Drum roll. All right. Good morning, and welcome to day two. Up next, we're pleased to have Fifth Third joining us once again. They've continued to execute on the strategy of investing in growth initiatives, particularly in the Southeast, as it builds out the franchise. In addition, it's maintained a focus on cost control and a strong capital position through its peer-leading earnings power. Here to tell us more about the story is CEO, Tim Spence, and Chief Financial Officer, Jamie Leonard. Tim is going to walk us through a couple of slides, and then we're going to have a Q&A session. Tim?
Thank you, Ryan. Okay, good morning, everyone. We published a slide presentation last night on our investor relations website, which I'll reference throughout my prepared remarks. After that, as Ryan mentioned, Jamie and I are happy to answer your questions. We'll note at the outset that our fourth quarter guidance is unchanged from our earnings call as well. During our last earnings call, I mentioned the old saying, "Cincinnati invented hustle," which dates back to the 1970s and the Big Red Machine. Hustle has been part of the culture at Fifth Third for decades, and it shapes how we operate today. To us, hustle is doing things the hard way because that is generally the right way. It's getting there early, even when you're allowed more time. It's solving the whole problem for customers and not just what you can do with traditional products.
And it's about coming in every day and asking how you can get 1% better while making sure that every dollar that we spend will benefit our customers, communities, and shareholders. And this morning, it's taking the first conference slot. We believe that the best banks differentiate themselves based on how they perform in challenging environments. That belief dictates our operating priorities of stability, profitability, and growth in that order. Turning to slide four, we have built a balance sheet which is more resilient to changes in credit and interest rate environments, and which will enable us to generate peer-leading results with lower volatility. Our liquidity is best-in-class amongst our regional peers, driven by a differentiated funding base composed of granular consumer households and payment-centric commercial deposit relationships. Multi-year investments and products in our Southeast footprint have produced consistent household growth.
Per the FDIC's summary of deposits, in the last year, we maintained or gained market share in all 40 of our largest MSAs. As we highlighted in our third quarter earnings call, we generated 4% average deposit growth compared to the year-ago quarter versus a 5% decline for the industry. Sequentially, through last week, our quarterly weighted average total deposits were up about 1.5% compared to the industry being flat quarter to date. At the end of the third quarter, we had the strongest loan-to-deposit ratio in the peer group, and we have achieved a full Category I LCR compliance every day since August thirty-first of this year. Our credit metrics also remain strong. Over the past decade, we have transformed our credit risk management approach, centralizing credit underwriting with granular geographic sector and product-level concentration limits.
The commercial portfolio is well diversified across subsectors and geographies, and we have the lowest commercial real estate exposure as a percentage of total risk-based capital relative to peers. We continue to assess forward-looking client vulnerabilities based on firm-specific and industry trends and closely monitor all exposures where inflation and higher rates may cause stress. These practices enable us to engage in early constructive client dialogue and to proactively manage our portfolio. Our shared national credit portfolio remains very strong from a credit quality perspective, with criticized assets, non-performing loans, and net charge-offs consistently lower than our overall commercial portfolio across a multi-year period. We're also very active in the management of our CRE portfolio. In 2023, we have reviewed 100% of the CRE construction portfolio to evaluate stress tied to increased interest rates.
We have also reviewed 100% of the office portfolio, with loans maturing in the next 24 months to evaluate risk tied to increased interest rates, lease rollover, softening rental rates, and appraisal deterioration. Lastly, we've reviewed 100% of the REIT portfolio to evaluate risk tied to increased interest rates. In our office CRE portfolio, we had zero delinquencies and zero Net Charge-Offs for the third quarter. We have and will continue to maintain credit discipline in commercial real estate. In consumer, as we have discussed on several prior occasions, we have maintained one of the lowest overall portfolio concentrations in non-prime borrowers among our peers based on conservative underwriting policies. We have also focused on lending to homeowners, which is a segment less impacted by inflationary pressures. Loans to homeowners constitute roughly 85% of our total consumer credit exposure.
