Morningstar | Slow Loan Growth for Fifth Third, Expense Control and Success of MBFI Acquisition Remain Key
No-moat-rated Fifth Third’s third-quarter results were largely in line with our expectations; however, based on more conservative credit assumptions and net interest income assumptions over the longer term, we are decreasing our fair value estimate to $29 from $31 per share. Normalized earnings per share were $0.64, and the normalized return on assets and return on tangible equity were 1.26% and 14%, respectively. These returns were slightly lower than last quarter's results, but are still improvements over last year. Fifth Third continues to believe it will close the MB Financial acquisition by the 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. It now appears that full-year loan growth will come in at under 3%. Even so, with the strong economy and higher GDP numbers, we wouldn't be surprised to see some pickup in loan growth in 2019. Net interest margins expanded 2 basis points during the quarter, and the bank continued decent upper-single-digit net interest income growth year over year. New interest rate sensitivity disclosures stated that the bank is nearing a neutral state, meaning the growth in net interest margins should be minimal. Some of the assumptions underlying this disclosure look a bit conservative to us, and as such we still expect some incremental benefit from rising rates for Fifth Third; however, this is a good reminder that as the cycle progresses, the pace of the benefit from rate hikes will decline.
Noninterest income grew slightly, with adjusted levels up 3% year over year. Mortgage fees remain a headwind; however, we are seeing good growth within wealth management fees, and year-to-date card processing fees and corporate banking fees were both up midsingle digits year to date. Expenses were roughly flat quarter over quarter, and management believes it will keep adjusted expenses to roughly 1% growth year over year. There still seem to be more costs to take out of the business, and we would expect low-single-digit expense growth over the next several years as well. Overall, if Fifth Third can get close to its longer-term, sub-60% efficiency ratio goal, and if the bank can successfully integrate and reap the gains from its MB Financial acquisition, we think the bank will have improved normalized returns over the longer term. This will help reposition the bank as it finishes selling off the remaining Worldpay shares.
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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