Fifth Third Bancorp

Ladies and gentlemen, thank you for standing by. Welcome to the Fifth Third Bancorp 1Q20 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's remarks, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telethon. If you wish to remove yourself from the queue, please press the pound key. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. Thank you. I would now like to hand the conference over to your host, Mr. Crystal. Sir, the floor is yours.

Thank you, Laura. Good morning, and thank you all for joining us. Today we'll be discussing our financial results for the first quarter of 2020. Please review the cautionary statements in our materials, which can be found in our earnings release and presentation. These materials contain reconciliation for non-GAAP measures, along with information pertaining to the use of non-GAAP measures, as well as forward-looking statements about Fifth Thirds performance. We undertake no obligation to, and would not expect to, update any such forward-looking statements after the date of this call. This morning I'm joined by our President and CEO, Greg Carmichael, TFO Typhoon Kazoon, Chief Risk Officer Jamie Leonard, and Chief Credit Officer Richard Stein. Following prepared remarks by Greg and Typhoon, we will open the call for questions. Let me turn the call over now to Greg for his comments.

Thanks, Chris, and thank all of you for joining us this morning. Given the unprecedented nature of the current environment, I will focus most of my commentary on the practice steps we are taking to navigate this crisis due to the pandemic. And Typhoon will provide more details related to the quarterly financial results in his remarks. As all of you are aware, the events over the past couple of months related to the COVID-19 health crisis and the resulting economic Fallout has led us to reprioritize our focus. We are taking significant and ongoing actions to serve our customers, protect our employees, and assist our communities. We believe these proactive steps will ultimately deliver long-term sustainable value for all stakeholders, including our shareholders. Starting in early February, the executive team and the board began actively planning and prioritizing the organization's response efforts. We quickly mobilized our workforce to accommodate remote access for a large number of employees. Currently, more than 50% of our workforce is working remotely across the company, and for many groups, that number is over 95%. For employees who are not able to do their job remotely, we have established social distancing and enhanced cleaning measures based on CDC guidelines. Throughout these uncertain times, We have been proactively communicating with our customers and employees. We have issued more than a dozen press releases, several fact sheets, and numerous proactive outreaches to our customers in addition to ongoing updates on our website. We have also significantly increased the frequency of communications with our employees in order to keep them informed of the latest developments, recommendations, and health precautions. From a customer perspective, We are leveraging the strength of our balance sheet to help address the economic challenges many of our customers are facing. We are prudently extending credit to customers who support economic activity. In March alone, we extended $13 billion of new credit, including approximately $8 billion from C&I line draws. In addition to keeping our traditional lending channels open, We are also participating in government-sponsored programs established as part of the CARES Act, such as the SBA PPP, and the forthcoming Main Street Lending Program. With respect to PPP, we assisted approximately 10,000 clients, employing over 300,000 employees, totaling nearly $3.5 billion. To maximize our support, we recently announced we suspended share repurchases. And as Typhoon will discuss in greater detail, we continue to have strong capital and equity levels to weather a prolonged downturn. In addition to utilizing our strong balance sheet, we are directly supporting consumers and businesses by keeping 99% of our branches open and fully operational with modified health protocols and amended hours as appropriate. We continue to process over 100,000 branch transactions per day, underpinning our role as an essential service provider. And for many other banking needs, we continue to encourage our customers to use our highly rated digital platforms in addition to our network of approximately 53,000 fee-free ATMs. Furthermore, we continue to proactively engage with our customers. Our bankers have personally connected with 2 million customers over the past month to see how they are doing under these circumstances, both personally and financially. and to offer assistance as needed under our extensive financial hardship relief programs. In March, we began providing relief in the form of payment deferrals and forbearances to customers across a wide array of lending products. We also suspended vehicle repossessions and home foreclosures. Since the rollout of our assistance programs, we have processed over 96,000 hardship requests, which represents approximately $1.5 billion in fifth-third loan balances, in addition to $6 billion from our mortgage servicing portfolio. As I mentioned, taking care of our employees is a top priority. In addition to our safety measures, we have announced special payments of up to $1,000 per employee for those providing essential banking services. These measures have helped maintain call center operations and branch personnel at appropriate levels. For our communities, we recently committed nearly $9 million in philanthropic funds to help address the effects of COVID-19 pandemic. We will continue to take proactive and aggressive measures to help mitigate the effects of the downturn. From a macro perspective, while we do not know the duration or severity of the crisis, we have spent many years preparing for a downturn by strengthening our balance sheet through a disciplined approach to credit, and by increasing our capital and equity levels. We have also improved and diversified our revenue streams in our loan portfolios. Finally, we evaluate our firm-wide resilience through stress testing our balance sheet under a range of conditions worse than the last crisis and more severe than a regulatory-run stress test. Since the financial crisis, we have taken several steps which have put us in a very strong position. We transformed our overall approach to credit risk management centralized credit underwriting, and added stringent geographic sector and product level concentration limits. We exited certain commercial real estate segments and remained disciplined in our existing CRE portfolio. The client selection focused on top-tier developers and virtually no land loans. We also continue to maintain an underweight position relative to our peers. We exited businesses such as commodity trader lending and mezzanine lending. Three years ago, we exited $5 billion in commercial loans given the risk-return profile. This has helped reduce our leveraged lending exposures by over 50%. We have also reduced our indirect commercial leasing portfolio by almost $2 billion over the past two years, which has significantly lowered our exposure to certain assets such as commercial aircrafts and rail cars. Lastly, we have maintained our credit discipline and our consumer portfolio with a weighted average FICO score above 750. We have consistently communicated our through-the-cycle principles of disciplined client selection, conservative underwriting, and an overall balance sheet management approach focused on long-term performance horizon. Our unwavering adherence to these principles and our balance sheet strength gives us confidence as we navigate this environment. Our first quarter operating results reflect the strength of our franchise and strategic decisions we made in managing our balance sheet, our interest rate risk, and our liquidity risk exposures, in light of the rapid and widespread economic deterioration we saw towards the end of the quarter. Non-interest income, interest margin, non-interest income, and expenses all performed in line with or better than our January guidance, with the net charge-off ratio also consistent with our previous expectations. Typhoon will discuss the changes in our allowance in more detail. Similar to what you have seen from many of our peers, our reserves reflect the CECL adoption, the economic impacts of COVID-19, lower oil prices, and the impact of loan growth during the quarter. As I mentioned earlier, we believe that we are in a very strong position from both a capital and liquidity perspective. We are continuing to evaluate potential economic scenarios, but we currently believe our capital position is strong enough to maintain our current dividend if these conditions persist through the end of the year or remain well-capitalized. Before I turn it over to Typhoon to discuss our results and our outlook, I'd like to once again thank our employees. I am very proud of the way you have responded in extraordinary ways to support our customers, our communities, and each other as we navigate these unprecedented times. With that, I'll turn it over to Typhoon to discuss our first quarter results and our current outlook.

