Fifth Third Bancorp FITB shares touched a 52-week high of $43.85 on Thursday following the Federal Reserve's announcement of a 50-basis points interest rate cut.

The FITB stock closed slightly lower at $43.64, gaining nearly 18% over the past six months. It has outperformed its industry, the S&P 500 Index and its close peers like Comerica Incorporated CMA and Bank of America Corporation BAC in the same time frame.

Six-Month Price Performance

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Key Drivers Behind FITB Stock's New 52-Week High

A major factor for this upward movement of FITB stock can be attributed to the Federal Reserve’s aggressive start to monetary policy easing.

On Wednesday, the central bank signaled two additional rate cuts this year to support the economy. Fed officials further indicated plans for four more cuts in 2025 and two in 2026.

The interest rate cut is a positive development for banks, including Fifth Third, CMA and BAC, which have been struggling with rising funding cost pressures. While higher rates have led to a significant jump in banks’ net interest income (NII) the same led to increased funding costs, which squeezed margins.

FITB’s NII has witnessed a three-year (2020-2023) compound annual growth rate of 6.8%. However, the company’s NII declined in the first half of 2024 due to higher funding costs.

So now that the Fed has cut the rates, funding costs will gradually stabilize and eventually start declining, thus supporting FITB’s NII.

Other Factors Supporting FITB’s Performance

Raised Guidance: At the Barclays Global Financial Services Conference, FITB raised its third-quarter 2024 outlook. The bank stated that total revenues are now expected to rise 2-3% sequentially in the third quarter from its baseline of $2.2 billion compared with the previous guidance of a 1-2% increase. Also, management updated its non-interest income, now expecting a 3-4% increase from its baseline of $717 million, up from the earlier projection of a 1-2% rise. 

Strategic Collaborations: The company has been expanding its embedded payments platform on the back of strategic partnerships, positioning itself for substantial growth in the commercial payments space. Fifth Third's embedded payments platform, Newline, entered into a collaborative agreement with Trustly in September. This collaboration aims to develop its pay-by-bank arrangements and payments made through the Automated Clearing House (ACH) and Real Time Payments networks. 

In July, the bank announced a collaborative agreement between its embedded payments arm, Newline, and Stripe, a financial infrastructure platform, to expand embedded financial services offerings.

In May 2024, in collaboration with Bottomline, Fifth Third launched Enhanced Payables — a new payment platform powered by the latter’s business payments network, Paymode-X. This partnership offers customers access to a wide range of payment options, including invoice automation, virtual card payments, premium ACH payments, standard ACH payments, check payments and business-to-consumer payments.
 
Through such strategic collaborations, the bank anticipates commercial payments to be a $1 billion business in the next five years. This will eventually boost the company’s non-interest income growth over time.

Balance Sheet: The bank has a strong liquidity position. As of June 30, 2024, the company had a total debt (long-term debt and other short-term borrowings) of $19.7 billion and total liquidity (cash and due from banks and other short-term investments) of $23.9 billion. The company’s senior debt enjoyed investment-grade credit ratings of BBB+, A- and Baa1 from Standard & Poor’s, Fitch and Moody’s, respectively. This will likely enable the company to access the debt market at favorable rates.

Impressive Capital Distribution: The company is expected to keep enhancing shareholder value through efficient capital distribution.  This month, the company announced a 5.7% rise in quarterly dividend to 37 cents per share. It has increased its dividend five times in the last five years. At present, the company has a dividend payout ratio of 40% with an annualized dividend growth rate of 8.55%.

Similarly, BAC hiked quarterly dividends by 8.3% in July to 26 cents, while CMA has kept its dividend payouts steady at 71 cents per share since February 2023. 

In addition to dividends, the company has an impressive share repurchase plan. FITB repurchased 3.5 million of its outstanding common shares in the first half of 2024 as part of the 100-million-share repurchase plan announced on June 18, 2019. As of June 30, 2024, 28.6 million shares remain available under the authorization. Going forward, the company expects to repurchase $200 million worth of shares for each remaining quarter of 2024. Such efforts will enhance shareholder value in the long term.

Few Concerns Prevail for FITB

Mounting Expenses: Fifth Third’s non-interest expense saw a five-year CAGR of 2.8%, ending 2023. In the first half of 2024, the non-interest expenses remained flat compared with the same period of last year. Higher compensation and benefits expenses, as well as initiatives, such as branch expansion and digitization, will keep the company’s expense base under pressure in the short term. 

Limited Loan Portfolio Diversification: The company’s loan portfolio comprises majorly of commercial loans (61.6% of total portfolio loans and leases as of June 30, 2024). The current rapidly changing macroeconomic backdrop may put some strain on commercial lending. Moreover, in case of any economic downturn, the asset quality of these credit categories might deteriorate. Thus, the lack of loan portfolio diversification is likely to hurt the company’s financials if the economic situation worsens.

Final Words on FITB

FITB’s inorganic expansion efforts and a robust balance sheet position, along with the Fed’s recent rate cut, are set to support FITB’s financials in the upcoming period.

Sales Estimate

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EPS Estimate

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Unlocking Valuation

FITB stock appears expensive relative to the industry. The company is currently trading at the 12-month trailing price-to-earnings (P/E) F12M ratio of 12.49%, above the industry’s 11.59%.

P/E F12M

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Though the rising expense and lack of diversification in its loan portfolio remain near-term concerns, FITB’s long-term prospects remain bright. 

Considering its expensive valuation, prospective investors can keep this Zacks Rank #3 (Hold) stock on their radar and can wait for a better entry point. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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