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 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.
Fifth Third has $9.2 billion in Dayton-area deposits among 59 branches in the Miami Valley.
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.”
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.
Fifth Third Bank
JPMorgan Chase & Co.
As someone deeply immersed in the world of finance and banking, I bring forth my expertise to analyze the recent developments at Fifth Third Bancorp. My extensive knowledge is underscored by a comprehensive understanding of financial markets, banking operations, and strategic decision-making within the industry.
Fifth Third Bancorp recently reported fourth-quarter earnings that surpassed analysts' expectations, showcasing its adept ability to manage expenses and strategically cut loan-loss reserves. The lower-than-anticipated expenses and the prudent release of loan loss reserves contributed significantly to the bank's better-than-expected performance.
CEO Tim Spence's commentary on the company's future outlook is a testament to the depth of strategic planning undertaken by Fifth Third. Despite anticipating lower revenue and higher expenses in the coming year, Spence expresses confidence in the bank's resilience, attributing its success to years of dedicated effort to perform well across all banking cycles.
One noteworthy achievement is Fifth Third's early initiatives to shore up capital, positioning itself to boost loans in the future. The bank's adaptability and defensive positioning during challenging times, such as the fast-climbing interest rates and economic concerns of 2023, are indicative of a well-prepared financial institution.
The financial metrics presented in the article highlight Fifth Third's strong performance in various key categories. The bank leads in return on tangible common equity, a critical profitability measure, and excels in efficiency ratio, a key indicator of expense control. Additionally, it claims the top spot in deposit growth, outpacing the industry with a 5% increase while others experienced a 3% decline.
Fifth Third's focus on the Southeastern markets, with the opening of 37 branches and plans for more, indicates a strategic move to capitalize on fast-growing regions. Simultaneously, the bank plans to close 29 branches, emphasizing a commitment to optimizing its branch network for efficiency and customer accessibility.
Looking ahead, Fifth Third anticipates a decline in revenue and loans, with a slight increase in noninterest expense. However, the bank's defensive positioning in the previous year positions it to play offense in 2024. The decision to cut back on loans in preparation for regulatory changes has allowed Fifth Third to meet expected requirements and now shift its focus back to driving loan growth.
Expert opinions from analysts like Bill Jung and Chris Marinac reinforce the view that Fifth Third is navigating challenges well and possesses resilience and flexibility to weather economic uncertainties. Despite a forecasted decline in net interest income, analysts recognize the bank's ability to manage headwinds and maintain a low-cost funding base, supporting a positive stock outlook.
In summary, Fifth Third Bancorp's recent performance, strategic decisions, and outlook reflect a well-managed and resilient institution, well-prepared to navigate the complexities of the banking industry in the coming years.