Release Date: July 19, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Fifth Third Bancorp (FITB, Financial) reported earnings per share of $0.81, exceeding guidance.
- The company achieved a return on tangible common equity of 15.1% and a return on assets of 1.22%, ranking best among peers.
- Sequential growth in net interest income (NII) for the first time since 2022, with expectations for continued positive operating leverage.
- Strong performance in strategic investments, particularly in the Southeast and middle market expansion markets, commercial payments, and wealth and asset management.
- Resumed share repurchases and increased CET1 ratio to 10.6%, highlighting strong capital levels and profitability.
Negative Points
- Customer demand for credit remains muted, impacting commercial loan growth expectations for the second half of the year.
- Adjusted non-interest income decreased by 4% year-over-year, primarily due to lower private equity gains and reduced demand for mortgage and commercial customer hedging.
- Net charge-off ratio increased to 49 basis points, driven by two commercial credits, indicating potential credit risk.
- Provision builds expected in the second half of 2024, reflecting cautious outlook on credit quality and economic conditions.
- Continued high levels of cash and liquidity, impacting net interest margin (NIM) and overall profitability.
Q & A Highlights
Q: Just talk to us around the comfort level regarding rate cuts and their impact on NII. What are the deposit beta assumptions?
A: Bryan Preston, CFO: We believe rate cuts are positive for Fifth Third. About 64% of our interest-bearing deposit growth is in higher beta categories, including index deposits and CDs. We have confidence in managing deposit costs effectively, needing only mid-50s to low-60s beta to be neutral to liability sensitive.
Q: How do you view the potential for loan growth and credit quality if rate cuts occur?
A: Tim Spence, CEO: Rate cuts would positively impact loan demand and credit quality. However, we remain cautious due to broader macro issues like geopolitical tensions and fiscal deficits. We focus on proven strategies and won't stretch into unfamiliar categories or rely on favorable macro conditions for repayment.
Q: Can you elaborate on the fee income trajectory and expectations for the third and fourth quarters?
A: Bryan Preston, CFO: We expect continued strong performance in wealth and asset management and commercial payments. Seasonal impacts from mortgage servicing will not repeat, setting us up well for 2Q to 3Q growth. Fourth quarter should see additional seasonal benefits from card spending and commercial banking.
Q: Can you address the recent CFPB issues and their impact on operations?
A: Tim Spence, CEO: The CFPB issues were old and identified by us. We settled to avoid prolonged litigation costs. The fines were small, and the issues are in the past. There will be no ongoing expenses related to these matters.
Q: How do you manage your cash position in light of interest rate and liquidity rules?
A: Bryan Preston, CFO: We maintain high liquidity to manage potential rule changes and market conditions. This allows us to be more aggressive in liability management. As rates come down and market stability improves, we can reduce cash levels, benefiting our NIM.
Q: Are you still the right owner for Dividend Finance given the litigation and reputational risks?
A: Tim Spence, CEO: We believe in attaching ourselves to long-term secular trends like renewable energy. Dividend Finance aligns with our strategy of supporting distributed power generation and storage. We focus on high-quality installers and take care of customers if issues arise.
Q: How is Fifth Third positioned for different yield curve environments?
A: Bryan Preston, CFO: We are about 75% sensitive to the front end of the curve. Relief on the front end would be beneficial. Even with lower long-term rates, we expect a nice pickup due to fixed-rate asset repricing.
Q: Can you discuss the trends in commercial criticized assets and potential upgrades?
A: Greg Schroeck, CCO: Charge-offs improve criticized assets. We saw stability in criticized levels and expect them to remain stable. The trend has been encouraging, with minimal growth in criticized assets, mainly in well-secured ABL facilities.
Q: What is the opportunity for growth in the home equity portfolio?
A: Tim Spence, CEO: While home equity growth has been slow, we see potential as homeowners focus on improvements rather than moving. We like the credit quality and expect slow and steady growth in this area.
Q: Can you explain the non-agency CMBS portfolio and its risk profile?
A: Bryan Preston, CFO: We have a cautious outlook on commercial real estate and participate in the market through structured non-agency CMBS with strong credit enhancements. We have minimal exposure to SASB structures and monitor the portfolio closely, seeing no concerns.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
