Fifth Third Bank : Will it go to a Fifth or be up a Third?
We’ll start from their 10Q filed in Mar
Net revenues : $1.7 BN (25% Better YoY)
Net Interest Income: 826 MM
Non Interest Income: 864 MM ( Excluding one timers growth of 17% YoY)
Loan Loss Reserve build: 544 MM
Tangible Equity/Tangible Assets : 6.22%
Net Interest Margin: 3.41% ( margins are almost flat and holding)
Quarterly Losses: 276 MM
Charge of rate to Loans (Ann): 1.37%
LLR/ Loans: 1.62%
NPA/Loans & REO: 1.96%
Shareholder Equity: $9.4 BN
Tier I Cap:7.72%
Tier II ( Risk) : 11.34%
General Commercial Loans: 26.6 BN
Comm Mortgage : 12 BN
Commercial Construction: 5.6 BN
Comm Leases : 3.7 BN
Total Commercial : 48 BN
Residential Mortgage : 11.7 BN
Home Equity : 11.8 BN
Auto : 10.5 BN
Credit Card : 1.7 BN
Others : 1.2 BN
Net Consumer : 37 BN
Total Loans : 85 BN
Operations Discussion and BreakUp
A small but important dynamic here. You’ll see most of their Home Equity ( under Consumer Loans) is in the Branch Banking division – which means instead of these being Broker originated – are done to retail banking relationship customers.
Commercial : 48 BN
2 problematic sectors :
NPA YoY Growth
Real Estate: 12 BN 2.0% 295%
Construction: 5 BN 7.3% 350%
Total 48 BN 2.1% 236%
Based on the above I think NPA doubles in Real Estate, 3x in Construction and total they 2.5-3x - going to about $2.5+ BN in NPAs on their Commercial Portfolios.That’s about an additional $1.5 BN from this level and would be about 5-7% of Commercial loans. Exposure primarily in Ohio, Michigan and Florida
Residential Mortgage :12 BN
(1) >80 LTV with no Motgage Insurance ( this typically points to being Non-prime)
(2) > 80 LTV Interest Only ( Alt-A)
Exposure is about 2.5 BN : with 9.6% Delinquency ( NOT NPA)
Total NPA % : Without TDR%
211 MM 1.8% 1.6%
Home Equity: 12 BN
As pointed out before mostly retail originated split 50/50 between >80% LTV and below. Delinquency ratio of 2% ( This is LOW)
Total NPA % Without TDR%
128 MM 1.1 % 0.6%
This can go on and on. Instead lets get back to a synopsis and what repercussions the new Capital actions have on the portfolio
Well starts getting murky from here. We are not talking Downey any more. Fifth has a $3 BN outstanding Commercial QPSE. Their cash inflow for Q1 2008 from this source itself was $370 MM. They have a $5 BN liquidity commitment on this.
They also have $1.5 BN Credit recourse from their Consumer ( Home Equity and Auto Finance) QPSEs.
If they have ever to transfer these back on balance-sheet, they will have to hold adequate capital against them : Could easily be 300 MM-500 MM based on asset class.
Current LLR=1.2 BN
Current Equity: 9.4 BN
Intangible & Goodwill: 1.9 BN
Tangible: 7.5 BN
NEW RAISE: 1BN ( Potentially +1BN more for asset disposition)
Extra Cash by Dividend Reduction: $166 MM ( That’s about 10% of revenues)
NPA’s going up by 40-45% to 2.3 BN to 2.6% of Loans. Whoa! That’s very close to the number I predicted earlier ( No I did not cheat!) over here.
Before we jump to conclusions – let listen to what they said. Consumer NPAs are going to go up 30-35%. This implies Commercial is going up 48-55% Well, they are on their way to end up at 2.5BN+ NPAs in their commercial portfolio as I said.
However, their main growth (90%) in NPAs in consumer are from TDRs ( Seeing a common theme amongst banks , arent’ you ? I am hoping you read my earlier posts).TDRs are going to be common – they buy time and also if you have a committed borrower – works for both the bank and the individual.
Their loss projection is now 1.6-1.65%. Based on my projection of 7% NPAs in Commercial: They should take about 33% of that in losses = 2.2% ( Currently run rate is 1.21%)
Consumer current run rate is 1.6% : This should climb to about 2.5-3%. ( Basically their NPAs will double also here …losses will go up about 50%)
Blended: They will be around 2.4-2.5% loss rate, I think. That would mean at peak Fifth will take about $500 MM in losses a quarter ( I would say 2 quarters – possibly Q4 2008 and Q1 2009).
Anyway in the NEW SCENARIO
LLR= 1.2 BN +0.8 BN ( additional in Q2)= 2 BN
However peak NPA = 3.5-3.7 BN based on the calcs shown. Based on that they would need about 2.6- 2.7 BN. However they get about $500 MM in extra cash by dividend elimination. And +1 BN in potential asset sales. My guess is this is the peak LLR build quarter – they will possibly build upto $2.7BN by Q4 2008.
At the computed rate they would have about 350+450+500+550=1850 MM in loan losses. And possibly about 700 MM-1 BN in reserve builds. Their Net income ~300 MM
Which means they are about 1.6 BN short. However the 1BN Capital + 166MM(Div cut) x4=664MM covers that.
THEY NEED THAT 1BN ASSET SALE – BADLY. If it happens, they would barely make it thru.
I do not see Fifth having positive EPS for next 3-4 quarters. They may have to cut/eliminate the dividend. That makes them a possible short candidate – if they have a bounce
Additionally they are now around 50% Book Value. Based on 529 MM shares and a $10 price = appx Book is about 10 BN. Looks like they would dilute that to about 7.5 BN . Factoring in Capital infusions of about 2 BN – Fifth is not too far from Fair Value. I think.
If they need to bring some of the off-balance sheet – they can have more pain. However, chances of Bankruptcy are very slim.
This makes Fifth in my view an opportunistic short and a very very long term Value play – but I do not see tremendous upside. Maximum 30-40% over a 3-5 year period.
NET CONCLUSION: NEUTRAL ( Negative Outlook)