Fifth Third Shifting Into Higher Gear As Rates And The Economy Ramp Up

 

The Fed is tightening again, and the economy is growing - this is the opportunity that growth-oriented banks like Fifth Third (NASDAQ:FITB) have been waiting for, and management seems ready to produce. Not only is Fifth Third looking to further leverage its "land and expand" strategy and take more share in faster-growing Southeast markets (including a focus on consumer business that I think many banks are overlooking), but the bank is also focused on opportunities like commercial lending growth in California and Texas, as well as in the emerging point of sale lending market.

I was bullish on Fifth Third when I last wrote about the stock, and thought there was a lot of growth potential once rates started heading higher. The shares have since outperformed the peer group by a healthy margin (around 20%), while also outperforming the S&P by a wide margin. The shares don't look particularly cheap now (as was the case back in August), but if Fifth Third can deliver on its growth targets, there could be beat-and-raise upside here.

 

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Fifth Third Shifting Into Higher Gear As Rates And The Economy Ramp Up

Fifth Third Ready To Flip The Switch On Growth, When The Yield Curve Cooperates

 

My “it’s better than the Street thinks” call on Fifth Third (FITB) has continued to work since my last article, with the shares up more than 20%, almost doubling the return of the regional bank index over that time. Fifth Third has been outperforming on a pre-provision basis and loan growth is starting to move in a better direction as management positions the bank for higher rates.

Given the strong move in the shares over the last year, I don’t think the “Fifth Third doesn’t get enough respect” thesis is all that valid anymore. Now the question is whether the company’s efforts to shift to a better, more consistent, growth trajectory will work and whether the company can and will generate better-than-average ROE and ROTCE in the coming years – something that has been an issue for the bank in the past.

I’m not fully sold that Fifth Third will be one of the big winners in its push into the Southeast, if only because there’s so much competition there, but I do still see mid-single-digit core earnings growth. I’m hesitant to say that Fifth Third can’t continue to outperform, but I don’t think it’s quite the buy call it was six or 12 months ago.

 

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Fifth Third Ready To Flip The Switch On Growth, When The Yield Curve Cooperates

Fifth Third's Shares Are Back To Pre-Pandemic Levels, But There Could Still Be Upside

Another of my “it’s not really that bad” calls on undervalued banks back in the late summer/early fall of 2020, Fifth Third (FITB) has outperformed as investors have gained more confidence on the economic outlook for 2021 and banks as a whole. Up more than 50% from my last article and outperforming its peers by about 15% since then, higher estimates have been driven in large part by an improved credit outlook.

Although I expect core earnings to accelerate significantly from the low starting point of 2020 results, my core growth expectations aren’t really that high, as I think Fifth Third will be a low single-digit growing on a long-term core earnings basis. There’s certainly room for outperformance there, but as is I think Fifth Third is a little undervalued below the mid-$30’s. With the bank’s ability to deploy a lot of cash into lending as rates improve and likely richer reserve releases than many peers, I think the odds of beat-and-raise quarters are better here than for many peers.

 

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Fifth Third's Shares Are Back To Pre-Pandemic Levels, But There Could Still Be Upside

More Conservative Assumptions Should Help Fifth Third

Fifth Third (FITB) has been a relative laggard compared to its peer banks so far this year, and most of that divergence occurred with the announcement that the CFPB filed suit against the bank for unauthorized account openings, bringing to mind the massive scandal at Wells Fargo (WFC). It also hasn't helped that Fifth Third's loan book is perceived as riskier than its peer average.

Based on management disclosures, I don't think the fallout from the account issue will be nearly as bad as it has been for Wells Fargo. I also think that Fifth Third's riskier loan book is mitigated by management taking a more bearish view of the COVID-19 recession and recovery, leading the bank toward a more conservative reserving approach. Fifth Third has never been among my favorite banks from an operational standpoint, but at a 20% discount to tangible book, this is a name worth considering now.

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More Conservative Assumptions Should Help Fifth Third

Fifth Third Still Lackluster In A Few Important Respects

Credit where due - Fifth Third's (FITB) integration of MB Financial appears to be going well, and the bank is producing good fee-based income growth, which is an important consideration in an environment where spread revenue growth opportunities are limited. Unfortunately, the company is not really distinguishing itself on loan growth nor pre-provision profit growth, and those were concerns that had me neutral on the stock back in the summer (the shares are down slightly since then, underperforming the sector by around 5%).

