The focus for Fifth Third has been where we're going to compete, get dense, and use the fact that we are limiting the market definition as a mechanism to obviate the national marketing scale advantages that somebody like a JPMorgan would have. I actually think one of the things that's interesting about what we're seeing in technology right now is that it contravenes a lot of the established wisdom on the benefits of industrial scale for our industry. So if you look at the announcements that are being made by the, you know, the largest financial institutions, us included, like, we're all buying cloud compute from the same three cloud providers. We're all signing up to pay by the API call, which is a purely variable cost, from the same hosted software providers.
At some point in the future, we're all gonna be paying by the prompt for the access to the large language models. So, if modern technology architecture variabilizes technology costs, there really isn't a big difference in being our size or being twice the size. What I do think, though, the other side of the equation to that is the large language models and our ability to get access to essentially unmetered intelligence through these AI tools that will become available are gonna turn human capital into more of a fixed cost. So we're gonna have more variable costs on the core processing and more fixed costs in terms of a limited number of people being able to have a much larger impact.
Both those things are probably beneficial for people our size relative to being much smaller, you know, necessarily much larger.
I definitely want to come back to that tech discussion, but before we do, maybe just kind of expand on your sailing analogy and how that translates to loan growth. Obviously, it looks like industry data is a little subdued of late. You know, where are you starting to see the tailwinds emerge, and what are the biggest headwinds remaining in your mind?
Yeah. I mean, I think in the most literal sense, it doesn't translate to loan growth, and I, and I know you're hearing that from others. In general, we're seeing very tepid loan growth across the industry. You know, if we have an outlook, if the outlook shifts and our clients view, you know, that or believe that the market is more difficult, you tend to see more loan growth because people start hoarding liquidity. If they think things are gonna be much better, they take on debt to support expansion. But in an environment where there's a lot of uncertainty and it's unclear which direction we're gonna go, they tend to be internally focused, which is where they are. I think the benefit for us, that, of course, is not good for revenue growth.
I think the benefit for us of having done the things that we did last year in terms of positioning the balance sheet, a lot of liquidity, and in doing the work to adapt to the new, the proposals on, capital rules, is it gave us a lot of optionality. So we continue to feel very confident in our ability, to grow NII, as we talked about in our first quarter earnings call, because the, large amount of liquidity we've got allows us to manage trade-offs between rate and volume, even, if we don't see really robust loan growth. I think secondarily, we actually achieved the 10.5% capital target in April.
So if the loan growth outlook doesn't improve, you know, we have the ability to start buying back stock sooner than we originally anticipated. Then we indicated when we said the second half of the year is a focus. So the focus on stay liquid, stay neutrally positioned, be broadly diversified, is gonna give us the ability to navigate this environment even when we don't get a pop in the second half in terms of loans.
Just to make sure I understand the liquidity point, so you've got $25 billion as you get cash. Maybe that's double what you need long term. It's-- you're saying if the loan growth doesn't emerge, it's pay, pay down high cost debt, or what is the option?
Yeah, and change and reprice deposits.
Okay.
Manage deposit prices.
Yeah. Well, maybe let's use that as a natural transition. I mean, hopefully 2023 was the toughest year for deposits any of us will ever have to live through. You know, I think one thing it proved was your laser focus on managing the primary relationships, primary operating accounts for both consumers and commercial. So, what are you seeing now in the short term? Is the deposit storm finally passed? And, you know, talk us through a little bit more, what's the next step of that primary account relationship journey?
Yeah. I mean, there's so much... And narrowly on deposits, there's so much more liquidity in the banking system right now that the competition for deposits has softened a little bit. It's still competitive in pockets. You still have folks who've made commitments around balance sheet growth, who have to find a way to fund it. But in general, I would say the level of competition is lower because there isn't a desperate bid in the market the way that there might have been at different points last year. I think you hit on the more salient point, though, which is the focus for Fifth Third has, at any given point in time, may be more deposits or more energy on loans or more energy on fee income. But the North Star for us has always been primary relationship growth.
