Fifth Third Bancorp

Q1 2024 Earnings Conference Call

4/19/2024

spk00: Thank you. I'd now like to hand over the call to Matt Kuro. You may now begin the conference.
spk10: Good morning, everyone. Welcome to Fifth Third's first quarter 2024 earnings call. This morning, our Chairman, CEO, and President Tim Spence and CFO Brian Preston will provide an overview of our first quarter results and outlook. Our Chief Credit Officer, Greg Schreck, has also joined for the Q&A portion of the call. Please review the cautionary statements in our materials, which can be found in our earnings release and presentation. These materials contain information regarding the use of non-GAAP measures and reconciliations to the GAAP results, as well as forward-looking statements about Fifth Third's performance. These statements speak only as of April 19, 2024, and Fifth Third undertakes no obligation to update them. Following prepared remarks by Tim and Brian, we will open up the call for questions. With that, let me turn it over to Tim.
spk01: Thanks, Matt, and good morning, everyone. At Fifth Third, we believe that great banks distinguish themselves not by how they perform in benign environments, but rather by how they navigate challenging ones. In that sense, the uncertainty we face in the current environment provides us with an opportunity to demonstrate that our focus on stability, profitability, and growth in that order will produce consistently strong, some might even say boring, financial results. This morning, we reported earnings per share of 70 cents, or 76 cents excluding the Visa MasterCard settlement litigation charges and the additional FDIC special assessment. All major income statement captions were in line with or better than the guidance that we provided in our January earnings call. Our adjusted return on equity and return on assets are the highest of all peers who have reported thus far and the most stable when compared to results from the first quarter of 2023. We grew period-end deposits compared to the prior quarter and generated annualized consumer household growth of 3%, punctuated by 7% growth in our southeast markets. Since 2018, we have built more than 100 de novo branches in the southeast. As a portfolio, they are exceeding our expectations, having achieved 112% of their household growth goals and 132% of the deposit goals built into the business cases. Florida is our top performing de novo market with deposit dollars at 195% in gold. J.D. Power also recently named fifth third number one for retail banking customer satisfaction in the Florida market. Importantly, net interest margins improved in the quarter driven by stabilizing deposit costs. With interest bearing deposit costs increasing only one basis point sequentially. Consistent with our guidance last year, the fourth quarter of 2023 marked the low point for NIM And we believe the first quarter of 2024 will mark the low point for NII. While end of period loan balances were down 1% compared to the prior quarter, we saw solid middle market loan growth across our footprint with Tennessee, the Carolinas, Kentucky, Indiana, and Texas achieving the strongest results. Our footprint continues to benefit in an outsized way from federal incentives to bolster investments in domestic manufacturing and energy infrastructure. The Midwest and Southeast have received more investment per capita than other U.S. regions in industries as diverse as multimodal logistics, semiconductors, batteries, and pet food. Treasury management and wealth and asset management were the strongest contributors to fee income, driven by the strategic investments we have been making in both areas. Treasury management revenue grew 11% year over year, driven by our software-enabled managed services payments offerings and NewLine, our embedded payments business. Over one-third of the new treasury management relationships added in the quarter were payments led and had no credit extended. Wealth and asset management fee revenues grew 10% year-over-year, highlighted by strong growth in fifth-third wealth advisors. The RIA platform we launched in 2022, which recently crossed $1 billion in assets under management. Our credit performance remains stable, highlighted by continued strength in our commercial real estate portfolio. We posted another quarter of zero net charge-offs in CRE and have less than 3 million of NPAs in our non-owner-occupied portfolio. While we expect that broader credit trends will continue to normalize, our emphasis on client selection and credit discipline helps to ensure that we have a well-diversified portfolio, not overly concentrated in any asset class, industry, or geography. Expenses are well-controlled. Adjusted for discrete items highlighted in the release, Expenses declined 1% year-over-year driven by savings realized through process automation and our focus on value streams. Expense discipline is what has allowed us to make the long-term investments in our business necessary to generate superior returns and operating leverage through the cycle. Looking forward to the rest of the year, we remain cautious given the wide range of potential economic and geopolitical scenarios that could materialize. Depending on how you read the most recent data, inflation is either sticky at 3%, slowly moving down to 2% or moving back up past 4%. Geopolitical tensions remain elevated and deficit spending, green energy investments, and the domestication of supply chains are all inherently inflationary in the medium term. We believe the best way to manage in uncertain times is to stay liquid, stay neutrally positioned, and stay broadly diversified while investing with the long term in mind. That is what we intend to do. I want to thank our employees. Your hustle, heart, and dedication are why we've been recognized thus far in 2024 as one of the world's most admired companies by Fortune, one of the best brands for customer service by Forbes, and one of the world's most ethical companies by Ethisphere. Thank you for keeping our shareholders, customers, and communities at the center of everything we do. With that, I'll now turn it over to Brian to provide additional details on our first quarter results and our current outlook for 2024. Thanks, Tim.
