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Fifth Third Bancorp Lags Earnings Estimates

This week I’ve got a short-term short-sell momentum trade on Fifth Third Bancorp. According to Zacks Investment Research using their Earnings Estimate Revision Stock Picking Formula, Fifth Third Bancorp reported first quarter net income available to common shareholders of $88 million or 10 cents per share, significantly below the Zacks Consensus Estimate of 27 cents. The results also compared unfavorably with net income of $270 million or 33 cents per share in the prior quarter, but compared favorably with net loss of $72 million or 9 cents in the prior-year quarter.

The results were negatively affected by lower net interest income and non-interest income, partially offset by better-than-expected improvement in credit metrics and lower operating expenses.

Net income reduced by $153 million or 17 cents per share of discount accretion recorded in preferred dividends, which increased due to February repurchase of $3.4 billion in TARP.

Performance in Detail

Total revenue at Fifth Third was $1.5 billion in the first quarter, in line with the Zacks Consensus Estimate but down 6% sequentially. However, revenue was also in line with the prior-year quarter’s figure. The sequential decrease in revenues primarily reflects the significant drop in non-interest income.

Net interest income was down $33 million from the prior quarter to $884 million. Net interest margin inched down 4 basis points (bps) sequentially to 3.71%.The sequential decline in income and margin reflected full-quarter effect of the refinancing of FTPS, LLC loan, lower mortgage warehouse balances in loans held-for-sale and the effect of $1 billion fixed-rate debt issuance related to TARP repayment.

Income was down $17 million from the prior-year quarter due to lower average loan balances. However, net interest margin was up 8 bps year over year, driven by deposit growth and shift in mix from higher cost term deposits to lower cost deposit products.

Although average portfolio loan and lease balances inched up 2% sequentially and inched down 1% year over year, average core deposits increased both 1% sequentially and 2% year over year. The company reported growth across all transaction deposit account categories, which offset both sequential and year-over-year declines in consumer CDs.

On the flip side, Fifth Third’s non-interest income decreased 11% sequentially and 7% year over year to $584 million. The sequential decline reflected lower mortgage-related revenue, investment securities gains, and seasonally lower corporate banking revenue and deposit service charges, partially offset by lower credit-related costs realized in other noninterest income. The year-over-year decline was driven by lower mortgage-related revenue and deposit service charges based on the effect of August implementation of Regulation E.

Non-interest expense inched down 7% sequentially to $918 million. The figure includes $17 million of expenses associated with the termination of $1 billion in FHLB funding in the prior quarter.Excluding one-time items, Fifth Third’s non-interest expense came in at $935 million in the reported quarter. The remaining sequential decline reflected lower revenue-based compensation as well as lower credit-related expenses, partially offset by seasonal increase in FICA and unemployment costs.

Credit Quality

Credit metrics showed mixed trend in the reported quarter. Net charge-offs were $367 million or 192 bps of average loans and leases compared with $356 million or 186 bps of average loans and leases in the prior quarter. Provision for loans and leases increased 1% sequentially but plummeted 72% year over year to $168 million. Total nonperforming assets, including loans held-for-sale, were $2.3 billion, a decline of 5% from the prior quarter reflecting sale of assets from held-for-sale during the quarter and decreases in NPLs and OREO in the held-for-investment portfolio.

Capital Ratios

Capital ratios were strong during the quarter. On a sequential basis, the Tier 1 common equity ratio advanced 150 bps to 9.00%, while Tier 1 capital ratio decreased 173 bps to 12.21%. As of March 31, 2011, book value per share and tangible book value per share were $12.80 and $10.11 compared with $13.06 and $9.94 per share, respectively, reported in the prior quarter. Though book value and tangible book value per share increased due to higher retained earnings and the issuance of common stock at a premium, they were largely offset by the effect of the repurchase of the TARP warrant from the U.S. Treasury.

Return on assets (ROA) was 1.0% and return on average common equity (ROE) was 3.1%, down from 1.18% and 10.4%, respectively, in the prior quarter. Over the long term, ROE and ROA are expected to improve based on balance sheet growth, related efficiencies, lower credit costs, and overall economic environment.

Zacks Take

For Fifth Third, we are encouraged to see the credit management efforts and expect it to experience an improvement in credit quality in the upcoming quarters. Though challenging economic conditions along its footprint and the recent regulatory issues are expected to remain an overhang, going forward, we expect Fifth Third’s diverse revenue stream, opportunistic expansions and cost containment measures to support its earnings.

Fifth Third shares are maintaining a Zacks #3 Rank, which translates into a short-term ‘Hold’ recommendation. Also, considering the fundamentals, we are maintaining a ‘Neutral’ rating on the stock.

My Take

With the support break of 13.40, I see more downside momentum to my price targets listed below. My price target don't have a huge amount of percentage return to them but 10% to 15% is possibly available, and maybe more if the broad market sells off. Tighten up the stop-loss if you like to make the reward risk ratio more favorable. I see the broad market running out of steam here and into major resistance currently, with the potential of for significant downside very possible. Then again, the bulls are still in the game so anything is possible.

Sell-Short Short-Term Fifth Third Bancorp – Ticker FITB

Sell Entry: 13.16 to 12.76

Stop-Loss: 14.22

Take Profit Areas: 12.02 to 11.94, 11.42 to 11.35

Fifth Third Bancorp Company Profile

Fifth Third Bancorp operates as a diversified financial services holding company. The companys Commercial Banking segment offers banking, cash management, and financial services; traditional lending and depository products and services; and other services, including foreign exchange and international trade finance, derivatives and capital markets services, asset-based lending, real estate finance, public finance, commercial leasing, and syndicated finance for business, government, and professional customers. Its Branch Banking segment provides deposit and loan, and lease products to individuals and corporations. Its products include checking and savings accounts, home equity loans and lines of credit, credit cards, and loans for automobile and personal financing needs. The companys Consumer Lending segment involves in mortgage and home equity lending activities, such as origination, retention, and servicing of mortgage and home equity loans; and other indirect lending activities, which include loans to consumers through mortgage brokers, automobile dealers, and federal and private student education loans. Its Investment Advisors segment offers investment alternatives for individuals, companies, and not-for-profit organizations. It offers retail brokerage services to individual clients, and broker dealer services to the institutional marketplace. This segment also provides asset management services; holistic strategies to affluent clients in wealth planning, investing, insurance, and wealth protection; and advisory services for institutional clients, as well as advises the companys proprietary family of mutual funds. As of December 31, 2009, the company operated 1,309 full-service banking centers, including 103 Bank Mart locations and 2,358 Jeanie ATMs in Ohio, Kentucky, Indiana, Michigan, Illinois, Florida, Tennessee, North Carolina, West Virginia, Pennsylvania, Missouri, and Georgia. The company was founded in 1862 and is headquartered in Cincinnati, Ohio.

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