And the reason for that is that if you look at the economics of our customer base, they look a lot more like either a subscription software contract or the way that you might think of a fixed income instrument. In a sense, the zero cost to acquire the relationship, whether that is a marketing cost or a sales cost, combination of both of those things. And then if you do a good job of providing high-quality service, you retain those relationships a long time. Like, if you look at the vintages, the last several years of new consumer relationships. After the first year, they season out to about a 6% annualized attrition rate, 6%-7% annualized attrition rates. When you look at that on an inverse, you know, that's a 16-year sort of an average life of a relationship.
As long as you're able to keep them engaged, you have the ability then to bid for more business when you need it. So the majority of our deposit growth last year actually came from existing relationships. It was this stock of primary operating accounts that we had built up over time, that we were able to go back to and say: We want you to move more liquidity on to Fifth Third. And, while that can be a more expensive way to build liquidity in the short term, it's a much better way to build liquidity from a total cost of deposits through the cycle, because those are all people who have a reason to back you, other than you being the highest rate in market.
You're able then, to do some of the things that we were able to do in the first quarter, when we were able to manage interest expense in ways that other people just weren't able to manage, interest expense. So this year, because we have all that liquidity, there's more focus on household growth in terms of our, marketing and sales activity. Comparatively a little bit less focused on deposit growth. I still think, we'll grow deposits year-over-year, as we indicated in the first quarter, so there's no, change in the outlook on that front. But, households running above 3% on the consumer side of the equation continues to be very strong in the market.
Maybe, you know, the other big differentiator for deposits for Fifth Third is the Southeast expansion, no doubt. I think you mentioned on the call, you're now over $30 billion of deposits, which is, you know, a mid-sized regional bank, in and of itself, that you've grown organically. What does the next phase look like in those markets?
Yeah, we. By the end of this year, we're effectively gonna have grown two MB Financials, which is the last bank we acquired on a purely organic basis. I feel very excited about what's going on in the Southeast. We benefited from being in a position to be able to invest at a period of time when a lot of other folks were just cutting branches. The byproduct of that is we have excellent high visibility locations, and have been able to build our way into a top five position in about a third of the original focus markets, with a path to being able to get the other two-thirds done here over the course of the next few years.
Part of what's exciting there is that our branches, if you just look at them over time, tend to mature over about a 7-year cycle, and the weighted average life of the branches we built down, down there is about 2.5 years. So even if we didn't build another branch in the Southeast, we still have several years of deposit growth tailwind and relationship growth tailwind that'll investments. But we are continuing to build. And the benefit of having done it organically the way that we have, as opposed to inorganically, is we didn't, like, buy 100 branches.
We built one branch 100 times, and we learned a few things along the way about what makes a branch most successful, whether that's location selection, the actual physical format, the relation to how we hire and staff and, launch those branches, and how quickly we can get them out of the ground. So I think we're gonna move from building, call it 25-35 a year, to more like, 35-50 a year over the next four or five years. And being able to nose our way into some of the adjacent market and size markets down there that we aren't even in in some cases today.
Maybe to round out the more macro discussion. You know, hopefully, we're in for a soft landing here. How is your outlook for credit evolving? You know, if you had to pick out the parts of the book you worry or watch the most closely right now, what would they be?
Yeah, our full-year guidance for credit was 35-45 basis points. We continue to expect to be right in that range. So no material change. Consumers effectively normalized. You can see that across the industry data. We don't really have a subprime lending business. I think we have a lower share to sub-600 FICOs than any of the banks that disclose that measure. So we're not really exposed to some of the continued softening that we're seeing in that segment. And actually, as we continue to mature, Dividend Finance and some of the other lending businesses we got, I actually think that there is a reasonable view that credit will continue to get better as opposed to going the other direction.
The commercial side of the equation is maybe the more interesting one right now, because we're still running at, like, 30, call it 33% a third lower annualized charge-offs today than we were in 2019. And we're not exposed to what's going on in commercial real estate, in the same way that others are, as I know we've talked about. So the byproduct there is, your outcome in a given quarter is literally a function of, do you take the charge on a credit this quarter, or does it go next month? Because we're just sort of bumping along. I expect there to be, not just for us, but certainly for us, to more episodic credit over the course of a year, lands us right in the middle of that 35-45 range until we see more normalization.