spk10: And thank you to everyone joining us today. Our first quarter results were a strong start to the year, reflecting our balance sheet strength, disciplined expense and credit risk management, and diversified fee revenue streams. We saw new household growth accelerate and new quality relationships and commercial post-study gains. For over a year, we have highlighted the importance of maintaining balance sheet strength and flexibility in an uncertain economic and interest rate environment. Our first quarter results evidence the strength of our current position, which should produce strong and stable returns across a wide range of economic outcomes. This approach has served us well as rate cut expectations are pushed out. As Tim mentioned, our profitability remains strong as we have the highest ROA and ROE and among the best efficiency ratios of our peers that have reported to date, in a quarter in which we have outsized seasonal compensation expenses. On a year-over-year basis, we were the most stable for both ROA and ROE and among the most stable for NII and the efficiency ratio. Our consistent and strong earnings added 15 basis points to CET1 during the quarter, inclusive of absorbing eight basis points impact from the CECL phase-in. Turning to the income statement, net interest income for the quarter was $1.4 billion and consistent with our expectations. Interest-bearing deposit costs were well managed and increased only one basis point compared to the prior quarter. The balance sheet continues to be reflective of defensive positioning with optionality to navigate the changing economic and interest rate environments. Net interest margin improved one basis point for the quarter. Increased yields on new production of fixed-rate consumer loans and day count benefits contribute to the growth and were partially offset by the deposit balance migration from demand to interest-bearing accounts. This increase in NIM is the first sequential improvement since the fourth quarter of 2022. Excluding the impacts of security gains and the Visa total return swap, adjusted non-interest income decreased 1% from a year ago quarter due to lower revenue in commercial banking, leasing, and mortgage, partially offset by strong growth in treasury management and wealth and asset management fees, where both saw double-digit revenue growth over the prior year. The securities gains of $10 million reflected the mark-to-market impact of our non-qualified deferred compensation plan, which is more than offset in compensation expense. Adjusted non-interest expense decreased 1% compared to the year-ago quarter due to our continued focus on expense discipline and the ongoing benefits from our process automation efforts. While expenses are down versus the prior year, we continue to invest in opening new branches and increased marketing spend to drive household growth. Adjusted non-interest expense increased 8% sequentially, as expected, due to seasonal items associated with the timing of compensation awards and payroll taxes, in addition to $15 million of expense from the previously mentioned non-qualified deferred compensation plan. Moving to the balance sheet, total average portfolio loans and leases decreased 1% sequentially. Average commercial portfolio loans decreased 2% due to lower demand from corporate banking borrowers and the average balance impact of last year's RWA diet, which reduced both total commitments and loan balances during the second half of 2023. Middle market loans increased during the quarter as we drive for more granularity and are winning private bank relationships. As Tim discussed, we saw solid middle market loan growth across our footprint. Period and commercial revolver utilization was 36%, a 1% increase from the prior quarter, also driven by middle market. Average total consumer portfolio loans and leases were flat sequentially due to the overall slowdown in residential mortgage originations given the rate environment, offset by growth from solar energy installation loans and indirect auto originations. Average core deposits decreased 1% sequentially, driven primarily by normal seasonality within our business. Decreases in DDA balances and CDs were partially offset by increases in interest checking by segment Average consumer deposits decreased 1% sequentially, while both commercial and wealth deposits were flat. Consumer deposits rebounded towards the end of the quarter to finish slightly higher than at the start of the quarter. As Tim mentioned, we are very pleased with the results of our multi-year southeast branch investments, which are driving both strong household growth and granular insured deposits. DDA as a percent of core deposits was 25% as of the end of the first quarter. compared to 26% in the prior quarter. Migration of DDA balances continued during the first quarter, and we expect that trend to carry on in 2024, but at a slower pace than in prior quarters. We ended the quarter with full Category 1 LCR compliance at 135%, and our loan-to-core deposit ratio was 71%. The strong funding profile continues to provide us with great flexibility. Moving to credit. Asset quality trends remained well-behaved and below historical averages. The net charge-off ratio was 38 basis points, which was up six basis points sequentially and consistent with our guidance. The ratio of early-stage loan delinquencies, 30 to 89 days past due, decreased two basis points sequentially to 29 bps. The MPA ratio increased five basis points to 64 basis points. We have maintained our credit discipline by generating and maintaining granular high-quality relationships and by managing concentration risks to any asset class, region, or industry. In consumer, our focus remains on lending to homeowners, which is a segment less impacted by inflationary pressures, and have maintained our conservative underwriting policies. We continue to see the expected normalization of delinquency and credit loss trends from the historically low levels experienced over the last couple of years. From an overall credit risk management perspective, we assess forward-looking client vulnerabilities based on firm-specific and industry trends and closely monitor all exposures where inflation and higher for longer interest rates may cause stress. Moving to the ACL, our reserve coverage ratio remained unchanged at 2.12% and included a $16 million reserve release driven by lower end-of-period loan balances and modest improvements in the economic scenarios. We continue to utilize Moody's macroeconomic scenarios when evaluating our allowance and made no changes to our scenario weightings. Moving to capital. We ended the quarter with a CET1 ratio of 10.44%, and we continue to believe that 10.5% is an appropriate near-term operating level. As a reminder, at the beginning of the quarter, we moved $12.6 billion of securities to help the maturity. This represented one quarter of our AFS portfolio and was done when the five- and ten-year treasury rates were below 4%. The move reduced AOCI volatility to capital due to our investment portfolio by around 50% during the first quarter. Our pro forma CET1 ratio, including the AOCI impact of the AFS securities portfolio, is 7.8%. We expect improvement in the unrealized securities losses in our portfolio given that 60% of the AFS portfolio is in bullet or locked out securities, which provides a high degree of certainty to our principal cash flow expectations. Approximately 26% of the AFCI related to securities losses will accrete