case study fifth third bancorp - amazon s3...7/14/2016 3/31/2016 price/ ytd 2016 2015 closing 2016e...

Case Study Fifth Third Bancorp

Denis Laplante July 28, 2016 [email protected]

mailto:[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


Part 1 - Normalized Earnings Exercise – Fifth Third Bancorp


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?


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


($ 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.


Fifth Third Bancorp – Q1:16 Earnings & Balance Sheet

Fifth Third Bancorp – Key Financial Ratios (2005)


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)


($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)


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)


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


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


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%


Part 2 – Valuation Exercise – Fifth Third Bancorp


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


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


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.

Break-Out Group Strategy


DIVIDE

AND

CONQUER


The

Thinker

case study fifth third bancorp - amazon s3...7/14/2016 3/31/2016 price/ ytd 2016 2015 closing 2016e...

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