Thank you, Greg. Good morning, and thank you for joining us today. Our company is well positioned to deliver on our pledge to provide financial support to our customers, communities, and employees during the current pandemic and the duration of the economic downturn. It is important to note that despite the unexpected time and nature of the events that led to the sudden decline in economic activity, We are entering this downturn from a position of balance sheet strength that was built through the actions that we've taken during the past few years. Although it is impossible to predict the timing of inflection points in the economy with precision, since late 2018, we had been anticipating an eventual change in the economic cycle after a record expansion period. Our client selection, capital, interest rate and liquidity risk management decisions have all reflected that expectation. What makes this downturn more challenging than others is clearly the unexpected nature of the initial trigger and the ensuing low visibility surrounding the depth and duration of the downturn. All parts of the global economy are entering this cycle at the same time, but the unprecedented level of fiscal and monetary actions will undoubtedly provide a level of support to cushion a portion of the economic setback. The actions that we have taken so far and those that we will be taking in the coming months will focus on maintaining and leveraging our strength to support our clients and stand by them as we help them manage through this difficult period. As always, we incorporate all information that is available to us at the time when we provide commentary about our business, and discuss our expectations. Our overall perspective on the next few quarters had been very negative at the end of the first quarter, even before the rapid deterioration in the data and market expectations that we have seen over the past couple of weeks. As we look at the economy today, we do not expect a V-shaped recovery. Our discussions on relevant factors, including credit, will be based on an assumption that it will take a number of quarters before we see visible signs of recovery. What is unclear is the interaction between the fiscal and monetary programs and the pace of the recovery and what the new run rate will be after that point. Turning to slide four. With respect to the first quarter, we were pleased with our overall financial performance despite the economic disruption. Our performance in January and February was ahead of our expectations. Once again, our net interest income, net interest margin, non-interest income, and non-interest expenses for the full quarter all performed in line with or better than our guidance. Credit quality remained strong during the quarter. Charge-offs were consistent with our prior expectations, and the NPA ratio decreased two basis points sequentially. Reported results for the quarter included a negative $0.09 impact from several notable items, including a credit valuation adjustment for client derivatives, a charge related to the valuation of the Visa total return swap, the impact of MB merger-related charges, and a mark in our private equity portfolio in addition to the $0.55 impact of the provision in excess of charge-offs. Adjusting for those items, and the purchase accounting impact shown in our earnings materials, first quarter pre-provision net revenue increased 22% from the prior year. Excluding the first quarter seasonal impacts on compensation and benefits expenses, PPNR increased 2% sequentially. Our core return on tangible common equity, excluding AOCI, increased from the prior year to nearly 15%, and our efficiency ratio continues to trend toward the top quartile among peers. Moving to slide five. Total average loans increased 1% sequentially, with growth balanced between the consumer and commercial portfolios. Prior to the market disruption in March, total loan growth was generally tracking in line with our previous guidance. Growth in average commercial loans was impacted by the line draws of approximately $8 billion in March. Since the end of the quarter, line utilization has remained very stable. Average commercial real estate loans were flat with the construction book declining by 4%. Our CRE balances as a percentage of total risk-based capital remained very low, around 80%, which is significantly lower than our exposures prior to the last downturn, which stood at 174%. Average total consumer loans grew 1% from last quarter. In general, our consumer portfolio trends from the past year or so continued again during the first two months, with the auto portfolio leading the growth, reflecting strong production of $1.7 billion with healthy spreads and the same risk-return parameters as before. Clearly, the origination activity significantly slowed down in March, and in the near term, we expect the weakness to continue. The quarter-over-quarter growth in auto was partially offset by a decline in home equity balances. Average deposits were up 1%. In addition, our end-of-period deposit growth exceeded our end-of-period loan growth, which enabled us to maintain very strong liquidity levels during the quarter, even when we experienced very high utilization rates. The ability to grow deposits so strongly while reducing deposit rates by 14 basis points during the quarter shows the strength of our franchise and our relationship-based banking model. Moving on to slide six. Reported net interest income increased $1 million compared to the prior quarter, with adjusted NII increasing $3 million. The strong NII performance reflects the impact of our $11 billion cash flow hedge portfolio as well as the wider than normal LIBOR Fed Fund spread near the end of the quarter. Purchase accounting adjustments benefited our first quarter net interest margin by four basis points this quarter, compared to five basis points last quarter. Our reported NIM increased one basis point, and the adjusted NIM increased two basis points sequentially, which was at the upper end of our January guidance. Our NIM performance reflected the benefits of our balance sheet hedges, proactive management of deposit rates, and a lower day count. The excess short-term liquidity levels in the first quarter caused a three basis point drag on our NIM compared to last quarter. Interest-bearing core deposit rates were down 14 basis points during the quarter, better than our previous guidance range of 8 to 10 basis points. We expect interest-bearing core deposit costs to decline another 35 to 40 basis points over the next two quarters and be heavily front-loaded in the second quarter. This forecast, combined with the deposit rate actions we have taken since the third quarter of last year in response to the Fed rate moves, results in a cumulative data in the mid-30s. In the near term, we intend to maintain higher than normal liquidity as we continue to gauge the duration of the line draws and the corresponding deposit