Fifth Third Braces For Higher Rates

9/9/2013


  Recent Price
$18
  Dividend
$0.48
  Yield
2.6%
  P/E Ratio
10
  Shares (millions)
901
  52-Week Price Range
$19.79 - $13.75

Fifth Third Bancorp ($18; FITB) shares have returned 22% so far in 2013, near the median return of 25% for regional banks in the S&P 1500 Index. But Fifth Third sat out the rally in the past three months, while many of its peers set new highs.

The bank continues to expand its deposit base and loan portfolio. It operates more than 1,300 banking centers in 12 states in the Midwest and Southeast.

However, investors have become jittery because the mortgage business, a key ingredient in recent growth, could become a weak link as interest rates rise. That leaves the stock trading 28% below its peer-group median relative to trailing earnings, 23% on sales, and 5% on book value. Fifth Third, earning a Value rank of 83, is a Buy and a Long-Term Buy.

Searching for growth streams

Mortgage banking, which accounts for nearly one-third of the bank's noninterest income, has quadrupled its profits over the last four calendar years. The unit got off to a strong start in the first half of 2013, with net revenue rising 17% to $453 million. Refinancing activity drove the growth.

But higher interest rates threaten to reduce mortgage volumes and profit margins, with refinancing activity particularly vulnerable. In July, management curbed full-year expectations for mortgage-banking revenue, now projected to fall about 18% to roughly $700 million. Fifth Third has already begun to slash the unit's expenses as its growth outlook dims.

Smaller business units should pick up the slack for the slowing mortgage business. Management expects 5% to 10% growth for corporate banking (15% of noninterest income), investment advisory (14%), and card and processing (9%). Among those segments, only corporate banking grew last year.

The bank projects mid-single-digit growth for deposit fees (19% of noninterest income), lower than prior expectations as customers maintain higher balances. But the new target still represents a rebound after fee revenue was flat or down in each of the past four years.

Management says credit trends should remain favorable in the second half of 2013. Net interest margin contracted further in the first half of 2013, but management says it should begin to improve in the December quarter, helped by modestly higher net interest income. Rising interest rates should help boost net interest margins, as rates paid to depositors are likely to rise less than rates earned on loans.

Fifth Third yields 2.6%, exceeding the 2.2% median for S&P 1500 regional banks. Since the financial crisis, Fifth Third has aggressively rebuilt its dividend, paying $0.12 per share quarterly, up from $0.01 per share in 2009 and 2010 but well below the peak of $0.44 per share in early 2008. Despite the dividend hikes, Fifth Third's payout ratio remains fairly conservative at 27%, below the 30% threshold above which the Federal Reserve promises additional scrutiny.

The bank slashed its share count nearly 6% in the past year. About $600 million remains under its 2013 buyback plan, equating to roughly 4% of outstanding shares. An annual report for Fifth Third Bancorp is available at Fifth Third Center, Cincinnati, OH 45263; (800) 972-3030; www.53.com.

FIFTH THIRD BANCORP
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Jun '13
0.44
vs.
0.36
6%
18.74
-
15.62
11 - 9
Mar '13
0.44
vs.
0.36
3%
16.77
-
15.19
11 - 10
Dec '12
0.45
vs.
0.32
8%
16.16
-
13.75
11 - 9
Sep '12
0.42
vs.
0.33
-1%
15.95
-
13.07
12 - 10
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2012
6.83
1.59
0.34
16.16
-
12.04
10 - 8
2011
6.67
1.18
0.21
15.75
-
9.13
13 - 8
2010
7.07
0.63
0.04
15.95
-
9.81
25 - 16
2009
7.69
0.67
0.04
11.20
-
1.01
17 - 2
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
88
65
83
61
91
68
58

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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