Here’s a shocker: Citi analyst Keith Horowitz has raised his estimates and price target on Fifth Third (FITB), citing increasing confidence in the lender’s capital position. FITB reported a $0.37 loss after a leveraged leasing charge, but core EPS came in at the upper end of guidance at $0.05. Horowitz identifies four key takeaways from the result:
1) Out-of-footprint lending is a big driver of loan losses. MI and FL acct for 44% of 2Q losses but 25% came from exposure in noncore markets,
2) Florida mtg-related exposure is very outsized vs. footprint, representing 30% of mtg, 21% of construction loan portfolios (vs 9% of deposit mix), which we think shows lack of disciplined underwriting as prior mgmt team was too focused on growth,
3) 2Q resid construction loans have grown to ~$4.5 bil vs. ~$3.2 bil held at 1Q, mostly from loans added by First Charter, and
4) issues in the commercial book remain centered in real estate/construction; rest of
book shows only modest credit deterioration.
Despite considerable challenges however, Horowitz reckons that FITB will be OK on capital:
With FITB’s $1.5 bil capital raise this qtr and the potential free up of $1 bil from pending asset sales (most likely asset mgmt, and possibly Visa stake and/or a piece of processing business), we believe mgmt will have sufficient capital to weather the storm. Mgmt provided several hypothetical scenarios – not guidance – that suggested losses could range from 1.45-1.80% in 2008 and from 1.70% to 2.50% in 2009. Our estimates are 1.77% & 2.16% for ’08 & ’09.
Horowitz raises his price target to $14 from $11 and reiterates his Hold/Speculative rating.
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