01—Abstract
Summary
Summary of the 10-K filed February 24, 2017. Cited figures are marked; the original filing is the authoritative source.
Fifth Third Bancorp's 2016 results show a year of lower earnings driven by the absence of large 2015 one-time gains, partially offset by a strong Vantiv-related recovery.
Net income attributable to the Bancorp fell to $1.56 billiona from $1.71 billion, and diluted EPS declined to $1.93 from $2.01. Total revenue dropped to $6.34 billion from $6.56 billion as noninterest income fell $307 million, mainly because 2015 included a $331 million gain on Vantiv, Inc. share sales. Net interest income was broadly flat at $3.6 billion (FTE), with a net interest margin of 2.88%, unchanged year over year.
Noninterest expense rose 3% to $3.9 billionb, pushing the efficiency ratio up to 61.6% from 57.6%. Credit quality improved. Net charge-offs fell to 0.39% of average portfolio loans from 0.48%, and the provision declined to $343 million from $396 million.
However, nonperforming portfolio assets rose to 0.80% from 0.70%, driven by energy-related commercial loans. The Bancorp's capital position remained solid, with a fully phased-in CET1 ratio of 10.29% and a Basel III transitional CET1 ratio of 10.39%. The company returned capital through a $0.53c dividend per share and about $661 million of share repurchases.
Investors should note several items. Management launched the three-year NorthStar Strategy, targeting ROTCE of 12-14%d, ROA of 1.1-1.3%, and an efficiency ratio below 60% by 2019.
Results also depend on continued monetization of the Vantiv stake, including remaining TRA settlements. Risks include a 'Needs to Improve' CRA rating that limits new activities and acquisitions, and a disclosure controls conclusion of 'not effective' tied to employee benefit plan registration deficiencies.
02—Key points
Key Highlights
- Net income attributable to Bancorp was $1.56B in 2016, down from $1.71B in 2015; diluted EPS was $1.93 vs. $2.01.
- Total revenue fell to $6.34B from $6.56B, as 2015's $331M Vantiv share sale gain was not repeated and noninterest income dropped 10% to $2.70B.
- Efficiency ratio (FTE) worsened to 61.6% from 57.6%, as noninterest expense rose 3% to $3.90B.
- Credit improved: net charge-offs fell to 0.39% from 0.48% of average portfolio loans, and provision expense declined to $343M from $396M; nonperforming assets rose to 0.80% from 0.70%.
- Capital remained strong: fully phased-in CET1 ratio of 10.29%, with the dividend raised to $0.14 per quarter in Q4 2016 and $660M of share repurchases authorized under CCAR.
- Vantiv exposure produced large one-time gains in 2016, including a $280M gain from TRA cash-flow settlement and a $164M gain on put/call options, with further TRA settlements expected in 2017-2018.
- The CRA 'Needs to Improve' rating restricts new activities and acquisitions, and management disclosed that disclosure controls were not effective due to employee benefit plan registration deficiencies.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2016filed February 24, 2017Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $558.00M— | — |
| Interest Expense | $578.00M$495.00M | +16.8% |
| Net Income | $1.55B$1.71B | −9.6% |
| EPS (Basic) | $1.92$2.03 | −5.4% |
| EPS (Diluted) | $1.91$2.01 | −5.0% |
| Shares Outstanding (Basic) | 757.43M798.63M | −5.2% |
| Shares Outstanding (Diluted) | 764.50M807.66M | −5.3% |
05—Questions
Frequently Asked Questions
Why did Fifth Third's net income decline in 2016?
The main driver was the absence of large 2015 gains, especially the $331M gain on sale of Vantiv, Inc. shares and $236M of warrant valuation gains, which together outweighed 2016's gains from TRA settlements. Noninterest expense also rose 3%, and noninterest income fell 10% overall.
How is the credit quality trending?
Net charge-offs and provision expense both improved, with net charge-offs at 0.39% of average portfolio loans versus 0.48% in 2015. However, nonperforming portfolio assets increased to 0.80% from 0.70%, mostly due to energy-related reserve-based lending and the impact of low oil prices on commercial borrowers.
Is the dividend and buyback capacity sustainable?
The dividend was $0.53 per share in 2016, with a 27% payout ratio, and was raised to $0.14 quarterly in Q4. Shares repurchased totaled about $661M in 2016, supported by a CET1 ratio of 10.29% fully phased-in. Future capital actions remain subject to FRB CCAR approval and the Bancorp's capital plan.
What is the NorthStar Strategy and what targets does it set?
NorthStar is a three-year plan launched in Q3 2016 with targets by end of 2019 of 12-14% ROTCE, 1.1-1.3% ROA, and an efficiency ratio below 60%. Initiatives include the GreenSky partnership, mortgage and teller system upgrades, expansion of card and treasury products, and automation. Investors should track progress against these targets, since 2016 ROTCE was 11.6% and the efficiency ratio was 61.6%.
What regulatory or disclosure risks should investors monitor?
The FRB's CRA rating of 'Needs to Improve' limits new activities and acquisitions and puts the financial holding company status at risk if not improved. Management also concluded that disclosure controls were not effective as of year-end due to deficiencies in registering and delivering prospectuses for employee benefit plans, with rescission offers planned for 2017.
06—Continue