Morning, everyone. Thank you for joining us for the second day of the RBC Financial Institutions Conference. Our fireside chat this morning is with Fifth Third Bancorp. Many of you obviously know it. It's the 12th largest bank in the United States. It has assets of around $250 billion and a market cap of about $24 billion. And in the fourth quarter, they had an ROE of 18%. To my immediate left is Tim Spence, who is Chairman, President and CEO of Fifth Third. He took over that role about a year and a half ago or a year ago.
Longer than that in dog years.
Has been at a bank, has been at the bank a number of years with many senior positions. To his left is the new CFO, Bryan Preston, who took over that role in January. Prior to that, he was the treasurer of the organization, and he joined the bank back in 2003. So he's been there obviously quite some time. What we'll do for this fireside chat, I'm going to open it up with some updated guidance for the first quarter of 2024. Then Tim has some prepared remarks and some slides as well. With that, I'm going to turn it over to Bryan.
Oh, I don't know. I think they have to listen to me before they go.
Oh, Bryan. Oh, I apologize. I apologize, Tim. I goofed then. Go right ahead. Okay. Go right ahead. You started off.
No problem. Thanks, Gerard. And good morning, everyone. As Gerard mentioned, I have a few prepared remarks here, and then we posted a slide deck on our investor relations website last night that l referenced. After that, Bryan will provide an update on guidance, and I'm happy to answer some questions. At Fifth Third, we believe in starting the morning early. So thank you very much for joining us. We also believe that the best banks distinguish themselves not by how they perform in benign environments, but rather how they navigate challenging ones. The last five years have been quite eventful. We experienced a global health pandemic, an economic shutdown, then zero interest rate policy and significant quantitative easing and fiscal stimulus. That was followed by a spike in inflation and the largest interest rate increases in the past 40 years.
In 2023, we saw bank failures and the most significant capital and liquidity proposals since Dodd-Frank. Market observers are now increasingly nervous about the structural reduction in office space demand and the potential for broader weakening in commercial real estate. Throughout all this volatility, though, our simple, well-diversified business portfolio, with a focus on building scale through density in the markets where we compete, helped Fifth Third to continue to produce top quartile profitability and efficiency and to deliver strong returns to our shareholders. This is evidenced by the best one, three, and five-year total shareholder return among all regional peers who did not participate in an FDIC-assisted transaction. Our focus continues to be on stability, profitability, and growth in that order. Over the last several months, the U.S. economy has continued to show strength and resiliency. We've seen job growth and inflation coming in above market expectations.
This strength is reinforcing the belief that interest rates are likely to stay higher for longer than the market had been expecting at the beginning of the year. These rapidly changing expectations continue to reinforce our belief that there is more uncertainty in the future than there is certainty, and that has been a significant driver of our positioning and actions for some time. As an industry, we've yet again been reminded of the risks associated with maintaining high concentrations in certain asset classes or geographies. Stability starts with building a strong core deposit-funded balance sheet and maintaining credit discipline. We strive to be resilient to changes in rate and credit environments in order to continue to generate peer-leading results with lower volatility. The strength of our core deposit franchise is evidenced by our 5% deposit growth in 2023 when the industry declined by 3%.
We gained or maintained market share in all 40 of our largest MSAs. This result was not because of investments we made during the year, but because of the investments we made when rates were low and investments in low-cost deposit gathering were out of favor. Since 2019, we have built roughly 100 branches concentrated in high-growth markets, launched Momentum Banking, our feature-rich, non-interest-bearing checking product, and spent $ tens of millions on analytically driven direct marketing to acquire hundreds of thousands of consumer checking households. Following the volatility of last March, the importance of stable retail and operational deposits has only increased. Now we see competitors announcing similar strategies to Fifth Third, but the cumulative impact of these multi-year investments cannot be replicated through a few years of hiring, building a handful of new branches, or making small tuck-in acquisitions.
