In the opening of Fifth Third Bancorp's Third Quarter 2024 Earnings Conference Call, led by conference operator Jael, participants are informed that the call is being moderated and will include a question-and-answer session after the presentations. Matt Curoe, Senior Director of Investor Relations, introduces the session and outlines that Chairman, CEO, and President Tim Spence, along with CFO Bryan Preston, will discuss the earnings results and outlook. Chief Credit Officer Greg Schroeck will join for the Q&A. Cautionary statements and information on non-GAAP measures are provided in their materials. Tim Spence emphasizes the bank's focus on stability, profitability, and growth amid uncertain environments. Fifth Third reported an earnings per share of $0.78, or $0.85 when excluding certain items, exceeding previous guidance.

The paragraph highlights Fifth Third's strong financial performance, including a 12.8% return on equity and improved efficiency ratio. Despite a 1% decline in headcount, the bank achieved positive operating leverage for two consecutive quarters and is on track to meet its 2024 financial guidance. Strategic growth investments have driven long-term organic growth, with consumer households increasing by 2.7% and leading retail deposit growth among large banks. Fifth Third maintained or improved its market positions, securing a number two spot in the Midwest and closing the gap to the top five in the Southeast markets.

The paragraph discusses the company's growth and expansion in various business sectors. Retail deposits grew by nearly 16% year-over-year, and the company gained market share in 14 of 15 targeted Southeast markets. It plans to open 19 new branches in the fourth quarter and aims to increase the pace of openings through 2028. The Commercial Bank segment expanded its middle market presence and commercial payments, while headcount increased by over 20% in Southeast and expansion markets. Middle market loan production saw significant growth, and the Commercial Payments business grew net fee revenues by 10% year-over-year, processing $4.3 trillion in volume. Wealth and Asset Management recorded record revenues, with assets under management increasing by $12 billion to $69 billion. The company increased its common dividend by 6% and repurchased $200 million in shares, resulting in a CET1 ratio increase to 10.8%.

The paragraph discusses Fifth Third's plans to increase share repurchases to $300 million in the fourth quarter, with potential for further increases based on loan growth. It acknowledges optimism about the economy but notes potential challenges, such as interest rate changes and geopolitical uncertainties. The company is focused on stability, profitability, and growth, while staying liquid and conservatively positioned. The paragraph also expresses sympathy for those affected by Hurricanes Helene and Milton and acknowledges the efforts of employees in supporting customers and reopening branches. Bryan Preston takes over to discuss the company's strong third-quarter results and revenue growth.

In the third quarter, the company experienced a 5% growth in pre-provision net revenue due to strong net revenue performance and disciplined expense management. Profitability remained robust, allowing for capital accumulation, share repurchases, and a 6% increase in the quarterly dividend. The CET1 ratio increased to 10.8%, and the tangible book value per share rose significantly. The results were affected by costs related to Visa and Mastercard litigation and severance expenses. Net interest income surpassed $1.4 billion, improving due to higher yields on new loans which offset increased interest-bearing deposit costs. Although average loans and leases remained flat, there was a notable rebound in loan production in specific regions and sectors. The commercial portfolio saw a slight decrease in average loans due to increased paydowns and a dip in revolver utilization.

In the latest quarter, the financial institution experienced a 1% increase in average total consumer loans and leases, largely due to higher indirect auto originations. This contributed to improved asset repricing in their portfolio. Core deposits also grew by 1%, primarily due to higher money market balances, though savings and CD balances decreased. The institution reduced higher-cost short-term borrowings through strategic long-term debt issuance, slightly lowering the rates paid on total interest-bearing liabilities. As the rate-cutting cycle begins, they are focusing on managing deposit costs and testing price sensitivity to enhance net interest income. Demand deposit account (DDA) balances made up 24% of core deposits, in line with expectations, and commercial deposits rose by 3%. Their liquidity coverage ratio (LCR) was fully compliant at 132%, and the loan-to-core deposit ratio decreased to 71%. Additionally, excluding certain impacts, adjusted non-interest income saw a 2% increase compared to the previous year.

The paragraph reports strong financial performance for the commercial payments and wealth divisions, highlighting double-digit revenue growth driven by investments in products and sales personnel. In commercial payments, revenue grew 10% due to new client acquisitions, while the wealth division saw a 21% increase in assets under management, reaching $69 billion. The capital markets also performed well with a 9% rise in fees, supported by debt capital markets activities. Adjusted non-interest expenses rose by 3% year-over-year, mainly due to increased performance-based compensation and ongoing investments in technology and personnel. Credit performance showed a slight improvement with the net charge-off ratio at 48 basis points.

Early stage delinquencies decreased slightly, maintaining low levels compared to the last decade. Non-performing assets (NPAs) rose by $82 million, with the NPA ratio increasing to 62 basis points, aligning with the 10-year average and remaining below the peer median. Commercial NPAs grew by $60 million, mainly due to fluctuations in the commercial and industrial (C&I) portfolio, although year-over-year C&I NPAs decreased by $7 million. The commercial real estate (CRE) portfolio performed well with no net charge-offs, but an increase in commercial mortgage NPAs was linked to one senior living credit. Consumer NPAs rose by $20 million partly due to a policy change affecting nonaccrual processes. No widespread credit weakening is observed, and limited impact from recent hurricanes is anticipated. The allowance for credit losses (ACL) coverage ratio increased slightly, incorporating an $18 million reserve build. The company maintains strong capital levels, with a CET1 ratio of 10.8%, well above the required minimum.