As slide five indicates, we are generating top quartile profitability metrics. Our return on assets, return on tangible common equity, and efficiency ratio are all among the best of our investor peer group, having improved consistently over the past five years. Our balance sheet management, strong fees to revenue mix, and disciplined expense management should make our return profile more durable than the sector under a wide range of interest rate and regulatory scenarios. Our strategies to drive growth and sustained operating leverage have been consistent for several years... and have been funded largely through savings we were able to generate in other parts of the business. We treat strategic planning as a resource allocation exercise, as opposed to an investment request process.
This approach allows us to invest consistently and links expense management to strategic growth, making it something that we do all the time, as opposed to a program launched in response to a down point in the cycle. Our strategic investment priorities continue to be adding branches and talent in the Southeast, with a goal of achieving a roughly 50/50 mix between our Southeast and Midwest markets by 2028. Investing in product innovation that leverages technology to dramatically improve the customer experience, with a focus on everyday banking and large purchase needs. And modernizing our technology infrastructure, platforms, and apps to produce operating leverage and improve quality throughout the company. Slide seven highlights our well-diversified fee mix. We often talk about strength in treasury management and capital markets, but today I want to highlight our wealth and asset management business.
It is one of the largest among our investor peers, as measured by assets under management and assets under custody, and is perhaps underappreciated as a success story for Fifth Third. Over the past six years, revenue in wealth and asset management has grown 6% annually, while our assets under management growth rate was nearly double our peers. Our wealth business is designed to deliver the best of Fifth Third to its clients and receives the majority of its new opportunities from referrals that delivered via our retail and commercial businesses. We were recently recognized as the best private bank by Global Finance for the fourth consecutive year, and our net promoter score is 76.
Our growth strategies in wealth and asset management include the build-out of Fifth Third Wealth Advisors, an independent RIA platform that we launched in 2022, and a differentiated service model dedicated to preparing business owners financially and personally for the sale of their business. These investments are in our expense run rate and should support continued strong growth in fees and AUM over peers for the next several years. Slide 8 highlights our focus on tech-led product innovation. We try to approach product lifecycle management the way a subscription software company would, continuously improving our offerings through regular release cycles, as opposed to launching once with a static set of features. That means existing customers at Fifth Third get the benefits of enhanced product functionality on an ongoing basis, making our relationship stickier, and it allows us to remain differentiated even as competitors adopt prior innovations.
One example of this would be our early pay functionality in momentum banking, which we first launched, which we launched first among our peers in 2021. Since then, as others have begun to offer early pay for direct deposit, we have expanded our offering beyond direct deposit to include gig work, retirement income, tax payments, and other income sources. The same parallels exist in our Provide business, where we added seven new products in the past year in Dividend and in our treasury management offerings. Finally, as I've mentioned, we continue to invest in our retail franchise throughout the Southeast. Over the past three years, we have added more new branches in our focus metro areas than any other bank except JPMorgan. The payback on these investments has outperformed our expectations.
We will open another 35 branches in 2024 and expect to add 35-40 per year for the foreseeable future. In summary, with our proactive balance sheet management, disciplined credit risk management, and commitment to delivering strong performance through the cycle, we continue to position Fifth Third to have significant flexibility to navigate what could be an uncertain economic environment. We've demonstrated the ability to consistently make strategic investments necessary to generate long-term, strong results while maintaining peer-leading expense discipline. Finally, we have established a track record for making proactive decisions to improve the business, and we pride ourselves on our transparency with respect to risks, uncertainties, and opportunities for the future. With that, Jamie and I are happy to take your questions. Thank you.
All right. Thanks, Tim. So, maybe to kick it off, you know, you've managed through... Well through a difficult operating environment, events of March, higher rates, new regulation. Maybe just talk about what the key priorities for the bank are and how you think it's positioned to win?
Yeah. You know, I think like a lot of us in the financial world, I spent a good bit of the last week going back through the aphorisms that Charlie Munger-
Mm-hmm
... shared at one point or another during his life. And the, you know, the one that at the moment is most on my mind is this concept that great companies at fair prices are superior to fair companies at great prices. And, you know, I think perhaps Fifth Third, what we would like to believe is that Fifth Third at the moment is a great company at a great price. Right? Potentially the best of both of those things. I, I meant what I said at the outset of my prepared remarks. The best for banks are the ones that perform well in uncertain environments, and that is our focus. So, maintaining flexibility, Jamie will probably remind you later that you can't spell flexibility without F-I-T-B.
so that we can navigate, you know, a range of scenarios in the macro environment, continuing to focus on execution so that we drive strong profitability, and then investing consistently-
Mm-hmm.
