In its first quarterly report since converting Comerica's systems, the bank earned an adjusted $1.13 a share, against FactSet's consensus of $1.10, while reported earnings were 90 cents after 23 cents of items, mostly merger charges. Revenue was about $57 million below FMP's consensus, and unrealized securities losses widened. The stock was up less than 1%.
Fifth Third's quarter showed what its acquisition of Comerica can earn. It also showed what higher interest rates are doing to the balance sheet behind it.
Fifth Third Bancorp reported third-quarter earnings of 90 cents a diluted share. Excluding 23 cents of items, mostly $171 million of after-tax merger charges along with litigation costs and technology impairments, adjusted earnings were $1.13 a share, slightly above FactSet's consensus of $1.10. Net income available to common shareholders was $828 million, up from $763 million in the second quarter.
Revenue on a fully taxable-equivalent basis was $3.284 billion, about $57 million below the roughly $3.34 billion consensus compiled by Financial Modeling Prep. Net interest income rose 3% from the second quarter to $2.276 billion, and was up 49% from a year earlier with Comerica included. Total revenue rose about 42% from a year earlier. Adjusted return on tangible common equity was 20.6%, already above the bank's 19% target for 2027.
"Fifth Third's third quarter reflected the earnings power of the combined company," Chief Executive Tim Spence said.
The balance sheet
Two lines deserve more attention than the earnings beat. The net interest margin slipped to 3.34% from 3.36%. And accumulated other comprehensive loss, which mainly reflects unrealized losses on securities as rates rise, widened to $4.92 billion from $3.29 billion. As a result, tangible common equity including those losses fell to 6.88% of tangible assets from 7.29%, and tangible book value per share fell to $22.01 from $23.22.
Regulatory capital held up. The common equity tier 1 ratio rose to 10.02% from 9.93%. The bank bought back no stock in the third quarter. On the call, management said it expects $200 million to $300 million of buybacks in the fourth quarter, depending on loan growth.
Credit was stable. Net charge-offs were 0.31% of loans. Nonperforming assets rose to 0.64% from 0.60%, a rise that includes a $58 million merger-related item.
The rate tradeoff
Fifth Third is an example of how higher rates cut both ways for regional banks. As loans and securities reprice, rising short-term rates support net interest income. But a 10-year Treasury yield above 5% lowers the value of fixed-rate bonds on the balance sheet, which is what widened the bank's unrealized losses. Management said about $4 billion to $5 billion of fixed-rate assets reprice each quarter. The chief financial officer described deposit competition as the wildcard.
The bank declined to update its 2027 targets of a 53% efficiency ratio and a 19% return on tangible common equity until January.
The reaction
Shares fell about 0.8% before the open, rose as much as 2.2% in the morning and were up about 0.7% at about $50.74 by early afternoon, against a 0.6% decline in the SPDR S&P Regional Banking ETF.
Market implications
One reading is that the integration is done and the earnings power is showing. Adjusted profit beat, returns are already above the 2027 target, capital ratios are rising, credit is clean and buybacks resume this quarter.
A second reading is that the beat came with weaker revenue, a thinner margin and a smaller tangible book. If long-term yields stay above 5%, unrealized losses will keep weighing on tangible book value per share, and deposit competition could squeeze margins further.
What to watch
Results from Zions, Western Alliance and other regional lenders after Monday's close; Fifth Third's buyback execution; deposit costs and margin guidance; the 10-year yield; and the January update on 2027 targets. A further widening in unrealized losses at peers would show the balance-sheet pressure is sector-wide.