The operator introduces the conference call for Fifth Third Bancorp's second quarter 2024 earnings. The CEO and CFO provide an overview of the results and outlook, and the Chief Credit Officer joins for the Q&A portion. The speakers remind listeners of cautionary statements and discuss the company's performance in a challenging economic and interest rate environment.

The bank's focus on stability, profitability, and growth has resulted in consistent and strong profitability since the bank failures last spring. They exceeded their earnings guidance for the first quarter and have the best adjusted return on tangible common equity and assets compared to their peers. The second quarter saw growth in NII and NIM, and their investments in the southeast, middle market expansion, commercial payments, and wealth and asset management have led to strong growth and market share gains. They have also seen growth in consumer households and middle market loan production, particularly in certain regions and industries with federal government spending benefits.

Fifth Third Bancorp saw growth in commercial payments revenue and wealth and asset management fee revenues in the second quarter of 2024. They also received recognition for their private banking services and maintained strong capital levels. The company remains cautious for the rest of the year and will prioritize maintaining flexibility and investing in the long-term. The CEO expresses gratitude to employees for their hard work and dedication to customer service.

The speaker, Bryan Preston, thanks everyone for joining the call and discusses the strong second quarter results, highlighting the importance of maintaining balance sheet strength and flexibility. He mentions that despite changes in the rate outlook, NII and NIM have remained consistent and that the full year outlook remains unchanged. He also mentions the resumption of share repurchases and growth in CET1 ratio. The reported results were impacted by certain items, but excluding those, adjusted net interest income and net interest margin both improved compared to the prior quarter. This was due to increased yields on new loan production, which offset the impact of increased interest bearing core deposit costs.

The bank's total average portfolio loans and leases did not change from the previous quarter, but they saw an increase in fixed rate asset repricing due to their indirect auto business. Their consumer portfolio loans remained flat, while commercial loans decreased due to lower demand. However, they saw an increase in middle market loan production, particularly in the southeast and other states. The bank is cautious about commercial loan growth in the second half of the year due to muted customer demand. They have been investing in analytics to optimize deposit outcomes and have seen strong deposit growth. They are also focusing on managing deposit costs with the potential for rate cuts later in the year. Consumer deposits increased, while commercial and wealth deposits decreased.

The Southeast branch investments are driving household growth and granular insured deposits. Demand deposit balances are expected to fall below 25% in the third quarter and stay around 24% for the rest of the year. The company is well-positioned to continue growing net interest income and has flexibility to navigate economic and interest rate conditions. Adjusted non-interest income decreased by 4% compared to the year ago quarter due to a private equity gain recognized in 2023. Commercial payments and wealth and asset management fees continue to deliver strong results, while market-sensitive businesses have been impacted by the higher rate environment.

In the first quarter, the leasing business revenue decreased by $9 million due to a decision to reduce operating leases, but this was offset by a decrease in leasing expenses. The company also saw a $3 million gain in securities, but this was balanced out by compensation expenses. Adjusted non-interest expenses remained flat compared to the previous year, and decreased by 7% compared to the previous quarter. Credit metrics showed improvement, with a decrease in net charge-offs and early-stage delinquencies. NPAs also decreased by $100 million. The company's credit discipline is focused on maintaining high-quality relationships and managing concentration risks. There are no signs of widespread industry or geographic weakness, and any potential future credit losses are expected to be isolated incidents.

The company's focus on lending to homeowners has helped mitigate the impact of inflation. They have maintained conservative underwriting policies and will continue to evaluate their positioning. The company's capital levels are strong and they have completed $125 million in share repurchases. They expect continued improvement in unrealized securities losses and anticipate a decrease in NII for the full year in line with previous guidance.

The outlook for the second half of 2024 assumes two rate cuts, but the company believes they can achieve their desired outcome without any cuts or loan growth. Customer demand is the main factor in the expected 3% decrease in total loans for the year. If the economic outlook improves, loan growth could be in-line with market growth. Non-interest income is expected to be stable to slightly down, while non-interest expenses will be managed at 2023 levels. The company plans to invest in technology and open new branches in growth markets while closing others. The efficiency ratio is projected to be around 57% for the full year.

The bank's net charge-off outlook for full year 2024 is expected to remain in the 35 to 45 basis points range. Provision builds are expected to resume in the second half of 2024, but at a lower rate than the first half. NII and NIM growth are expected to continue in the third and fourth quarter, with a 2% increase in NII in the third quarter. Interest-bearing core deposit costs are projected to increase by 4 basis points. Total loan balances are expected to remain stable or increase slightly. Non-interest income is expected to increase by 1-2%, while expenses are expected to increase by 1%. Net charge-offs are projected to be in the 40-45 basis points range in the third quarter, with a provision build of around $25 million.

The company expects positive operating leverage and record results in 2025, assuming no major changes. They plan to execute share repurchases and generate sustained profitability. They also have a comfortable rate sensitivity and expect rate cuts to benefit their net interest income.

Fifth Third believes that rate cuts will have a positive impact on their business. They have a detailed breakdown of their interest-bearing deposit book and are confident they can manage the cost of repricing. They expect average loan growth if conditions improve and believe that rate cuts will help both loan demand and credit quality.

Jamie Leonard and the speaker have been visiting different markets and conducting a straw poll on where rates need to be for activity to pick up. The consensus among Fifth Third employees is that rates need to be around 4.5%. However, the speaker expresses concern about broader macro issues such as land wars, the upcoming election, fiscal deficits, and Treasury Issuance. They also mention the government's role in supporting GDP growth and the need to focus on proven strategies in uncertain environments rather than taking risks. A client in Tennessee has reported half-speed activity due to the current environment. The speaker emphasizes the importance of focusing on known businesses and avoiding risky ventures that rely on favorable macro conditions for repayment.