In the franchise, are the things that we believe characterize, you know, the best financial institutions, and those are the things that are the operating priorities for us today.
So, you know, Tim, yesterday, a lot of people talking about a soft landing. I think you've been, you know, based on our discussion at dinner, a little bit less certain of that outcome. Maybe just talk about how that, first your views, how you think that's impacting how you run the bank. And when you're out talking to clients, you know, maybe just talk about what the mood is amongst them and what-
Yeah
and what they're looking for.
Gosh, from Charlie Munger to Mark Twain, right? When you find yourself in the majority, it's time to reflect. So I don't think we find ourselves in the majority right now on the outlook. I just. You look at the forward curve, and it feels like either the forward curve is right, in which case the soft landing narrative is wrong, or the soft landing narrative is right, in which case the forward curve is wrong. And I'm not smart enough to know which of those two things is the case. So, in an environment like that, what you have to do, in our business is to run...
Make your decisions defensively and to operate with, you know, a plan for the worst case scenario, so that if you get surprised, things get better, as opposed to hoping that we get both relief on interest rates and a soft landing, and then to be surprised if things go worse. When you look at our customer base, I mean, the credit performance continues to be very good. Delinquency rates remain very, very low, for Fifth Third, at historically low levels. Credit hasn't normalized as fast as I would have expected, so I feel very good about what we've got. But a lot of the data points that people point to, to support a soft landing narrative are actually, in my mind, pretty concerning.
Like, if you scrape the word soft landing off of it and just told people that, you know, jobs report was strong because more people were working two jobs, and the Black Friday sales were excellent because there was unprecedented use of buy now, pay later products, and that, you know, economic growth and that, commercial projects in terms of starts and whatnot, were still solid, but only because we were running a massive fiscal deficit. Those are not signs of healthy behavior. And it just feels like at some point that has to come home to roost. I mean, our deposit customers who have a FICO less than 660, have almost 20% less in deposit balances today than they did in February of 2020, prior to the pandemic.
In total, deposit balances are still higher, but those balances are concentrated in a very small percentage of the U.S. population. And I think I've mentioned previously that when I speak with the economic development agencies in our footprint, like, the pipeline is still really robust. At 60% of all of the, federal programs around infrastructure, and domestic manufacturing and otherwise, have been made to date in our footprint, even though we're only about a quarter of the U.S. population. But the average time to decision on those projects has more than doubled in the last eighteen months. So that's a pretty clear indication that these decision factors, even in places where there's federal support for capital investments, that they're creeping out. So that all feels like softening to me.
And I don't want to bet on the idea that it's going to be only, you know, soft softening as opposed to harder softening, I guess.
Fair enough. So, bringing it back to the bank, given, you know, some softness, we've seen soft loan growth across the industry. Loans are expected to decline as per the reiteration of the guidance. You know, and as you're completing the balance sheet diet, I guess once this is complete, how are you thinking about loan growth and what are going to be the drivers of it?
Yeah, Tim stole my flexibility line, so-
I did say that you were going to-
That's it.
I gave you credit at least.
Classic boss. Classic boss thing to do.
That's right. So, when it comes to loan growth, we've talked about finishing... You know, this year, we'll be down 2 points on the RWA diet and, you know, loan balance is down 2-3. For 2024, our goal is, and we go to our plan, go to our board next week with our plan. Our goal will be grow on a point-to-point basis, 2, 2% from the end of this year to the end of next year. But given the diet and the trajectory of that loan growth, that means YWA, loan growth next year is, down about 2 points. So we'll, you know, on a full year basis, be down next year, but on a point to point, be up.
That growth is really going to be driven by the success we're having in growing middle market relationships. That's the number one focus for us. Tim touched on it in his prepared remarks about the Southeast expansion. That includes, you know, increasing the Southeast relationship manager, sales force, and then continued success across the footprint. So C&I will certainly be the big driver of that loan growth, along with continued progress in the other asset classes.