That's helpful. And maybe on the Dividend Finance comment, can you just flesh that out? I mean, it's not a huge business in the context of Fifth Third, but it has been meaningful on the provision line item and-
Yeah.
You know, why do you expect charge-offs to, I think you said, flatten, maybe even improve going forward?
Yeah. So we, we talked about the fact that I think one of the things that we bring to that market is an expectation around client care. And that when customers need support because they have an installer who's having a hard time fixing the job, we go in and fix it. So we talked about in the first quarter earnings call, the fact that we had set aside provisions associated with what will look like non-performing loans, because we're doing a lot of concessions to help get customers to PTO. And that will not be an area of growth going forward. That's one thing. I think secondarily, Dividend does a really excellent job of picking good borrowers and in driving the installer network in a way that ensures high-quality client outcomes, but it was still a nascent company.
So there are a lot of things that we know how to do, whether it relates to installer management, the way that we've managed auto dealers forever, or collections activity or otherwise, that are gonna be net positives for our credit performance over time.
And then you mentioned commercial real estate, thankfully, is not a big exposure for you, 10%-15% of the loan book. Your IR team was kidding me that I'm not allowed to say you've had 0 charge-offs so far, because it's like talking about a no-hitter-
Yeah
in the middle of the game. But you've actually had zero charge-offs so far, which is pretty remarkable. So recognizing that it's not a huge business for you, what did you do different? What did the team focus on? Because it's a pretty different outcome than most banks that are kinda 2%-3% charge-off right now.
I have... I'm very fond of our head of commercial real estate, more even more so now. But I have been fond of referring to him as the envy of our commercial team, and he's been taking a victory lap over that. No, I was just realistic. It wasn't, it wasn't dour. Listen, like any commercial lending business, client selection is the name of the game, right? And if you bank developers with deep pockets who are willing to put real skin in the game in terms of equity, and recourse, and who recognize that we may not always be the cheapest, or the most willing, to press on terms, but that because of that, we're gonna be able to support them at every point in the cycle, you can do really well.
If, on the other hand, you look at commercial real estate as the primary driver of loan growth, and you're willing to compete with some of the non-bank sources of capital that tend to make terms and risk spreads more volatile, you can get yourself into a lot of trouble, right? So in our case, we're almost exclusively a recourse lender. We never moved our LTV targets. So we have, you know, we have a 60% LTV target in terms of the new properties. We're focused on large national developers. Not to say that we don't have treasured relationships in some of the markets, very well-established local developers, but the principal focus of the business is banking well-established companies who have the ability to put equity into properties that they need to.
And because we didn't stretch, we're not having to bear the challenges a lot of others are facing.
Maybe one natural follow-on, given the position you're in, is there a point in the cycle where you could see being more effective in the commercial real estate book? Not to imply, you know, you don't play offense with your clients, but is there a time where you'd be more opportunistic?
No, I think, what's made us successful is the fact that we're Steady Eddy , so you don't wanna, you don't wanna diverge from the strategy that's worked well. I am optimistic about segments of that portfolio. I think the builder market is a great point of... That's a big point of focus for us, a thing that we're good at, and is gonna be a good market for us and for the banking industry in general over the course of the next several years. We're still structurally short, something like 5 million single-family housing units, across the U.S. And at the moment, because the developers are well capitalized, they're not borrowing a whole lot to support existing developments.
So if we get some relief on interest rates, a little bit more activity in terms of home buying, and better affordability, you'll see that market move, and that'll be a you know, a source of growth for us. But otherwise, you know, we're sticking to the folks that you know, have been great clients and continuing to invest in the business where it makes sense.
Let's come back to technology. I know it's a place that's been really core to a lot of your career in banking and someplace you've been very passionate about. You know, maybe three questions, and I'll start with the first. You know, payments is a big area of investment.
Yep.