We believe we still have more runway for growth as our branch and sales investments mature. Slide 10 highlights our strong fee mix. We've made continued investments in our fee businesses, such as treasury management, capital markets, and wealth and asset management, which diversify our revenue and help stabilize profitability in changing interest rate environments. These products are relationship-centric and help our clients create efficiencies in back-office activities, manage their risk, and achieve their financial goals. I'd like to highlight our treasury management business, which ranks top five nationally in six significant cash management categories. Over 95% of our commercial deposits have at least one treasury management service attached to them, including 85% of the uninsured deposits. We remain focused on delivering software-enabled solutions that digitize and automate order-to-cash and procure-to-pay processes for our customers, such as Expert AP and Expert AR, our receivables and payables managed services businesses.
We continue to see growth opportunities for this business as 50% of B2B payments are still paper-based. We also see significant growth opportunities in enabling instant payments for our clients, which is a much less expensive alternative to traditional card payments. Our Newline embedded payments business helps clients build, launch, and scale compliant payment products within their own software product or payment platforms. We offer the full suite of capabilities in Newline to allow clients to customize their offerings through APIs with functionality for more than 70 different distinct product features. Our modern architecture helps to integrate payment rails easily and provides risk management capabilities that could take new entrants in this space years to replicate. Over one-third of our new treasury management relationships are treasury management-led and do not have credit attached.
With low capital needs and low marginal costs due to our embedded infrastructure, the embedded payments business will help to drive both profitability and growth for many years. Turning to slide 12, our commercial loan portfolio is well-diversified with low exposure to individual geographies, industries, or products. Our concentration of commercial real estate as a percentage of total loans and as a percentage of total capital is the lowest in our peer group. As of the end of 2023, our CRE criticized asset ratio remains well below the peer median, and we're the only bank in our peer group to experience a year-over-year improvement. Our CRE portfolio also experienced zero net charge-offs in 2023. While it would be foolish to expect this to continue forever, it evidences the decisions we made as we transformed our credit risk management approach, centralizing credit underwriting with granular geographic sector and product-level concentration limits.
We continue to assess forward-looking client vulnerabilities based on firm-specific and industry trends and closely monitor exposures where inflation and higher rates may cause stress. These practices have enabled us to engage customers early in constructive dialogue and to proactively manage the credit risk in our portfolio. On expenses, we have a strong track record of discipline with the lowest annualized expense growth over the prior five years among our regional peers. We reduced our headcount by 4% from our peak in 2023 through the end of last year without the need for a company-wide expense program, but instead through disciplined capacity planning and ongoing process automation. We will continue to make progress on expenses this year and in the future to create investment capacity and to produce operating leverage.
In summary, we're committed to maintaining a resilient balance sheet and disciplined credit risk management, which will provide significant flexibility to navigate an uncertain economic environment. We will continue to make decisions for the long term with strategic investments necessary to generate strong long-term results while also maintaining peer-leading expense discipline. Lastly, we will maintain a balanced, realistic view of the environment and make proactive decisions to improve the business. We pride ourselves on providing transparency with respect to risks, uncertainties, and opportunities for the future. With that, Bryan is now happy to provide a guidance update.
Thank you, Bryan.
Thanks, Gerard. Thanks, Tim. You know, the quarter's shaping up quite nicely. We're very pleased with what we're seeing from a business perspective. As a reminder for people, our guidance at the beginning of the year was based on a six-cut scenario playing out, which was in line with the market forwards at the time. That's obviously not the scenario that is playing out. Certainly more in line right now with the three-cut scenario, which is what we'd expect, the guidance in April when we update for the first quarter to reflect. But we'll see where the market takes us from here. Revenue is coming in towards the top end of the range. We talked down four to five. Certainly going to be in that top half of the range is what it's looking like.
