Fifth Third Eyeing Acquisitions

Fifth Third Bancorp (FITB) will look for acquisitions to increase density in core markets. The company expects to achieve the top 3 position in approximately two-thirds of its market. Currently, the company has that position in about half of its markets. The company looks forward to future acquisition activity, but does not expect any in the near term.

At the Goldman Sachs (GS) Financial Services Conference in New York yesterday, Fifth Third’s CEO Kevin Kabat expressed his expectation for more acquisition deals in the overall industry. The financial crisis and the economic weakness have weakened the health of smaller banks, providing several acquisition opportunities for the stronger competitors in the coming days.

Fifth Third’s priority has consistently been on deposit growth. The company’s expansion strategy has clearly been retail-oriented, involving a combination of de novo branching and acquisitions.

Fifth Third’s acquisition of First National Bancshares of Florida in 2005, and the acquisition of R-G Crown in November 2007, significantly expanded its presence in Florida.

The company also purchased 9 branches from First Horizon National Corporation and completed its acquisition of First Charter Corporation, a regional financial services company, in 2008. This marked the company’s entry into the North Carolina market and added to its fledgling presence in Georgia, thus widening its footprint. The company also acquired all the deposits of Florida-based Freedom Bank through a Federal Deposit Insurance Corporation (FDIC) deal in late 2008.

Going forward, we expect such strategic acquisitions to support Fifth Third’s revenue stream. The company is well positioned to benefit from a rebound in economic conditions along its footprint. Its diverse revenue mix augurs well. Improved credit metrics are encouraging. However, regulatory issues remain an overhang.

Fifth Third retains a Zacks #2 Rank, which translates into a short-term ‘Buy’ recommendation. Considering the fundamentals, we have maintained a “Neutral” recommendation on the stock.

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