It's a tough time to be a bank. Not only is the traditional 3-6-3 rule a thing of the past (pay depositors 3%, loan that money out at 6%, and be on the golf course by 3 p.m.), but revenue sources traditionally used as cash cows are under siege.
Low interest rates are weighing on earning asset yields, which is putting downward pressure on net interest income. In addition, post-financial crisis regulations have markedly curtailed noninterest income, such as overdraft and debit interchange fees.
But don't tell this to Fifth Third Bancorp (NASDAQ:FITB). For the nine months ended Sept. 30, the regional bank reported a $316 million, or nearly 19%, increase in pre-provision pre-tax profit. The result was leaps and bounds beyond its Ohio-based competitors KeyCorp (NYSE:KEY) and Huntington Bancshares (NASDAQ:HBAN) -- the former reported a 6% drop in PPPTP while the latter's stayed flat.
At first glance, you'd be excused for concluding that this is a good sign. How could making more money not be? But a deeper look at Fifth Third Bancorp's numbers reveals an unfortunate reality; virtually all of the gain came from an asset sale as opposed to core operations.
As the bank explained in its most recent quarterly report:
The Bancorp's ownership position in Vantiv Holding, LLC [a payment processing company] was reduced in the second quarter of 2013 when the Bancorp sold an approximate five percent interest and recognized a $242 million gain. The Bancorp's ownership percentage was further reduced in the third quarter of 2013 when the Bancorp sold an approximate three percent interest and recognized an $85 million gain.
Once you remove the impact of this sale, Fifth Third Bancorp's PPPTP increased by a much more reasonable $46 million, fueled principally by an assortment of other noninterest income sources. You can see the impact of this reality on the bank's stock, which is effectively even with the KBW Bank Index (DJINDICES:^BKX) this year.
Of more interest to long-term shareholders, in turn, are the trends in the bank's core operations -- that is, its deposit taking and lending functions and its operational efficiency. And the news on these fronts was underwhelming, although not entirely unexpected.
Like many of its competitors, Fifth Third Bancorp saw net interest income fall in the first nine months of the year compared to the same period in 2012. You can see this deterioration in the bank's net interest margin, which dropped by 25 basis points in the third quarter on a year-over-year basis.
Additionally, while Fifth Third Bancorp's executives claim to be making progress on the efficiency front, there's little evidence of it on the bottom line, as its operating expenses for the first three quarters actually increased by $54 million compared to the year-ago period.
What's the takeaway for current and prospective shareholders of Fifth Third Bancorp? You should think twice before getting too excited about the bank's admittedly impressive bottom-line results. We still have a long way to go before banks are back to making the type of money many investors are accustomed to.