Morningstar | Fifth Third Turns in a Decent First Quarter, Completes Merger With MB Financial
No-moat rated Fifth Third Bancorp reported a decent first quarter of 2019 after it completed the acquisition of MB Financial, a Chicago-based regional bank. After updating our model to incorporate some of the intricacies of the acquisition, we maintain our fair value estimate of $31 per share. Our core questions are: how long will it take for the expense synergies to materialize and to what extent can the merged bank leverage its increased market share in the Chicago market to improve returns on tangible equity.The bank did reasonably well in its core lending franchise. Net interest margins expanded by one basis point after rates on Fifth Third’s commercially focused loan book increased and the bank controlled deposit cost increased. We expect deposit costs will continue to increase even without any rate hikes. We expect the merger will increase net interest margins because of MB's lower deposit costs and higher asset yields.
Ignoring merger-related items, non-interest income grew at a healthy 5.9% from the linked quarter. We believe Fifth Third’s growing wealth management and corporate banking businesses will drive non-interest income growth. Core non-interest expenses remained under control and grew below the inflation rate. Seasonally high compensation expenses were partially offset by reductions in FDIC-related expenses. We are watching the extent to which Fifth Third can maintain expense controls in a strong labor market, and realize expense synergies from the merger.
The net charge-off ratio remained reasonable at 32 basis points, down from 35 basis points last quarter. Declines in charge-offs for commercial and industrial loans largely boosted the credit improvement, and these gains were partially offset by increases in auto loan charge-offs. Eventually the economic cycle will begin to turn, and we expect credit costs to increase over the next three to five years as the credit environment normalizes.
For our latest analysis of bank M&A opportunities, please see our March 2019 Financial Services Select Presentation, The Fellowship of the Banks: U.S. Banks Merging for Size, Scale, and Scope.
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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