Fifth Third Bancorp (FITB), Bank of America Corp (BAC): Five Reasons This Bank Should Sell For More Than Book Value

When a bank can increase cheaper deposit sources they can self-fund their loans. Fifth Third’s net interest margin of 3.42% only beats Bank of America at 2.43%, and lags PNC at 3.81%, and U.S. Bank at 3.48%, but Fifth Third’s cheaper source of funding should change this relationship. If the bank continues growing non-interest bearing deposits faster, their margin will expand.

Quality Loans And A Quality Balance Sheet
The third and fourth reasons investors should consider Fifth Third Bancorp (NASDAQ:FITB) has to do with their excellent credit quality and coverage. Looking at the bank’s non-performing loan percentage of 1.11%, none of their peers can match this. U.S. Bank comes the closest with a non-performing loan percentage of 1.35%, but PNC at 1.83%, and Bank of America Corp (NYSE:BAC) at 2.53% aren’t in the same ballpark.

Looking at Fifth Third’s coverage ratio, we find opportunity here as well. The bank’s coverage ratio for non-performing loans stands at 187%. This is the second highest to only U.S. Bank at 221%, and is much higher than PNC Financial Services (NYSE:PNC) at 111.86%, and Bank of America at 98.24%. This high percentage means if Fifth Third doesn’t realize as much in losses, the bank might be able to release some of these reserves, which would increase earnings.

The fifth reason to consider the bank is their balance sheet strength. Under the harsher Basel 3 rules, Fifth Third estimates its Tier 1 capital to be at 8.9. Compared to their peers, only Bank of America Corp (NYSE:BAC) has a higher ratio at 9.42. PNC’s ratio stands at 7.9, and U.S. Bank comes in at 8.2. This higher ratio means U.S. Bank should have sufficient balance sheet strength to endure almost any challenge the economy might throw at the company.

You Might Not Want To Wait
Unlike Sean Williams, I’m not sure that investors should wait to see what happens with Fifth Third Bancorp (NASDAQ:FITB). The stock yields 2.43% today, which is still better than each of their peers, except PNC, which yields 2.48%. Fifth Third’s growth in deposits should lead to better margins, and the company’s loan growth should lead to higher earnings. If the company’s non-performers are handled correctly, they should be able to release some reserves, which would increase earnings even further.

The article 5 Reasons This Bank Should Sell For More Than Book Value originally appeared on Fool.com and is written by Chad Henage.

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