growth that we witnessed over the past month, excluding the impact of PPP loans we expect our loan-to-core deposit ratio to remain stable in the second quarter. As a reminder, our margin is approximately two-thirds sensitive to the front end of the curve, which results in a three-to-four basis point reduction in NIM per 25 basis points moved in Fed funds, and one-third to the long end, which results together in a cumulative four-to-five basis point impact. It is worth noting once again that our differentiated hedge and securities portfolios are expected to provide strong NIM protection on a relative basis. We executed our hedges early when the 10-year was around 3% and also structured them to provide protection for much longer than most peers with hedge protection against low rates through 2024. And as we have discussed before, our securities portfolio is also structured in a way that is meaningfully different than peers, which results in significantly lower cash flows and less stress on the portfolio yield. Our net premium amortization was under $1 million during the quarter. Moving on to slide seven, we had a stronger quarter and fee income than we guided in January. The resilience in our fees continues to highlight the level of revenue diversification that we have achieved. Adjusted non-interest income increased by 1% sequentially despite the March headwinds compared to our previous expectation of down 3% coming into the quarter. The strong performance was driven by mortgage banking, client financial risk management, and wealth and asset management revenues. Mortgage banking revenue of $120 million increased $47 million sequentially, reflecting the widening of primary-secondary spreads and strong volumes combined with the impact of the MSR valuation net of hedges. Origination volume of $4 billion increased 6% sequentially and 145% from the year-ago quarter as customers took advantage of the low rate environment to refinance. we expect second quarter mortgage revenue to be adversely impacted by COVID-19. In our commercial business, we generated another strong quarter of capital markets revenues, which were up 25%, over 25% from the year-ago quarter. Client financial risk management revenue was very strong this quarter, reflecting investments in talent and technology, the continued focus to deepen client relationships, as well as the market volatility during the end of the quarter. Wealth and asset management revenue increased 4% from the prior quarter due to higher brokerage and seasonally strong tax prep fees. We continued the AUM flow momentum again this quarter despite the broader market dynamics. Given the current portfolio allocations, we expect our wealth and asset management revenue to experience approximately a 50 beta relative to the S&P 500 on about a month lag. Deposit service charges declined slightly this quarter. Commercial deposit fees were positively impacted by reductions in earnings credit rate and solid gross TM revenue, which was offset by seasonal declines in consumer fees. Moving on to slide eight. First quarter reported pre-tax expenses included merger related items totaling $7 million and intangible amortization expense of $13 million. Adjusted for these items and prior period items shown in our materials, non-interest expense increased 2% sequentially, well below our previous guidance of 5%. In line with previous years, our first quarter expenses were impacted by seasonal items associated with the timing of compensation awards and payroll taxes. Excluding these seasonal items, our total expenses in the first quarter would have been down approximately 4% sequentially. In the current environment, there will be a natural decline in expense items that are directly tied to business performance and activity. In addition, we recognize that as we navigate this environment, investments and projects with low returns will need to be reprioritized, which gives us the ability to evaluate a wide range of potential actions. As we develop better visibility on the extent and duration of the downturn, several of these items will be actionable. We will provide more details on our expense management in this environment in the coming months. In March at the RBC Conference, we provided a snapshot picture of our exposures to COVID-19 high impact sectors. Slide 9 provides an update for quarter end exposures. and also expands our scope of highly impacted industries to include nonessential retail and exposures to healthcare facilities. We are also adding more information on the utilization rates and the percentage of the portfolio that is described as highly leveraged. The totals on this page represent 12% of our total loans and approximately one-third of our total leveraged loan portfolio which at the end of the quarter was just over $4 billion in outstanding. We believe that in these segments, our client selection has been very disciplined with a focus on larger companies that have access to capital in stressed environments. 75% of our total CNI loans in the industries most stressed by COVID-19 are shared national credits. In addition, on slide 10, we give you a snapshot of our energy portfolio. This portfolio is less levered and more hedged than the portfolio before the last downturn in oil prices. Nearly 80% of the portfolio is in reserve-based lending. During the 2015 disruption, we experienced approximately $25 million in losses. In the current environment, we estimate that the production break-even is about $18 per barrel. On slide 11, we give you an updated view of the consumer and mortgage portfolios. The FICO scores clearly indicate the high credit quality of the portfolio, with over 55% of the portfolio containing FICO scores of 750 or higher on a balanced weighted basis. Approximately 90% of the consumer portfolio is secured, and as you can see by our FICO band distributions, Our portfolio is heavily weighted in the high prime, super prime space. From a hardship perspective, only 10% of the mortgage forbearance requests have LTVs greater than 80%, except for those with guarantees or insurance. Also, in February, we further tightened our underwriting standards, specifically on minimum FICO scores and maximum LTV levels. Turning to credit results on slide 12. Net charge-offs remained near historically low levels during the quarter. The consumer net charge-off ratio was down 12 basis points and commercial was up 12 basis points sequentially, resulting in a total net charge-off ratio of 44 basis points, consistent with our previous expectations. NPAs continued to be well-behaved, up just 4% sequentially. Given the loan portfolio dynamics I mentioned earlier, the NPA ratio was down two basis points sequentially. Obviously, with the adoption of CECL, we substantially increased our reserves at the beginning of the quarter, and given the COVID-19 impact and loan growth, our provision was 525% of charge-offs. Slide 13 provides an overview of the major