Fifth Third is another of those situations where the valuation seems too low now, but I wonder and worry about the likelihood of weak loan growth and pre-provision profit growth limiting the gains. Management's guidance seems relatively encouraging on that score, but I'm worried about reports of ongoing defections from the bank and what they may say about long-term loan growth in the now-key Chicago market.

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Fifth Third Still Lackluster In A Few Important Respects

Fifth Third Showing Steady Execution And A Little Aggression On Middle-Market Lending

I’ve never been a big fan of Fifth Third (FITB), but I have to give credit where it’s due – management has been executing pretty well of late relative to its stated plans and goals. As far as the shares go, it has only recently started diverging (positively) from the peer group, so I still don’t feel as though I’ve missed out on all that much by being relative “meh, it’s okay… I guess” toward the shares.

At this point, with MB Financial in the fold and pretty bold middle-market growth plans, I’m leaning a little more positive on the shares. Although Fifth Third does look a little undervalued here, I do have some concerns that Fifth Third could see more spread compression than is currently in the sell-side expectations. On balance, below $30, I think it’s an okay name to consider, though still not my favorite bank.

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Fifth Third Showing Steady Execution And A Little Aggression On Middle-Market Lending

Does KeyCorp Really Deserve To Be So Unpopular?

What do you do with a stock that seems too cheap when you’re not all that fond of the company? That’s the question I have with KeyCorp (KEY), as this is definitely not my favorite bank, but I can’t really get a good handle on why it is trading so far below what would otherwise seem to be a normal valuation range. KeyCorp’s long-term track record isn’t the best, and there are issues with its deposit base and branch network, but it seems like the Street is really down on this name relative to the underlying fundamentals.

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Does KeyCorp Really Deserve To Be So Unpopular?

Encouraging, If Choppy, Progress At Umpqua

Orgeon’s Umpqua Holdings (UMPQ) has generally been well-liked by investors, which has often meant a less-appealing valuation compared to many peers. Between that popularity, a less asset-sensitive balance sheet than many peers, and general optimism on the company’s efficiency initiative, the shares really haven’t lagged its regional banking peers all that much over the last six or 12 months.

Looking at fourth quarter results, Umpqua seems to be going into 2019 with some decent momentum and attractive prospects for spread improvement on delayed repricings, as well as further cost-reduction benefits from the NextGen process. Although I believe Umpqua is undervalued on both a long-term earnings basis (assuming high single-digit growth) and near-term ROTE, the degree of undervaluation is less than for many banks in its peer group.

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Encouraging, If Choppy, Progress At Umpqua

Signs Of Improved Momentum At Fifth Third Are Welcome

Cincinnati-based Fifth Third (FITB) has never really been my favorite regional bank. With a performance that matches the trailing 12-month performance for the regional indices, beats slightly on a two-year comp and trails modestly on a five-year comp, I can’t say that I regret that position all that much. In fairness to this bank, though, performance has been improving recently, and if management can skillfully reposition the bank for this next phase of the cycle and successfully integrate MB Financial (MBFI), there’s enough upside here to at least consider the name.

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Signs Of Improved Momentum At Fifth Third Are Welcome

Sluggish Results And Guidance Renew Questions About BB&T's Self-Improvement

I had thought BB&T (BBT) had been making some progress in resolving at least some of the issues that had led the bank to underperform peers like PNC (PNC), SunTrust (STI), Fifth Third (FITB), and Regions (RF) in recent years. One quarter doesn’t really change a story, but BB&T’s lackluster results and guidance do suggest that the turnaround isn’t happening quite as fast or smoothly as the bulls might hope.

While the sell-off after earnings was probably at least partly due to the lower guidance, I believe the market also didn’t like the indications that large bank M&A was likely coming back onto the near-term agenda once the bank is fully clear of its consent orders. Selling BB&T because you don’t like M&A seems pretty silly given that M&A has always been core to this company (and management has never backed away from that as an ongoing long-term driver), but then that’s Wall Street for you.

I can’t say that BB&T is all that cheap today, and I’m a little troubled that BB&T seems to be unable to generate the sort of growth initiatives that peers like PNC have put into place. Although the shares are somewhat undervalued on the assumption of mid-single-digit long-term earnings growth, I won’t make a forceful argument that investors should choose this stock over PNC, U.S. Bancorp (USB) or other options in the banking sector.

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Sluggish Results And Guidance Renew Questions About BB&T's Self-Improvement

PNC Financial Is A Great Bank With A Good Valuation In A So-So Market

This has been a pretty mediocre year so far for banks, as the sector has continued to modestly trail the S&P 500 on growing concerns that the rate cycle has largely played out and there aren’t many particularly compelling drivers left. For its part, PNC Financial (PNC) has been a middling performer so far in 2018, underperforming JPMorgan (JPM) and Bank of America (NYSE:BAC), while outperforming Wells Fargo (WFC).