That's a combination of a little bit of softness in NII, more towards the bottom end of the range of down 3%. We had said down 2%-3%, but down 3% from an NII perspective. But we are seeing strength in fees. We're going to be at the top end of our range of down 6%, maybe even a point better than that. So seeing nice strength in the fee performance. That's fairly broad-based. Seeing strength in capital markets, continuing to see performance out of our wealth businesses with some brokerage activity, as well as strength in our payments treasury management business. From an expense perspective, in line at +8%.
You know, the one thing that we're going to call out from an expense perspective is a lot of people may or may not have noticed, but the FDIC did revise their estimates associated with the losses for Signature and Silicon Valley that came post-year-end. It's about a 25% increase in the special assessment. So that'll be a $56 million one-time item for us in the first quarter. That's not included in the guidance, but it is something that we wanted to make sure that people understood. Charge-offs, credit continues to perform very strongly, continue to expect to be in line with our guidance of 35-40 basis points. The one callout there is the economic scenarios that we're seeing are continuing to improve.
So while we had previously talked about a $0-$25 million provision build, we're actually now expecting provision release in the first quarter due to improved outlooks from an economic scenario perspective. It's going to be about a $25 million release at this point, based on what we're seeing. Certainly, there's still some, you know, quarter-end analysis in terms of rerating the portfolio that occurs every quarter, as well as just potential risk associated with where the balances migrate from here. But, you know, certainly feel fairly good about that provision release and being in that $25 million range. And the last item is we are seeing a little bit of favorability on our tax rate as well, where we expect that to come in about 22% versus the 22%-23% range that we called out in the first quarter. So overall, performance is good.
You know, certainly, you know, no doubt that the rate environment is going to continue to have an impact from a balance sheet management perspective. But the trajectory of the business is good, and we feel good about where we're able to take it from here.
Another boring quarter from Fifth Third.
Yeah, another boring quarter from Fifth Third. Boring is beautiful.
Boring is good. Thank you for the update and for the presentation, Tim. Maybe to start off, Tim, what are you hearing from your clients? You know, the macro view seems to be mixed. I mean, your numbers, as Bryan just pointed out, were pretty good. What are your clients seeing in their businesses?
Yeah, I think when you asked me that in January, I told you cautious but not pessimistic. I think it's the same. If there is one thing that's changed is that there had been some optimism on the part of clients just based on what they were reading at the beginning of the year that they would see relief in interest rates. And you're seeing that start to shift a little bit. I was reading through a CFO Alliance survey that got done just recently, and almost 40% of the CFOs in the middle market that they surveyed said that they're going to undertake an expense program of some sort this year. So I think that's realistic. It's prudent. It demonstrates good discipline.
But it also tells you that they are having to find ways to offset, you know, increases in debt service costs as inflation and input costs and labor has normalized a little bit.
Maybe, Bryan, coming back to you, you talked about, you know, the rate outlook. The forward curve has changed. Many of us obviously have seen that. And there's even some talk maybe they don't cut rates. Is there a period that you can compare how your margin did, you know, to like 2016? You might recall the Fed stopped raising rates in the middle of the year and didn't really start cutting until, you know, well into, you know, I think it was 2017 or I'm sorry, 2006. Then they didn't start cutting until they got into 2007, 2008. So maybe if there's any comparisons.
Yeah, absolutely, Gerard. And, you know, history doesn't always repeat itself, but it often rhymes, I think is the quote. We do feel, you know, we do feel like it's an interesting comparison back to 2006, where the last hike occurred in June compared to the July of 2023 hike. And it was at 5, you know, the rates went to 5.25 versus 5.50 today. We've talked for a while about we typically see about it takes about two quarters for the impact of those hikes to fully come through. And that's the same trend that we're seeing now. You know, if you were to look back at our monthly trajectories back in 2006, we started to see that deceleration towards the end of the fourth quarter, and we saw stabilization in the first quarter from a rates paid perspective.