back into equity by the end of 2025, and approximately 62% by the end of 2028, assuming the forward curve plays out. Moving to our current outlook. We expect full year average total loans to be down 2% compared to 2023, consistent with our prior expectations. The decrease is primarily driven by the impact of the 2023 RWA diet on average balances, as well as lower mortgage production due to the higher interest rate environment. While we expect full year average total loans to decrease, we expect average total loans in the fourth quarter of 2024 to be up 2% compared to the fourth quarter of 2023. with both commercial and consumer balances up low single digits by the end of 2024. We are also assuming commercial revolver utilization remains stable. For the second quarter of 2024, we expect average total loan balances to be stable. We expect softness in commercial due to uncertainty on the interest rate and economic outlooks to be offset by consumer loan growth, which is expected to be up due to solar and auto originations. Our retail household growth and commercial payments growth remained robust in the first quarter, and those outcomes will drive deposit growth in 2024. However, we are mindful of potential economic and market headwinds from monetary policy. Therefore, we are forecasting full-year average core deposit growth of only 2% to 3% compared to our 5% growth realized in 2023. While we expect DDA migration to continue given the high absolute level of interest rates, The pace of migration has declined. If rates remain at current levels, we expect to see the DDA mix dip below 25% during the middle of the year. Shifting to the income statement. Given the stabilization in our deposit costs and the benefit we are seeing from the repricing of our fixed rate loan book, we continue to expect the full year NII to decrease 2 to 4%. And as Tim mentioned, we expect the NII and MIM trough is behind us. This outlook is consistent with the forward curve as of early April, which projected three total cuts. However, our balance sheet is neutrally positioned so that even with zero cuts in 2024, we expect stability in our NII outlook. The primary risk to our NII performance would be a re-acceleration of deposit competition. Our forecast also assumes our cash and other short-term investments, which ended the quarter at over $25 billion, remain relatively stable throughout the remainder of 2024. We expect NII in the second quarter to be stable to up 1% sequentially, reflecting the impact of slowing deposit cost pressures and the benefit of our fixed-rate loan repricing. Our current outlook assumes interest-bearing deposit costs, which were 291 basis points in the first quarter of 2024, would increase about six basis points sequentially if we see no rate cuts. We expect adjusted non-interest income to be up 1 to 2% in 2024, consistent with our prior guidance, reflecting growth in treasury management, capital market fees, and wealth and asset management revenue. We expect second quarter adjusted non-interest income to be up 2 to 4% compared to the first quarter, largely reflecting higher commercial banking revenue. Consistent with our prior guidance, We expect full-year adjusted non-interest expense to be up 1% compared to 2023. Our expense outlook assumes continued investments in technology with tech expense growth in the mid-single digits and Salesforce additions in middle market, treasury management, and wealth. We will also open 30 to 35 new branches in our higher growth markets and close a similar number of branches in 2024. We expect second quarter total adjusted non-interest expense to be down approximately 6% compared to the first quarter due to the seasonal compensation and benefits cost in the first quarter. In total, our guide implies full year adjusted revenue to be down 1 to 2% and PPNR to decline in the 4 to 5% range. This outcome will result in an efficiency ratio of around 57% for the full year. a modest increase relative to 2023 driven by the decrease in NI. We continue to expect positive operating leverage in the second half of 2024. Our outlook for 2024 net charge-offs remains in the 35 to 45 basis point range as credit continues to normalize, with second quarter net charge-offs also in the 35 to 45 basis point range. We expect to resume provision builds in connection with loan growth assuming no change to the economic outlook. Loan growth and mix is expected to drive a 75 to $100 million build for the full year, with the second quarter build being approximately zero to 25 million. As we mentioned last quarter, our consistent and strong earnings provides us the flexibility to resume share repurchases of three to 400 million in the second half of 2024, including one to 200 million in the third quarter. assuming a stable economic and credit outlook and capital rules that are no worse than the current NPR. In summary, with our well-positioned balance sheet, disciplined expense and credit risk management, and diversified revenue growth, we will continue to generate long-term sustainable value for our shareholders, customers, communities, and employees. With that, let me turn it over to Matt to open up the call for Q&A. Thanks, Brian. Before we start Q&A, given the time we have this morning, we ask that you limit yourself to one question and one follow-up, and then return to the queue if you have additional questions. Operator, please open the call for Q&A.
spk00: We are now opening the floor for question and answer session. If you'd like to ask a question, please press start and number one on your telephone keypad. Our first question comes from Mike Mayo from Wells Fargo. Your line is now open.
spk02: Hi, can you hear me?
spk01: We can. Good morning, Mike.
spk02: Hey, I'm just trying to figure out how you get away with interest-bearing deposit costs going up only one basis point quarter over quarter when the group is like around up 10. And I mean, is this sustainable? Is it due to your tech? Is it because of your Southeast expansion? Yeah. you know, what's your secret here? Or maybe it's just ways to, you know, bite you in future quarters. Thanks.
spk10: Thanks, Mike. It's Brian. Great question. You know, I think one of the things on this front, you know, we very early last year made the decision to grow deposits very aggressively. You know, we viewed it as a very consistent theme with being focused on the long-term, focused on stability, and quite honestly, focused on returns. You know, we viewed it worst case, We're going to generate some low-cost wholesale funding with no prepayment penalties. Best case, it gave us an opportunity to have 12 million interactions with prospects and customers. And we have a lot of confidence in our ability to win relationships when we can get our team in front of our customers. And so with that, as we've moved into this more stable environment, they're clearly with some costs as we brought those promo balances in. But it gives us an ability to actually manage and recycle interest expense. where we're able to pulse offers through different markets, where we can basically harvest some savings and reintroduce that back into interest expense on new offers and ultimately have a lower net overall cost. We just feel like it's being very efficient with every dollar we're utilizing. As I mentioned in the guidance, there's certainly some risk that the competition can reaccelerate, but it does feel like overall deposit competition did soften at the end of last year, and that continued to occur.