Bryan Preston, speaking on behalf of the company, was asked about the fee trajectory and provided some insight. He mentioned that the second to third quarter increase would not be too aggressive and that they expect continued performance from their wealth and asset management and commercial payments divisions. He also noted that there would be some seasonal impacts, particularly in their mortgage business, but overall they are set up well for growth in the third and fourth quarters. He also mentioned some specific factors that would contribute to this growth, such as an increase in card spending and a $10 million TRA benefit.

The speaker is discussing the recent news about the Consumer Financial Protection Bureau and Fifth Third Bank's account issues. They urge the reader to focus on the facts rather than the press releases and state that the issues are old and have already been addressed. They also mention that the one-time expense incurred will not have any ongoing impact on the bank's operations.

During a conference call, Tim Spence from the company is asked about their deposit strategy by Mike Mayo from Wells Fargo and Ken Usdin from Jefferies. Bryan Preston responds by saying that they expect a 4 basis point increase in the third quarter and have a downside beta of mid-50s to 60. They also mention that they have a two-thirds deposit-based high beta and plan to be more aggressive with rate cuts for CDs and promo portfolios. They have successfully navigated through previous down rate cycles and are confident in their ability to manage commercial and index balances.

Bryan Preston, speaking about the company's NII, states that most of the growth is due to the natural transition of the balance sheet. This includes fixed rate asset pricing and slowing deposit costs, which are expected to add about $8 million per quarter. Additionally, there is $20 million per quarter from fixed rate asset repricing and potential savings of $10-20 million from slowing deposit costs. Day count will also contribute $10 million in the third quarter. With the potential for loan growth, the company is confident in achieving record NII. The only uncertainty is the competitiveness of deposit pricing, but if there are rate cuts, there could be relief on the liability side. Tim Spence adds that the company is well-positioned for growth.

The speaker discusses the success of their intermediate duration fixed rate loan origination platforms, particularly in the auto and solar industries, which have seen a significant increase in yields. They attribute this success to their origination capacity and the fact that these assets will reprice faster than other fixed rate products. The speaker also mentions a decrease in transfers to non-accrual status of loans, which has been a trend since the second quarter of 2023. They do not provide specific reasons for this drop.

The speaker, Greg Schroeck, addresses two questions regarding the increase in commercial loan charge-offs in the quarter. He explains that the increase was due to two specific loans in different industries, but overall credit metrics remain solid. He also mentions that delinquencies and non-performing assets have decreased, with the exception of a small increase in the consumer side. The commercial real estate portfolio continues to perform well with minimal delinquencies.

The speaker is discussing the bank's Shared National Credit portfolio and the potential exposure to private equity and private credit. They clarify that they are not active in that space and have only a few direct lending lines of credit. The speaker also mentions the potential for charge-offs in the future and uncertainties that could affect them, but cannot give long-term guidance on the trajectory of MCR rates.

The speaker discusses the potential impact of rate cuts on Fifth Third's asset quality and portfolio metrics. They also mention that the bank is currently more sensitive to the front end of the yield curve due to their cash position. However, they could still benefit from fixed rate asset repricing in the future.

The company has a large cash position, which is twice as much as last year. They are focused on maintaining this liquidity to deal with potential new rules and market uncertainty. This also allows them to be more aggressive in managing their liabilities. The combination of liquidity and liability management benefits is the reason for their current cash position.

The speaker discusses the impact of interest rates on the bank's net interest margin and the potential for it to return to more normalized levels. They also address concerns about the bank's ownership of a solar product and its impact on the stock, stating that dividend and the CFPB issue are separate matters. The bank's focus on the Southeast is seen as a way to attach to long-term growth trends.

The company's focus on commercial payments is driven by the trend of digitization and the need to modernize energy infrastructure. The company is diversifying energy sources and sees residential solar and battery storage as important for meeting future power needs. Banks are viewed as the best source of liquidity for the company's products, and the company relies on the quality of installers to ensure a good customer experience. The company has refocused on the top 150 installers in their portfolio.

The analyst asks if Fifth Third is confident that they will not face any negative publicity or litigation due to their recent vendor changes. The speaker, Tim Spence, assures that they take care of their customers and will complete any projects that their installers are unable to finish. They also mention that they have a high level of cash and an LCR of 137%, but due to the inverted yield curve, they are not currently earning much by extending their duration.

The speaker discusses their outlook on interest rates and their decision not to add duration. They also mention competition driving loan spreads lower and their strategy for loan growth. The speaker then addresses a question about risk in the commercial real estate bond market and clarifies that most of their bonds are agency-backed. They are then asked to explain the non-agency CMBF and their response is cut off.

The speaker discusses the company's cautious outlook on commercial real estate and their participation in the market through structured forms. They mention a specific structure called SASB and how they have very little exposure to it in their portfolio. They stress the portfolio regularly and have no concerns about its performance. A question is asked about the commercial criticized and charge-offs, and the speaker explains that the charge-offs will improve those loans and they may see upgrade trends in the future.

The bank is seeing improvements in charge-offs and criticized assets, and does not expect continued increases. They have only seen growth in a few ABL facilities, which are well secured and have low loss content. The bank has also seen a small uptick in home equity lending and is considering this as a potential area for growth due to the high amount of equity in houses.

The speaker discusses the current state of the home equity market and how it has improved since the 2008-2009 financial crisis. They mention that while home equity may not be a major driver of loan growth in the next few quarters, it is a good option for homeowners with 3% fixed rate mortgages to improve their homes. The speaker also notes that spending on home improvement remains low, but they anticipate slow and steady growth in the home equity market.

This summary was generated with AI and may contain some inaccuracies.