I don’t really see anything in PNC’s second-quarter results that is going to change many minds. The valuation is still attractive, but not so much so that it demands action, and the company’s efforts to grow loans and drive attractive operating leverage are working, but not really that much moreso than expected.

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PNC Financial Is A Great Bank With A Good Valuation In A So-So Market

Fifth Third Changes The Plan, But The MB Financial Deal Looks Sound (Albeit Pricey)

By and large, bank investors tend to crave and reward consistency, predictability, and conservatism, so it is not that unusual to see the market punish, at least temporarily, surprising moves. To that end, Fifth Third’s (FITB) acquisition of MB Financial (MBFI) seems like a well-reasoned, if expensive, deal that augments Fifth Third’s operations in positive ways. And yet, even though good (just good, not “great”) execution on this deal seems likely to drive more accretion than a buyback would have, investors still sold the shares on the news (with the stock regaining some of that the next day).

I’ve had my reservations about the stock because of valuation, but the shares have been quite strong until the deal announcement – beating peers/rivals like KeyCorp (KEY), Huntington (HBAN), U.S. Bancorp (USB), PNC Financial (PNC), and JPMorgan (JPM) over the past year. Although I still don’t see the value in these shares that many investors apparently do, I think the MB Financial deal is an understandable deviation in the company’s strategy and a solid move on balance.

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Fifth Third Changes The Plan, But The MB Financial Deal Looks Sound (Albeit Pricey)

BB&T Making A Slow Turn In The Right Direction

It has taken a while, but BB&T (BBT) continues to show signs of improvement and close some of the performance gap with peers like PNC Financial (PNC), Fifth Third (FITB), Comerica (CMA), Key (KEY), and U.S. Bancorp (USB) that built up over the past few years. Although lower loan growth is a disappointment, a low deposit beta and rising interest sensitivity offset it somewhat, and management is doing well on expenses and credit quality.

When it comes to valuation, I think the market has it more or less right at this point (which hasn’t often been the case). U.S. Bancorp and Wells Fargo (WFC) are cheaper (for good reasons) and PNC arguably offers better quality today for a similar level of expected return, but I believe BB&T has more self-improvement potential and more potential for higher/better earnings revisions over the next few years.

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BB&T Making A Slow Turn In The Right Direction

Ongoing Excellence At PNC, But At A Price

PNC Financial (PNC) continues to reap the benefits of sound strategic decisions ahead of this upturn in the rate cycle. The shares have responded to this outperformance, with the shares up more than 75% over the past two years and up a third over the last year - not quite as good as JPMorgan (JPM) or Bank of America (BAC) but still a very solid performance next to its regional bank peers.

Although PNC isn't especially asset-sensitive, the company's strategy of building its middle-market commercial and asset-based lending should continue to support growth as well as the company's willingness to lend in consumer areas like autos where other banks are pulling back. Lower taxes will certainly support a higher earnings growth rate and it may also support a decision to monetize the company's BlackRock (BLK) stake. I expect PNC to generate earnings growth at a mid-to-high single-digit rate on an adjusted basis, but the share price already amply reflects the growth prospects.

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Ongoing Excellence At PNC, But At A Price

Can Fifth Third Grasp All That It's Reaching For?

Plans and goals can be great things, but reaching them can be tricky and a set-up for disappointment. In the case of Fifth Third (NASDAQ:FITB), management has had no problem laying out bold targets tied to its Project North Star self-improvement plan, but recent performance creates some valid questions about the magnitude of growth this Midwestern bank can really achieve and where that growth will come from.

The Street is already expecting a lot of improvement from Fifth Third, and I struggle to see how these shares are a bargain. Even with a lower tax rate, today’s share price more than rewards Fifth Third for the robust Project North Star targets, as well as a healthy overall banking environment.

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Can Fifth Third Grasp All That It's Reaching For?

Asset Sensitivity And Cost Restructuring Have Brought Comerica's Groove Back

Comerica (CMA) is something of an odd duck in its pond. Big enough to have to go through the CCAR process and operating across an extended geographic footprint, CMA is nevertheless quite a bit smaller than the likes of U.S. Bancorp (USB), PNC Financial (PNC), BB&T (BBT), and Fifth Third (FITB). It’s also uncommonly asset-sensitive and committed to business lending – residential mortgages and consumer loans make up less than 10% of the loan book – but has long struggled to achieve attractive operating leverage.

