Fifth Third Bancorp’s fourth-quarter earnings beat analysts’ estimates thanks to lower expenses than anticipated and its ability to cut loan-loss reserves.
But downtown Cincinnati-based Fifth Third (Nasdaq: FITB), the largest locally based bank and 11th-largest U.S.-based consumer bank, revealed Jan. 19 –when it posted results – it expects lower revenue and higher expenses next year.
Still, CEO Tim Spence sees Fifth Third’s results as a confirmation of work it has done the past several years to succeed in any part of the banking cycle, even in difficult years like 2023 with fast-climbing interest rates and economic concerns.
And the bank’s early moves to shore up capital have set it up to boost loans down the road.
“The work we’ve done to build the company into a bank that would perform well for all seasons really became visible in 2023,” CEO Tim Spence told me in an interview. “It was a challenging year for the industry.”
Fifth Third posted adjusted earnings per share of 99 cents for the fourth quarter. That was 10% better than analysts’ expectations it would earn 90 cents, according to Zacks Investment Research. But earnings were down 5% from the $1.04 per share it generated in profits in the quarter one year ago.
Fifth Third shares climbed 97 cents, or 2.9%, Jan. 19 to $34.21.
It beat expectations in part because it was able to release some loan loss reserves because its loan losses remained low and its loans were down, Spence said. It also held expenses lower than anticipated and had a higher earning asset balance than expected.
But earnings declined from a year ago largely because average loans declined 3% thanks to Fifth Third’s planned decrease in order to build capital.
Fifth Third topped its peers in its key categories, Spence said. For the fourth quarter it was:
- First in return on tangible common equity, its most critical measure of profitability
- In the top two in efficiency ratio, a measure of expense control
- The leader in deposit growth.
Fifth Third continues to increase deposits at a rate that defies the rest of the industry. Its deposits rose 5% for the year while banks overall saw a 3% decline in deposits. The increase was widespread. Fifth Third’s deposit market share increased or held steady in each of its 40 largest markets.
Fifth Third focused on fast-growing Southeastern markets and added people in those locations.
The bank opened 37 branches in the Southeast last year and plans to open another 31 this year, Spence said. Of those, it opened 18 in the Southeast during the fourth quarter and another in the Midwest. Its consumer households grew 3% from a year ago, driven largely by Southeast growth. Fifth Third now ranks sixth in deposits in the Southeast and second in the Midwest.
“These branches have continued to outperform our expectations on both household acquisition and deposit growth, and should provide a tailwind for several years forward,” Spence said of the Southeast locations.
At the same time, it will close 29 branches this year, he added. Many of those will close in locations where it has operated for decades.
“Increasingly we’re taking two locations that were well-placed 30 or 40 years ago but aren’t in the primary traffic flow today and consolidating them into one new location that is extremely well-located for customers of both branches,” Spence said. “It allows us to continue to evolve with the places we’ve banked for decades.”
Fifth Third’s guidance calls for revenue to decline in the 1%-2% range while loans drop by about 1%. It also sees noninterest expense notching up about 1%.
But the bank has put itself in position to benefit when business customers start borrowing more money again. Fifth Third cut back on loans last year. That enabled it to build capital before its peers did so it could meet expected new regulatory requirements. It has now met that goal and can go back to building up loans.
“Our defensive positioning and decision to move quickly to adapt to proposed regulatory changes have put us in a position to play offense in 2024,” Spence said during a conference call. “Loan growth is the most significant thing we expect to be able to do because we got done early with the adaptation to the new regulatory rules. We have the ability to refocus on continuing to add new quality relationships and driving loan growth.”
- MORE: Fifth Third poised to thrive amid industry changes, CEO tells Goldman Sachs crowd
Bill Jung, senior research analyst and principal at Cincinnati-based Johnson Investment Counsel, agrees Fifth Third is thriving amid difficult times for banks.
“Fifth Third appears to be managing the headwinds facing the banking industry relatively well as banks attempt to navigate an uncertain economic and policy environment,” Jung told me. “Management has built the bank to be resilient and flexible, to be able to weather a wide range of scenarios.”
Fifth Third has forecast a decline in net interest income this year, but that’s based on its assumption of six Fed Funds interest rate cuts, which is more than most predict. Fewer rate cuts would help profitability.
But Jung sees Fifth Third as able to withstand the challenges.
“Management has a demonstrated track record of execution in expense discipline which should help in a year of revenue growth challenges,” he said.
Chris Marinac, analyst at Janney Montgomery Scott, lowered his 2024 earnings estimate for Fifth Third by 6% to $3.27 per share. But he maintains a “buy” rating on the stock.
“We like the low-cost funding base at the company, which supports a higher stock price,” Marinac wrote in a report.
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Now, let's break down the key concepts used in the article:
Earnings Performance: Fifth Third Bancorp's fourth-quarter earnings exceeded analysts' estimates. The beat was attributed to lower expenses than anticipated and the ability to cut loan-loss reserves. Despite this success, the bank anticipates lower revenue and higher expenses in the coming year.
CEO's Perspective: CEO Tim Spence views the results as a confirmation of the bank's strategic efforts over the past several years to succeed in any part of the banking cycle. The bank's early moves to shore up capital have positioned it to boost loans in the future.
- Adjusted Earnings Per Share (EPS): Fifth Third posted adjusted earnings per share of 99 cents for the fourth quarter, surpassing analysts' expectations of 90 cents.
- Return on Tangible Common Equity (ROCE): The bank claimed the top position in ROCE, a critical measure of profitability.
- Efficiency Ratio: Fifth Third ranked in the top two in the efficiency ratio, a measure of expense control.
- Deposit Growth: The bank led in deposit growth, with a 5% increase for the year, while the industry saw a 3% decline in deposits.
Branch Expansion and Consolidation: Fifth Third strategically opened 37 branches in the Southeast in the previous year, with plans for more openings. Simultaneously, it intends to close 29 branches in less strategic locations, consolidating them into more accessible ones.
Market Presence: The bank's focus on fast-growing Southeastern markets has resulted in a 3% growth in consumer households. Fifth Third now ranks sixth in deposits in the Southeast and second in the Midwest.
Future Guidance: Fifth Third's guidance for the future includes an expected decline in revenue (1%-2%), a drop in loans by about 1%, and a predicted 1% increase in noninterest expense.
Strategic Positioning for 2024: The bank, having cut back on loans in the previous year, is now positioned to benefit from increased loan demand. Management expresses confidence in their ability to play offense in 2024, focusing on driving loan growth.
Analyst Opinions: Analysts, such as Bill Jung and Chris Marinac, acknowledge Fifth Third's resilience amid industry challenges. Jung emphasizes the bank's resilience and flexibility, while Marinac maintains a "buy" rating on the stock, citing a low-cost funding base that supports a higher stock price.
In summary, Fifth Third Bancorp's performance in the fourth quarter, strategic moves, and market positioning reflect a resilient and flexible approach, demonstrating its ability to navigate challenges and capitalize on opportunities in the banking industry.