From DoddFrank to macro uncertainty coupled with high betas, financials are off the table for many individuals. As I have stated numerous times, however, this type of mentality has irrationally depressed banks well below intrinsic value. Fifth Third Bancorp (FITB) and Huntington Bancshares (HBAN) are testaments to my optimism. Based on my multiples analysis and DCF model, I find meaningful upside for both firms.
From a multiples perspective, Huntington is the cheaper of the two. It trades at a respective 9.6x and 8.7x past and forward earnings, while offering a dividend yield of 2.8%. Fifth Third trades at a respective 11.4x and 8.5x past and forward earnings while offering a dividend yield of 2.5%. Fifth Third is also more sensitive to the macroeconomy with 120% greater volatility than the broader market.
At the recent fourth quarter earnings call, Fifth Third's CEO, Kevin Kabat, reflected upon a challenging year:
Although it was a fairly tough year environmentally, I believe our results demonstrate the many core strengths of Fifth Third, as well as the many steps we've taken to make it a better company. Net income to common shareholders of $1.1 billion is the highest since 2006 and more than doubled from last year. Pre-provision net revenue exceeded $2 billion for the third consecutive year, as we've managed the regulatory headwinds and a slow growth environment. We've posted a return on assets of about 1% for 5 consecutive quarters with the full year ROA of 1.2%, up about 50 basis points from our 2010 full year ROA. I'm pleased with our ability to produce these returns in the midst of a relatively weak economic recovery and significant regulatory changes.
We remain committed to serving our markets, which is being demonstrated through our strong deposit and loan growth results. For the year, average transaction deposits increased 10%, and we grew portfolio loans 5%, with average balances increasing each quarter throughout the year. Credit quality metrics showed continued and significant improvement.
While fourth quarter EPS of $0.33 was decent - driven by loan growth and NIM expansion - the higher NIE runrate gives me cause. Management is anticipating improving momentum in loans for 1Q12, which will be furthered by auto and residential mortgage tailwinds. Only one-third of the negative impact from the Durbin Amendment is expected to be meaningful following 3Q12. And capital allocation is likely to get more aggressive with wide bid/ask spreads increasing cash holdings by limiting takeover activity. Growth rates in investment advisory, meanwhile, is forecasted to be around the mid-to-single digits. Credit Suisse models ROA holding steady while ROE expands by 80 bps to 10.4% in 2014.
Consensus estimates for Fifth Third's EPS forecast that it will grow by 18.5% to $1.41 in 2012 and then by 7.8% and 14.5% more in the following two years. Assuming a multiple of 11.5x and a conservative 2013 EPS of $1.47, the rough intrinsic value of the stock is $16.91, implying 29.3% upside. Modeling a CAGR of 13.2% for EPS over the next three years and then discounting backwards by a WACC of 9% yields an even higher fair value figure of $21.86.
Huntington similarly has strong upside. During the third quarter, EPS of $0.14 down 12% sequentially as a result of two main setbacks. First, electronic banking income fell because of the negative impact from the Durbin Amendment. Second, the company lacked automobile loan securitization gain, which helps hedge against the financial risks in auto loans. At the same time, EPS met expectations and NIM expanded by 4 bps sequentially to 3.38% when it was anticipated to be under pressure. Going forward, implementation of Fair Play Banking and Optimal Customer Relationship Model are catalysts due to their ability to reduce macro vulnerability.
Consensus estimates for Huntington's EPS forecast that it will be flat at $0.59 in 2012 and then grow by 8.5% and 17.2% in the following two years. Assuming a multiple of 11.5x and a conservative 2012 EPS of $0.61, the rough intrinsic value of the stock is $7.02, implying 24.5% upside.