spk02: And just to follow up, I mean, you're expanding share in the southeast. You said you went from, what, eight to six year over year. I mean, don't you need to price competitively and offer higher rates to gain that share?
spk01: Well, we definitely took advantage of the fact that we have, I think at this point with the investments that have been made down there, Mike, a higher natural share than we did existing market share, right? So we were able to use the Southeast as a mechanism to raise deposits without repricing existing relationships to the same degree that we would have if we were using those rate offers in markets where we had high existing shares. I think, though, What's important is that what's driving the growth in the Southeast is the household growth. And those relationships are that vast majority momentum banking relationships, which means the core deposit product is a non-interest bearing deposit product. So the 7% growth in the Southeast, when you break it apart, I mean, the research triangle is like 25% year over year. Most of the major markets in Florida were in the mid to high teens, Tampa, 11 or 12%. Broward County in North, in Southeast Florida, 17, 18% year-over-year household growth rates. So we're gaining share in a way that then allows us to make decisions about whether we want to move more of the deposit wallet, where obviously rate is part of it, or where then we have the opportunity to introduce the fee-based businesses on the consumer side of the equation. And in commercial, a third of the relationships that we added in treasury managers we mentioned this last quarter were payments-led, so they're not driven by deposit rates or credit as the entry point.
spk02: All right, thank you. Yeah.
spk00: Our next question comes from Scott Seekers from Piper Sandler. Your line is now open.
spk11: Morning, everyone. Thanks for taking the question. I was hoping you could spend a moment discussing on-demand trends in more detail. You know, kind of soft for the group, though. You noted some specific states that have generated stronger middle market growth. And then maybe within the response, if you could also please discuss the outlooks for the specialty businesses, such as Dividend and Provide.
spk01: Yeah, sure. Happy to – I'll start that one, and if need be, Brian can fill in here, Scott. I mean, listen, I think in general, the commentary we've provided about what we hear from clients is more or less the same. They are not pessimistic at that current point, but they're also not leaning forward in the saddle here, whether it's capital investments or pushing forward on M&A opportunities or building inventories or otherwise. Prospect we now face with rates being higher for longer definitely will weigh on plans. And so I do expect it in general that if we're going to get growth, we have to get it principally through taking market share. And the byproduct of that is that the places where we are expecting to see growth in the second half of the year are the places where we made investments to be able to do it. So middle market CNI was strong in the first quarter. I gave a little bit of a breakout on the markets. a driver there in the Midwest and the Southeast both is the benefit that we get, the early benefit that you see from the federal stimulus programs on manufacturing, energy transition, infrastructure, and otherwise, because our regions have gotten a disproportionate share of those dollars. I think in addition to that, we have a much larger sales force in the Southeast today than we did three years ago. And again, the byproduct of that is we will continue to see an accretion of market share attached to those investments as those RMs become fully productive. Texas has been a really nice story for us. We've been in Texas for a little more than a decade now. We have, I think it's 175 employees there roughly. And it's a really nice compliment to the strong commercial banking team that we built out in California a few years back. in terms of expanding the middle market footprint. So we expect to see growth in that area. And then lastly, on the industry vertical side, aerospace, defense, transportation, and TMT are the places where the pipelines have, we're seeing some pickup in the pipelines.
spk11: Okay, perfect. Thank you very much. And then Brian, I was hoping you could discuss, I know that the numbers aren't huge here, but maybe you could discuss sort of the fluctuations in kind of reserve building versus reserve releasing outlook. I know it sounded like from your comments it'll be a little reserve build in connection with loan growth, but I think you were among the fewer sort of mid-quarter when you said maybe a little release. So just curious sort of the puts and takes as you see them.
spk10: Yeah. Yeah. Thanks, Scott. I think the main thing there is two items. For the guidance for the rest of the year, that is under the assumption that there is no change to the economic outlooks as provided by Moody's. A big driver of the release this quarter was the economic outlook from Moody's did get better. So that was a factor. We also had an end of period decrease in loans sequentially. So that was an item that drove the release as well. Next quarter, we did guide to stability on loans, so that's what we're saying, kind of zero to 25. Mix could cause a little bit of build, but we do expect end-of-period loan growth in the second half of the year, and that's where you get the larger numbers.
spk11: Perfect. Okay, wonderful. Thank you very much.
spk00: Next question comes from Gerard Cassidy from RBC Capital. Your line is now open.
spk14: Lou, can you hear me? We can. There we are. Good morning, Gerard.
spk08: Good morning, Tim. Thank you. Brian, just to pick up on your comments about Moody's and the outlook, can you share with us how it's kind of evolved over the last two or three quarters, and what is their current outlook for the U.S. economy in 2024? Are they still calling for a slowdown or a recession, or are they actually in the camp now that we're going to have positive real GDP growth for 2024?
spk10: Their baseline scenario has had a bit of stability. It's certainly, I don't think it is a significant, there's no slowdown in 2024. They continue to push out their baseline expectations. They've also improved their downside scenario. That's had a little bit of a bigger impact on our reserve calculation. But overall, they're now in the camp of the economy continues to be
spk08: moving well and i don't think that they're expecting a significant slowdown at this point in 2024. got it thank you and then tim coming back to the growth particularly in the commercial side you gave us some very strong numbers of course particularly in your southeast franchise can you take it a little deeper or give us a little more color once you bring on these clients like you mentioned about the customers that came in this quarter based on payments How long does it take to get them to a return that you find passes your hurdle rate and you guys are happy with it? Is it a 12-month, 24-month period? Can you walk us through that kind of waterfall on how you get there? How many more products do they need in addition to payments or in addition to a loan to get them to your return levels?
