Fifth Third Bancorp: Financial Loser
The broad indices ended mixed after the U.S. Census Bureau said retail sales rose by 0.1% in January after increasing 0.5% in December. Excluding the auto sales, retail sales were up 0.2%, compared with a 0.3% gain in December. The increase in total sales matched the consensus estimate among economists, according to Zacks, while sales growth excluding auto sales came in ahead of the 0.1% increase expected by economists.
There had been some concern among economists that the rise in payroll taxes in January would damp consumer sales. The tax increase has certainly had a major effect, with the U.S. Treasury reporting on Tuesday that the federal government operated with a $3 billion budget surplus during January . Deutsche Bank analyst Dominic Konstam said in a report early on Wednesday that "the anecdotal evidence suggests that consumers have been more resilient than we had anticipated. At present, we anticipate +1.5% real GDP growth in the current quarter and this assumes consumer spending rises just 1%."
Bank stocks took a breather from a rally. The KBW Bank Index (I:BKX) was down 1% to close at 55.37.
Fifth Third Bancorp
Shares of Fifth Third Bancorp of Cincinnati have returned 6% this year, following a 23% return during 2012. The shares trade for 1.3 times their reported Dec. 31 tangible book value of $12.33, and for 9.5 times the consensus 2014 earnings estimate of $1.69 a share, among analysts polled by Thomson Reuters. The consensus 2013 EPS estimate is $1.65.
Based on a quarterly payout of 10 cents, the shares have a dividend yield of 2.48%.
During the fourth quarter, Fifth Third continued to grow its mortgage revenue, which totaled $258 million, increasing from $200 million the previous quarter and $156 million a year earlier, as the company continued to enjoy robust volume amid the refinancing boom. (Please see TheStreet's earnings coverage for a detailed discussion of the company's fourth-quarter results.)
But at this point in the economic cycle, investors are concerned over how much of a decline in profitability the large mortgage lenders will see from lower gains on the sale of newly originated loans. With the market rate on 10-year U.S. Treasury bonds rising by about 40 basis points to roughly 2% over the past two months, mortgage-backed securities are also seeing higher yields.
Atlantic Equities analyst Richard Staite said in a report Jan. 29 that the increase in MBS yields had led to a contraction in the primary secondary mortgage spread to 82 basis points from an average of 123 basis points during the fourth quarter. This means smaller gains on the sale of loans to government-sponsored enterprises, including Fannie Mae (FNMA) and Freddie Mac (FMCC) .