FIFTH THIRD BANCORP Q2 FY2024 earnings call

Management Statement and Operational Highlights:

• Tim emphasized the bank's ability to navigate challenging environments, with strong profitability since last spring. Adjusted return on tangible common equity and return on assets were best among peers. NII saw sequential growth and NIM improved for two consecutive quarters.
• Strategic investments in southeast, middle market, commercial payments, and wealth management are driving growth. Consumer households and middle market loan production are up. Commercial payments revenue is growing due to software-enabled services. Wealth and asset management fees are strong.
• Bryan discussed NII outlook unchanged, adjusted NII and NIM improvements, deposit management, fee income trends (commercial payments and wealth up, others impacted by rate environment), credit metrics (net charge-off ratio, NPAs), and capital position with CET1 ratio at 10.6%.

Segment Performance:

• Consumer: Consumer households grew 3% year-over-year in Q2, with 6% growth in southeast markets. Average consumer deposits increased 2% sequentially.
• Commercial: Middle market loan production and new quality relationships were strongest in Indiana, Carolinas, Texas, and California. Commercial payments revenue grew 12% year-over-year. Commercial loans decreased 1% sequentially. Period end commercial revolver utilization remained at 36%.
• Wealth and Asset Management: Fee revenues grew 11% year-over-year, and total assets under management grew to $65 billion, a 10% increase compared to the same quarter last year.

Guidance:

• Full-year NII expected to decrease 2% to 4% consistent with January guidance.
• Expect average total loans to be down 3% for full year 2024, with Q4 expected to be stable to up 1%.
• Full-year adjusted non-interest expense stable to 2023 levels, with tech expense growth and branch openings in higher growth markets.
• Net charge-off outlook remains in 35 to 45 basis points range.
• Q3 NII expected up 2% sequentially, adjusted non-interest income up 1%-2%, adjusted non-interest expenses up 1%, net charge-offs 40-45 basis points, provision build of ~$25 million.
• Expect positive operating leverage in Q4 2024 and record results in 2025 if no major economic/rate changes.

Risks:

• Economic and geopolitical uncertainties.
• CFPB issues related to old auto and other programs, with limited ongoing expense but reputational risk.
• Commercial real estate risks, including non-agency CMBF and potential issues with SASB structures.
• Reputational risks from solar vendor issues, such as installer failures and customer complaints.

Question and Answer: Q: Hey, good morning. Maybe first question For Bryan, just looking at Slide 49 in the deck around rate sensitivity, it implies that rate cuts should benefit NII. So you talked about the second half guide, I think as we think about 2025. But just talk to us around the comfort level. I think it says 75% to 80% effective betas on the downside. Just talk to us in terms of the deposit beta assumptions. What's contractual within your deposit mix that should repriced lower, and is it fair to assume that rate cuts are positive for Fifth Third?

A: Thank you, Ebrahim. We certainly believe that rate cuts are positive for Fifth Third’s. If you look at slide 42, we actually give a little bit more detail on the mix of the interest-bearing deposit book. 64% of our book right now would be classified in kind of the higher beta categories. This represents our index deposits, which are up to $35 billion. The CDs that we have in place, we've done a nice job of managing the maturity of the CD bucket so that most of our CDs will mature by the end of the year. That's another $14 billion of balances and our promotional balances as well. So we have a lot of captions where within that book that we are going to be able to reprice down. Overall, that's about 64% of the deposits. We certainly have some lower rate buckets still that we think the betas are effectively zero. We have a high amount of confidence though that we're going to be able to get cost out and be able to manage. We really only need to be in a kind of mid-50s to low-60s beta to be able to be neutral to liability sensitive and we're confident we can deliver that.

Q: Good morning, everyone. Thanks for taking the question. Let's see -- actually, Bryan, I was hoping you could speak a little bit about the fee trajectory. You discussed sort of the second quarter softness a month or so ago, feels like it might persist a bit into the third quarter, but I imagine we are still feeling like that'll rebound. Just hoping you could maybe share some thoughts on sort of when and how that ends up looking. You know, there's just a little more color on the fee trajectory, please?

A: Yeah, absolutely, Scott. You know, the second to third quarter increase, we're talking about not too aggressive of a fee growth perspective. We continue to expect continued performance out of our wealth and asset management business, as well as commercial payments. Payments has been taken along at $3 million to $4 million a quarter increases, and we expect that to continue and feel really good about it. We're also going to see some seasonal impacts actually come out associated with our mortgage business. We've benefited a lot from the servicing portfolio, all the servicing ads that we did right at the end of the low rate cycle has benefited us and generated a lot of great income, but there is a seasonal headwind, 1Q to 2Q that we felt that was about $7 million. That's not going to repeat. So we're set up really well for that 2Q to 3Q growth that we've laid out. And then in the fourth quarter, we'll get some additional seasonal benefit out of the MSR. The payments and card spend will continue to pick up, especially the seasonal card spending consumer. We'll get the $10 million TRA benefit. And then we always see some pickup in both commercial banking and leasing in the fourth quarter that should both generate some additional income as well. That gets us to that little bit higher growth rate trajectory that you could see that's implied throughout in 3Q and 4Q.