Company Reports

No-moat-rated Fifth Third reported a decent start to 2024. First-quarter revenue was 1% above the FactSet consensus estimate. GAAP earnings per share of $0.70 beat the FactSet consensus estimate of $0.67. Noncore items were a $0.06 drag by our calculations, so we view the EPS beat as closer to $0.09 than $0.03. Net interest income was healthy, in our view, and we would also note that net interest margin ticked up slightly to 2.86% in the first quarter from 2.85% in the fourth quarter after several quarters of declines. Adjusted expenses declined 1%, which highlights management's focus on increasing efficiency. If there was one blemish, it was credit trends, which, while they have worsened, were still healthy, in our view.

Fifth Third is a midsize regional bank, primarily concentrated in the Midwest. The bank has a mix of commercial and retail banking offerings, as well as a healthy mix of corporate banking/capital markets, wealth, and payments fees.

Our thesis on the U.S. banks following the Silicon Bank fallout was that all of the banks we covered, except for First Republic (which we downgraded to a $3 fair value estimate on March 20, 2023, and a $0 fair value on April 27, 2023), would be able to weather the storm. We believed that banks in trouble were in uniquely risky positions. We believe this thesis has largely held up, and sorting through banks based on their unique risk profiles remains necessary and valuable. To the extent that the market is selling off all banks because of what has happened to NYCB, we think there could be opportunities once again while acknowledging the significant time horizon risk (how long does it take for the banks to prove to the market they are fine) and the choppy waters that could occur in the meantime (we expect more commercial real estate related loan losses in the future).

Fifth Third reported a solid end to 2023. Fourth-quarter adjusted earnings per share of $0.99 beat the FactSet consensus estimate of $0.77 and revenue of $2.17 billion was slightly ahead of the consensus estimate of $2.16 billion. We attribute the beat to lower provisioning and a lower tax rate. Fifth Third’s provision in the quarter was $55 million, down from $119 million in the third quarter. Given a slowing macroeconomic environment and commercial real estate exposures, many banks have been increasing their provision for loan losses. The firm’s tax rate of 18.4% benefited from a $17 million favorable tax resolution. Overall, the firm’s 2024 revenue outlook was in line with our expectations. As we incorporate fourth-quarter financial results, we do not expect a material change to our $35 per share fair value estimate.

Fifth Third is a midsize regional bank, primarily concentrated in the Midwest. The bank has a mix of commercial and retail banking offerings, as well as a healthy mix of corporate banking/capital markets, wealth, and payments fees.

No-moat-rated Fifth Third reported decent third-quarter earnings per share of $0.91, beating the FactSet consensus estimate of $0.82 and our estimate of $0.85. The outperformance was largely driven by lower provisioning, with net interest income, or NII, fees, and expenses all coming in close to our expectations. After factoring in these results and updated guidance from management, NII is trending toward the midrange of the bank’s previous guidance, flat fees are trending as expected, and expenses are trending toward the high end of the previous guidance range. These are minor differences, and we would describe current results as meeting expectations. Management now expects NII to trough in first-quarter 2024, better than some regional peers that don't have clarity yet on when their NII will bottom.

Fifth Third is a midsize regional bank, primarily concentrated in the Midwest. The bank has a mix of commercial and retail banking offerings, as well as a healthy mix of corporate banking/capital markets, wealth, and payments fees.

No-moat-rated Fifth Third reported second-quarter earnings per share of $0.82, missing the FactSet consensus and our own estimate of $0.88. The miss was largely driven by weaker net interest income, or NII, of $1.46 billion compared with our estimate of $1.50 billion, along with slightly lower fees and slightly higher expenses. Higher funding costs have been a common pattern for the regional banks this quarter, and Fifth Third was no exception, as it reduced its NII outlook to up 3%-5% from up 7%-10% last quarter and raised its deposit cost estimates. While we were already at the lower end of the previous guidance range, projecting a 7% increase for the full year, we now expect to dial back our NII projections a bit more. As we think ahead, we are hoping that NII will bottom out in the fourth quarter and may even be somewhat resistant to rate cuts in 2024, if they happen.

Fifth Third is a midsize regional bank, primarily concentrated in the Midwest. Its reputation as a solidly profitable bank took a hit during the financial crisis. Fifth Third regularly reported returns on equity that exceeded 17% before 2007, largely because of a strong line of fee income businesses. In 2007, primarily because of weakness in some of its most significant markets—Ohio, Michigan, and Florida—loan losses began to pile up. Although management could not avoid the impact of operating in hard-hit economies, a generally increasing appetite for risk compounded the bank’s problems. Over the course of 2008-09, loan-loss provisions ate up more than 100% of net interest income. Since the crisis, much has changed, and management has made improvements to the underwriting process and generally improved the bank's risk management.

The Federal Reserve released its review of what went wrong with supervision and regulation of Silicon Valley Bank. There are still no official new regulatory proposals, but this is the first official clue about where the regulators are heading. Our thesis was that regulations were going to change but that they would be manageable changes phased in over a period of several years. This is why we do not think capital raises are likely for the banks under our coverage. We think this is a key point because prices currently seem to be implying permanently impaired profitability or capital raises for multiple banks under our coverage. We think this is too harsh.