Along those lines, on the balance sheet, last time we heard from you, you'd built up $20 billion of cash on the balance sheet. The slide showed fully LCR compliant. Maybe just talk about where you're running liquidity today, what are your plans to do with that, and are you waiting to see how regulations shake out in terms of a deployment plan?
Yeah. Last night, I think we closed with about $22.6 billion of cash, give or take. We've run as high as $24 billion of cash over the past week. So obviously, the deposit success that Tim referenced in the prepared remarks, which is being driven pretty evenly between commercial and consumer. Whereas in the third quarter, that deposit growth was more overweight to commercial, given the benefits of the RWA diet and going out and having those conversations with customers to see what additional share of wallet could be attracted. This quarter, the success is really more balanced, with about half of it coming out of retail and half of it coming out of commercial.
In fact, most of the commercial growth is in the middle market space, which is very nice to see from a granularity perspective. So cash levels have driven higher, which is obviously a good problem to have. So, we'll continue to keep the options open. I think over time and over several years, you know, that's not a cash level we would look to maintain. But in this environment, until the liquidity rules come out, until we have a little more conviction on which way the economy is going, we'll continue to hold an elevated cash position and then look to rightsize the balance sheet over time.
Just one. Jamie gave you the breakdown on commercial. On consumer, the growth has been driven by the Southeast, but the other big contributor has been Chicago, and that's been fun to watch. As you think about the places where we've made the big investments in the network, it was the Southeast, and then it was the acquisition of MB in 2019. So we were seventh or eighth in Chicago in 2019, third or fourth in deposit share, retail deposit share, at the time of the acquisition, and we're now second there, only to JPMorgan. So have been able to continue to make progress everywhere where we have been investing in the franchise.
You know, you talked about capital. I believe the goal is to end above 10%. The adjusted capital had been lower, although you look intelligent now, given what rates have done, as you decided to maintain the flexibility. Maybe just talk about the capital priors from here. What are you managing the capital base? Have you made any changes since rates have moved? And what do we need to see before we start returning additional capital?
Yeah, what, what we found is, depending on the day, the sun rotates. Doesn't always shine on the same forehead the same. So,
It usually gets me.
Yeah, all three of us, even though we're ostracized in the sick ward over here. In terms of the pricing of the portfolio and the CET1 fully phased in at the end of the year, we certainly 10% pre-AOCI is where we expect to be. Given the movement in the rally in the bond market and the decline in rates, we've picked up to where the fully phased-in AOCI would be, call it three points right now, so 7% versus the 6% that was getting some attention earlier in the quarter. That has translated to, you know, 11% increase in tangible book value per share, about $1.50, give or take, when you count the swaps.
So overall, we feel well positioned, but the story is still the same, which is at the fully phased-in time in 2028, we would expect 125 basis points of, you know, AOCI, unrealized losses. Given the structure of the investment portfolio, we'll roll down the curve. Obviously, the past month or several weeks has given us even more confidence in that. So our goal, given that 125 basis point need, along with a 20 basis point need for the RWA bloat, assuming the rules come out, as currently written, means that as a company, we would like to get to 10.5% CET1, and let's call that mid-year 2024.
Mm-hmm.
At that point in time, we would be holding 125 basis points for AOCI that, you know, we will need 3 years, 4 years down the road, and the 20 basis points for the RWA bloat, which translates back to about a 9% CET1, prior to those rules, impact. So I think the company is very well positioned. The strong earnings capacity, the ability to accrete 25 basis points of capital a quarter, and then certainly the rate moves. I think there's one other element to your question, which was, you know, have we done anything differently? The one item I would mention is that last week, given some of the euphoria on the potential for 4 or 5 rate cuts, in 2024, we felt like that might have been a little overdone.
So we did terminate $4 billion of our swap book that was maturing in the fourth quarter of 2024, as a view that if we were to get no cuts or a couple of cuts, that would help bolster NII, given that this is a balance sheet that is definitely liability sensitive. You see that in our rate disclosures. And so, we felt like that would be a good balanced approach to do that.
