Excess Capital and Reserves Should Boost Earnings at Fifth Third
The $205 billion asset Fifth Third Bancorp (NASDAQ: FITB), based in Cincinnati, generated earnings in the second quarter that beat analysts' expectations. The bank reported slightly better income on its interest-earning assets such as loans and securities, but loan growth continued to remain elusive. Fee income continued to come in strong for the year, while expenses also declined from the sequential quarter.
While the bank is not particularly optimistic on loan growth or net interest income, it still has a lot of excess capital and a conservative credit outlook that should provide a boost to earnings going forward.
Banks are required to hold regulatory capital for unexpected losses. This can be seen through a number of different capital ratios, but the most prevalent is the common equity tier 1 (CET1) capital ratio, which expresses a bank's core capital as a percentage of risk-weighted assets (RWA), such as loans. Each bank has a different CET1 requirement based on its size and riskiness. To determine how much excess capital a bank may have, you want to look at the CET1 ratio required by regulators, then the management team's own internal target, and the bank's CET1 ratio as it currently stands. This excess capital can used for loan growth, investments in the business, acquisitions, and capital returns such as dividends and share repurchases.
Source Fool.com
