Fifth Third May Be Wrapping Shareholder Present: Analyst

Tickers in this article: FITB

NEW YORK (TheStreet) -- KBW analyst David Konrad expects good news this month for shareholders of Fifth Third Bancorp .

The Cincinnati lender on Wednesday in its second-quarter 10-Q filing with the Securities and Exchange Commission estimated that its Tier 1 common equity ratio -- under the Federal Reserve's enhanced capital rules proposed in June -- was approximately 9.0%, declining from 9.77% under the current Basel I rules.

Under Basel III, banks are required to have a Tier 1 common equity ratio of at least 7.0% -- including a minimum ratio of 4.5% plus a "capital conservation buffer" of 2.5% -- by January 2019, when the rules are fully phased-in. "Global systemically important financial institutions," or GSIFIs, will have an additional capital buffer required ranging between 1% and 2.5%, but Fifth Third is not expected to be required to have an additional capital buffer.

The Federal Reserve in March partially approved Fifth Third's annual capital plan, which included an increase in the dividend on common shares and repurchases of common shares. The Fed only approved the company's plan to repurchase $1.4 billion in trust preferred securities and repurchase common shares in amounts equal to after-tax gains from the sale of shares in Vantiv , Fifth Third's former payment processing subsidiary, which went public during the first quarter.

Fifth Third on July 19 reported second-quarter earnings available to common shareholders of $376 million, or 40 cents a share, declining from $421 million, or 46 cents a share, during the first quarter, when the company realized after-tax benefits of roughly $82 million, or nine cents a share, from the Vantiv IPO. Second-quarter earnings increased slightly from a year earlier.

The second quarter results included $36 million in after-tax gains from the sale of Vantiv shares.

Fifth Third's second-quarter return on average assets (ROA) was 1.32%, declining from 1.49% in the first quarter, but increasing from 1.22% in the second quarter of 2011. The second-quarter return on average common equity (ROE) was 11.4%, declining from 13.1% the previous quarter, and increasing from 11.0% a year earlier.

Konrad said that KBW viewed Fifth Third's Basel III disclosure "positively as we believe some investors feared that FITB's tier 1 common ratio would decline to the 8.5% range similar to a few of its peers." The analyst also said that Fifth Third should hear back from the Fed on its revised capital plan covering dividends and share buybacks through March 2013 "no later than August 22nd," and that he expects the plan "to be similar to the one that had been previously submitted with minor adjustments in regard to the timing of the capital actions."

Fifth Third's shares closed at $13.77 Wednesday, returning 14% year-to-date, following an 11% decline during 2011.

FITB ChartFITB data by YCharts

The shares trade for 1.2 times their reported June 30 tangible book value of $11.89, and for nine times the consensus 2013 earnings estimate of $1.54 a share. The consensus 2012 EPS estimate is also $1.58.

Based on a quarterly payout of eight cents, the shares have a dividend yield of 2.32%.

Konrad rates Fifth Third "Outperform," with a price target of $16, saying "we still believe the stock offers a compelling story at these levels as it offers strong profitability metrics with a pre-tax, pre-provision for loan losses ROA north of 2.0% yet still trades at a discount to peers on 2012 estimates (9.0x vs. 9.9x) and 2013 estimates (8.9x vs. 10.1x)."

Interested in more on Fifth Third Bancorp? See TheStreet Ratings' report card for this stock.

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-- Written by Philip van Doorn in Jupiter, Fla.

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Tickers in this article: FITB