Fifth Third Earnings: Manageable Decline in Net Interest Income Outlook, Stock Still Undervalued
Funding costs rising, but not sign of major deposit outflow.
Fifth Third Bancorp Stock at a Glance
Current Morningstar Fair Value Estimate: $38.00
Stock Star Rating: 4 Stars
Uncertainty Rating: High
Economic Moat Rating: None
Fifth Third Bancorp Earnings Update
No-moat-rated Fifth Third FITB first-quarter results showed that earnings pressure is building, we view the pressure as being quite manageable. We had already expected that fourth-quarter results would be the peak for profitability during the current rate cycle, and while the drop off from that peak has accelerated a bit more than we expected, it was not that categorically different.
As we revise our projections again to make sure we are still being prudent with our through-the-cycle net interest margin, or NIM, estimates (assuming that rates eventually fall from current levels), we do not expect a material change to our current $38 per share fair value estimate for the bank. We believe Fifth Third stock remains undervalued.
Fifth Third saw its deposit base decline less than 1% during the first quarter, which we view as good news relative market worries over the last month about major deposit outflows from the banks. Funding costs are accelerating, though, which caused management’s net interest income, or NII, outlook to fall to “up 7% to 10%” this year from “up 13% to 14%.”
While this is not good, it is roughly what we’d been expecting in our updated forecast from the end of March, where we were looking for an increase of 7% for the full year, which is now the the lower end of Fifth Third’s updated guidance. We were also already projecting for noninterest bearing deposits to decline to 32% of total deposits, with an accelerating deposit beta.
Even as we look at the latest rate sensitivity disclosures from the bank and compare it with our through the cycle NIM estimate, we do not think that we are far off the mark with our projections. If Fifth Third has to permanently hold more capital than we expect, we would only expect to see a low-single-digit percentage impact on our fair value estimate. Therefore, while revenue are coming under some pressure right now, we think it is more than priced into Fifth Third’s stock price.
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