spk01: Yeah, sure. So I'm going to do payments first and then we'll start with the loan because payments is easy. So The payments clients meet their return thresholds essentially out of the gate, Gerard, because you don't have credit attached, which means the capital you're holding is off-risk capital. And it can take as long as 30 to 45 days to board a client, but because of some investments we made fortuitously for us prior to the deposit crisis last spring, we can board a client provided that the client's ready to do it in six days now on average. And that then allows for a very quick ramp. And that's what's supporting the, I think it's 11% growth in commercial payments fees year over year, that current pace. A high single digit pace has been the goal there for a while. And it requires us to get ramped quickly every time we add a new client. On the credit side of the equation, I think the beauty of the focus that we have on granularity right now is when we move a middle market relationship, it's generally a single bank relationship. And that means the credit comes on. It will take a month or two to move payables and receivables and otherwise and to get the payments flowing. But you hit the return threshold very quickly. I would say generally well within a year on what we do in middle markets. Where we are playing either at the upper end of middle market or in corporate banking, the return profile can develop over a longer period because quite often then the ancillary that we're focused on is not payments, it's the capital markets, revenues. Where we lead, we get the returns quickly. Where we are a participant, we're a participant because we believe we can grow the relationship over time and then There is a strong discipline here to go back through the book every year. We do an operating review in every region with every corporate vertical, and we have them show us the 25 lowest returning relationships in their portfolio, and there's either a relationship plan that we believe or we exit.
spk08: And real quick, Tim, just to follow up on that payments, the new customers that you've referenced, are those customers that don't have a payments product already, or are you taking them from a fintech company or a competitor? Yep.
spk01: The disproportionate share of the clients that we are moving with the conventional payments products and managed services are moving from another bank. So it would be either they are a business that doesn't run with any leverage and that relationship moves or they make a decision to move their payables or receivables business to Fifth Third because we can provide a superior service. So that is a share shift. In the case of the embedded payments businesses, we are quite often helping people to build products into their software applications that didn't necessarily exist previously or where they had a smaller bank who had agreed to provide simple services and they're looking for somebody who's more robust controls the ability to support higher volumes. And then in the case of the work we're doing on the technology side now, a simpler process to do integration and future product development.
spk08: Appreciate all the color. Thank you, Tim. Absolutely.
spk00: Question comes from Ibrahim from Bank of America. Your line is now open.
spk01: Good morning. Morning.
spk03: I guess just one question for you, Tim. You've been fairly cautious on the macro outlook the last 12, 18 months. Has that changed today? And the reason I'm asking is I'm trying to sync that up with your messaging around buybacks, both in terms of the back half and third quarter seem quite front footed. So just give us a sense of do you feel better about the economic outlook in your markets today than you did six or 12 months ago? And And just broadly, as a result of that, how are you thinking about capital allocation? Should we expect this level of sort of second half buybacks continuing, absent growth reaccelerating next year? Thanks.
spk01: Yeah. Ibrahim, thank you. And as you know, we're big believers in accountability here. So I actually asked Matt to go back and look through the Q&A and the scripts from prior quarters to see when we got the first question on higher for longer rates. And You were the one that asked it. So in the fourth quarter of 22 earnings call, what we said was we thought the market was overly optimistic on how quickly inflation would come down. And I don't remember what event it was last December. But the comment that I made then was that we thought either the bond market or the equity market were wrong. The question was just which one. And if we had to guess, it was bonds. So I think for certain we know now that the bond market was the side of the trade that was wrong at the beginning of the year. The factors that have influenced our more cautious outlook are pretty much exactly the same today as they were the last time we talked about it. We just view the current fiscal and monetary policies to be at odds and that the fiscal side in particular is unsustainable and inflationary over time. And the longer it goes on, right, the more that the Fed will need to remain higher for longer, which puts pressure on the long end of the curve. And then I think as a knock-on to that, we know that longer rates stay elevated, the more likely it is that you see adverse consequences either in asset prices or in credit performance. The big question is just how long does that take, right? When does that play out? And that is an area where we have low conviction. So what we are trying to do and what we will always try to do in low conviction environments is be liquid, be neutral, be diversified. Because historically, when you had a change, you know, things that slowly but suddenly or slowly then suddenly sort of a dynamic plays out in terms of big environmental shifts. On capital priorities, we do continue to expect to buy back between $300 million and $400 million in shares in the second half of the year. Our level of confidence in that just comes from the strength of the capital generation of the franchises. Brian and I both mentioned we have the highest ROE and the most stable ROE, if you look at it on a year-over-year basis, of any of our investor peers. And that is the basis of the confidence. If the environment ends up softening and we don't see the loan growth, that will then create a capital opportunity because the capital need to support organic growth won't be there. So you do have a buffer here if we do see a turn in the environment and softening in loan growth expectations. And if not, then we have more than enough capital generation to do 300 to 400 million a second after the year.
spk03: That was helpful, and to be clear, it wasn't a planted question. But the other thing that caught my attention, you mentioned Texas, and obviously you mentioned, so we think about it, fifth, third, southeast. Just talk to us, remind us in terms of the strategy in Texas. Are we opening a lot of de novo branches there? And I'm assuming there's no near-term M&A, but that does open up potential opportunities, I guess, down the road. Thanks.
