Sold Fifth Third Bancorp

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We sold Fifth Third Bancorp on June 28, 2006. FITB’s performance has been subpar for some time. It has also had a defection of senior management people. The proceeds from the sale have been redeployed to other financial stocks in our portfolio that have brighter prospects.

Prior Analysis from April 2005

Moose Pond Investors purchased an initial position in Fifth Third Bancorp on March 24, replacing Fannie Mae. FITB has a projected average return 19.5% and quality rating of 78.9.

Morningstar gives Fifth Third Bancorp a five-star rating and a wide moat. Here are the positives and negatives from the Morningstar report.

Bulls Say

• Consistent midteen earnings growth and a focus on efficiency have made Fifth Third among the most respected regional banks in the country.
• The bank has expanded into more-lucrative markets like Chicago and Florida.
• Although it accounted for just 11% of revenue in 2004, Fifth Third’s segment that focuses on services like ATM and merchant-card processing is growing rapidly.
• The loan and lease portfolio is about evenly split between consumer and commercial credits, and the commercial portfolio is well diversified across business sectors. The bank also minimizes the size of loans (few are for more than $25 million) and avoids subprime lending.
• Few banks have as entrepreneurial a culture as Fifth Third. To push financial responsibility as far down the management chain as possible, some 2,500 segments, units, and groups have their own profit and loss statements produced on a monthly basis.

Bears Say

• Improved efficiency has helped drive earnings gains, but Fifth Third has cut most of the fat from its organization. Further savings won’t be easy to find. Fifth Third has earned its premium because of its consistent growth, but its lofty valuation leaves no room for disappointment. If one occurred, the stock could be severely punished.
• Although Fifth Third’s growth prospects remain bright, the larger the bank becomes, the more difficult t will be to balance its decentralized, entrepreneurial culture with the need to maintain consistency and adequate risk control.
• By entering larger, more competitive markets, Fifth Third is straying from its historical successes in sleepy Midwest towns. Although its low cost structure provides the bank a powerful weapon with which to compete, larger, more-entrenched banks will not cede share easily.

For a less optiistic view of FITB see article by Tom Brown on BankStocks.com. Brown concludes that Fifth Third’s 2004 annual report shows that the company has morphed from great to merely good. He also believes that the company’s sheer size will prevent a return to its previously lofty levels of performance. We don’t agree.