Case Study Fifth Third Bancorp
Case Study Fifth Third Bancorp
Denis Laplante July 28, 2016 [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
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
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
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
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?
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
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
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
Fifth Third Bancorp – Q1:16 Earnings & Balance Sheet ($ Millions)
Net Interest Margin
2.91%
Net Interest Income
$909
Provision for loan losses
119
Average Loans
$93,275
Fee Income
637
Average Earning Assets
125,651
Operating Expenses
986
Average Assets
141,582
Pretax Income
441
Net Charge-offs
$96
Taxes
114
Net Income Preferred dividends
327 15
NCO/Average Loans
.42% $1,439
Net Income Available
312
Allowance for Credit Losses ACL/EOP Loans
1.54%
NPAs/Loans & OREO
.88%
Severance expense
14
Securities gains
4
Gain on sale of St Louis branch offices
8
Vantiv warrants gain VISA swap benefit
47 1
18.3% stake in Vantiv (VNTV) or 35mm shares.
Carrying value is $374mm
Vantiv closing price $59/share (7/14/16) Equity earnings Vantiv $13mm/qtr.
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
Fifth Third Bancorp – Key Financial Ratios (2005) Return on Assets
1.50%
Return on Tangible Common Equity
22%
Net Interest Margin
3.23%
Efficiency Ratio
52.8%
Net Charge-Offs / Average Loans
.45%
Average NCO Ratio (2001 – 2005)
.50%
Reserve / EOP Loans
1.14%
Reserve / Non-Performing Loans
2.77x
Reserve / Net Charge-Offs
2.72x
Average Loans / Average Earning Assets
72%
Securities / Average Earning Assets
27%
Average Loans / Average Core Deposits
118%
Demand Deposits / Total Funding
15.4%
Tangible Common Equity Ratio
6.86%
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
Fifth Third Bancorp – Financial Data (2005) ($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
Preferred div.
1
Net Income Available to Common
1,548
Average FD shares
558
Earnings Per share
$2.77
1.51% 1.50%
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
Fifth Third Bancorp – Financial Data (2005) Other Noteworthy Items: Securities Gains (2005)
$39mm Pretax / $25mm After-Tax
Intangibles Expenses (2005)
$46mm Pretax / $30mm After-tax
Midwest Processing (Vantiv) Processing revenue (fee income)
$665 million
Processing expense
$463 million
Processing Biz pretax
$185 million
Processing Biz Net Income
$120 million
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
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.
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
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 Interest Rates + 200 bps ramp
% Change in Net Interest Income 7.0%
2) Fifth Third’s Net Interest Margin History (2003 – 2007) NIM
2003 3.62%
2004 3.48%
2005 3.23%
2006 2007 5-Year Avg 3.06% 3.36% 3.35%
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
Fifth Third Bancorp – Key Financial Data
3) Fifth Third’s Net Charge-Off History (2003-2007) 2003 2004 2005 Net Charge-Offs / Avg. Loans .63% .45% .45%
2006 .44%
2007 Average .61% .52%
4) Fifth Third’s Efficiency Ratio History (2003 – 2007) * adjusted for securities transactions & non-recurring Items 2003 2004 2005 2006 2007 Efficiency Ratio 46.6% 48.5% 52.8% 53.5% 56.7%
Average 51.6%
5) FITB’s Tangible Common Equity Ratio History (2003 -2007) 2003 2004 2005 2006 2007 Tangible Common Equity Ratio 8.55% 8.34% 6.86% 7.78% 6.03%
Average 7.51%
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
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%
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
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?
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
Regional Bank Valuation Table – Peer Group
Symbol BBT CFG CMA COF FITB HBAN KEY MTB PNC RF STI USB ZION
7/14/2016 Closing 2016E Price EPS
2017E EPS
$ 36.67 $ 2.80 $ 3.14 20.99 1.79 2.08 43.60 2.49 3.17 68.85 7.40 8.05 18.44 1.59 1.72 9.23 0.84 0.93 11.78 1.09 1.30 119.46 8.22 9.05 82.86 7.08 7.65 9.08 0.83 0.91 43.86 3.49 3.66 41.25 3.26 3.49 26.02 1.77 2.16
Median (a) proforma for M&A transactions.
P/E 2016
P/E 2017
Dividend
Div. Yield
3/31/2016 Tangible BV
Price/ YTD 2016 Tangible Price BV Perf.
