Morningstar | Fifth Third Posts a Strong 2Q As It Integrates MB Financial. See Updated Analyst Note from 24 Jul 2019
No-moat Fifth Third Bancorp reported a good second quarter as it integrates the acquired MB Financial into its operations. Earnings per share shrank 30% to $0.57 per share, largely because of one-time expenses relating to the merger and the higher share count. Fifth Third seems to be delivering on the expense synergies that justified the merger reasonably well. After adjusting for merger-related expenses, the efficiency ratio improved by 2.6% to 58.5%. Adjusted net interest income grew 13.7% from the previous quarter, but much of this is owing to the merger. The adjusted net interest margin expanded 4 basis points to 3.32%, as the acquired portfolio’s asset yields were higher than the existing portfolio’s yields. We were impressed to see the cost of interest-bearing deposits expanded by only 4 basis points this quarter, which we think is indicative of a strong deposit base across the portfolio and we are gaining confidence in the acquired portfolio’s deposit base. We are now incorporating three rate cuts into our base-case scenario, though we expect Fifth Third will be more insulated from rate cuts than other banks under our coverage because of a combination of derivative hedging, loan portfolio structure, and the timing of deposit repricing. After incorporating new rate assumptions into our model, we are maintaining our fair value estimate of $31 per share.Adjusted fee income grew 18.9% sequentially, largely because of the merger, but Fifth Third produced a decent amount of organic growth as well. Strong equity markets benefited the bank’s wealth management unit, and falling yields drove higher mortgage origination volumes and benefited the bank’s mortgage banking business.
The net charge-off ratio remained under control and fell three basis points to 0.29% this quarter. The continued low credit costs increase our confidence in the quality of the acquired portfolio’s assets.
Fifth Third Bancorp is a bank holding company. Through its subsidiaries, the company provides financial products and services to the commercial, financial, retail, governmental, educational, energy and healthcare sectors. The company's segments are: Commercial Banking, which provides credit intermediation, cash management and financial services; Branch Banking, which provides a range of deposit and loan products to individuals and small businesses; Consumer Lending, which includes the company's residential mortgage, automobile and other indirect lending activities; and Wealth and Asset Management, which provides a range of investment alternatives for individuals, companies and not-for-profit organizations.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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