We're seeing the exact same behavior this time in the cycle. You know, we had about a 24 basis point increase in our rates paid on interest-bearing deposits from 3Q to 4Q. We guided to up 5-10 basis points in the first quarter from the fourth quarter. That's looking to be more like 4-5 basis points. So we're seeing that very similar deceleration trend. And the monthly trends look very similar as well, where in the first half of last year, you know, we were seeing 15-20 basis point increases in rates paid each month. That decelerated into the single digits starting in the early third or late third quarter, early fourth quarter, and that's continued to decelerate at the beginning of this year into a low single-digit kind of pacing. And so it's seeing those very similar trends.
That's part of what gives us confidence in terms of even in a higher-for-longer environment, we are going to see a deceleration of that deposit cost pressure. And at the same time, we're going to continue to see the tailwinds coming from the fixed-rate asset repricing and throw in a little bit of loan growth from here. And that's where we get a lot of confidence that we're going to see that NIM trough, that NII trough, and being in a position to continue to grow from here. And we're not going to have to count on a lot of loan growth to actually create a trajectory that is an upward trajectory for us. So we feel very good about our positioning.
Very good. Thank you. Kind of come out and said that a stock repurchase program could start off in the second half of the year. So maybe a little more color there. And then second, as part of just capital return to shareholders, what's your thinking of how much is appropriate with the dividend and the buyback once we get the Basel III Endgame numbers?
Yeah, so let me go backward. I think what we had said prior to the capital rules, prior to the, I'm going to call it the concentration crisis, maybe we'll come back to that one later, last spring, was that our basic belief was that it was the right capital allocation strategy was sort of a third, a third, a third for Fifth Third. Pay a strong dividend, that's a third. Share repurchases is another form to return capital to investors, that's a third, and then a third to support the organic growth of the balance sheet.
Because we do think that, you know, based on both the positioning we have relative to the secular tailwinds that are going to drive growth in the U.S., the industrial policy, the green energy policy, the migration to the Southeast and otherwise, we can get industry growth plus a couple of percentage points without taking on any sort of unusual risk. So that is, if you were to say what's the base case for Fifth Third, always going to be the base case in terms of the way that we think about capital allocation. Like, I believe that discipline has value, and I believe that getting stuff done early has value. And if you look at the way that we handled the regulatory proposals last year, if you look at the way that we've tried to position the balance sheet, those two things are clear driving forces.
So we set out to get everything we needed to get done if the regulatory proposals didn't change at all in the second half of last year. We got to full Category One LCR compliance at the end of August, maintained that through the end of the year, and continued to. We got all the work we needed to get done on our RWA diet, as Jamie referred to it, the reduction in risk-weighted assets. By the end of last year, that put us in a position then to start to return to loan growth. And because of the composition of our revenue, the fact that we kept expenses and checks, we still have a very strong efficiency ratio in an environment where six is the new five for a lot of other folks, right?
The positioning, the neutral positioning of the balance sheet, we have a lot more certainty about what sort of capital we think we can generate, you know, in a range of outcomes this year. So barring some big change in the economic outlook or the capital rules getting withdrawn and resubmitted as being more onerous than they currently are, which I think is a very low likelihood at this point, given how overwhelmingly negative all the comment letters were. And seven of eight of those, I think, were from non-banks, you know, where they were onerous and opposed. You know, it just put us in a position where we could make a more definitive statement about our plans to get back to more capital return to investors the second half of the year.
The concentration crisis that you referred to last year with Silicon Valley and the others, really, some of the new proposals don't address that in Basel III. But we believe, based on what we're hearing, there is going to be another ANPR notice of proposed rulemaking on liquidity. And with you guys already as a Tier One Category Bank having over, you know, the LCR ratio above where it needs to be, any thoughts on what you're hearing on what could be coming down the pike on the liquidity side?
