Fifth Third Earnings: Net Interest Income Outlook Softens; Shares Still Undervalued

No-moat-rated Fifth Third FITB 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.

Management slightly lowered guidance on fees to stable from stable to up 1% and maintained noninterest expense growth expectations at up 4%-5%. Our projections were already within these updated ranges, so we don’t expect any material updates to our expectations for either of these items. As we factor in higher funding costs, softer loan demand, and lower NII, we anticipate our current fair value estimate of $39 per share may fall by a low- to mid-single-digit percentage but would still expect to view shares as undervalued.

Fifth Third grew its deposit base by 1% sequentially, which we consider good news as many of its regional peers reported slight deposit declines. A material amount of this growth continues to come from higher-cost balances, given the mix shift toward interest-bearing balances. Even so, in the current environment, we’d rather see deposit growth and the paydown of short-term borrowings. The next test will be how much the bank can keep growing deposits and how much pricing it can get back on deposits if rate cuts ever do occur.