Jamie, speaking of NII, you know, near term, it's being pressured by funding costs, deposit costs catch up. You reiterated the fourth quarter. I think in the past you said NII should bottom sometime early next year, and the NIM, obviously, it's going to be down because of the liquidity, but, you know, at some point in the next, you know, quarter or two. Any, any updated thoughts from here? Maybe dig into some of the pieces you mentioned, terminating some swaps. And, how do you think about the bank forward curve? So let's say two cuts happening as opposed to, you know, no cuts, which ends up being more beneficial for Fifth Third.
... So we would certainly prefer the front end of the curve in the 3%-3.5% rate. We think the balance sheet is particularly well-positioned for that. With that said, if we were to get a couple rate hikes, looks unlikely, but if that were to happen, you know, that would still be an environment that we could grow the balance sheet, grow NII. But we believe that the higher for longer story at some point will create cracks, and therefore cuts will need to happen. So we believe that we'll get, you know, the first cut, you know, call it—let's call it mid-year 2024. So with that in mind, then the NIM trough looks like it would be this quarter, given the run-up in cash.
With that said, I reserve the right to say the first quarter, if cash continues to run at these levels. All of our NIM decline this quarter is driven by the excess cash. And, you know, I've been doing this for 10 years, and there are points in time, we will scrape and claw almost every day, all the time, to eke out another basis point or two of NIM. And this is just not an environment that we are looking to do that. We have a very stable NIM profile for this environment. It is just growing deposits as well as we have, and then choosing to hold that liquidity in cash is NIM eroding. I think that will trough the NIM in the fourth quarter, and therefore, NII would trough in the first quarter with the day count impact.
Then from there, the loan growth, enhancements and the dynamic we talked a lot about on the earnings call, where the front book, back book rates on the consumer loan portfolio is significantly better. And there's about $8 billion of maturities that will be occurring in the consumer book that we will, reprice into new production, as well as the securities portfolio cash flows that will get reinvested. And so there's a nice tailwind, to help bolster NII down the road.
So maybe switching gears to talk about credit. Tim, you highlighted the exposures or lack thereof in the presentation, which, you know, the market appreciates. Can you maybe just talk about, one, what are you watching most closely on either the commercial or the consumer side? And, you know, how does - and you talked about normalization be slower than you expected. How does that factor into your expectations of, you know, 35-45 basis points of losses over time?
I'm going to sound like a walking quote book here by the time that we're done. But the another great Mungerism, right? Was, "The best way to avoid mistakes is avoid toxic people and toxic situations." So I think the best way to manage risk is to avoid it. And if there's one thing that we've done really well over the course of the past several years, it's been to reconstitute the portfolio at Fifth Third, so that we have lower exposure to high volatility asset classes or borrower types. So, we are the lowest, as I mentioned in my prepared remarks, among all our peers in terms of total commercial real estate exposure.
We've reduced our leverage lending exposure by more than 60% in the past 5, 5.5 years, during a period of time when the balance sheet grew by 50%. So, it's now a very small portion of the overall balance sheet, and based on what we can see from public reporting, we appear to have either the lowest or very close to the lowest exposure to non-prime consumers. And that, in totality, is going to help us a great deal. So what we worry about, obviously, is what we have versus what we don't have. And there, we're focused on the same things that we've been talking about. It's the COVID-impacted sectors that we continue to watch to make sure that you see the full recovery, whether that's senior living or city center hotels, or offices.
And then we do have this thesis that there is going to be softening on the consumer side of the equation because there's only so much additional powder that you can get out of buy now, pay later, if your deposit balances are below where you were during pre-COVID levels and your expenses are higher, which is the reality for people who rent, in particular, today. So we watch sectors, or individual properties, or business models that are keyed to that lower-end consumer. You actually can see it when you look at hospitality right now. You know, vacation destinations have done very well, but there's more softening in brands and locations that tend to serve the lower end of the mass market than you see in the upper end of the mass market.
And that therefore to be our focus is if we don't have a lot of direct exposure, then what's the first derivative exposure, and how does that creep into the broader economy?
Speaking of risk, I think you disclosed in the 10-Q an investigation by several attorney generals regarding installer relationships in solar division of Dividend Finance, particularly with one. Maybe just talk about what happened here and, you know, what are you doing to ensure these practices are not happening across the entire network?