Odd isn’t always a bad thing, though, and Comerica is reaping the benefits of higher rates and a thorough restructuring effort. If U.S. growth can accelerate from here, driving better commercial loan demand, Comerica could really enjoy a run of strong earnings growth. That said, the share have shot up more than 50% in the last year, and more than 75% in the last three years, and it is difficult to see much undervaluation unless you factor in some combination of higher-than-expected rates, 3%-plus U.S. GDP growth, less regulation, and/or meaningfully lower corporate taxes.

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Asset Sensitivity And Cost Restructuring Have Brought Comerica's Groove Back

Fifth Third's Current Performance Underlines The Need For North Star

Whether you look at just the period since the election or the last twelve months, Fifth Third (NASDAQ:FITB) has had a pretty remarkable run in an admittedly strong tape for bank stocks. What's arguably more remarkable is that the performance has come despite minimal loan growth (up just 2% since the end of 2014) and a decline in core pre-provision earnings. Even further, I don't think there's really a meaningful metric you can look at and declare Fifth Third a top operator.

On the other hand, the market is a forward-looking entity and I won't argue that Fifth Third's prospects aren't looking better now. Guidance for 2017 doesn't call for robust growth, but it was better than expected, and management continues to position its North Star program as a major transformational effort for the business. I am not giving full credit to the North Star efforts at this point (there's still too much of a "trust us … it'll work" element to the disclosed details), but each incremental 1% of long-term adjusted earnings growth translates to about 10% incremental fair value, so there is at least a path to a higher valuation here.

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Fifth Third's Current Performance Underlines The Need For North Star

Lackluster Results Don't Help The BB&T Story

BB&T (NYSE:BBT), like almost every bank, has gotten a bump since the election. Even so, it has been outperformed by many of its peers since the election (up around 18% versus 19% to 35% for U.S. Bancorp (NYSE:USB), Fifth Third (NASDAQ:FITB), Regions (NYSE:RF), Wells Fargo (NYSE:WFC), and PNC (NYSE:PNC)), and fourth quarter results weren't a particularly strong rebuttal to the idea that BB&T has near-term growth challenges.

I believe that BB&T has been taking steps recently, and will continue do so into 2017, that will better position the company for long-term growth, but it's harder to argue that there will be incoming outperformance to support higher multiples in the near term. Although I still like this bank, I think the valuation already embeds higher growth than is expected from the likes of Fifth Third, U.S. Bancorp, PNC, and Wells Fargo, and I can't make a compelling "buy this instead of that" argument at this time.

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Lackluster Results Don't Help The BB&T Story

Fifth Third Has Done Well In The Market, But Conditions Are Still Tough

Fifth Third (NASDAQ:FITB) has been a relatively strong name this year within the group of banks I follow closely, with the shares outperforming the likes of BB&T (NYSE:BBT), U.S. Bancorp (NYSE:USB), Wells Fargo (NYSE:WFC), and PNC (NYSE:PNC) since my last update on this Cincinnati bank. While this probably sounds like sour grapes, I wonder if this has been part of a "flight from quality" as names like Comerica (NYSE:CMA) and Regions (NYSE:RF) have also been doing better in part on less fear about energy credits and more optimism regarding the opportunities down the road from cost cuts and higher rates.

I struggle to make the valuation really work now. Even assuming that Fifth Third is on the higher end of the range in terms of ROE improvements over the next five to 10 years, I still don't see it being up there with the likes of U.S. Bancorp or Wells Fargo. I think Fifth Third is more likely to generate mid single-digit earnings growth, and that supports a fair value around $21 to $23.

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Fifth Third Has Done Well In The Market, But Conditions Are Still Tough

U.S. Bancorp Well Recognized For Its Quality

Back in January I wrote that U.S. Bancorp (NYSE:USB) would be a relative outperformer in the bank sector if the economy remained lackluster, rate increases failed to materialize, and credit concerns grew. All of that has taken place, and U.S. Bancorp has been a relative outperformer within its peer group on a year-to-date basis (and over the last year as well).

With that outperformance, and a modest downward revision in fair value due to lower/weaker earnings prospects, the relative apparent value has evaporated. To me, U.S. Bancorp seems priced almost exactly as it should be. While I can understand long-term investors being reluctant to part with a quality bank holding (and that is not my recommendation), investors looking to add bank exposure in the large-cap tier may want to shop around.

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U.S. Bancorp Well Recognized For Its Quality