Fifth Third Is Worth A Premium Despite Sluggish Loan Growth, Argus Says In Bullish Initiation

Strong fee income, a better efficiency ratio than peers and credit quality are behind Argus' bullish Fifth Third Bancorp FITB thesis.

The Analyst

Argus analyst Stephen Biggar initiated coverage of Fifth Third with a Buy rating and $36 price target.

The Thesis

The bank's loan growth has been muted in recent quarters, with consumer loans and commercial/industrial loans estimated to grow 3 percent and 4 percent this year, respectively, Biggar said in the initiation note.

Argus attributed the slow growth to a range of market conditions, including an increase in the prime lending rate; uncertainty over policy changes coming out of Washington; lower corporate taxes that have reduced the need for borrowing; and a greater preference among large corporations for direct debt placement over line-of-credit borrowing.

Higher interest rates have benefitted the net interest margin, which rose by 8 basis points in the first quarter, the analyst said. Argus projects high single-digit growth in net interest income in 2018.

Besides two more expected rate hikes from the Fed, the biggest catalyst in Fifth Third’s future is its merger with MB Financial Inc MBFI, announced in mid-May, Biggar said. Fifth Third expects the deal to boost earnings by 7 percent in the second year after it closes.

All in all, Argus is looking for Fifth Third to trade at a premium to its regional bank peers.