A lot of banks talk about it. You know, you've talked about your commercial payments up 11% year-over-year. What's driving that growth, and how do you think about the future opportunities in commercial payments?
Yeah... If I were an investor, I'd have a hard time sorting through what I hear from different folks. So there is a lot of activity in the payments space.
Every bank I cover is better than average in technology.
Exactly.
I'm waiting for that one bank that's like, "Yeah, we stink.
I spent a few years living in Minnesota and are very familiar with Lake Wobegon. So not everybody can be beautiful and above average, contrary to what they tell you. Here's what I'd say: like, we're number 13 in deposits nationally. EY does an annual cash management survey that virtually everybody in the industry participates in. We're number six in terms of the equivalent, and as big as number two in several major commercial payment categories. So, and I'll talk about why that is, but just in terms of the facts here, we're growing at 2x the rate of the market, and we have effectively 2x the share relative to the size of our balance sheet, which I think says we're good at it. Our sales folks tell me that we win because we have differentiated solutions.
You know, I hear from you and others that all banks say they have the same stuff, but we either are differentiated or we're doing two times as good a job driving the execution of the business. One way or the other, I'm pretty happy that we're getting the growth that we are, and I think the truth is probably somewhere in between. The core of the business today is this focus on managed services. So a recognition that we tend to think of payments inside the banking sector based on the rail, like the infrastructure rail we use to process it, whether it's an ACH payment or a wire.
Customers organize payments around tasks, whether that's managing the order-to-cash cycle, so you get your day sales outstanding into a reasonable spot, or managing your payables so that you're stretching vendor contracts, routing payments through least cost methods, or otherwise. The value you can create, having a different sort of a product, is not in your access to the ACH rails, but rather your ability to build software around your payments, your payment rails, so that you can help them do those tasks better, right? That was the focus of Expert AP, which was one of the core managed services that we launched several years ago. It's the focus of the things that we do in Expert AR, which is the managed receivables product.
It's the thing that we're doing in healthcare with Big Data Healthcare, which is really focused on provider networks in terms of an individual solution. Of our total revenue, more than 35% now is attached to clients that are using those managed services, and it's north of half the total pipeline right now, so we continue to grow.
And because we can essentially shift the conversation with customers away from, like, "Let's price out your analysis statement and talk about what everybody else could talk to you about," and into how much operational cost can we reduce because we can eliminate courier routing, reduce the amount of float that's necessary in your retail store, cut your payment acceptance cost by routing transactions for, you know, the at least cost routing on the payable side of the equation or otherwise. Like, you're in a realm now where you're reducing costs by encouraging them to switch, which has then allowed us to drive north of a third of all our new TM relationships, with TM as the lead product, like, decoupled from any extension of credit whatsoever, which is the only way you can outgrow your balance sheet.
The thing that is going to be exciting, it's a more nascent part of the business today, but will grow, is dating back to the spin-out of Vantiv, you know, then Worldpay, then FIS, now Worldpay. Again, we had to be in the business of provisioning payment infrastructure to third-party software developers because of the separation of Vantiv into, you know, what's now Worldpay, essentially created an independent entity that was wholly reliant on Fifth Third's access to the network rails, to process payments. So we got really good at the risk and compliance layer, and had the configured technology to be able to support third-party providers.
And then with the addition of Rize, the acquisition we made last year, are on the way to having north of 200 individual microservices that will be available via API with a modern way, and all of the developer support to be able to add third-party software developers onto our scaled, payments rails. That is gonna continue to be a very exciting catalyst for growth. I mean, if the overall business is growing at 11% at the moment, the mature businesses would be growing, call it 3%-4%, and the managed services would be growing high teens, and the embedded business would be growing much faster than that.
So you're saying this gives customers the ability to generate their own payments products-
Yes.
on your systems and rails and using your
To embed payments into their software offerings. So think about a company that is in the business of providing management software for nonprofits, who needs to be able to allow those nonprofits to accept donations through their website. I mean, their product, their core competency is in the development of the tools to host the website, the management of the reporting behind the scenes. They want to be able to offer a service in that particular case. They can embed Fifth Third code, so Fifth Third API is directly product their hosted software solution, and enable merchants or individual nonprofits, in that case, to sign up for the ability to accept payments via the website. And the work then gets done behind the scenes with the process, the payments, generating the revenue, you know, and settle the balances to those nonprofits.
