Fifth Third Bank Is the Pits

By Malcolm Berko

December 12, 2018 5 min read

Dear Mr. Berko: In March of this year, I bought 300 shares of Fifth Third Bank at $34, but it hasn't gone higher, even in this bull market. The shares have just continued to go down in price, while most other banks in the Midwest have risen in value. I've got a 27 percent loss. Would you recommend that I buy another 300 shares? — PS, Columbus, Ohio

Dear PS: No!

I recently talked with some semi-big shots at four consumer-oriented public companies in several Midwestern states where Fifth Third does business. They expressed concerns that higher interest rates, rising shipping expenses, increasing costs for labor and materials, and the effects of the Trump tariffs are muffling their bottom lines. Loan growth in the Midwest is slowing. Commercial loans are drying up. And some businesses are beginning to question their bullish expectations for the coming few years. However, I think that they're wrongheaded and that there's a lot of business out there.

Fifth Third Bank (FITB-$24.59) took its first deposit in 1858. It has $145 billion in assets, but it may be experiencing some cracks, fissures and strains in its business model — or, as retired Dutch politician Koos Andriessen might say, there may be a little leak in the dike. FITB, based in Cincinnati, has over 1,150 bricks-and-mortar locations in the Midwest and the South, more than 2,400 ATMs, and 18,000 full-time employees. The stock is trading at 25 percent of its high and is lollygoggling near its yearly low. The published consensus of 28 brokerages shows that two of them have "buy" recommendations, 22 have "hold" recommendations, three rate FITB as "underperform" and one says, "Dump the thing!"

Meanwhile, FITB's motley board of directors and indifferent management, whose universal antenna doesn't pick up all the channels, seem to agree. Figuring FITB's price was too high, CEO Greg "Greggy Boy" Carmichael sold 87,000 shares this year at $32.37. Executive Vice President Frank Forrest, the bank's chief risk officer, sold 30,000 shares this year at $32.56. Executive VP James "Little Jimmy" Leonard, the bank's treasurer, unloaded 35,000 shares at $33.80. There's more, but I think you get the photo. It seems that FITB's net profits may decrease by 10 percent next year. Noninterest income may go down by 20 percent. Return on total assets could go down by 18 percent next year, to 1.4 percent, while return on equity may decrease by 20 percent, to 11.8 percent. And management's answer to expected lower revenues and profits is to cut jobs across the board and lay off over 10 percent of its workforce. Recognizing that many of its branches are woefully understaffed, this move is major dumb.

I wouldn't care a whit to own the stock. I'm not impressed with Greggy Boy, who came up from the ranks and, according to a source at FITB, is definitely not considered an employee-friendly boss. I'm very unimpressed with the low number of shares owned by FITB's board of directors. And I'm also unimpressed with the board's decision to purchase Chicago's $20 billion-asset and 4,000-employee MB Financial for $4.7 billion. The talk on the Street suggests that the $54-a-share purchase is way too pricey. Given that it's 16.4 times earnings and 2.9 times book value, Wall Street may be right. Some say the MB Financial deal plus the board's simultaneous decision to close its $8 billion institutional investment management business encouraged the former chairman and two members of the FITB board to resign early this year. In addition, the stock's dividend isn't worth a second look.

FITB's management and inutile board of directors are unimpressive and could individually benefit from a series of industrial-sized enemas. Earnings progress and asset growth stink, and future price appreciation may be disappointing. Meanwhile, many middle- and upper-middle management types at FITB's headquarters are nervous about being redundant when the MB Financial acquisition is completed next year.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at [email protected] To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

Photo credit: at Pixabay

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