I don’t always have the time to check out a stock that sounds interesting right away. I keep a watch list of stocks on hand, so I can go back later, and see if the company deserves my attention. In an article by Sean Williams of The Motley Fool, he mentioned Fifth Third Bancorp (NASDAQ:FITB) as a bank that was doing well. I knew that I wasn’t following the company, and I wanted to find out if I was missing an opportunity. By the time I got around to researching the company, I had already missed some of the upside in the stock, but that doesn’t mean its run is over.
Getting It On My Watch List About Two Months Too Late
Sean does a good job for Fool.com in coming up with companies that investors can add to their watch list for further research later. Sometimes he talks up the company, sometimes not, but there is always pertinent information for the investor. He mentioned Fifth Third, and I took notice because I used to work at a bank, and I pretty much remember everything Peter Lynch wrote in his two books. Lynch mentioned Fifth Third Bancorp (NASDAQ:FITB) as a favorite bank stock that was treated like a slow grower.
Sean’s found several positives, such as the facts that the bank just passed the Fed’s stress test with flying colors, they raised their dividend by 10%, and were paying a 2.7% yield at the time. His only concern was the stock traded at 109% of book value, and though he said it might go higher, he concluded by saying he, “might consider a position if the share price drops considerably.” Unfortunately for Sean, that hasn’t happened.
Bad News For One, Opportunity For All
On the surface, Fifth Third Bancorp (NASDAQ:FITB)’s deposit growth of 5% and loan growth of 6% only beats its peer Bank of America Corp (NYSE:BAC). Bank of America, in the last quarter, reported deposits up 4.38%, but loans were down 0.82%. Other banks like PNC Financial Services (NYSE:PNC) and U.S. Bancorp (NYSE:USB) did much better. In fact, PNC saw deposits increase 9%, while loans were up 13%. U.S. Bank reported deposits increased 7.3%, and loans were up 5.8%. The difference between these companies is their deposit composition.
For instance, PNC Financial Services (NYSE:PNC) saw non-interest bearing deposits increase by 7%, which lagged total deposit growth of 9%. The same relationship held true at Bank of America Corp (NYSE:BAC) and U.S. Bank as well. However, at Fifth Third Bancorp (NASDAQ:FITB), the company’s non-interest bearing accounts grew by 10%, which was double the overall growth rate. The reason that faster growth in cheaper deposits is important, leads us to the second reason investors should give Fifth Third a look–their net interest margin should improve.
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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