Fifth Third Bancorp: Stay The Course Because There Is Now A Major Catalyst In Place

Summary

• Fifth Third stock has significantly underperformed the broader market over the last year, and the YTD performance has not been much better.
• However, I believe that this bank is well-positioned for 2019 and beyond, especially if you factor in the recently approved acquisition of MB Financial.
• I am long Fifth Third, and I plan to stay long the stock.
• This idea was discussed in more depth with members of my private investing community, Going Long With W.G.. Start your free trial today »

Fifth Third Bancorp (NASDAQ:FITB) stock has been under significant pressure so far in 2019, as economic slowdown and interest rate concerns have wreaked serious havoc.

Data by YCharts

However, I believe that the underperformance has created a buying opportunity for investors with a long-term mindset because, in my opinion, Fifth Third is well-positioned for 2019 and beyond. Plus, it helps the bull case that this bank now has a significant catalyst in place.

The New Catalyst

On March 22, 2019, Fifth Third announced that it completed its $4.7 billion acquisition of MB Financial (MBFI). Management expects big things from this deal:

• Revenue synergies of $60-70 million over the next three years
• Pre-tax expense synergies of $255 million over the next two years (50% in year 1)
• It improves several key capital ratios and will help the bank reallocate capital to core markets

Simply put, management expects for this deal to be a game changer. And more important than the current revenue/expense projections, management believes that MB Financial will put Fifth Third in a better position for the future.

Source: Company Presentation, March 2019

Moreover, the combined company will be better positioned to compete with other large financial institutions in key growth markets.

Source: Company Presentation, March 2019

MB Financial brings in approximately $20 billion in assets, along with several strong business lines. Moreover, management expects for the deal to be accretive to operating EPS in the first full year and, more importantly, they believe that the deal will help Fifth Third speed up the achievement of its strategic financial targets (i.e., Project NorthStar).

There is a lot to like about this deal, especially if you are a shareholder who plans to stay long FITB through at least 2020, because having MB Financial in the fold puts Fifth Third in a great position for the years ahead. Additionally, Fifth Third's recent results show that the long-term story for this regional bank remains intact.

The Latest Results

On January 22, 2019, Fifth Third reported Q4 2018 results that beat the bottom-line estimates. The bank reported adjusted Q4 2018 EPS of $0.69 (beat by $0.05) on revenue of $1.66 billion (in line with estimates).

The highlights:

Source: Q4 and Full-year 2018 Earnings Presentation

And while Fifth Third's full-year 2018 results were what I would consider lackluster, I believe that there were several positive takeaways.

Full-year revenue was basically flat YoY, but let's remember that the reduced stake in Worldpay (WP) also came into play (negatively impacted noninterest income). Moreover, the bank was still able to grow EPS by almost double digits YoY, as management reduced the share count by buying back stock hand over fist in 2018.

At the end of the day, Fifth Third's Q4 and full-year 2018 operating results were nothing to brag about, but the bank was able to enter 2019 with higher EPS, a stronger liquidity position, and an improved balance sheet, which is meaningful given the challenging operating environment (i.e., rate pressure and broader market uncertainty) that management had to contend with in the prior year. More importantly, looking forward, I believe that Fifth Third is well-positioned for 2019 and beyond. To this point, management is guiding for the bank to have a strong fiscal 2019.

Source: Q4 and Full Year 2018 Earnings Presentation

Take note of the fact that management is still projecting for NII to be up 3% without any rate hikes in 2019, and they appear to finally have a good grasp on the bank's expense base (noninterest expenses projected to only be up slightly, even after factoring in the anticipated investments in infrastructure, technology, etc.).

Looking beyond the 2018 results, Fifth Third's capital return story - the bank pays an above-average dividend (~3.6%) and has the potential to buy back a ton of stock in the years ahead - is a good reason, in my opinion, to stay the course. I believe that the strong 2019 guidance, coupled with the recently approved MB Financial deal, means that Fifth Third is officially worthy of investment dollars.

Valuation

Fifth Third stock is trading at an attractive valuation when compared to its peer group.

Data by YCharts

Based on its own historical metrics, FITB shares are trading at attractive levels.

Source: Seeking Alpha

Based on this analysis, I believe that Fifth Third stock is attractively valued and worthy of investment dollars.

Risks

The banking industry has promising prospects, but a significant downturn in the economy would definitely negatively impact Fifth Third's business in the near term. However, I do not believe that a recession is likely over the next 12 months, though things could change quickly (risk factors seem to be increasing by the day).

Integration risk is another important factor that investors should continuously consider for Fifth Third. Management has talked up the MB Financial acquisition so far, and I tend to agree with the initial assessment of the deal, but there is no guarantee that the acquired assets will be a strategic fit for the bank.

Bottom Line

The main takeaway from Fifth Third's Q4 and full-year 2018 results was the fact that this bank appears to be well-positioned for 2019 and beyond. The MB Financial acquisition is a long-term catalyst for the stock (three to five years), in my opinion, but the potential for Fifth Third to monetize its remaining stake in Worldpay may actually be a catalyst that materializes sooner rather than later.

Investors should, however, not expect smooth sailing in 2019. The two key risk factors (i.e., the possibility of an economic slowdown and further rate pressure) may have an impact on FITB shares over the next few months, but in my opinion, this bank is a great investment if you are willing (and able) to hold onto shares for at least the next three to five years. As such, investors should consider pullbacks as long-term buying opportunities, especially if they are caused by broader market selloffs.

Author's Note: I recently initiated a Fifth Third position in the R.I.P. portfolio, and I have no plans to sell any of the stake in the near future.

Disclaimer: This article is not a recommendation to buy or sell any stock mentioned. These are only my personal opinions. Every investor must do his/her own due diligence before making any investment decision.

Disclosure: I am/we are long FITB, KEY. 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.