So you've been very clear on the payment side, the investments you're making, the success you're having. You know, what is, what is another area or two in the broad concept of technology that you're most excited investing?
Yep. I mean, I'm excited about investing in a lot of things in technology. I think we're probably not talking enough about the progress we've made in wealth management over the course of the past several years, right? We've a very good wealth management business. I think it, you know, it's one of the largest, if you just look at wealth management, in terms of assets under management and assets under care, one of the largest regional bank wealth management businesses, and that includes the Category threes and the Category fours in terms of where we sit.
But we started down the path a few years ago to take the we have a fiduciary tradition inside the bank at trust bank heritage, and to look at the technology, and again, the controls environment that were built to support fiduciary standard of care inside the bank. And we launched our own RIA. We have essentially enabled strong teams who want to have the ability to integrate investment advice and a full fiduciary standard with the sort of capabilities that we offer through the bank in banking, lending, estate management, and settlement and otherwise. And still to have the independence to operate in an entrepreneurial way, and the name of that business is Fifth Third Wealth Advisors. So, we started it, we launched it publicly 18 months ago.
We just crossed $1 billion in AUM, as you know, a few months ago. I expect we'll be at $2 billion in AUM, doubled it, before the end of the year, and potentially faster than that in terms of the growth pace. And that's a really good example of our having leveraged a technology investment to use Fifth Third's business as the anchor tenant, but then to enable a faster rate of growth than, you know, just our own Fifth Third brand and channels will be able to generate otherwise.
Maybe let's just keep it capital. Hopefully, the AOCI boom is finally behind us or mostly behind us. You know, remind us from a steady state, what are your priorities? Where are the opportunities to play offense? Anywhere you still see a need to kind of step back and play defense right now?
Yep. Strong dividend, organic, supporting organic growth, and a share repurchase program have been the top three areas of priority to be the areas of priority for us in terms of focus. So, we look at the dividend every year. It's been important to us as the stock price has moved the last several years to be able to continue to boost the dividend to support a strong payout ratio. So that will continue to be a priority for us from a capital perspective. Organic growth clearly the best thing we can do, given the unit economics of the business we've got in terms of continuing to generate growth. We like granular. We don't like unpredictability, we don't like big bets.
We like granular additions, whether they're investments in branches or new loan commitments to high-quality clients. And then the share repurchase program, it continues to be a capital priority, even though it was on pause, as we ramped up. I think the AOCI didn't just distort capital ratios. In some ways, it's distorted valuation multiples in an environment where people are really focused on price to tangible book value. We were not believers in the held-to-maturity designation, but we try not to let accounting rules affect economic decisions. So ex-AOCI, we trade at 1.5x book right now, and if you look at our PE multiple, we're effectively getting 10% earnings.
You know, when you -- we purchase a share of Fifth Third stock, and we think the math on those two things is constructive for the company over time. And therefore, as you mentioned, you know, one of the things I'm excited about is having gotten to the 10.5% earlier. We may have a little bit more we're able to do this year.
You've referenced the ability to toggle if the loan growth comes in a little softer. Is it a one-for-one toggle in your mind? Is it, you know, a little bit more partial toggle? How do you think about that?
My mental math isn't fast enough to be able to answer that question directly. So here's what I'm-
Will you buy back a lot more stock if the loan growth is weaker?
We're very comfortable running the company at 10.5%. The guy was comfortable running the company at 9.5%. I think the signal out of D.C. right now is obviously that we're likely to see, at a minimum, more tiering in terms of and less gold plating in terms of the capital proposals. That will only be favorable for banks like us that did the hard work last year to achieve the, you know, what we thought was the right capital ratio under the prior proposals. So we have some flexibility there.