2015 Price Perf
13.1 11.7 17.5 9.3 11.6 11.0 10.8 14.5 11.7 10.9 12.6 12.7 14.7
11.7 $ 1.12 10.1 0.48 13.8 0.88 8.6 1.60 10.7 0.52 9.9 0.28 9.1 0.34 13.2 2.80 10.8 2.20 10.0 0.26 12.0 0.96 11.8 1.02 12.0 0.24
3.1% $ 19.32 a 2.3% 25.21 2.0% 39.96 2.3% 55.94 2.8% 16.31 3.0% 6.28 a 2.9% 10.03 a 2.3% 65.36 2.7% 64.57 2.9% 8.83 2.2% 32.60 2.5% 17.94 0.9% 28.20
190% 83% 109% 123% 113% 147% 117% 183% 128% 103% 135% 230% 92%
-3.0% -19.9% 4.2% -4.6% -8.3% -16.5% -10.7% -1.4% -13.1% -5.4% 2.4% -3.3% -4.7%
-2.8% 5.3% -10.7% -12.6% -1.4% 5.1% -5.1% -3.5% 4.5% -9.1% 2.2% -5.1% -4.2%
11.7
10.8
2.5%
123%
-4.7%
-3.5%
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
Regional Banks – ROTCE & PRICE / TBV ROATCE Symbol (% ) A
P/ TBV (% ) B
BB&T BBT 13.4 Citizens Financial Group CFG 7.1 Comerica CMA 6.5 Capital One COF 13.3 Fifth Third Bancorp FITB 10.2 Huntington HBAN 13.9 Keycorp KEY 11.6 M&T Bank MTB 12.5 PNC Financial PNC 12.2 Regions Financial RF 8.9 SunTrust STI 11.1 U.S. Bancorp USB 17.3 Zions Bancorp ZION 6.7 A: blend of 2016E and 2017E ROTCE figures B: a/o July 14, 2016.
190 83 109 123 113 147 117 183 128 103 135 230 92
Regional Bank
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
Break-Out Group Strategy
DIVIDE AND CONQUER
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
The Thinker
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
Denis Laplante July 28, 2016 [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
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
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
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
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?
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
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
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
Fifth Third Bancorp – Q1:16 Earnings & Balance Sheet ($ Millions)
Net Interest Margin
2.91%
Net Interest Income
$909
Provision for loan losses
119
Average Loans
$93,275
Fee Income
637
Average Earning Assets
125,651
Operating Expenses
986
Average Assets
141,582
Pretax Income
441
Net Charge-offs
$96
Taxes
114
Net Income Preferred dividends
327 15
NCO/Average Loans
.42% $1,439
Net Income Available
312
Allowance for Credit Losses ACL/EOP Loans
1.54%
NPAs/Loans & OREO
.88%
Severance expense
14
Securities gains
4
Gain on sale of St Louis branch offices
8
Vantiv warrants gain VISA swap benefit
47 1
18.3% stake in Vantiv (VNTV) or 35mm shares.
Carrying value is $374mm
Vantiv closing price $59/share (7/14/16) Equity earnings Vantiv $13mm/qtr.
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
Fifth Third Bancorp – Key Financial Ratios (2005) Return on Assets
1.50%
Return on Tangible Common Equity
22%
Net Interest Margin
3.23%
Efficiency Ratio
52.8%
Net Charge-Offs / Average Loans
.45%
Average NCO Ratio (2001 – 2005)
.50%
Reserve / EOP Loans
1.14%
Reserve / Non-Performing Loans
2.77x
Reserve / Net Charge-Offs
2.72x
Average Loans / Average Earning Assets
72%
Securities / Average Earning Assets
27%
Average Loans / Average Core Deposits
118%
Demand Deposits / Total Funding
15.4%
Tangible Common Equity Ratio
6.86%
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
Fifth Third Bancorp – Financial Data (2005) ($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
Preferred div.
1
Net Income Available to Common
1,548
Average FD shares
558
Earnings Per share
$2.77
1.51% 1.50%
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
Fifth Third Bancorp – Financial Data (2005) Other Noteworthy Items: Securities Gains (2005)
$39mm Pretax / $25mm After-Tax
Intangibles Expenses (2005)
$46mm Pretax / $30mm After-tax
Midwest Processing (Vantiv) Processing revenue (fee income)
$665 million
Processing expense
$463 million
Processing Biz pretax
$185 million
Processing Biz Net Income
$120 million
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
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.
