On the whole, banks are pretty fully-valued right now. There are a few worthwhile buys here and there, but the sector as a whole has recovered and run into the headwinds of interest margin compression and weak loan growth. Fifth Third (Nasdaq:FITB) looks like an exception, though. Although Fifth Third is seeing margin compression and loan pressures, few banks can match Fifth Third in 2013 when it comes to its ability to raise dividends and execute significant share buybacks. Couple this with organic growth plans in high-value areas like the Southeast, and Fifth Third stands out as an interesting bank investment candidate.

Discount Brokers Comparison: Your one-stop shop for finding the perfect broker for your investments.

First, The Bad News
Between the company's 10-Q and presentations at industry conferences, the news regarding Fifth Third's operating environment hasn't been all that positive. While the company is seeing negative loan repricing abate, there is growing loan price pressure in C&I and auto lending. This is not surprising given the commentary of banks like Comerica (NYSE:CMA), PNC (NYSE:PNC), and Bank of America (NYSE:BAC) regarding their intentions to grow lending, but as it represents more than 50% of Fifth Third's loan book, it's a threat nonetheless.

Fifth Third is also seeing some difficulty in cutting costs as much as it would like. Historically, Fifth Third has a pretty competitive efficiency ratio (a measure of a bank's operating expenses), but it sounds like the efficiency ratio is going to remain elevated in 2013 – probably on the order of 60% or so. Longer term, management believes that returning to the mid-50%'s (lower is better) is still possible.

SEE: The Industry Handbook: The Banking Industry

Returning Capital Could Drive Sentiment
Although I think Wall Street tends to overvalue capital returns from banks (dividends and share buybacks), the reality is that the Street likes it and Fifth Third is in a position to provide it. In a world where weak lending margins, weak loan growth, and sub-optimal expense leverage are going to limit reported earnings growth, buybacks are a way to boost earnings per share.

Fifth Third has already talked about accelerating its repurchase program, to the tune of more than $500 million and 30 million shares. What's more, Vantiv (Nasdaq:VNTV) recently closed on a secondary offering that allowed Fifth Third to sell another 15.6 million shares of Vantiv (while still owning a roughly 28% stake).

I still see these transactions as a mixed blessing. On one hand, I'd like to think that Fifth Third can use this capital to grow the business – whether by making loans (not so easy now, though) or opening branches in new markets or expanding the fee-generating business lines. On the other hand, the bank already arguably has more capital than it can effectively deploy given current circumstances. What's more, buybacks could boost the the company's fair value as much as 10% by the end of 2013.

The Bottom Line
Fifth Third is not the only quality bank that has options outside of core banking to improve its standing with investors. U.S. Bancorp (NYSE:USB) is likewise poised to return meaningful amounts of capital to shareholders, while also leveraging its fee-generating businesses and cutting costs. KeyCorp (NYSE:KEY) and First Horizon (NYSE:FHN) also seem to have the opportunity to improve reported earnings growth through buybacks, though the quality there isn't quite at the Fifth Third/USB level.

Fifth third is a quality bank with a footprint that has grown from its Midwest roots into the more attractive Southeast markets of Georgia, Florida, and North Carolina. It also happens to be a relatively undervalued bank even after a 50% climb over the past year.

SEE: 5 Must-Have Metrics For Value Investors

Using an excess equity returns method and an assumed long-term return on equity of 12.5%, Fifth Third would appear to be worth almost $21 today. I will grant that a 15% discount to fair value is not a huge bargain, but as I said before, there aren't many quality banks trading all that cheaply anymore. I do have some concerns that bank stocks in general will be middling performers given the weak loan environment, but if there can be outperformers in the regional space (particularly among the quality companies), I like Fifth Third's chances to be among them.

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.

Related Articles
  1. Retirement

    Technical Top-Down Investing: Analyzing The Market

    The top-down investment strategy depends on economy and market strength. Find out what you should know before jumping in.
  2. Personal Finance

    Understand Your Role In The Investing Process

    Knowing what to expect when managing your assets will help you achieve your financial goals.
  3. Investing

    The Evolution Of Sinful Investing

    Like beauty, whether something is sinful often depends whom you ask.
  4. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares Morningstar Small-Cap Value

    Find out about the Shares Morningstar Small-Cap Value ETF, and learn detailed information about this exchange-traded fund that focuses on small-cap equities.
  6. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  7. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  8. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  9. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  10. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
RELATED TERMS
  1. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  2. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
  3. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
  4. Middle Market

    Definition of middle market
  5. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
  6. Net Present Value - NPV

    The difference between the present values of cash inflows and ...
RELATED FAQS
  1. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>
  6. How can a company execute a tax-free spin-off?

    The two commonly used methods for doing a tax-free spinoff are either to distribute shares of the spinoff company to existing ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!