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Case Study Fifth Third Bancorp
Denis Laplante July 28, 2016 [email protected]
Group Case Study Assignment
1. Normalized Earnings Exercise
2. Valuation Exercise
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
Guiding Principle Today
“Better to be approximately correct ……………. than precisely wrong!” Professor Choi
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
Part 1 - Normalized Earnings Exercise – Fifth Third Bancorp
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
Using all of the historical data and market information provided, estimate the following Information for Fifth Third Bancorp: 1) Estimate Fifth Third’s Normalized Net Income
2) Estimate Fifth Third’s Normalized Earnings Per Share
3) Estimate Fifth Third’s Normalized Return on Assets
Normalizing Earnings
FOUR MAJOR FACTORS TO CONSIDER:
1) Are Net Interest Margins Unusually Depressed? 2) Unusually High or Low Credit Costs ?
3) Efficiency Opportunities ? 4) Can Excess Capital Be Deployed?
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
Normalized Earnings Exercise – Fifth Third Bancorp
1) Evaluate the 4 Factors for Normalizing Fifth Third Bancorp’s Earnings 2) Use Fifth Third’s First Quarter 2016 Financials as a Baseline.
3) Use Financial Disclosures / Peer Group Norms / Historical ratios
4) Make appropriate adjustments
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
($ Millions)
Net Interest Income $909
Provision for loan losses 119
Fee Income 637
Operating Expenses
986
Pretax Income 441
Taxes 114
Net Income Preferred dividends
327 15
Net Income Available Severance expense
312 14
Securities gains 4
Gain on sale of St Louis branch offices
8
Vantiv warrants gain 47
VISA swap benefit 1
Net Interest Margin 2.91%
Average Loans $93,275 Average Earning Assets 125,651 Average Assets 141,582
Net Charge-offs $96 NCO/Average Loans .42% Allowance for Credit Losses
$1,439
ACL/EOP Loans 1.54% NPAs/Loans & OREO .88% 18.3% stake in Vantiv (VNTV) or 35mm shares.
Carrying value is $374mm
Vantiv closing price $59/share (7/14/16) Equity earnings Vantiv $13mm/qtr.
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
Fifth Third Bancorp – Q1:16 Earnings & Balance Sheet
Fifth Third Bancorp – Key Financial Ratios (2005)
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
Return on Assets 1.50%
Return on Tangible Common Equity 22%
Net Interest Margin 3.23%
Efficiency Ratio 52.8%
Net Charge-Offs / Average Loans .45%
Average NCO Ratio (2001 – 2005) .50%
Reserve / EOP Loans 1.14%
Reserve / Non-Performing Loans 2.77x
Reserve / Net Charge-Offs 2.72x
Average Loans / Average Earning Assets 72%
Securities / Average Earning Assets 27%
Average Loans / Average Core Deposits 118%
Demand Deposits / Total Funding 15.4%
Tangible Common Equity Ratio 6.86%
Fifth Third Bancorp – Financial Data (2005)
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
($Millions) % Average Assets Average Assets
$102,876
Interest Income $5,026 4.88% Interest Expense 2,030 1.97% Net Interest Income 2,996 2.91% Provision for Loan Losses 330 .32%
Fee Income 2,500 2.43% Operating Expenses 2,927 2.85% Pretax Profits 2,239 2.18% Income Taxes 690 .67% Tax Rate 30.8% Net Income 1,549 1.51% Preferred div. 1 Net Income Available to Common 1,548 1.50% Average FD shares 558 Earnings Per share $2.77
Fifth Third Bancorp – Financial Data (2005)
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
Other Noteworthy Items: Midwest Processing (Vantiv)
Securities Gains (2005) $39mm Pretax / $25mm After-Tax Intangibles Expenses (2005) $46mm Pretax / $30mm After-tax
Processing revenue (fee income) $665 million Processing expense $463 million
Processing Biz pretax $185 million
Processing Biz Net Income $120 million
Fifth Third Bancorp – Disclosures (2016)
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
Noteworthy Items: Management announced a streamlining program: • Eliminate 60 branches in various markets including St.Louis and
Pittsburgh. • Early retirement program & other initiatives.
• Roughly $80 million in anticipated cost savings.