spk01: Yeah, absolutely. So we got into Texas in 2012 when we formed our energy vertical. We have deeply experienced folks there who have done a really excellent job. And then over the course of the past several years, added middle market offices in Houston and Dallas, where we were able to attract very strong talents from trillionaire banks who understand the focus we have on whole relationships and were able to do what I think for us is a little bit unique, which is a heavy focus on CNI and then the delivery of the value-added services, whether they're capital markets or payments, as opposed to a focus on either loan-only relationships or buying participations or investor real estate or otherwise. That business now also has specialty products, so ABL, equipment leasing, coverage, uh, it has coverage, dedicated treasury management. Uh, it has wealth and asset management support, and then a non-public branch office, which allows us to do things on the pub fund side. Um, uh, what it does not have today is any retail banking presence. Uh, I wouldn't rule that out, but those are very large markets that we're talking about here. They're not markets of between half a million and 3 million people, which has been the expansion strategy. in the southeast. So any effort that we elect to make with branches in those markets will be a thing that we communicate to you in advance, because we'll be talking about committing 50 to 100 branches in a single city in many cases, as opposed to what we're doing in the southeast right now, which is really building 10 to 25 at an individual market level and getting to that top five presence that we know we need to be able to support the primary banking model.
spk03: Thank you.
spk00: Question comes from John Pankari from Evercore. Your line is now open.
spk14: Morning. Morning.
spk13: On the NII outlook of the of down two to four. I know the previously your last quarter your forecast was forward curve as well and you had five or six cuts in that assumption and now you're sticking to the forward curve so much less of three cuts I'd say is in the forward curve now. However, your NII guide has remained intact despite that. Can you maybe just talk a little bit around it, around the ability to keep that outlook without changing it? And then what does that mean in terms of your margin forecast? I know you indicated that it's bottomed as well as NII now, but as you look through the year, what type of trajectory do you see in the margin?
spk10: Thanks. Yeah, John. Thanks for the question. You know, it's one where The main thing that I would highlight for you is that we continue to have very strong benefits from the fixed rate asset repricing at this point. And you can see this, you know, for us, you can see that in our actual numbers. Year over year, our indirect secured consumer business, which is primarily our indirect auto business, that's up 100 basis points year over year on a $15 billion portfolio. So $150 million of annualized benefit in a year where we were actually constraining production and auto because of the RWA diet. So those businesses we have, those medium-term fixed rate lending assets, whether it's the auto business, RV Marine, whether it's solar, provide, generate a lot of power for us in terms of earnings capacity. Over the next 12 months, we'll have enough fixed rate assets reprice that will generate $350, $400 million plus of annualized NII benefits. So even in a higher rate environment and with the curve selling off some, that benefit is increasing for us. So that is a good outcome for us that helps support and offset some continued migration from a DDA perspective, as well as some continued forecasted increases in deposit costs overall. We're not making any assumptions that the deposit environment and the competition and the increasing costs is over, but it is definitely moderating. From a NIM perspective, we do expect positive NIM from here as well. And we're only talking about a couple few basis points a quarter trajectory. A big wild card on the magnitude of the NIM increases just ultimately is where the cash position ends up. If we continue to have really strong performance out of our deposit franchise above the 2% to 3% that we're guiding to, NIM will be a little bit lower, but NII will be better as a result of that. But overall, we feel really good about the absolute positioning.
spk13: Got it. Thanks, Brian. Very helpful. And then separately on the credit side, MPA's up a bit this quarter. If you just give us a little bit of color what you're seeing in terms of credit migration, you know, and maybe by, you know, sector. You know, we're hearing a bit of stress on the transportation sector. We have aviation credit impacted some of the names as well as some banks flagging healthcare. So if you could just give us a little bit of color there and maybe also your confidence in your 35 to 45 basis point charge-off guidance.
spk09: Thanks. Great. Thanks. Great question. So the $59 million increase that we saw in NPAs this quarter, 49 of it was in commercial, two names, not in the industries that you had indicated. We had a retail trade name and a senior living trade name. So we are continuing to see stress on that healthcare side, specifically in the senior living. That's not a huge portfolio for us, and we think we have our hands around it, continue to review that portfolio on a consistent basis. So not overly concerned. The thing that we have been consistently saying and we continue to see is we just, we are not seeing trends by geography, by product, by industry. Our issues that have bubbled up have been more episodic, and we've been able to deal with those episodic events on a quarter-by-quarter basis. So I am not expecting to see a linear increase in our NPAs. To your last question, I still feel very good about the guidance Brian talked about earlier, 35 to 45 for the year, based on, again, Tim mentioned our commercial real estate portfolio continues to perform very, very well. The rest of our C&I borrowers continue to perform well. They've done a nice job with expense cutting. They've done a nice job passing along pricing. They're operating about as efficiently as we've seen them. We're taking a cautious view as well, not sure where rates are going to go. So we're not seeing a lot of capex. But overall, we like the behaviors of our C&I portfolio, and I think the results of our commercial real estate portfolio speak for themselves.
spk14: Great. Thank you for taking my questions. Absolutely.
spk00: Our next question comes from Ken from Jefferies. Your line is now open.
spk12: Thank you. Good morning. Just want to follow up with Brian. Brian, you mentioned the annualized dollar impact from those fixed-rate securities and loans. I think you said previously that was $12 billion. I'm just wondering if you have an understanding of what you know will be also repricing in 25, and I would assume that would also then be incremental to that annualized benefit you referred to earlier.