No-moat-rated Fifth Third first-quarter results showed that earnings pressure is building, we view the pressure as being quite manageable. We had already expected that fourth-quarter results would be the peak for profitability during the current rate cycle, and while the drop off from that peak has accelerated a bit more than we expected, it was not that categorically different. As we revise our projections again to make sure we are still being prudent with our through-the-cycle net interest margin, or NIM, estimates (assuming that rates eventually fall from current levels), we do not expect a material change to our current $38 per share fair value estimate for the bank. We believe shares remain undervalued.

We have updated our fair value estimates for a number of regional banks in our coverage (M&T Bank: $179 to $163, Fifth Third Bancorp: $42 to $38, Regions Financial: $21 to $19, KeyCorp: $24 to $21, Huntington: $17 to $15, Comerica: $86 to $79 , Zions: $66 to $58, Cullen/Frost: $133 to $124 ). We did this based on an expectation of increased funding costs, some pressure on deposit bases (in other words, deposit outflows), and potentially lower securities yields in the future due to potential changes in bank regulations (which would likely force banks to hold more short-term treasuries instead of their current preference for mortgage-backed securities).

Fifth Third is a midsize regional bank, primarily concentrated in the Midwest. The bank's reputation as a solidly profitable bank took a hit during the financial crisis. Fifth Third regularly reported returns on equity that exceeded 17% before 2007, largely because of a strong line of fee-income businesses. In 2007, primarily because of weakness in some of the bank’s most significant markets--Ohio, Michigan, and Florida--loan losses began to pile up. Although management could not avoid the impact of operating in hard-hit economies, a generally increasing appetite for risk compounded the bank’s problems. Over the course of 2008-09, loan-loss provisions ate up more than 100% of net interest income. Since the crisis, much has changed, and management has made improvements to the underwriting process and generally improved the bank's risk management.

We are increasing our Morningstar Uncertainty Rating on our U.S. regional banking coverage (excluding U.S. Bancorp and PNC Financial Services) to High from Medium, to reflect the increased uncertainty associated with predicting what the deposit base, funding costs, and regulatory costs will look like in the future. We’re leaving the Uncertainty Ratings on the largest banks unchanged, as we believe they are less likely to experience deposit base volatility.

With the U.S. banking system coming under heightened liquidity pressure, we had speculated that the Federal Reserve might step in and provide some sort of solution. There was a lot of speculation about what mechanism/s could be used, and one of our favorites was simply allowing banks to exchange their underwater securities, at par, with the Fed. This has the benefit of taking away any concerns about being forced to sell these securities at fair value and therefore taking a hit to capital while also exposing the U.S. taxpayer to minimal risk of loss, as most securities held by the banks are either agency-backed MBS or Treasuries.

Bank stocks sold off meaningfully on March 9 as Silicon Valley Bank announced that it would have to take a number of “strategic actions,” including selling off its entire available-for-sale securities portfolio (incurring a $1.8 billion aftertax loss, or roughly 15% of the bank’s tangible common equity as of Dec. 31, 2022), announcing it is seeking to raise $2.25 billion in additional capital, and increasing its use of “term borrowings” (essentially higher-cost but more stable funding). Aside from crypto-related meltdowns, this is one of the first banks we’ve seen that has really suffered a liquidity crunch that has forced it to restructure the balance sheet and realize losses on its securities portfolios.

Fifth Third is a midsized regional bank, primarily concentrated in the Midwest. The bank's reputation as a solidly profitable bank took a hit during the financial crisis. Fifth Third regularly reported returns on equity that exceeded 17% before 2007, largely because of a strong line of fee-income businesses. In 2007, primarily because of weakness in some of the bank’s most significant markets--Ohio, Michigan, and Florida--loan losses began to pile up. Although management could not avoid the impact of operating in hard-hit economies, a generally increasing appetite for risk compounded the bank’s problems. Over the course of 2008-09, loan-loss provisions ate up more than 100% of net interest income. Since the crisis, much has changed, and management has made improvements to the underwriting process and generally improved the bank's risk management.

No-moat-rated Fifth Third reported fourth-quarter earnings of $1.01 per share, in line with FactSet consensus of $0.99 and a bit below our own estimate of $1.06. There weren’t any major misses within the 5% difference from our own EPS estimate, simply small differences throughout the income statement.

Fifth Third’s reputation as a solidly profitable bank took a hit during the financial crisis. The bank regularly reported returns on equity that exceeded 17% before 2007, largely because of a strong line of fee-income businesses. In 2007, primarily because of weakness in some of the bank’s most significant markets--Ohio, Michigan, and Florida--loan losses began to pile up. Although management could not avoid the impact of operating in hard-hit economies, a generally increasing appetite for risk compounded the bank’s problems. Over the course of 2008-09, loan-loss provisions ate up more than 100% of net interest income. Since the crisis, much has changed, and management has made improvements to the underwriting process and generally improved the bank's risk management.

No-moat-rated Fifth Third's third-quarter results came in slightly short of expectations, with earnings of $0.91 per share 7% below FactSet consensus' projection of $0.97 per share and 10% below our own estimate of $1.01. Revenue of $2.17 billion was slightly below our forecast of $2.20 billion, with all of the shortfall coming from fees. With expenses falling in line with our expectations, it was lower fees and slightly higher provisioning that drove the earnings miss.