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
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 Interest Rates + 200 bps ramp
% Change in Net Interest Income 7.0%
2) Fifth Third’s Net Interest Margin History (2003 – 2007) NIM
2003 3.62%
2004 3.48%
2005 3.23%
2006 2007 5-Year Avg 3.06% 3.36% 3.35%
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
Fifth Third Bancorp – Key Financial Data
3) Fifth Third’s Net Charge-Off History (2003-2007) 2003 2004 2005 Net Charge-Offs / Avg. Loans .63% .45% .45%
2006 .44%
2007 Average .61% .52%
4) Fifth Third’s Efficiency Ratio History (2003 – 2007) * adjusted for securities transactions & non-recurring Items 2003 2004 2005 2006 2007 Efficiency Ratio 46.6% 48.5% 52.8% 53.5% 56.7%
Average 51.6%
5) FITB’s Tangible Common Equity Ratio History (2003 -2007) 2003 2004 2005 2006 2007 Tangible Common Equity Ratio 8.55% 8.34% 6.86% 7.78% 6.03%
Average 7.51%
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
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%
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
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?
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
Regional Bank Valuation Table – Peer Group
Symbol BBT CFG CMA COF FITB HBAN KEY MTB PNC RF STI USB ZION
7/14/2016 Closing 2016E Price EPS
2017E EPS
$ 36.67 $ 2.80 $ 3.14 20.99 1.79 2.08 43.60 2.49 3.17 68.85 7.40 8.05 18.44 1.59 1.72 9.23 0.84 0.93 11.78 1.09 1.30 119.46 8.22 9.05 82.86 7.08 7.65 9.08 0.83 0.91 43.86 3.49 3.66 41.25 3.26 3.49 26.02 1.77 2.16
Median (a) proforma for M&A transactions.
P/E 2016
P/E 2017
Dividend
Div. Yield
3/31/2016 Tangible BV
Price/ YTD 2016 Tangible Price BV Perf.
2015 Price Perf
13.1 11.7 17.5 9.3 11.6 11.0 10.8 14.5 11.7 10.9 12.6 12.7 14.7
11.7 $ 1.12 10.1 0.48 13.8 0.88 8.6 1.60 10.7 0.52 9.9 0.28 9.1 0.34 13.2 2.80 10.8 2.20 10.0 0.26 12.0 0.96 11.8 1.02 12.0 0.24
3.1% $ 19.32 a 2.3% 25.21 2.0% 39.96 2.3% 55.94 2.8% 16.31 3.0% 6.28 a 2.9% 10.03 a 2.3% 65.36 2.7% 64.57 2.9% 8.83 2.2% 32.60 2.5% 17.94 0.9% 28.20
190% 83% 109% 123% 113% 147% 117% 183% 128% 103% 135% 230% 92%
-3.0% -19.9% 4.2% -4.6% -8.3% -16.5% -10.7% -1.4% -13.1% -5.4% 2.4% -3.3% -4.7%
-2.8% 5.3% -10.7% -12.6% -1.4% 5.1% -5.1% -3.5% 4.5% -9.1% 2.2% -5.1% -4.2%
11.7
10.8
2.5%
123%
-4.7%
-3.5%
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
Regional Banks – ROTCE & PRICE / TBV ROATCE Symbol (% ) A
P/ TBV (% ) B
BB&T BBT 13.4 Citizens Financial Group CFG 7.1 Comerica CMA 6.5 Capital One COF 13.3 Fifth Third Bancorp FITB 10.2 Huntington HBAN 13.9 Keycorp KEY 11.6 M&T Bank MTB 12.5 PNC Financial PNC 12.2 Regions Financial RF 8.9 SunTrust STI 11.1 U.S. Bancorp USB 17.3 Zions Bancorp ZION 6.7 A: blend of 2016E and 2017E ROTCE figures B: a/o July 14, 2016.
190 83 109 123 113 147 117 183 128 103 135 230 92
Regional Bank
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
Break-Out Group Strategy
DIVIDE AND CONQUER
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
The Thinker
Copyright © 2016 S&P Global. Knowledge Center, a part of S&P Global Market Intelligence, a division of S&P Global Inc.