spk10: That's right. We do have a similar amount that will happen in 25. And actually, we've been in the range of $4 to $5 billion a quarter repricing overall in the portfolio. between loans and investment portfolio. The investment portfolio has actually been in, say, a 6 to 800 million a quarter range. That number is actually going to start accelerating later this year as we start to get some maturities on the bullet lockout structures. We're expecting over a billion dollars in the fourth quarter and a pace similar to that in 2025. So this benefit and the repricing is going to continue and actually pick up a little bit. And that's where the higher for longer environment, as long as the front end stays relatively stable, because that will help keep deposit costs stable, the higher long end will actually help and contribute to higher income over time.
spk12: Okay. And then also you mentioned keeping the cash and securities at around the same level. Can you talk about just how you're preparing for liquidity rules and what that will mean in terms of how you think about the mix of across portfolios and the amount of cash you want to keep?
spk10: Yeah, we are there today for whatever comes out from a liquidity rule perspective. So we will not have to make any material changes to the balance sheet compared to what we have today. What will happen over time as the loss position on the investment portfolio burns off, that will actually increase the liquidity contribution from the investment portfolio so we can start to take the cash position down. Also, we will start to remix the composition of our investment portfolio to continue to shift more into level one securities, which will also help us take the cash position down over time. So it'll be just a natural transition where the balance sheet will get a little bit lighter from a cash and securities perspective as time passes. But we're very well positioned for any pending liquidity rules. Okay. Thank you, Brian.
spk00: Next question comes from Vivek Jeneja from J.P. Morgan. Your line is now open.
spk05: Thanks. Tim and Brian, a question for you on the Southeast. How much do you have in deposits there now? And what are you doing in terms of consumer side loans? Where do those stand relative to deposits?
spk01: Sure. Let me start on the consumer loan side and then Brian will fill in on the detail on deposits. So the balance sheet in the southeast on the consumer side for the core banking relationships is a net funding provider for us. Vivek, the sort of general development of a customer relationship is acquire the primary DDA via direct marketing and the work that we do around the new branches as we build them. The payments products are an important part of primacy, so credit card would come after that. And then from there, you have the episodic opportunities, whether that's home equity because there's some improvement going on or mortgage, although there obviously hasn't been a lot of that in the environment over the course of the past few years. The auto business, the dividend solar finance business, In particular, do have strong production in Florida just because of the size of the population relative to the other states where we do business. But they're really unconnected to deposits. Brian, you want to talk about the individual markets and deposit balances?
spk10: Yeah, absolutely. We've got about overall about $31 billion in deposits in the southeast now. About over half of that relates to the consumer franchise. So we're doing very strong in consumer on that front. And as Tim mentioned, it is a net provider of funding. We only have about $18 billion worth of loans in the Southeast.
spk05: And I would imagine most of those are on the commercial side, as Tim said, at this point.
spk01: Yes, absolutely.
spk05: Separate question. Solar, I noticed your growth has slowed, as you've been indicating. Any update on what you're thinking in terms of originations, loan growth, as well as credit?
spk01: Yep. Well, I'll start and we'll get Greg to answer on credit. We are still number two, right? We are the number two largest financer in the residential solar market. And the byproduct of that is our growth opportunity has as much to do with the market size as it does anything else at this stage. And right now, with rates being high and with net metering having been rolled back in a couple of places, you just have an affordability gap. issue where the cost of purchasing energy off the grid is cheaper than it would be to finance solar installations. I think the other dynamic is that as rates rise, and this is, I think ironically it's the same phenomenon in auto, is as rates rise, the mix of leased to financed installation shifts toward leases, which means as a lender, the solar is going to be down. I think the estimate from the industry is like 13, 14% this year, go back in terms of total installation. You're going to see a more significant decline in the financing volumes. So we built our plan around being down 30% year over year. And, you know, I think in a higher for longer environment, that's probably right. If it's any softer than that, it's just going to be a by-product of this continued dynamic on the lease versus finance and Does it make sense? Can you offset energy costs on a zero basis with the cost of the equipment that's being installed?
spk09: Greg? On the credit side, the solar dividend credit losses are performing right as we modeled, right around 1.3%. We actually think we'll run a little bit better for the remainder of this year. Early volume within the portfolio is seasoning, so we saw a little bit of that seasonality this quarter, but we feel good about what we're seeing. And we certainly have a more optimistic view for the rest of this year.
spk10: And then just on the volume front for originations for solar, and I know this question came up earlier as well, we're probably talking closer to $1.7 billion to $2 billion of originations this year, just given the dynamics that Tim mentioned earlier.
spk14: Thanks.
spk00: Next question comes from Manan Kusalia from Morgan Stanley. Your line is now open.
spk04: Hey, good morning. I wanted to touch on deposit competition. You compete with several of the money center banks in several markets. How are you thinking about deposit competition as QT continues, as RRP balances continue to decline and the focus shifts back to bank deposits. How do you think deposit competition will trend in that environment?
