Fifth-Third Bancorp: I Changed My Mind

| About: Fifth Third (FITB)

Summary

I downgraded the stock in late 2014 to a hold.

The bank had been struggling a bit in 2015 but it has shown it is growing loans, deposits, revenues and earnings.

With the stock at a 52 week low despite the improving picture, I think now is the time to change my mind.

I recently discussed Fifth Third Bancorp (NASDAQ:FITB) and went over the merits of its sale of Vantiv (NYSE:VNTV). I maintained a hold rating after that coverage and let me tell you that it was not an easy call. I had downgraded the name almost a year ago, and I am glad I did. At the time of this writing the stock is at a 52 week low. But just what is going on here?

The recent earnings show the company had a better than expected quarter. The company delivered a beat on the top line and a bottom line earnings per share beat, though the latter may not be comparable to estimates. There were some key strengths and weaknesses. The Q4 2015 net income was $634 million. This is a large gain over last year but of course this includes a $331 million pre-tax gain on the sale of Vantiv holdings. After preferred dividends, this quarter's income was a solid quarter-over-quarter improvement from the net income available to common shareholders of $366 million, or $0.45 per diluted share in Q3 2015.

While these earnings figures are strong year-over-year, even in light of the sales of Vantiv, but one of the key drivers of a bank's performance that I examine is loans and deposits. They are critical. Average loan and lease balances increased $221 million sequentially and increased $2.6 billion, or 3%, from Q4 2014. This surprised me since the company was seeing sequential declines when I last covered the name. Average commercial portfolio loan and lease balances increased $183 million sequentially and increased $2.9 billion, or 5% year-over-year. Average consumer portfolio loan and lease balances increased $38 million sequentially and were down $347 million year-over-year. While there has been growth in loans overall, it is slow.

I will state very clearly that the deposit front had me concerned when I last covered the name. However, things have improved. Average core deposits increased $1.0 billion sequentially, or 1%, increased $3.4 billion, or 4% from Q4 2014. Average transaction deposits increased $1.0 billion quarter-over-quarter driven by higher demand deposit and money market account balances. Average commercial transaction deposits rose 2% sequentially as well and jumped 5% from last year. Further, average consumer transaction deposits were up 2% year-over-year.

All things considered, this earnings report was pretty strong. I am surprised by the action on the Street today. At a new 52 week low with a 3.3% yield, I think the stock is compelling here. While I do have concerns longer-term with loans and deposits, I was pleased to see them rise year-over-year. I am pleased to see the company monetizing the Vantiv holdings and with the bank growing in conjunction with rising interest rates, I am now upgrading the name to a buy.

Note from the author: Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit "follow." He also writes a lot of "breaking" articles, which are time sensitive, actionable investing ideas. If you would like to be among the first to be updated, be sure to check the box for "Real-time alerts on this author" under "Follow."

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.