Fifth Third Bides Its Time

Whatever Fifth Third Bancorp (Nasdaq: FITB) is today, that's what it'll be until the Fed is through hiking rates in this cycle. Once that's finished, though, the bank's management will have to implement the changes needed to better compete with large rivals like National City (NYSE: NCC) and Comerica (NYSE: CMA), as well as dozens of smaller banks like Park National (NYSE: PRK)

Once again, results in the here and now weren't great. Net interest income was down more than 5%, non-interest income was up only 3%, and non-interest expenses climbed 4%. That all translated into a 2% revenue decline and an 8% drop in net income. Though there were some positive notes here and there, including strong performance in processing and merchant revenues, the overall numbers remained relatively uninspiring.

The scant good news: Credit quality remains good, and there's still some decent balance-sheet growth. Average loans increased 9%, and the company boosted its core deposit balances by 7% -- though transaction balances were up just 3%, and total interest-bearing deposits were up 12%.

For a bank that's had a stretch of pretty tough quarters, the levels of return on assets and equity are both still decent -- not U.S. Bancorp (NYSE: USB) or Wells Fargo (NYSE: WFC) good, but better than some. And with a recent shuffling of management, the bank may be gearing up for some new strategies designed to foster more effective competition and performance.

Fifth Third shares look a little undervalued, but it's tough for me to get excited about a bank that doesn't seem able to turn things around unless and until the Fed eases off. What's more, I would have liked to see a little more cost-consciousness from management -- I agree that long-term growth shouldn't be sacrificed for short-term profits, but I nevertheless think that operations here could use some tightening.

In the meantime, this is likely to remain a popular name in the merger-and-acquisition guessing game. Few banks could buy Fifth Third (at least among those that might want to), but the speculation could liven up an otherwise dull and difficult summer.

For more financial Foolishness:

• Can National City Turn Into Paradise City?
• Fifth Third Getting Second Wind?
• A Closer Look at Bank Stocks

National City and U.S. Bancorp are Motley Fool Income Investor recommendations. See Mathew Emmert's complete market-beating portfolio of dividend-paying stocks with a free 30-day guest pass.

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).