changes in our allowance. Our day one bill was $653 million, consistent with our previous guidance, and includes $171 million from the NB portfolio, as we discussed previously, which was significantly impacted by the disparate manner in which purchase accounting discounts were treated under the incurred model versus the CECL model. The post-day one incremental allowance during the quarter was based on several factors. A significantly weaker economic outlook, including a lower oil price, higher funded loan balances, and the impact of unprecedented fiscal and monetary stimulus. The overall approach is a combination of quantitative model-based estimates and qualitative overlays. We use a three-year reasonable and supportable period followed by a two-year reversion to historic losses. The quantitative process is based on multiple economic scenarios. The expectation for the two predominant macroeconomic factors is a sharp downturn in GDP and a rise in unemployment in the next two quarters, the impacts of which are partially cushioned by the aggressive levels of fiscal and monetary stimulus, leading to a very weak recovery in the fourth quarter. The challenge associated with calibrating our expectations is, as other banks have discussed, the speed at which the real-time updates to economic forecasts are changing. The base scenario assumes that GDP growth will slowly start to recover in the fourth quarter and will reach a year-over-year growth of approximately 3% in 2021, with the unemployment rate remaining above 6% throughout 2021. the more stressful scenario has GDP continuing to decline through the first quarter of 2021 and unemployment staying above 7% for almost the entire three-year reasonable and supportable forecast period. The oil price under the base case reaches $33 in the fourth quarter, but under the more stressful scenario remains below $30 through 2021. As a reference point, we compare our current reserve level with the nine-quarter total loss estimates within the two most recent severe stress test runs that we ran, including the 2019 stress test that we ran last year, despite the fact that we were not required to submit, and the 2020 stress test that we recently submitted to the Fed, in addition to the most recent Fed run adverse and severe stress test from 2018. Our current reserves stand at 76% of the nine-quarter cumulative losses projected under the 2018 Fed adverse scenario, 44% of the nine-quarter losses under the 2018 Fed severe scenario, 50% of the nine-quarter losses under the 2019 severe scenario, and 54% of the nine-quarter losses under the 2020 severe scenario that we just submitted. In the absence of better visibility on future levels of economic activity, these reference points give you some guidance on the strength of our current ACL ratio of 2.13%. In addition, we still have approximately $200 million or 17 basis points of our total loans and remaining discounts associated with the MB portfolio. As other management teams have mentioned during their earnings polls, most of the economic scenarios published since the end of the quarter are forecasting a weaker outlook compared to previous forecasts. As more quantitative and qualitative information becomes available, we will incorporate them into our reserve analysis. As the significant fiscal and monetary support is likely to reduce the impact of both the near-term decline in the GDP and the increase in unemployment, the more meaningful impact on reserve levels will be the shape of the recovery and the level of the economic activity in the post-recovery period. Turning to slide 14, our capital and liquidity positions remained very strong during the quarter. our CET-1 ratio ended the quarter at 9.4%, over 280 basis points above the well-capitalized minimum. Given the various dynamics during the quarter, we are providing you a CET-1 reconciliation between net income, RWA growth, seasonal adoption, and the impact of dividends. As a reminder, we did not repurchase shares during the first quarter. As you can see, The majority of the 39 basis point change in CET1 is attributable to line draws from the commercial book along with the impact of CECL. Dividend payouts constitute a smaller portion of the change in CET1. Understandably, the topic of dividend sustainability is of major interest to our shareholders. We believe that we are similar to other banks in that we are entering this downturn from a position of strength and that strength will be able to withstand severe downturns. That does not mean that dividends will be sustainable in all scenarios, but at this time, we expect to maintain our dividends, which our board will continue to evaluate based on the data available. Our tangible book value per share was $22.02 this quarter, up 18% year over year. We have grown our book value for five consecutive quarters. At the end of the quarter, our unrealized pre-tax gain in our securities and hedge portfolios was approximately $3.3 billion, which is not included in our regulatory capital ratios. From a liquidity perspective, we have over $80 billion in readily available and contingent liquidity. Although we are no longer subject to the LCR, We have since continued to stress test our positions on a monthly basis under seven different types of liquidity scenarios. And we then hold ourselves to the most stressful scenario. Our liquid securities positions have not changed since our phase outs of the LCR. Slide 15 provides a summary of our current outlook. Given the uncertain environment, we are withdrawing our previous full year guidance until we get more visibility on the economic environment. For the second quarter, based on the line draws at the end of the first quarter, we expect low double-digit growth in average commercial loans and relatively stable consumer loans. Net interest income should grow slightly as a result of higher loan outstandings while NIM tightens based on my earlier discussion on our interest rate sensitivity. In addition to the impact of the rate environment, NIM will also be impacted by the PPP loans and the amount of short-term liquidity on the balance sheet. Non-interest income and expenses are both expected to decline by high singles and low double digits from their current levels, reflecting the impact of COVID-19-related impacts. Total net charge-offs are expected to be in the 45 to 50 basis points range. In summary, our first quarter results were strong and continue to demonstrate the progress we've made over the past few years, improving our resiliency, diversifying our revenues, and proactively managing the balance sheet. That being said, we are in an unprecedented environment right now and have limited visibility with respect to the economic path forward. We will continue to rely on the same principles, discipline client selection, conservative underwriting, and a focus on a long-term performance horizon, which gives us confidence as we navigate this environment.