Fifth Third Bancorp – Key Financial Data
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
1) INTEREST RATE SENSITIVITY DISCLOSURE - The table below displays the
estimated impact on net interest income 13-24 months out given a 200bp increase in interest rates as of March 31, 2016. % Change in
Change in Interest Rates Net Interest Income + 200 bps ramp 7.0%
2) Fifth Third’s Net Interest Margin History (2003 – 2007) 2003 2004 2005 2006 2007 5-Year Avg NIM 3.62% 3.48% 3.23% 3.06% 3.36% 3.35%
Fifth Third Bancorp – Key Financial Data
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
3) Fifth Third’s Net Charge-Off History (2003-2007) 2003 2004 2005 2006 2007 Average Net Charge-Offs / Avg. Loans .63% .45% .45% .44% .61% .52% 4) Fifth Third’s Efficiency Ratio History (2003 – 2007) * adjusted for securities transactions & non-recurring Items 2003 2004 2005 2006 2007 Average Efficiency Ratio 46.6% 48.5% 52.8% 53.5% 56.7% 51.6% 5) FITB’s Tangible Common Equity Ratio History (2003 -2007) 2003 2004 2005 2006 2007 Average Tangible Common Equity Ratio 8.55% 8.34% 6.86% 7.78% 6.03% 7.51%
FITB Case Study - Key Interest Rates
Interest Rate Environment vs. 2005
2005 July 2016 Federal Funds Rate 3.25% .38%
10-year Treasury 4.25% 1.58%
Prime Lending Rate 6.25% 3.50%
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
Part 2 – Valuation Exercise – Fifth Third Bancorp
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
Using all of the Pricing, Valuation data, and Peer Group ratios provided, answer the following questions: 1) Does Fifth Third deserve to trade at a discount or premium to the Peer Group? Why? 2) One-Year Price Target for Fifth Third Bancorp? 3) Buy / Hold / Sell ? And Why?
Regional Bank Valuation Table – Peer Group
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7/14/2016 3/31/2016 Price/ YTD 2016 2015Closing 2016E 2017E P/E P/E Div. Tangible Tangible Price Price
Symbol Price EPS EPS 2016 2017 Dividend Yield BV BV Perf. Perf
BBT 36.67$ 2.80$ 3.14$ 13.1 11.7 1.12$ 3.1% 19.32$ a 190% -3.0% -2.8%CFG 20.99 1.79 2.08 11.7 10.1 0.48 2.3% 25.21 83% -19.9% 5.3% CMA 43.60 2.49 3.17 17.5 13.8 0.88 2.0% 39.96 109% 4.2% -10.7%COF 68.85 7.40 8.05 9.3 8.6 1.60 2.3% 55.94 123% -4.6% -12.6%FITB 18.44 1.59 1.72 11.6 10.7 0.52 2.8% 16.31 113% -8.3% -1.4%
HBAN 9.23 0.84 0.93 11.0 9.9 0.28 3.0% 6.28 a 147% -16.5% 5.1%KEY 11.78 1.09 1.30 10.8 9.1 0.34 2.9% 10.03 a 117% -10.7% -5.1%MTB 119.46 8.22 9.05 14.5 13.2 2.80 2.3% 65.36 183% -1.4% -3.5%PNC 82.86 7.08 7.65 11.7 10.8 2.20 2.7% 64.57 128% -13.1% 4.5%RF 9.08 0.83 0.91 10.9 10.0 0.26 2.9% 8.83 103% -5.4% -9.1%STI 43.86 3.49 3.66 12.6 12.0 0.96 2.2% 32.60 135% 2.4% 2.2%
USB 41.25 3.26 3.49 12.7 11.8 1.02 2.5% 17.94 230% -3.3% -5.1%ZION 26.02 1.77 2.16 14.7 12.0 0.24 0.9% 28.20 92% -4.7% -4.2%
Median 11.7 10.8 2.5% 123% -4.7% -3.5%
(a) proforma for M&A transactions.
Regional Banks – ROTCE & PRICE / TBV
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
Regional Bank SymbolROATCE
(%) AP/ TBV (%) B
BB&T BBT 13.4 190 Citizens Financial Group CFG 7.1 83 Comerica CMA 6.5 109 Capital One COF 13.3 123 Fifth Third Bancorp FITB 10.2 113 Huntington HBAN 13.9 147 Keycorp KEY 11.6 117 M&T Bank MTB 12.5 183 PNC Financial PNC 12.2 128 Regions Financial RF 8.9 103 SunTrust STI 11.1 135 U.S. Bancorp USB 17.3 230 Zions Bancorp ZION 6.7 92 A: blend of 2016E and 2017E ROTCE figuresB: a/o July 14, 2016.
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
Break-Out Group Strategy
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DIVIDE
AND
CONQUER
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