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Fifth Third Bank : Will it go to a Fifth or be up a Third?



June 27, 2008 – Comments (7) | RELATED TICKERS: FITB

We’ll start from their 10Q filed in Mar


Income Statement


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%




Balance Sheet



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.


Portfolio Analysis


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



Main pockets


(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


Off-Balance Sheet



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)


Provided Outlook


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.



7 Comments – Post Your Own

#1) On June 27, 2008 at 10:48 PM, abitare (29.51) wrote:

If this bank survives it will be thru government intervention.

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#2) On June 27, 2008 at 11:06 PM, EverydayInvestor (< 20) wrote:

Good analysis, anchak! Personally, I wouldn't buy or short FITB even with your money.

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#3) On June 28, 2008 at 10:05 AM, anchak (99.89) wrote:

Michael...well said....I am waiting for it to climb a little more...if the market goes up...then I will line up over here for hopefully 10+ CAP points.... Real life stay away!

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#4) On July 02, 2008 at 9:33 PM, SandmanKy (91.96) wrote:

I have been following your blogs on banks and have found them to be very helpful.  Thanks for sharing.  Have you looked at any of the larger foreign banks like MFG.  I know there are issues with their investment side but thier banking side seems to be making up for it.  The stock trades for .25% of its book value.  That's a 99.75% discount to book and it's not like they have negative profits. 

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#5) On July 03, 2008 at 8:40 PM, SandmanKy (91.96) wrote:

Big oops.  My above comments were based on information from the Yahoo Finance Key Statistics screen.  After looking at a few other sites, like this one and another brokerage site, I see they show their market cap to be more like $50B. Sorry for the goof. 

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#6) On July 07, 2008 at 2:09 PM, anchak (99.89) wrote:

SandmanKy....I'll try and take a look. However, I believe to value a bank one needs to be familiar with the operating business model. As well as some real factual data to analyze.

Foreign banks pose a real problem vis-a-vis this. I am not a bank analyst or anything thus I have to rely on public information. As far as my own knowledge of Japan financial institutions go - on the consumer side - they are screwed at least on the short term, especially the prior embedded players. This is because of their retrogressive legislation on Consumer Loans.  However, some local players have swooped into the opportunity ( GE Money's sell comes to mind - did Mizuho buy that - if so then you maybe onto something). Basically the delivery model needs to be altered to make money - Opportunity of spread is still tremendous ( I think the Cap is 20% while cost of money is 1%) . But demand has waned also.

My theory would be , net income growth has to be driven by Commercial activity and/or acquistions. Mizuho has been trying to do these things - but they are fraught with risks - their investment in Merill is a good indication.

It is good to see somebody look out of the quagmire and seek opportunities. All the best! If I find something I'll surely let you know.

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#7) On July 15, 2008 at 3:19 PM, DemonDoug (31.42) wrote:

48B in commercial loans, which is only just now starting to really get hit/impaired.  I think you are being too conservative assuming only 7% NPA there.  Your analysis a bit heavy on acronyms but I understand what you are saying.

Here's my theory: I believe that banks like FITB and WM may survive, but I get the feeling they may go through some kind of reorganization, like airline stocks seem to go through every once in a while, whereby the banks survive and continue to exist, but the stock goes to zero and new shares are issued.  This is what paulson, et al, are suggesting for FNM and FRE, and I wouldn't be surprised to see this process worked out in some way with banks, because so many of them are going to fail with their legacy costs from the housing bubble, it may be a good alternative to every single large bank going belly up.

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