Morningstar

Fifth Third Earnings: Tricolor Blemishes Otherwise-Healthy Quarter

We focus more on the bank’s commercial book than its consumer loans.

The Fifth Third Bank logo on building exterior.
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Securities in This Article
Fifth Third Bancorp
(FITB)

Key Morningstar Metrics for Fifth Third Bancorp

What We Thought of Fifth Third Bancorp’s Earnings

Fifth-Third FITB reported net income growth of 14% in the third quarter. Net charge-offs were 1.09% (0.52% excluding Tricolor). Importantly, management guided to fourth-quarter net charge-offs of about 0.4%. We attribute the positive market reaction to credit looking better than expected.

Why it matters: With Fifth Third charging off $178 million for an impaired asset-backed loan tied to Tricolor and regional banks like Zions and Western Alliance disclosing unexpected fraud with borrowers, investors are wondering whether these types of losses will expand. Higher-risk leveraged loans make up 2.2% of Fifth Third’s loan portfolio.

  • On balance, we focus more on the bank’s commercial book than its consumer loans. Commercial net charge-offs of 1.46% (or 0.51% ex-Tricolor) were up from the previous four-quarter average of 0.36%. Commercial 30-to-89-day delinquencies of 0.16% were up from 0.06% sequentially.
  • The firm’s consumer credit loan books look healthy. Net charge-offs of 0.52% were down sequentially, with 30-89 delinquencies of 0.47% being flat.

The bottom line: As we digest these results, we will maintain our $43 per share fair value estimate for no-moat-rated Fifth Third and see the stock as fairly valued. We see the risk-reward profile as balanced, with the firm’s Coamerica integration offset by the prospect of strong cost synergies.

Key stats: Net interest income grew 2.00% sequentially to $1.53 billion as net interest margins ticked higher to 3.13%, up from 3.12% in the second quarter and 2.90% in the year-ago period. Total deposit costs of 1.81% were steady when compared with 1.80% in the second quarter.

  • Core noninterest income was up 7% sequentially and 5% year over year. While wealth and asset management revenue are benefiting from high asset levels, we believe recent market appreciation will prove hard to replicate. The capital markets segment is also benefiting from increased deal activity.
  • Adjusted expenses grew 3%, in line with our expectations.

Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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