A Tour Of 4 Midwestern Regional Banks: Fifth Third Bancorp (FITB), Comerica Incorporated (CMA)

Cincinnati based Fifth Third Bancorp (NASDAQ:FITB) has a well-earned reputation as a conservative, well run institution. Despite having much of its asset base in two of the states (Michigan and Florida) most devastated in last decade’s recession, Fifth Third Bancorp (NASDAQ:FITB) has only been unprofitable one year in the last twenty, in 2008. In contrast, 2012 proved that the roughly $120 billion asset bank is back to its pre-recession levels. The year was capped by a strong fourth quarter coming in at $390 million, or $0.43 per share. This was a 30% jump from the fourth quarter of 2011, and also a few cents above the $0.41 per share that analysts had forecast.

Overall in 2012, earnings came to $1.54 billion, or $1.66 per share, up 41% from the $1.18 in 2011. Lowered loss provisions and excellent loan growth, especially on the mortgage side of things, brought about the stout earnings. $1.66 per share equaled a 1.32% return on assets, and an 11.1% return on equity, solid numbers both. Yet, the issue for any well performing bank from my standpoint is whether there is reason to expect improvement in key metrics as we look ahead over the next few years. With Fifth Third Bancorp (NASDAQ:FITB), unless there is an improved credit curve, I don’t see how revenue and profit pictures can meaningfully grow.

Mortgage originations grew in 2012 to $25.2 billion, a 35% jump from the $18.6 billion in 2011. The bank’s overall loan portfolio grew by about $4 billion, or by 5% to almost $84 billion at the end of 2012 versus 2011. Fifth Third Bancorp (NASDAQ:FITB)’s common capital at year end 2012 stood at 9.5%, which while well over the regulatory minimum, stood below most of its peer banks’ levels.

At the recent Citigroup Inc. (NYSE:C) conference, Fifth Third Bancorp (NASDAQ:FITB) noted that in 2012, it paid out a total of 62% of its profits to shareholders in the forms of stock buybacks and dividends. That payout total is relatively comfortable for a bank of Fifth Third’s stability, and we can expect that ratio to grow slowly, if at all in coming years. Therefore, since I don’t see much in the way of earnings improvements over the next year or two, I don’t see much room for increasing the size of the dividend or buybacks. I think Fifth Third is a suitable choice for very conservative investors, but for those looking for capital growth, it might be best to look elsewhere.

Comerica Incorporated (NYSE:CMA) Bank continued its recovery from the recessionary years with an improved 2012. Earnings came to $521 million, or $2.67 per share, a jump of nearly 30% from the $2.09 posted a in 2011. The earnings improvement was led by a $65 million dollar drop, or about 45% plunge in its provision for loan losses. Also relatively strong loan growth of 7% over the course of the year aided net interest income to eke out a $75 million, or 4.5% gain.

But what I like most about Comerica Incorporated (NYSE:CMA) is it still has plenty of room to improve earnings further. In the Sandler O Neill West Coast Conference in early March, Comerica management stated goals of a return on assets in excess of 1.3%, and an efficiency ratio of under 0.60%. In 2012 the bank’s return on assets was just 0.83% and its efficiency ratio was 0.69%. Comerica Incorporated (NYSE:CMA) will achieve those improvements by continuing the recent path of taking assets out of its slow growth Michigan market, and reinvest those assets in faster growing Texas and California. Indeed, in 2012 the bank’s Michigan loan portfolio fell by 2%, while the Texas and California loan books grew by 10% and 13%, respectively.