With that, let me turn it over to Chris to open the call up for Q&A. Thanks, Taifun. Before we start Q&A, as a courtesy to others, we ask that you limit yourself to one question and a follow-up question, and then return to the queue if you have additional questions. we would do our best to answer as many questions as possible in the time we have allotted this morning. During the question and answer period, please provide your name and that of your firm to the operator. Laura, please open the call for questions.

All right, thank you. Ladies and gentlemen, at this time, if you would like to ask a question, simply press star, then the number one on your telephone keypad. We will pause for a moment to compile the Q&A roster. Your first question comes from the line of Saul Martinez from UBS. Your line is now open.

Hey, good morning. Thanks for taking my question. I wanted to ask about the outlook for credit and the interplay there with your reserving. And, you know, your reserve, as you highlighted, Typhoon, your reserve levels are very high. versus – and they're especially high versus peers, so the 213 basis points. It's not only high versus other regionals, but I think even more striking is just within product categories, C&I at 168 basis points, way above, you know, I think anybody who I've seen report on reserve ratios on resi and home equity despite, you know, seemingly a high-risk – a high-quality portfolio, sorry. So – You know, I know there's a lot of you talked about your estimates and your process and your assumptions, but I guess, you know, I just want your perspective a little bit on. To what extent you're reserving is a function of taking maybe a more conservative stance than others within the confines of plausible scenarios and or to what extent it actually reflects perhaps. a riskier portfolio or at least a portfolio that might be more susceptible to a downturn in terms of the impact on lifetime losses?

Thanks, Saul. Good question. Obviously, it is a broad question. And the difficulty here is the environment has changed so quickly, it is difficult to compare one bank's ratios and coverage to another's. But having said that, what we gave you on page 12 of the slide presentation is a similar set of coverage numbers for stress test runs that other banks have. And clearly our coverage levels are exceeding those losses that we have predicted through our models compared to other banks. What we have done is we have incorporated as the environment continued to deteriorate in March into the end of the quarter, and basically reflected a fairly drastic change in the economic environment, not only in the second or third quarter, but tried to project a weaker recovery into the second year and third year, because we are looking at a three-year R&S period here. And I gave you some statistics around our assumptions. In our minds, the current fiscal and monetary policies are likely to cushion the second and third quarter impacts, but are not going to be necessarily providing a significant support to the latter years. So our reserve levels, as conservative as they are at 2.13%, do reflect a slowly recovering economy rather than a V-shaped recovery. Underlying those numbers is also the quality of the portfolio that we have. We shared with you statistics on our consumer and mortgage portfolios, and we are also sharing some details on the commercial book. The commercial book, I think Jamie and Richard can comment on the commercial book, but the portions of the commercial books that are exposed to COVID-19 also tend to be the book that has more large corp exposures, more heavy SNCC exposures. So all of those combined, hard to compare our numbers to another, but we do believe that we've appropriately accounted for a weak outlook, slow recovery, and the quality of the portfolio that we have in place.

Jamie or Drew, if you guys would like. I stepped into this chair and started looking at the portfolio. The one thing that stands out to me is just how intentional we have been about where we do business with the clients that we select that should be resilient in times of stress. Frankly, the focus for us has been on companies with larger scale that should be able to persevere in this environment. And so our loan book, I would tell you, is comprised of high-quality, liquid, resilient names. And the best data we could use to prove that point is the shared national credit information that we included on the page. And as you can see, it's a very high percentage. It's 75%.

Got it.

Now, none of this suggests that this is like, obviously, we continue to evaluate, you know, the data as it comes. We continue to evaluate these new programs. And, you know, at the end of this quarter, we'll do that evaluation again, just like every other bank will do. And then, you know, we'll share with you, you know, the results of our analysis.