spk10: Well, we think that is certainly a big question for us and for the industry. And it's one of the items why we highlighted that RNI guidance at this point is less rate environment dependent and more dependent on just the overall level of deposit competition. As you mentioned, we do compete against the money-centered banks as well as a lot of regionals across our different markets. In the Midwest, we compete against J.P. Morgan primarily. They're the number one bank, and most of our markets were the number two bank in those markets. So we see them and face off against them, and obviously in the Southeast, we do Bank of America, Wells, and Truist, so very significant competitions. In general, it does feel like the broader liquidity environment has stabilized versus what we saw mid-year last year. So even with a little bit of weakness from an overall industry deposit perspective, at this point, unless something really breaks in the liquidity system, we're not expecting the significant food fight for cash that happened last year as people were just scrambling to show that they had a stable balance sheet. But it does mean that over time that you're likely to see just a potential increase in competition. The big counter for this is really going to be whether or not loan growth shows up or not. If there's no loan growth for the industry, there's not going to be a need for significant competition for deposits. And so, broadly speaking, we think Competition probably stays lighter than what we saw last year, especially in a stable environment. Also at a time where we think the whole industry is going to be focused on maintaining profitability. So we do think that will moderate some of the pressures. But the bottoming of the RRP and potential decreases in bank reserves as QT continues certainly could create some pressure in the medium term.
spk04: Got it. And then Maybe a bigger picture question. Tim, in your annual letter, you talked about rationalizing the business model in response to the tougher regulatory environment. You used the RWA data as an example. Bigger picture, what do you think the evolution of the model for Fifth Third and other banks of your size will look like going forward? Maybe there's more partnerships with private credit or there's a pivot to more fee-based businesses, but In what ways will Fifth Third look different in five or seven years from now versus today?
spk01: Yeah. So a few things just on the industry in general and Fifth Third on that front. One, we've got to find a way to reignite growth and labor productivity, right? I think that's true of the economy in total, but you'd see the same thing if you look at the banking sector. is despite all the investments that have been made in technology over the course of the past 10, 15 years, aside from the branch rationalizations, you can't really point to a lot of examples where there were big productivity lifts. So whether it's the cloud platforms we're putting in where we should be able to drive more straight through processing or the use of AI or otherwise, overheads have to come down. That is going to be an important point of focus for us through the value streams and through the tech modernization work that we're doing. I think secondarily, there are going to be businesses that regional banks or community banks just don't compete in in the future if there isn't a rationalization of the way that the non-credit wallet is shared. And large public companies would be a good example of that space, right? We did our diet last year. We walked away from companies where We were an important lender, but we weren't getting a fair share of the ancillaries because they were being consumed by the money center banks. And that's either going to require the money centers to make larger individual commitments in order to justify the ancillary, or it's going to require that the treasurers at those companies reallocate the wallet proportionally. And my own view is, at least initially, you're going to see a shift there. I think private credit is going to be an interesting one to watch. There isn't a great track record historically for people growing as fast as private credit is growing and completely avoiding mistakes. I also have a hard time figuring out what the comparative advantage is there that's defensible if the model works. I would prefer always, since we are a good deposit gathering institution, that we be able, if there's good money to be made and the valuations that are being placed on these credit fund providers certainly suggest there is, that we be holding those assets on balance sheets. So that has not been an immediate point of focus for us. And then lastly, as we've talked about in the past, it's hard to imagine that whether it's you know, 1,000 or 2,000 or 3,000, it's hard to imagine that there are going to be 4,000 banks and that you're just going to have to see some consolidation and people retreating to places where they have density, you know, and focusing on markets where they can neutralize the scale advantages that the large banks, you know, have because you're the same size in the area where you compete versus being, you know, 7, 8, 9, 10 ranked you know, in every market across the U.S., which is just a fundamentally less defensible business strategy.
spk14: Very helpful. Thank you.
spk00: Next question comes from Christopher Marinoff from Janie. Your line is now open.
spk07: Hey, thanks. Good morning. Just wanted to ask about possible changes on technology. risk grades and criticize and classifieds. I know it might be premature to see anything upgraded, but just curious on the path of those that you saw and how that may evolve this year.
spk09: Yeah, it's a great question. So again, probably not going to be linear. It's going to be lumpy. It has been for us in the past, given current previous comments I made about episodic, more episodic events and the fact that we're just not seeing, you know, trending by industry, by geography. And so I would expect it to continue to be lumpy. But as I said earlier, we're still liking the way our C&I portfolio is behaving. We like our commercial real estate track record an awful lot. But with higher for longer, maybe higher forever interest rates, we're going to continue to see stress. And we're going to continue to proactively manage the portfolio as we have We're not doing deep dives because on an ongoing basis, we are stressing the CNI portfolio by 200 basis points. We're getting out ahead of any potential issues. But that could lead to some criticized assets, a special mention. We're doing the same thing, do something on the commercial real estate side, exit stress testing. So we're taking a look at maturities, and we're stressing by 100 basis points a forward curve on what that loan looks like at maturity. And so if we see weakness there, you know, we could see an elevation in criticized assets, but 99% of our accruing criticized assets are current, right? And if you include our non-accrual, we're still 93%, 94% current within that portfolio. So we'll see episodic kind of lumpiness for the remainder of the year.
spk07: Great. Thank you for that. And just a quick follow-up. I mean, the loss content ultimately is reflected in the reserve, so that would have to change a lot for you to kind of change your guide on reserve overall.
spk01: Exactly. Thanks for that, Chris. I think we don't have any other questions in the queue, but we'd be remiss if we didn't say congratulations to Erica and her family since she wasn't able to join us today before we wrap up our call.
spk10: Thanks, Tim. And thanks, Ellie, and thanks, everyone, for joining for your interest in Fifth Third.
spk09: Please contact the Investor Relations Department if you have any other follow-up questions. Ellie, you may now disconnect the call.
spk00: Thank you for everyone attending the call today. We all hope you have a wonderful day. Stay safe.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

-

-