01—Abstract
Summary
Summary of the 10-K filed February 28, 2018. Cited figures are marked; the original filing is the authoritative source.
Fifth Third Bancorp (FITB) reported full-year 2017 net income attributable to the Bancorp of $2.19 billiona, or $2.83 per diluted share, up from $1.93 in 2016.
Results were lifted by a one-time $1.04 billionb pre-tax gain on the sale of Vantiv, Inc. shares, and were also affected by the Tax Cuts and Jobs Act, which produced a roughly $220 million deferred tax remeasurement benefit alongside about $68 million of affordable housing impairments and $27 million of leveraged lease charges. Excluding the Vantiv gain, core profitability was more modest: net interest income rose to $3.8 billion (FTE) on a 3.03% net interest margin, while noninterest expense grew 2% to $3.99 billion and the efficiency ratio improved to 56.6%. Credit quality improved through the year.
Net charge-offs fell to 0.32% of average portfolio loans from 0.39%, the provision declined to $261 millionc from $343 million, and nonperforming portfolio assets dropped to 0.53% of loans and OREO from 0.80%. Average loans declined about 2%, reflecting deliberate exits from certain commercial and industrial credits and lower auto balances, while average core deposits were broadly flat. The balance sheet remained well capitalized, with a CET1 ratio of 10.61% and a Tier 1 leverage ratio of 10.01%, and the company repurchased substantial common stock, with about $1.6 billion of treasury stock purchases in 2017.
Looking forward, management expects a lower effective tax rate from 2018 onward given the 21% federal rate, and a gain of roughly $415 milliond in Q1 2018 from dilution of its Vantiv Holding stake to about 4.9%. The NorthStar Strategy targets, set for the end of 2019, include a return on average tangible common equity of 14% to 16% (upper end), an ROA of 1.35% to 1.45%, and an efficiency ratio below 60%. Investors should weigh the strong reported EPS against its dependence on one-time Vantiv-related gains, and the company's continued sensitivity to deposit betas and rising rates.
02—Key points
Key Highlights
- Net income attributable to Bancorp rose to $2.19 billion ($2.83 diluted EPS) in 2017 from $1.56 billion ($1.93) in 2016, aided by a ~$1.04 billion pre-tax gain on the sale of Vantiv, Inc. shares.
- Tax Cuts and Jobs Act effects: ~$220 million deferred tax remeasurement benefit, offset by $68 million affordable housing impairments, $27 million leveraged lease charge, and $15 million employee bonuses and foundation contribution.
- Net interest margin (FTE) expanded to 3.03% from 2.88%, supported by four Fed rate hikes and higher loan yields, while average loans fell about 2% to $92.7 billion.
- Credit quality improved: net charge-offs fell to 0.32% of average loans (from 0.39%), provision declined to $261 million (from $343 million), and nonperforming assets fell to 0.53% of loans and OREO.
- Efficiency ratio improved to 56.6% from 61.6%, though noninterest expense rose 2% to $3.99 billion, driven by other noninterest expense, personnel costs and technology.
- Capital remained strong with CET1 at 10.61%, Tier 1 leverage at 10.01%, and roughly $1.6 billion of share repurchases plus $0.60 per share in dividends declared in 2017.
- Outlook: Q1 2018 expected ~$415 million gain from Vantiv Holding dilution (to ~4.9% from ~8.6%) and a significantly lower effective tax rate from 2018, against the NorthStar 2019 targets (ROATCE 14-16%, efficiency below 60%).
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2017filed February 28, 2018Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $554.00M$558.00M | −0.7% |
| Interest Expense | $691.00M$578.00M | +19.6% |
| Net Income | $2.18B$1.55B | +40.9% |
| EPS (Basic) | $2.86$1.92 | +49.0% |
| EPS (Diluted) | $2.81$1.91 | +47.1% |
| Shares Outstanding (Basic) | 728.29M757.43M | −3.8% |
| Shares Outstanding (Diluted) | 740.69M764.50M | −3.1% |
05—Questions
Frequently Asked Questions
How much of Fifth Third's 2017 earnings growth came from one-time items?
The $1.04 billion pre-tax gain on the Vantiv, Inc. share sale was the largest single item, and the $220 million tax remeasurement benefit also boosted net income. These were partly offset by about $68 million of affordable housing impairments, a $27 million leveraged lease charge, and $15 million each in employee bonuses and a foundation contribution. Investors should therefore treat 2017 EPS of $2.83 as heavily influenced by non-recurring gains rather than as a clean run-rate.
What is the outlook for Fifth Third's Vantiv Holding stake?
The company's ownership in Vantiv Holding, LLC fell from about 8.6% to about 4.9% after Vantiv's acquisition of Worldpay closed in January 2018, which is expected to produce a gain of roughly $415 million in Q1 2018. The remaining stake continues to be accounted for under the equity method. Future monetization of this stake, including sales of Vantiv/Worldpay shares, is a stated intent, but timing and value are uncertain, and such sales could affect the stock price.
How strong is Fifth Third's capital position and how is it returning capital?
The company reported a CET1 ratio of 10.61%, a Tier 1 risk-based ratio of 11.74%, and a Tier 1 leverage ratio of 10.01% at year-end 2017, all above well-capitalized thresholds. The FRB did not object to its 2017 CCAR capital plan, which allowed up to $1.161 billion of common share repurchases from July 2017 through June 2018, plus a quarterly dividend increase to $0.16. Management also repurchased about $1.6 billion of stock during 2017 and entered a new $318 million accelerated repurchase in February 2018.
Is Fifth Third's loan growth healthy?
Not particularly. Average loans and leases declined about 2% in 2017, to $92.7 billion, driven by deliberate exits from commercial and industrial loans that did not meet risk-adjusted return targets and by a 12% decline in average automobile loans as the company shifted toward better risk-adjusted returns. Growth was concentrated in commercial construction, residential mortgages retained on the balance sheet, and point-of-sale other consumer loans. Total deposits were roughly flat at $103 billion.
What are the main risks investors should monitor?
Key risks include interest rate sensitivity, since the NII model shows benefits from rising rates but meaningful downside if rates fall 75 bps, and deposit betas, which management assumes average 69% on the way up. Other watch items are the energy and healthcare loan books, the potential impact of CECL adoption in 2020 that management expects will raise the allowance, the outcome of the Visa total return swap and interchange litigation, and mortgage banking revenue volatility, which fell 22% in 2017. The company also flags cybersecurity and reliance on Vantiv-related income as material risk factors.
06—Continue