Okay. And we can, you know, I know this gets into the weeds, but, you know, some elements of your modeling, three-year, reasonable, supportable, and whatnot, maybe on the more conservative side than some other peers. But one follow-up question. You did have the second consecutive quarter where you had a pretty elevated amount of non-performing loan formation in your commercial book. If you can talk to that, and was any of that related to sort of the accounting noise with PCI, you know, moving to PCD and then, you know, getting recast by the non-accrual? Or was there, you know, actually something underlying that that, you know, is suggesting some worsening credit trend in some parts of your book?

Yeah, so on the first part of the question, there's very little impact on the PCI to PCD transition. So, The MPA inflows that you see in the deck of about $175 million was driven by several factors. One, about a third of the inflow was a single real estate mall exposure. About one-fourth of the MPA formation is actually in smaller businesses, business banking, lower middle market, and then the remainder When you look at what drove it, it's really spread across industries and geographies, but the one common thread is that they're all predominantly in the service industry, so professional, medical, education, financial advisory, so pretty widespread there.

Got it. Thank you very much.

Your next question comes from the line of Matt O'Connor. from Deutsche Bank. Your line is now open.

Good morning.

Hey, Matt.

I was wondering if you could comment at all in terms of the PPP loans going to, I guess, those small businesses that need them the most. I mean, obviously, this is kind of a broader question than just Fifth Third, but it seems like a little bit of a free-for-all, and there's just been some articles out there about maybe some bigger companies getting the loans, and not really kind of criteria for deciding who gets it. And just wondering if you could comment on that, on your thoughts.

Yeah, Matt, this is Greg. As I mentioned, we processed about 10,000 loans for our customers to tune about $3.5 billion. The average loan size is about $350,000, $370,000. So that, for our portfolio, I think was pretty broad-based. But We did a good job, I think, of servicing both the LMI community of businesses, small business in general. Very few of our loans were up at that $9 million to $10 million range. So for our portfolio, I think we did a pretty good job of getting as much through the system as we could in the short time that we had available, the system was available to us. Hopefully that gets refunded tomorrow at the latest. We've got more resources there because we definitely have a larger pent-up demand for the PPP program. But overall, with respect to Fifth Third, I think we did a nice job. The size of our loans indicate that we served a large portion of the smaller businesses that are out there versus the larger business. I've read the headlines. I've seen some of the challenges. Other banks are faced with as far as prioritizing loans. We did not do that. We worked as hard as we could to get as many loans through the system. A lot of that was dependent on the complexity of the request itself and the ownership structure of companies kind of dictated how much we can get through at what pace, if your loan got through or not. Once again, we've already input a significant additional number of applications. Hopefully, the window will open here shortly, and we'll get those through.

In any sense, call it what the pipeline is for when there's additional funding?

Yeah, well, obviously I think most bankers would agree and most people would agree that the additional $300 billion is not going to be adequate to serve the total demand that's out there right now. We expect that $300 to $350 billion to be absorbed pretty quickly, even faster than the last, you know, 350 were absorbed. So we think it's going to be very fast. We don't think it's going to be adequate. We think the demand is going to outpace the available funds.

Okay. Thank you. Helpful caller.

Your next question comes from the line of Erica Najarian from Bank of America. Your line is now open.

Hi. Good morning.

Good morning.

So just to piggyback off of Sol's question, he took a significant reserve build and still earned 4 cents. You know, with the stock at $16.75 and tangible book value per share of 22 bucks, so clearly the market is fearful of tangible book erosion. And I guess my question here is in the realistic scenarios for economic stress that you see, and it seems like your band of expectations are reasonable, do you see yourself continuing to earn positive earnings during the duration of this downturn?

Good question. I will not comment on this. Look, I mean, I think, you know, our – away from reserve bills and lost expectations, I think the underlying – PPNR activity is going to continue to look good. You know, we intend to manage our expenses at an appropriate level relative to the environment. We have a strong protection against a lower rate environment, and we have diversified revenue streams. So the company has strong protection ability to generate capital and earnings in this environment. As I mentioned earlier, it is a little difficult to predict exactly what will happen to the provision and the charge-offs, but clearly our intent is to continue to outpace the impact of the credit here. And this is one of those environments where, unfortunately, looking longer than beyond one or two quarters is extremely difficult. So we will give you a better update as we get a better read on the environment. But obviously, we believe strongly in our ability to manage this company at profitable levels.

Thank you. And just my follow-up question is, you noted that, you know, there would be a total impact of four to five basis points on the net interest margin if we consider each 25 basis point of, decline in the short end, plus what's happened to the long end. And I'm wondering, does that include the PPP impact, and does that include the reduction in deposit costs that you anticipate? And how do you plan to fund the PPP loans that are coming on balance sheet? Thank you.

Yeah, so we did not give any NIM guidance this quarter, and that was on purpose. I think the general dynamics around NIM and the impact of lower short-term rates and a flatter curve at lower rates is pretty set for us. As I mentioned, it's four to five basis points per move. The reason why we chose now to give guidance this quarter is because there are three... I view the second quarter as a transitionary quarter. There are three main impacts. One of them is the very high levels of liquidity that we are carrying on our books. I mentioned that March... you know, carried significantly more liquidity on our balance sheet. Here in early April, we're carrying even more because some of the government programs are starting to throw cash. The second one is PPP, as you mentioned, and the third one is the LIBOR Fed Fund Spread. We expect LIBOR Fed Fund Spread to tighten throughout the quarter from the current levels. And what we also believe is the high level of liquidity that we're carrying in our balance sheet is going to give us a better ability to manage the deposit rates down during the quarter. So all those together, the second quarter is going to be one of those quarters that's going to be, you know, very busy. But beyond the second quarter, that relationship between rate moves and the curve shape and our NIM impact holds pretty tightly, you know, four to five basis points. is a pretty good number that, you know, you can use.