As we've said from the beginning with Dividend, the biggest risk is going to be installer management. Within the installer management program at Dividend, this is even before we bought them, there was one utility Power Home that was having challenges. Dividend had been running that portfolio down. We closed on the acquisition in May 2022. We only did $1 billion of loan originations. I'm sorry, $1 million.
$1 million.
$1 million of loan originations since we bought them. Our focus since then has always been, take good care of the customer, and I think that is the same. There are 17 state attorney generals that are looking to get the residents for all Power Home customers to get their power turned on and get their projects completed. It is an appropriate goal that we share, and since that point in time, we've worked almost 300 cases to get the, you know, jobs finished at our expense, to get the power turned on. As a result, there's under 40 projects left to go. You know, Fifth Third only does business in 11 of those 17 states, so this is an industry-wide thing. It's not a Fifth Third specific thing.
However, you know, we agree, we want to get the residents their power and get the projects finished. And, you know, maybe that last bullet point on our slide about transparent management team, you know, that's our goal. When we have regulatory matters, we have a lower bar for disclosure, perhaps than some, and so we wanted to say this investigation is out there. It was in the media for a period of time, even leading up to the 10-Q disclosure. So we think it's very manageable, but like we said, there are, you know, installers and risk management are the most important part of this business. When we closed on the transaction, Dividend had over 330 solar installers, and we've trimmed that back to 110. And, you know, we feel good about the installer book going forward.
That's the critical point. This is an important sector, and but it's also a nascent one, and there's been immense amount of government stimulus. And whenever you have those two things come together, there are bound to be some growing pains, and the growing pains are primarily going to be, they were first on supply chain, they're primarily going to be on installer management. So you pick the right installers, you serve them as your partner of choice, and you make sure that the end borrower gets power generation on their roof as it was expected, and it, you know, it becomes a very good business.
You, you guys have been managing costs well for a while. I think FTEs were down in the third quarter, and you've put initiatives in place to control costs. You know, while the top line was industry-wide, is likely to be somewhat challenging. You know, again, you guys are doing a good job managing it. So, Tim, maybe just talk about how do you think about balancing, making the investments that you need to make in, you know, some of the businesses Dividend, Provide, you know, technology and the like, and, and rationalizing where you can. And Jamie, maybe just put a finer point on, you know, when you kind of put it all together in the budget, what is what is lining up nicely looking like for 2024?
Yeah. I'm a big believer, philosophically, that the right way to run a company is to invest consistently in strategies that are going to generate long-term growth and profitability. If in a cyclical business like ours, you fall into the trap of investing in periods of time when rates are rising early and therefore revenues are up, and then cutting the second that the rate cycle turns, it's really difficult to do things that require a multi-year effort. Because you fall into this binge purge cycle, where you're feeding in one period, and then you're asking the same people to find savings. And generally, what happens is, the things that people cut are the things that they invested in most recently, which by definition, were the things you believed were most important in the business. So, we try to be very steady in what we invest.
Now, in an environment where there are significant revenue headwinds or there's uncertainty in the outlook, what's appropriate to do is to calibrate the certainty of the investment. So if you look at the things that we are doing now and that we're going to be investing in strategically next year, they're the branch expansion, which has proven to be very successful, and which, you know, in almost every case, each individual branch has outperformed our original projections in terms of their ability to support relationship, acquisition, and deposit growth. It's the continued investments in products which are largely in the run rate. I mean, that the software engineering and product development teams are not things that we do outside with a third party, they're things we do with existing resources.
So that allows us to sustain what we do in those areas. And it's the modernization of the tech core, which is obviously the right thing to do, and which is going to support our ability to generate even more expense savings in the future. So we are going to continue to be focused on investing in those areas because we know you get paid when we do them from either the expense benefits, the revenue generation, the liquidity that, you know, we have been able to generate or otherwise.
And so what that means for next year's expense growth is that our plan we're taking to the board next week will reflect up 1%, which is exactly what consensus is expecting from Fifth Third, where all of those investments that Tim referenced, we then will continue to improve upon the efficiencies of some of the businesses through process automation, value stream work, and other things.
Great. Well, unfortunately, we're out of time, but please join me in thanking Fifth Third.