Let me take the bait on the first part of that, and then you can answer the question on liquidity. So Fifth Third is declaring war on the term regional bank crisis. I got my first shot off on that one last night on television. Owing in part to the 400-page slide material that you circulated on an ongoing basis, I've become a student of history. And the remarkable thing, if you look back in time, is like whether it was Penn Square, Continental Illinois, Seafirst in the late '70s, early '80s, or it was energy concentration or the late '70s, early '80s, or the S&Ls, right? Bank of New England, some of these others in the late '80s, early '90s, where it was a rate-risk concentration in real estate or subprime mortgages in the 2000s.
The lesson that we relearn every 15 years as an industry is it's really bad to allow any part of your balance sheet become overly concentrated in one place. Now, maybe we learn that again in commercial real estate, in individual markets or product types or property types. But you have 200 banks and credit unions, roughly, you know, above $10 billion, and 3 of them failed last year. And of the 197, my guess is if we go back and do the work, a non-trivial share of those either had record or near-record earnings. And yet we were calling it a regional bank crisis because of the coincidental size of these institutions. It's just wrong.
The way you, you know, generate great returns for investors, you hit 8%, 9% EPS growth, you add in 3, 4 points of dividend growth, and you avoid big mistakes, which is what concentrations oftentimes lead to, and you can deliver a pretty good outcome. So now narrowly, liquidity rules.
Yeah, I mean, I obviously don't have a lot of inside baseball here. You know, I'll share what we hear from a whisper perspective from the investment bankers as they come in to visit us. But certainly an expectation that Category One LCR requirements are going to get pushed down to the $100 billion institutions. And as part of that, actually, some enhancements to the outflow assumptions is one, for one, basically looking at some additional runoff associated with uninsured deposits. You know, we are hearing that there might be some segmentation, so higher balance uninsured deposits having a more significant outflow. And the other component we're hearing is that they are going to do something associated with HTM and some potential cap or haircut associated with the amount of HTM that qualifies as part of your liquidity buffer.
Those are the two real big changes that we're hearing from an LCR perspective. We are hearing that there might be a new metric that they put in place as well, some type of uninsured deposit coverage ratio, thinking something like maybe cash and discount window capacity needing to be more than 100% of your uninsured deposits. Those are the big themes that we're hearing.
Yeah, no, very good. Bryan, you touched a little bit about loan growth in your outlook. Maybe Tim or Bryan, what is the outlook for loans? And specifically, you've had some real good success in growing Dividend Finance. Maybe an update on what you're seeing there and any risks associated with that business, specifically Dividend Finance.
Yeah, sure. So the loan growth this year is going to come principally from the middle market C&I platform and Provide, which is, you know, our fintech lender in the healthcare space. That's a C&I business. The stabilization of auto balances, so stopping the decline on auto because the, as tends to happen, you reach the point in the cycle where a lot of competitors exit, rates peak, and all of a sudden the returns in auto are really excellent relative to their duration. And then Dividend Finance, the solar business. I think we continue to be really happy with the way that Dividend Finance is performing. The solar product, from a credit perspective, is right in line with the expectations that we had at the time that we acquired Dividend Finance. The average customer FICO remains in the 660, or 660, 760-770 range.
These are all homeowners, so they have some inflation protection in the form of the fixed-rate mortgage that they had in place and therefore are doing quite well in an environment where renters are having a more difficult time. I think the dynamic that we will always contend with there as the addressable market in solar is a function both of the level of interest rates and the cost of energy. Because most people who put solar panels on the roofs of their homes are not doing it purely for altruistic purposes. They're doing it because generating their own power is a cheaper, you know, monthly cost. The debt service associated with that is a cheaper monthly cost than buying it from a utility company. So as rates are high and energy prices are low, the market size just ends up being a little bit smaller.
As the number two lender in that market, we, as a result, will sort of ride that wave. We don't want to fight that tide. I think Dividend originations this year will be lower than last year. It's a function of the addressable market size.
Got it. Very good. Maybe we could talk about the strategic priorities for you folks in 2024, what you're focusing on. Obviously, the buildout of the branches is something that you've been focusing on for a number of years, but any further color?
