Citing a number of “unusual items” in Fifth Third Bancorp’s first-quarter earnings report, Dan Poston, the bank’s chief financial officer, assured industry analysts the quarter was “not as noisy as it might seem.”
Those unusual items mostly centered on Fifth Third’s earnings ledger becoming markedly different since the bank changed the name of its processing sector to Vantiv Inc. and put it up for an initial public offering, Poston told analysts during an April 19 conference call.
Fifth Third Processing Solutions LLC became Vantiv Inc. last June. Earnings for the quarter included $115 million in pretax gains on Vantiv’s initial public offering, which took place March 22.The earnings report included several items related to Vantiv that combined to result in $125 million in fee income for the bank, Poston noted.
The $125 million total included the $115 million in gains related to Vantiv's IPO, but it also included an estimated $36 million in charges that were recorded through equity-method earnings related to refinancing Vantiv’s bank debt, offset by $46 million in gains on Vantiv warrants, he added.
The Cincinnati-based bank reported $59 million in first quarter card and processing revenue, down 26% from $80 million for the same period last year.
“The year-over-year decline represents the impact of the new debit-interchange rules, which cost us about $30 million on a quarterly basis,” Poston said. Those rules, which the Federal Reserve Board put into effect Oct 1 under a mandate in the Durbin amendment to the Dodd-Frank Act, essentially halved issuers’ debit card interchange income.
The bank forecasts second-quarter total card and processing revenue growth of about $10 million from the first-quarter levels because of higher transaction volumes and seasonal differences in consumer spending, he added.
Overall, Fifth Third reported first-quarter net income of $430 million, up 62% from $265 million. Revenue totaled $1.67 billion, up 14% from $1.46 billion.
“Credit continues to improve overall and across virtually all portfolios,” Kevin Kabat, Fifth Third president and CEO, told analysts. “We've already felt most of the negative impact from regulatory reform that's applicable to Fifth Third [card issuing], and we do expect further mitigation in coming quarters.”
Moreover, the bank’s speculation that Vantiv would grow more quickly as an independent operation turned out to be correct, Kabat said.
“Vantiv nearly doubled its revenue between 2008 and 2011, which also included the benefit of several acquisitions,” he said. Vantiv earned $1.6 billion in revenue in 2011, Fifth Third said.
Those acquisitions would have been difficult to accomplish had the processing business remained a fully consolidated subsidiary of the bank, Kabat added.
Fifth Third Bank owns 84 million shares representing a 39% interest in Vantiv. Based on Vantiv’s closing price of $19.63 on March 30, Fifth Third reported its interest in Vantiv was valued at $1.6 billion.