Got it. Thank you.

Your next question comes from the line of John Pankari from Evercore ITI. Your line is now open.

Morning. Good job. Thanks for the detail on slide 12. I think it's very helpful and I acknowledge that some of the prior comments that your reserves are booked to a level that's higher than peers. Can you discuss your confidence in your reserve relative to the DFAS numbers that you cited? I guess they're approximating around 50% of DFAS severe. Um, you know, given that you are factoring in a U shape essentially versus a V, um, why wouldn't you think that those numbers should be higher? Not that I've got a problem with them or anything. I'm just saying if it is factoring in a U, should that warrant possibly a, a level that's higher than about 50%, 50% of the severe defect? Thanks.

Yeah. In order to achieve, uh, a better level of precision, um, We need to know more about this environment. We are giving you these reference points as a comparison. I think the scenarios that underlie the DFAS are known, and they are quite severe, but no stress scenario is like the other one, and this one in particular is going to be very different in the sense that these support programs are yet to be evaluated with respect to how they impact the recovery path and where we are going to end up. That's a big difference because in most classic stress tests, usually the economy comes back at one point to where it started. What we don't know today is where this economy is going to end up when the recovery period flattens out to a plateau. So I'm very hesitant to answer your question because we just don't know enough about the nature of this downturn, but at least showing you the DFAS results gives you the ability to compare us with others, and then as this economy develops, then we have the ability to reshape our expectations.

No, I agree. Okay, thanks, Dr. Moon. And then the... Another question on the reserve. Do you have the allocation of the reserve to the high impact areas that you flagged?

So we did not provide that, John. So relative to the 2.1%, one would assume it's north of that number, but we did not disclose that percentage.

Okay. All right. That's fine. And then one last question, if I could. Just on the loan modifications, how much of your loan modifications have been done on the commercial side of the portfolio? And do you have any industry concentrations really where you're starting to see those deferrals? Thanks.

Yeah. So within the commercial segment, we've actually had a fairly limited number of requests in the commercial side to the consumer side. We've only had about 400 or so. And it's predominantly covenant waivers for terms in 2020, and that's roughly $2 billion of outstanding, and that's led by car dealers, hotels, and restaurants. When it comes to restructured or modified actual dollars, that's very small to date with only $200 million in loan balances. And probably the one sector with the most activity would be restaurants. You see that on slide nine, our billion nine in outstandings. The good news is we're favorably weighted with only 35% is in dining and 65% is fast food, quick service. So about 80% of the book continues to remain open. Those that are closed are predominantly in dining areas. So overall, some activity here in the modifications, but it's still a little early. We'll see how it plays out over the course of the year.

Got it. All right, thanks. Take my questions.

Your next question comes from the line of Gerard Cassidy from RBC. Your line is now open.

Good morning, Greg. Good morning, Typhoon. Good morning. Good morning, Gerard. You gave us very good detail on a number of your different risks that you have on the portfolios today. And in the opening comments, Greg, you mentioned that I think about 96,000 fee waivers have been executed, also deferrals on loans up to $1.5 billion. That, I think, represents just under 5% of the consumer loan portfolio. Do you guys have any expectations of where those deferrals may peak out at as a percentage of your portfolio?

Yeah, let me start, and I'll just throw it over to Jamie here. First off, it's 96,000 hardship requests, not fee waivers. So it's 96,000 requests in total, which a lot of that included, obviously, both forbearances and deferrals in our loan book also. But the fee waivers are actually much smaller now than Jamie's numbers, I think.

About half a million dollars in fee waivers. And so, Gerard, in terms of the hardship relief to date by product, and this is through the end of last week, so a little bit updated for April activity, what we're seeing is a lot of the fixed rate or fixed payment products have the higher rate request levels, so autos at 5%, mortgages in our own portfolio are at 4% of the portfolio, and then as you see the minimum monthly payments lower in home equity and credit card, they're at 2% and 3%. So as we model, obviously we expect this to rise as unemployment rises, but the ultimate amount of hardship relief that we give will ultimately depend on where unemployment peaks out. And for us, right now, on most products, we're offering 90-day loan payment deferrals, and then in mortgage, we offer the six-month forbearance. So we'll continue to update you as the quarter transpires.

Thank you. And then, obviously, the focus this quarter for you and others has always been on credit quality and the provisions of Equally as important, Typhoon, as you pointed out, is PPNR. Can you share with us your outlook for PPNR from the standpoint that obviously the second quarter end of period, first quarter loans for the industry was extremely high due to the drawdowns and revenues obviously will benefit from that in the second quarter. But as we get into the third and fourth quarters and the unemployment rate goes up, underwriting standards tighten, Should we anticipate that PPNR revenues start to shrink for you guys just because of the environment we're in?