Yeah, I mean, more of the same. We're back to being boring. The only way you create real differentiation from a competitive perspective is to continue to invest year on year on year in things that other people haven't been investing in or aren't investing in at the same pace, right? It's just a business where the sustainability of a competitive mode is diminishingly small if you're not continuing to invest in it. So the Southeast remains a major priority for us. We are starting to achieve the milestones we set for ourselves. We laid that strategy out 3-4 years ago of getting into a top 5 position in those markets. The map in the first slide shows places where we've already achieved those goals.
There are other places where, as a leading indicator, we have the locational share and the banker count in the middle market and wealth management to be able to achieve that outcome. But we can continue to build 35-50 branches, I would tell you, a year for the foreseeable future in those markets in a way that's very productive and that generates a high return. That's the initial focus. I think the secondary focus is continuing to strengthen the fees to revenue mix, right? And there, the commercial payments business in particular is the business that I think is probably least appreciated. We're a great wealth management shop. We talked a little bit about that. The capital markets business has been great growth.
But to be growing a, call it, $700 million top line business between all of the individual components at a rate of 8%-9%, which is kind of where we're thinking we'll be able to do it this year, is pretty impressive. And as a, you know, number 2 through number 5 player in most of the major commercial payment types, we're not an also-ran here. We're not coming from the bottom and trying to get to fair share. We're already above our fair share and continuing to consolidate it. So I'm very, very optimistic and bullish about the outlook for that business over several years.
And then lastly, the way that we've been able to fund these big investments that have been at a magnitude that maybe other people haven't, and at least at our size group, haven't been making, is by finding ways to get costs out of the business sustainably. So not consultant-led one-time span of control exercises, but structurally changing the way that work gets done. And the root of all that is technology. So this focus we've had on platform modernization, getting off of the mainframes and into a modern data center environment where we operate it with an overflow capacity into the cloud, swapping out these legacy applications for cloud-native ones and variabilizing the cost structure there, eliminating the maintenance, and then, you know, automating a lot of the work that gets done manually in the back office.
Those are the three things that really are going to drive the growth of the company.
Got it. And maybe, Bryan, we can go back to the just non-interest-bearing deposits for Fifth Third. I think they were around 25%, 25.5% at the end of the year. If we don't get any rate cuts, where do you think that number could bottom out at? Or if we get 1-2 rate cuts, any insights there?
Yeah, I mean, we talked a little bit about this at earnings. And if rates were to stay high for most of the year, you know, that number could certainly fall below 25%. You know, what I would tell you, though, is the dollar migration out of DDA has definitely been another item that is decent. You know, we are going to see stability in the dollars. And the mix is really going to be a function of how the floor of the mix is really going to be a function of how long they keep rates high. Because what happens in this environment is new customer acquisition just tends to be more concentrated in interest-paying products. And so while we may not see further migration out, we could see the mix continue to decline for a period of time just because of the mix of the new customer acquisition.
I feel very good about the performance that we're seeing and the stability that DDA balance is going to provide us. You know, mix is going to be a big question still just in terms of the rate environment, how long it stays high.
You gave us some guidance on charge-offs. Tim, you talked about the commercial real estate exposure being among the lowest in your peers. On the outlook for credit, when you think about C&I, not just, you know, commercial real estate, and you've always talked about, Tim, that the consumers that own homes seem to be much better credit risks than the renters. Any further color on just C&I, not necessarily commercial real estate, but other parts of the portfolio and credit?
Sure. I mean, the C&I portfolio continues to perform very well. You know, the couple of events that happened in 2023 were more episodic in nature. We're not seeing any weakness, broad weakness, in terms of industries, geographies, any type of loan product type. You know, you're going to continue to have an episodic item here and there. But overall, the portfolio is performing very well.
Good. With that, I've seen that we've run out of time. So please join me in a round of applause for Tim and Bryan. Thank you very much.