-tax ($31 million after tax) positive valuation adjustment on the remaining warrant in Vantiv, and an $8 million pre-tax ($5 million after-tax) gain tied with sale of certain branches in St. Louis. The prior-year quarter also included certain non-recurring items.

Net income available to common shareholders increased 10% year over year to $312 million.

Performance in Detail

Total revenue for the first quarter came in $1.55 billion, surpassing the Zacks Consensus Estimate of $1.47 billion. Further, revenues increased 4% year over year, driven by higher net interest income as well as non-interest income.

Fifth Third’s net interest income (tax equivalent) came in at $909 million, increasing 7% year over year. The rise primarily reflected the impact of higher investment securities balances.

Net interest margin increased 5 basis points year over year to 2.91%, mainly due to reduced cash balances held at the Federal Reserve.

Non-interest income increased 1% year over year to $637 million (including certain non-recurring items). Excluding significant items, non-interest income increased 2% year over year. Notably, the quarter witnessed a rise in corporate banking revenue and card and processing revenue, while mortgage banking and investment advisory revenues declined.

However, non-interest expenses increased 7% from the prior-year quarter to $986 million. The rise was mainly due to higher costs related to salaries, wages and incentives and technology and communications, partially offset by lower card and processing expense and net occupancy expense.

As of Mar 31, 2016, excluding loans held-for-sale, average loan and lease balances inched up 3% year over year to $93.3 billion. The rise was driven by increased commercial and industrial (C&I), commercial construction and residential mortgage balances, partially offset by reduced home equity balances, credit card and automobile loans. Average total deposits rose 1% year over year to $101.5 billion.

Credit Quality

Fifth Third’s credit quality was a mixed bag during the quarter. The quarter also included reserve build for the energy portfolio due to the persistent low oil prices.

Total nonperforming assets, including loans held for sale, were $830 million, up 20% from the year-ago quarter.

Further, net charge-offs for the quarter came in at $96 million or 42 bps of average loans and leases on an annualized basis, up from $91 million or 41 bps in the prior-year quarter. Additionally, Provision for loan and lease losses jumped 72% year over year to $119 million.

However, allowance for loan and lease losses dropped 4% year over year to $1.28 billion.

Capital Position

Fifth Third remained well capitalized in the quarter. Tier 1 risk-based capital ratio was 10.91% compared with 10.62% at the end of the prior-year quarter. Tier 1 Leverage ratio was 9.57% as against 9.59% at the end of the prior-year quarter.

As of Mar 31, 2016, common equity Tier I ratio was estimated at 9.81%.

Share Repurchase

The settlement of the forward contract pertaining to the Dec 4, 2015 share repurchase agreement of $215 million took place on Jan 14, 2016. Following the completion of the agreement, an additional 1.78 million shares were repurchased.

The settlement of the forward contract pertaining to the Mar 4, 2016, share repurchase agreement of $240 million took place on Apr 11, 2016.  Following completion of the agreement, an additional 1.87 million shares were repurchased.

Our Viewpoint

We believe the company, with a diversified traditional banking platform, remains well poised to benefit from a recovery in the economies where it has a footprint. The company’s steady improvement in loans and deposits highlight its efficient organic growth strategy.

Further, we remain optimistic as the Ohio-based bank continues with its restructuring measures as part of the plans announced in Jun 2015 to consolidate or sell around 105 branches and around 31 other properties. The proposed actions are likely to be completed by mid-2016 and are anticipated to result in $65 million in cost savings, annually.

However, several issues including a stringent regulatory landscape as well as competitive pressure remain matters of concern.

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

Performance of Other Major Firms

JPMorgan Chase & Co. JPM kick-started the first-quarter earnings season on a positive note. Earnings of $1.35 per share beat the Zacks Consensus Estimate of $1.26, which was pretty conservative after a number of downward revisions lately. The figure shows a 7% improvement decline from the year-ago period, indicating the impact of challenging market conditions.

Wells Fargo & Company’s WFC first-quarter 2016 earnings recorded a positive surprise of about 1%. Earnings of 99 cents per share beat the Zacks Consensus Estimate by a penny. However, it compared unfavorably with the prior-year quarter’s earnings of $1.04 per share.

Lower trading revenues as well as a rise in credit costs led Bank of America Corp.’s BAC first-quarter 2016 earnings of 21 cents per share, which lagged the Zacks Consensus Estimate by a penny. Further, the bottom line witnessed a 16% year-over-year decline.

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