In this article, let's take a look at Fifth Third Bancorp (FITB, Financial), a $17.08 billion market cap company, which is a diversified financial services company, based in Cincinnati, which operates 1,340 branches in 12 states, with a focus on Ohio, Michigan and Illinois.
A top bank
Fifth Third Bancorp operates with four business segments: Commercial Banking; Branch Banking; Consumer Lending; and Investment Advisers.
The bank was a fairly profitable Midwestern bank, but then provisions for loan losses started to increase, real estate prices played unfavorably and the bank's primary markets (Ohio, Michigan and Florida) started to be the losses.
In Michigan and Ohio, it enjoys a deposit market share of around 30%, achieving a pricing power that contributes to a good track record of results, principally reflected in the net interest margin.
Also, the bank benefits from two things. Firstly, a low-cost deposit base, helping the pricing policy of loans products; and secondly, switching costs which permits low-cost deposit funding. This is important when considering that the bank can finance 80% of its liabilities with low cost-deposit funding.
Fifth Third Bancorp is one of the best banks in some important metrics such as controlling costs, with a good efficiency ratio (around 55% in the last ten years) or the return on equity that exceeded 17%.
Since 2007, the mean return on equity was about 18% but then fell.
Some months ago, the Federal Reserve did not object the capital plan, earlier submitted under the 2015 Comprehensive Capital Analysis and Review (CCAR) program. This way, it can increase its quarterly common stock dividend to $0.14, from $0.13.
Moreover, the bank has announced that chief operating officer Greg Carmichael will assume the role of CEO on November, which we think his expertise will benefit the company.
Some risks
More than 40% of gross revenue came from noninterest sources, which leaves it less susceptible to interest rate movements than some competitors. Furthermore, revenue synergies generated from operating several noninterest income businesses contributes to Fifth Third’s consistently better-than-average operational efficiency.
Revenues, margins and profitability
Looking at profitability, revenue increased by 2.76% and led earnings per share increased in the first quarter compared to the same quarter a year ago ($0.42 vs $0.36). During the past fiscal year, the bank reported lower earnings of $1.67 versus $2.01 in the previous year. For the next year, Wall Street is expecting a contraction of 1.8% in earnings ($1.64 versus $1.67).
The gross profit margin is considered very high, at 88.69% and the net profit margin of 26.77% is above the industry median.
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| FITB | Fifth Third Bancorp | 9.41 |
| HBAN | Huntington Bancshares Inc | 9.80 |
| BBT | BB&T Corp | 8.25 |
| STI | SunTrust Banks Inc | 7.97 |
| RF | Regions Financial Corp | 6.29 |
| Â | Industry Median | 8.24 |
The company has a current ROE of 9.41% which is higher than the industry median. As shown in the table, Huntington Bancshares Inc (HBAN, Financial), BB&T (BBT, Financial), Sun Trust Banks (STI, Financial) and Regions Financial (RF, Financial) have very similar ratios among them.
Relative valuation
In terms of valuation, the stock sells at a trailing P/E of 12.1x, trading at a discount compared to an average of 13.7x for the industry. To use another metric, its price-to-book ratio of 1.18x indicates a premium versus the industry median of 1.10x while the price-to-sales ratio of 2.89x is below the industry average of 2.99x.
The stock price has an upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $18.956, which represents a 13.7% compound annual growth rate (CAGR).
Final comment
In a more favorable environment, an improvement in loan credit quality should benefit the bank in the upcoming years, reaching profitability in a scenario that should need some protection against interest rate movements. Further, David Einhorn has bought shares in Bank of New York Mellon Corp. (BK, Financial), because he probably thinks that the bank will benefit from an increase in interest rates.
The fact that Manning & Napier Advisors, Inc initiated a new position on the stock with 77,095 shares, help me think on this stock as a player on long-term portfolios.
Disclosure: Omar Venerio holds no position in any stocks mentioned
