Dear Mr. Berko: Last year, I bought 2,000 shares of Fifth Third Bank at $18. My stockbroker believed that it would be “an excellent long-term investment for growth and income,” but I’m having doubts. I’m socially friendly with some of the executives from the company’s headquarters, and I’m unimpressed. What would be your recommendation for a conservative, quality long-term investment?
— P.R., Cincinnati
Dear P.R.: You picked the wrong industry. There are more banks in this country than gas stations, pawnshops, tattoo parlors and bars. And you should be unimpressed with Fifth Third Bank (FITB-$18), because there’s not much to be impressed about.
FITB has 18,500 employees and about 1,300 branches, mostly in the Midwest. If the folks in Midwestern branches are as pleasant as the folks in the Florida branches, then FITB has a darn good ground crew. However, Abbott and Costello could do a better job of running FITB than the motley management crew occupying the plush offices on the top floor of Fifth Third Center, which overlooks their Cincinnati home.
Return on assets and return on shareholder equity will be down significantly this year. Interest income is expected to increase by about 2 percent, while non-interest income may fall by 19 percent this year. Also, non-interest expenses may rise by about $125 million while return on equity plummets from 10.8 percent to 8 percent this year. And fanning the flame of failure, FITB’s return on assets may implode from 1.21 percent to 0.91 percent, a huge drop of 24 percent. As a result, Wall Street expects 2016 earnings to come in at $1.55 a share, down enormously from 2015’s share earnings of $2.01. It’s no wonder that Goldman Sachs, Robert W. Baird, Credit Suisse, Sandler O’Neill and others recently downgraded the stock. Those guys certainly have a better handle on the abilities of FITB’s management team and the fawning toadies at headquarters. They downgraded FITB because they believe that it will take management longer than normal to tame the bank’s growing expenses and boost revenue growth. Management’s plans to expand its insurance business and generate better results from merger advisory activities have produced disappointing results. And management’s futile attempts to integrate wealth management with commercial banking have failed ignominiously.