Maybe to rope in the other changes on liquidity and regulation more broadly. You know, go through the full alphabet soup, but when you kind of look at the full suite of things that are in flux, where do you feel like the third is best positioned? And is there any rules pending that you feel like it's a little bit more challenging?
Yeah. I mean, I think in general, we're in pretty good shape on a relative basis, right? We already are complying with full Category 1 LCR compliance in terms of liquidity. I haven't looked at the numbers recently, but because we have always used long-term debt as a way to introduce structure into funding, we had a lower issuance requirement than a lot if not all of the other regional banks, and I feel pretty good about that. The market gave us a gift when people had one too many over the New Year's celebration, and the ten-year moved down to 3.5. We were able to do some things in terms of designating about a third, I think, of the new one, call it a quarter of the portfolio....
As exposure is held to maturity. And the byproduct of that is even with the AOCI opt-out going away, I feel pretty good about where we are. And then the RWA diet got done last year and, you know, put us in a good spot. I think the thing that isn't Fifth Third specific, but that I worry about right now, is the more administrative regulatory changes are having the effect of pushing more banking activity outside the regulated banking system, right? Every loan category for the first time ever last year was at least 50%, and non-bank, the mortgage industry is more than 80%. And I just think that literally doesn't make sense.
Like, if the folks who are the policymakers in Washington believe that people are better off with unregulated financial services, then deregulate the banks-
Yeah.
and let's go, right? So what I think we've done, unfortunately, is to shift some of the risk into segments of the economy that have less transparency, that tend to be more procyclical. That's not good for the stability of the system. Forget the banking system for a moment, it's just the stability of the U.S. economy and our ability to deal with what's likely to be more volatility in the future, given the fiscal imbalances that we've got and some of the geopolitical dynamics around the world. So I'm very strongly of the camp at this point of either de-designating non-banks as being systemically important and therefore subject to the same regulatory rules we face, or just deregulating and letting us go back to creative destruction.
Maybe on that private credit topic, I mean, so much airtime. So maybe two questions. I mean, one, where does private credit really start to bump up against what you do, the core of what you do? Because, you know, every time I listen to them, they like to talk about TAM.
Yeah.
Banks don't get to talk about TAM.
They do. I've tried.
One of them talks about a TAM of $40 trillion, which I'm still trying to get my arms around, because that's 4 times the banking system, or twice the banking system.
Yeah.
But where is private credit starting to bump into the core of what you do? And conversely, where would you say private credit is kind of a different thing that doesn't really compete with Fifth?
Yeah. I mean, the greatest overlap at the moment is the leverage loan market, right? That's the place where you see them most. We're not a big player there on a relative basis, and where we play tends to be on a more limited number and select group of sponsors. But you do see the activity there. I mean, I read the same stories in the news that you do. I think secondarily, where they are making inroads in the middle market, what they are doing is essentially using unitranche structures to consolidate what would have been maybe a senior position that we would have and that finco's subordinated position. And they charge for it, but they don't do the same level of diligence, so they're fast.
Like I wrote in my annual letter this year, there are two ways to be fast, right? You can just be good, or you can not be detailed, and you can get to the same outcome one way or the other. But they are a little bit faster in that regard. They tend to have fewer covenant structures. I mean, the driver of that is they have the ability to basically move from debt to equity in ways that banks don't want to. I don't happen to think that borrowers should feel very good about that being the bail-in solution to a loan that's gone bad either.
But, it really is for us, at least in the Southeast, and more on M&A-related activity, or as the takeout in some cases for real estate where we were a construction lender on it.
Let me take a few pigeonhole questions. Hopefully, everyone's familiar with the system at this point. Please feel free to submit them. We've got about 10 minutes left. Maybe one that's pretty straightforward here. You know, you talked about the excess liquidity. How do you think about how much liquidity Fifth Third needs long term?
Yeah, about half of what we have. I mean, any given evening right now, we have been running at about $20 billion ±. Pre-COVID, we would have been running at, call it $3 billion ±, like $10 billion is probably the right place to be.
