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Morningstar | Slow Growth and More Worldpay Share Sales for Fifth Third in 2Q

No-moat-rated Fifth Third’s second-quarter results were largely in line with our expectations, and we are maintaining our fair value estimate of $31 per share. Normalized earnings per share were $0.63, and the normalized return on assets and return on tangible equity were 1.33% and 14.6%, respectively. These are strong results and improvements on results from just last quarter. Fifth Third now believes it will close the MB Financial acquisition by first-quarter 2019, and then the integration process will begin as the bank attempts to climb the nearly 8% tangible book value dilution it has paid for MB Financial. We believe that overall the acquisition will improve long-term returns on tangible equity, even though it may take a while to get through the earn-back period.

Average loan growth was slow during the period, up roughly 1% year over year, and without a rebound in commercial loan growth the bank may miss its full-year target of 4% growth. Even so, net interest margins expanded, and the bank continued decent upper-single-digit net interest income growth. We would expect slightly more expansion here as the balance sheet continues to roll over, and there is potential for one more rate hike this year. Noninterest income growth was nonexistent, roughly flat year over year. Lagging mortgage fees, a trend affecting all banks, were largely to blame. Meanwhile, adjusted expenses were up slightly, 5% year over year. Finally, credit costs remained well-controlled as the current credit environment remains pristine. Taking out the gains from more sales of Worldpay, formerly Vantiv shares, the bank may get close to missing operating leverage for the year. Either way, we still see long-term returns on tangible equity improving to roughly 15%, even after the bank is done reaping the profits of its Worldpay investment.

Fifth Third recently increased its dividend after the latest round of stress tests and was approved to repurchase an even larger value amount of shares, even with the pending MB Financial acquisition. Given the pending acquisition, and its currently large dividend payout ratio on normalized earnings, we don’t see above average room for expansion in dividends or increasing returns through reducing capital levels for Fifth Third.

For a more in-depth take on capital returns in the banking industry and the effects of changing stress-test regulations, please see our July 8 special report "New Regulatory Proposals Will Change Stress Test Landscape."