Fifth-Third Bancorp: I Changed My Mind

| About: Fifth Third (FITB)


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.

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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.