And then a follow-up on the loan growth commentary. You know, when we think about the specific guides you've got for 1Q being the bottom, 2Q being flat to up slightly, and then the full year guide implies 3Q and 4Q up slightly as well. Do you feel comfortable with that guidance, almost independent of the loan growth outlook?
Provided the deposit pricing remains manageable. That's a much bigger variable right now than loan growth is in terms of this year's guidance.
Any commentary on expense management, if the revenue environment is a little tougher, any places you might look to pare back, any places that are protected from an investment standpoint?
Yeah, I mean, I think we've grown expenses on a compound annual rate of, like, 1.5% over the course of the past several years, and then where inflation was obviously much higher than that, and where most of our peers have been growing faster. So I consider expense discipline to be a core competency at Fifth Third, and clearly, if the revenue environment is softer, then we're going to spend less money. You know, in terms of the focus, the way we've been successful on the strategies that we've whether it's Southeast, the stuff we talked about in terms of payments, the progress we've made in terms of replacing all these legacy mainframe applications, is we pick a small number of very big things, and we invest in them continuously through the cycle.
I would not anticipate that we will cut the investment spending and the stuff that we've talked about in terms of strategies. We just have to continue to get more disciplined, as it relates to, taking out variable costs if the volume isn't there, and leveraging the technology investments as they come in to drive down, the, you know, total cost of ownership and big processes inside the bank.
Maybe while I have you on this topic, I almost, but not quite, got my arms around the comment you made that the modern tech architecture is making tech costs more variable, but potentially people costs more fixed.
Yep.
Can you just flesh that out?
Yeah. So I'm really excited about the ways we're gonna be able to use... You, you wake up every morning when you get new platform technologies, you have to choose how to use. You can either be terrified because the way you've been doing things is not gonna be the way you're gonna do them in the future, or you can feel really excited.
We got a new publishing system two years ago, and I still only half know how to use it.
Okay, I was gonna say, you still wake up terrified.
I can put in a chart, but not a table.
So, I choose to wake up really excited, because when new tech platforms materialize, they have a flattening effect on, you know, competitive barriers. So, and when I say tech platforms, like personal computing, the internet, mobile computing, I was amused. I'm glad I'm not. I didn't compete with the crypto channel, here, but I wouldn't have put crypto in this boat. I would put AI, in the boat of in terms of technology that could create breakout improvements, in labor productivity, which is the thing ultimately, especially in a world where we're not even at a replacement rate in terms of fertility, is gonna be the big driver of our ability to grow our economy over time.
So the way you would've put in mainframe technology in the past is you invested in your own data centers, because you had to host the mainframe technology, you paid licensing for the software upfront. You did a ton of customization, and then you had to manage the software over time. So whether you were $2 billion, $10 billion, $40 billion, $250 billion, you still had to have the resources doing that. In a world where you are using a sort of a hybrid model, where you have a few of your own data centers to handle your base capacity requirements, and then you're using the cloud to handle either, you know, mission-critical apps, or peak volume levels, you now have a variable technology cost.
So if you're 20 billion versus 200 billion, your cloud costs should be roughly a tenth, what they are. And in fact, I look forward to JPMorgan Investor Day every year. I tell our people, we measure ourselves against the best, and nobody provides better, more granular benchmarking, than all of the work that their IR team puts into that, into that program. But their costs to modernize their data center, as an example, are almost exactly the same ratio to our costs to modernize our data center, which we completed, last year, as their assets to our assets. So that's a variable expense where you're not getting leverage, right?
And, we are maniacal about not allowing more than 5% customization in any of these new cloud software packages that come in, which sounds like a small thing, but that means we can accept vanilla releases from the nCinos or the FISs or the Workdays, or the ServiceNows of the world. In an environment where if we allowed for a lot of customization, we'd need to keep that maintenance expense. So now we're paying by the API call, which is the same way that everybody else pays for subscription software, and we've variabilized that cost. The game changer with AI is it used to be that if you needed to process 2x the volume, and you had an expert, you needed to do it, you had to have 2x people.