I think, Gerard, here's my take on the year. I do believe that assuming these drawdowns will stay with us for a while, the higher loan balances will provide a decent amount of support against the lower rate environments. Assuming that we manage the deposit rates down and our liquidity positions optimally, the year, despite the fact that it is the worst-case scenario beyond just negative interest rates for banks, the balance sheet should support a decent, healthy level of NII. In terms of the sequence of quarters from second into third into fourth, I think we will probably see a changing fee picture here, because clearly the economy stopped, and that will have a near-term negative impact on fees in the second quarter, from spend levels to asset management based on equity levels and to some capital markets activity. Our expectation is, assuming that things start somehow normalizing, either into the second half of the second quarter or the third quarter, we should see a little healthier fee picture in the second half of the year. And then the expense side of it, we clearly are going to benefit from lower expenses that are tied to activity. And then we will start making some decisions on our end based on this environment. So in general, the second quarter definitely is going to be a transition quarter. But I do believe that as we look into the third and fourth quarter, we are going to start seeing some normalizing PPNR levels. Thank you.

Your next question comes from the line of Vivek Janaja from J.P. Morgan. Your line is now open.

Thanks. Can you hear me? Yes, good morning, Greg. A couple of questions. Firstly, on your oil and gas exposure, can you talk a little bit about where you are in your reserve-based redetermination and what that could mean for the loans?

Yeah, hey, it's Richard. We're about a third of the way through the redeterminations, and at this point, we've seen about a 16% drop in oil-based foreign bases and about a 12% drop for those that are gas-based producers.

Okay. And I think I caught this right. You said you've got a breakeven Typhoon, you said, of $18 production price?

Yeah. What Typhoon was describing is we went through the portfolio and looked at the average production break-even lifting costs for our portfolio. So think about what it takes to get it out of the ground and what it costs and what it would take to serve its interest for that portfolio. And that's about $18 when you benchmark it to NYMEX. What Typhoon didn't give you, and I think this is important for the portfolio, we also say on slide 10, the portfolio is 80% hedge for 2020. Those hedges give our producers about $14.50 of benefit, net benefit. So if you add the hedges to it, it's five bucks for a Cuban and those hedges sounds like a lot of them mature by the end of 2020 we've described on slide 10 is the percentage of production that is 80% in 20 and then it rolls down to 30% in 21 and then what happens to those loans as those hedges roll off are you

Do you get to be done and the borrower has to figure out how to find other funding or how does it work?

Well, for those under a reserve-based structure, the borrowing base is redetermined every six months. So there will be a fall redetermination that will be based on current production, current reserves, and the outlook from prices at that time. So the borrowing base and the loan amount that we're willing to lend gets reset every six months. So to the extent prices improve, that'll change the borrowing base. To the extent they don't, the borrowing base will come down.

Okay, great. And, Jimmy, any color on the casino exposure of 2 billion?

The casino exposure on slide 9, the top part of the page of slide 9 refers to Lending to the operating companies within the casino and then the CRE portion would be obviously the land, the hotel, and going along with it. Really, the names are large companies, high quality, resilient. So, again, we feel like we're well positioned. And while there may be losses in this portfolio, we feel like – The lost content is very manageable.

It's Richard again. The only thing I'd add is in addition to high-quality names, we're diversified by operator types, so global operators, some Native American, and some regional. And in each case, high-quality operators usually, to the extent they are regional, they have got a great franchise area that is either given to them by regulation or demographics that give them a ton of resiliency and less competition.

Great. Thank you.

Your next question comes from the line of Scott Seifers from Piper Sandler. Your line is now open.

Good morning, guys. Thanks for taking the question.

Hey.

First of all, I just want to echo some of the prior comments. Really good detail and appreciate the disclosure. And I think at this point, just one small question, sort of a follow-up on the deferrals. I guess I'm most curious on the commercial side. And even though it's early, I was hoping you might be able to give a little insight as to how you would expect sort of the, I guess, the redo diligence process to go as, you know, we come up on the end of the deferral time period and, you know, how will that go, you know, sort of willingness to, defer again, or how does that entire process work through?

So on the mortgage, are you talking on the consumer side, Scott?

No, I'm actually, even though it's relatively small, I'm actually more curious about the commercial side.

Yeah, so the commercial side will just continue on a case-by-case basis with each client. The covenants, relief periods expire. And as we're executing on these covenant waivers, we have been adding some additional liquidity capital retention requirements as well. So we feel like the process has been productive. It's been a good dialogue with clients. And so that'll just continue over the course of the year.

Okay, perfect. And then at what point do you sort of, I mean, I guess it's all case by case, but at what point do you sort of make the decision as to, okay, we could continue to sort of forbear on this, or maybe it needs to be downgraded, charged off, et cetera?

Yeah, hey, it's Richard. So we review the portfolio actively, and for the names that are going to be more impacted at least quarterly, but there is active management, active dialogue, and so as new information comes in, we adjust our internal risk rating. And then as we have financial reporting, that would be the other driver that would change a view on our risk. To the extent that borrowers continue to perform in line with expectations, we would expect to continue the deferrals and the forbearance that we've agreed to. Okay.

All right, perfect. I appreciate the color. So thank you guys again.

There are no questions at this time. You may now continue, Chris.

Thank you, Kyle, and thank you all for your interest in Fifth Third. If you have any follow-up questions, please contact the Investor Relations Department, and we will be happy to assist you.

That concludes today's conference call. You may now disconnect. Thank you for your participation.