Fifth Third Bank CEO laments 'challenging environment' at annual meeting

CEO says Cincy's largest bank is undervalued

CINCINNATI - A week after Fifth Third Bank was identified in press reports as being vulnerable to activist investors, one of its shareholders asked CEO Kevin Kabat if he would consider board changes to make the stock more popular with large investors.

The short answer was no.

"Have you asked large investors why they're not buying?" asked Carl Boeckman.

The Pleasant Ridge shareholder asked the only question at the bank's annual meeting downtown Tuesday.

"Fifth Third's share price is nowhere near where it should be," Boeckman said. "The dividend should be higher."

Fifth Third's share price closed at $16.08 Monday, up about $2 from one year ago. Cincinnati's largest bank increased its dividend by one penny in March to 11 cents. It has returned nearly $1 billion to shareholders in the last year, in the form of dividends and share repurchases.

Last week, Houston-based research firm, Rotary Gallop, ranked Fifth Third as the third-most vulnerable company in the S&P 500 in a study that analyzed how difficult it would be for an activist investor to enact changes through a proxy fight. Activist investor Bill Ackman pushed for major changes after taking a one percent stake in P&G last year. At Covington-based Ashland Inc., Jana Partners LLC, revealed a 7.4 percent stake last week. But it has yet to propose major changes.

Boeckman said after the meeting that he was aware of the Rotary Gallop study and that's one reason he asked the question. He also said he was satisfied with Kabat's answer and is not an advocate for shareholder activism at Fifth Third.

Kabat's answer? Fifth Third is trying to concentrate on things it can control.

The bank's profitability reached its highest level since 2005 last year and 2012 loan delinquencies hit their lowest level since 2004, Kabat told shareholders. Total shareholder return of 22.5 percent was better than the bank's peers and higher than the 16 percent return for the S&P 500.

"We feel we're undervalued ourselves," said Kabat. "It is a challenging environment."

Kabat said Fifth Third is hampered by banking regulations that keep it from returning capital to investors in the form of dividends. He added that profits are restrained by "a slow economic recovery and an extremely low interest rate environment. Those things, though, are cyclical and they will change over time. Our best strategy from that perspective is to position the company to take advantage of where we are in the economic cycle today and be better positioned when we come out of that cycle."

Fifth Third Chairman William Isaac backed his CEO.

"I've been in this industry for about 40 years and this is the most challenging environment I've seen," Isaac said. "I'm really proud of the job that Kevin and the management team are doing to get us through this very difficult period and position us for a bright future."

Fifth Third shareholders endorsed the entire slate of 14 directors up for re-election, each receiving more than 97 percent of votes cast. An advisory vote on executive compensation received 94 percent approval by shareholders.

After the meeting, Kabat said Fifth Third is seeing pockets of opportunity for business lending in the energy and health care sectors. Mortgage and automotive lending increased in 2012. He expects small business lending to grow in the months ahead. But he added that loan growth will remain in the low single digits this year.

"Demand is not as heavy as we'd like and certainly not what you'd hope in an economic recovery," he said.

Beyond loan growth, Kabat said the bank is seeing broad acceptance of new technology that reduces Fifth Third's operating costs and improves service for savings account and checking customers.

"Our mobile deposit offering, we've seen incredible acceptance by the client base," he said. "That's relatively new for us and our acceptance of mobile deposit exceeds some of our trillionaire competitors who've had it for three years. I think that's a demonstration of the need and the want on the part of the customer."

Finally, Kabat said Fifth Third has an appetite for acquisition but "the dinner plate is light" in terms of banks willing to be acquired at prices Fifth Third is willing to pay.

"There will be consolidation," he said. "Obviously, that's how we grew up. So, from our standpoint, it's a strength of ours. We continue to feel like there will be opportunity within our footprint ... But we aren't there yet."


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