But where you get these structural lifts in individual productivity, now I can process 2x the volume with 1x people, right? So it becomes more important that you have a strong pool of human capital, and not necessarily a really large pool of human capital, to be able to drive outcomes. I've been talking to people who are a little bit ahead of where we are in terms of putting in, like, GitHub Copilot and GPT-4 in software development. They talked about prompt accept rates north of 30%, which means one in three lines of code is now being written by AI. So that's a 50% lift in terms of the amount of code you can ship on a month-to-month basis. If you can achieve that sort of a level of outcome, that means we could grow, right?
We can either take the expense, or at our existing cost level, we can support pretty significant amount of growth in terms of what we do.
You've made me very scared that one day my director of research is gonna stop by and say, "Given AI, you can cover twice as much for the same amount of salary.
Yeah, I feel like you're already doing that. Might help if we didn't schedule our earnings calls during the same four hours-
Yeah.
- one-hour windows.
Yeah. So you know, maybe two questions to kind of wrap things up, both bigger picture. So first, I want to ask you about the biggest change since you've been CEO, and as you look five years in the future, what you think the biggest change still will be to Fifth Third? So that's question one. And then question two, it is a more generalist-focused conference. A lot of times I hear from generalists, regional banks, they all look the same. It's a macro call. So, you know-
Yeah.
if you had your soapbox, so to speak
Yeah.
What would be the pitch to generalists on why Fifth Third is different and unique?
Yeah, I wish I'd answered your last question a little bit more briefly. That was a big, big 3 minutes.
I'm gonna have to reread the transcript for the last question about three times to get it. I heard GitHub at some point.
There you go. Well, I had to get a buzzword. It'll get picked up by aggregators. Look, I honestly think the only thing that's the thing I'm most proud of, and I think a big part of what's made us successful, is this focus that we have on continuity. Like, we're not a flavor-of-the-month company. We don't announce a new suite of strategic initiatives, every, you know, every year. I used to refer to us as boring. That's gotten a little bit crowded recently, so I gotta come up with... I'm gonna go with consistent. But we've made the impact we have in the Southeast because we've been at it for five years, right? And we're making progress the way that we're making it in payments, with the seeds of the Expert AP, Expert AR strategy.
We're in 2016, and part of Project North Star in terms of what we did. So, probably the biggest change in the last two years has been these things that we've talked about that we believe would produce a more stable, more profitable, and earnings profile, have actually proven that they could produce a more stable, more profitable earnings profile, right? And that's why, you know, when you look at, like, return on tangible common equity over the last 12 months, we have-- I think we have the highest, or ROE, maybe it's ROE, but it would... Among the highest, if not the absolute highest, of all the regional banks that didn't do an FDIC deal.
But we have the most stable, like, it's the least changed, despite the fact that the environment has become more difficult as you have deposit pricing pressures and otherwise. And that is a recipe for generating real value, you know, for long-term investors. In terms of what I'm most excited about, like, I blame the financial crisis, but if you look at the entire industry, we're kind of missing a generation. We're underrepresented in the generation of leadership, and it was pretty hard to go to college with this and convince people that working at a bank was a good thing to do when banks were being blamed for every ill in the world. So there's gonna be a lot of leadership succession across the sector the next five years. And it is rare that I walk into...
I spend a lot of time in our regions. I spend a lot of time actually directly with the teams across our company, and it's rare that I don't walk into a room where I can't see at least two and sometimes three generations of leadership. And that's the reason, is we've made some changes the last few years. We've been able to do it basically exclusively internally, whether that was Jamie stepping into the COO role, Bryan stepping up into the CFO role, what we did with Liz Osborne, we brought her on in audit. Some of the transition, a layer below in our management committee, that's going on right now. And that, if you prize continuity and stability and profitability above all other things, is the single best thing that you can have. And not everybody can say that.
Our industry actually does a lot of their hiring from the outside, when you look at it, the other major sectors, of the economy. So that is gonna be a thing allow us to turn what's, I think, a good 18-24 months here into a perpetuity, sort of play.
Well, good. Thank you for that, and thank you, everyone, for joining us. Always happy to have you, and hope to see you again next week.
Thanks, Bryan.
Thank you.