The paragraph discusses the expectations for improvement in unrealized losses within the securities portfolio and its positive impact on tangible book value per share over the coming years. It highlights the completion of a $200 million share repurchase, reducing the share count by 4.9 million. The capital priority remains at a 10.5% operating level. For the fourth quarter, continued growth in net interest income (NII) and net interest margin (NIM) is anticipated, with expectations unaffected by potential rate cuts. Average loan balances are expected to remain stable or increase slightly. Noninterest income is projected to rise by 3% to 4%, driven by capital markets and commercial payments growth. TRA revenue is expected to decrease in the fourth quarter compared to the previous year.

The company expects fourth-quarter noninterest expenses to remain stable despite increases in revenue-based compensation and investments in branches and technology, due to efficiencies gained elsewhere. Net charge-offs are anticipated to be similar or slightly lower compared to the third quarter. With expected loan growth, there is a forecasted allowance for credit losses (ACL) build of $20 million to $40 million, assuming no major changes in the economic outlook. The company projects to achieve positive operating leverage both sequentially and year-over-year and maintains its PPNR guidance for the year. The net interest income trajectory positions the company for potential record results in 2025, barring major economic or interest rate changes. They plan to increase share repurchases to $300 million in the fourth quarter, with potential for more depending on loan growth. Overall, they aim for strong capital accretion, top-tier profitability, and long-term value for shareholders and other stakeholders. The call is then turned over to Matt Curoe to begin the Q&A session.

In the paragraph, Bryan Preston discusses the positive outlook for net interest income (NII) in the fourth quarter, emphasizing confidence in the trajectory of NII and deposit performance. He notes that as anticipated, broker deposits and wholesale funding borrowings are decreasing, aligning with industry trends. Preston highlights that they have successfully managed deposit betas, achieving mid-40s since a recent rate cut, and outlines upcoming CD maturities that will impact deposit costs. He also mentions that the repricing of fixed-rate assets will provide a benefit, acting as a tailwind into the next year's fourth quarter, driving further NII increases. Scott Siefers acknowledges this information and references plans for record NII in 2025.

In the paragraph, Bryan Preston discusses the current lending environment, indicating that while significant loan growth isn't necessary to achieve record net interest income (NII), some growth would be beneficial. He notes that the trajectory looks positive with tailwinds in consumer businesses potentially driving future loan growth. Gerard Cassidy from RBC Capital Markets poses a question about the potential impact on net interest income if the Federal Reserve continues to lower interest rates and the yield curve shifts from inverted to positively sloping. Preston responds by acknowledging the question and defers detailed guidance until next year.

The paragraph discusses the potential benefits for net interest income (NII) if the yield curve steepens, alleviating inversion. This change could provide relief on the liability side of the balance sheet and opportunities to maintain fixed rate asset spreads. A return to a normal yield curve shape would enhance the profitability of fixed rate assets and allow for better economics from the duration in security and swap portfolios. The mention of the Fed suggests that if they successfully manage interest rate adjustments without triggering a recession, it could create a favorable economic environment not seen in a long time. The speaker believes the outlook, while it may seem optimistic, aligns with realistic expectations given current data and the Fed's actions.

The paragraph discusses potential inflationary dynamics, such as domestic manufacturing policies, green energy transition, and high fiscal deficits, that could prevent long-term interest rates from dropping significantly. This environment might benefit the company’s balance sheet revenue. The conversation shifts to Gerard Cassidy and Bryan Preston discussing shareholder returns. Preston mentions a target dividend payout ratio of 35% to 45% in normal conditions and emphasizes prioritizing organic growth investments. The remaining capital is managed through share buybacks, with $200 million to $300 million considered an appropriate level for buybacks, depending on capital capacity and growth opportunities.

In this discussion, Bryan Preston addresses Mike Mayo's query about the bank's loan production and growth. Despite the highest loan production in five quarters, overall loan growth remained flat due to $900 million in paydowns and a 1% reduction in revolver utilization, equivalent to about $800 million. These factors impacted average and period loan growth. However, Preston notes that utilization rates have stabilized and no longer pose as a concern. He attributes some paydowns to robust capital markets activity in the second quarter but anticipates a return to more typical levels, which should support future loan growth.

In the paragraph, Mike Mayo inquires about future growth expectations for Penta, specifically whether it will surpass 1% or 2%. Bryan Preston responds that they've provided a 1% sequential loan growth guide and aim to grow with or outperform the market, typically aligning with GDP growth. Tim Spence adds that conditions for favorable loan growth may be forthcoming, dependent on the election outcome and subsequent policies. He notes that higher interest rates have been challenging, leading businesses to pay down debt rather than invest, and there has been a trend from just-in-time to just-in-case inventory management, resulting in destocking.

The paragraph discusses financial strategies and market conditions impacting banking operations. It highlights efforts to optimize inventory and balance sheets, which can reduce the need for revolving credit. If interest rates decrease and economic certainty improves post-election, it could lead to increased mergers, acquisitions, and capital investments. This environment, combined with increased sales efforts, could support growth in lending at or above market rates. In the subsequent discussion, Ebrahim Poonawala asks about loan growth and the derisking of the Shared National Credit book at Fifth Third, which has decreased year-over-year. Tim Spence responds, indicating that the impact of these efforts should stabilize by the year's end, noting competition from non-bank lenders.

The paragraph discusses the shift in financial strategy, highlighting a focus on profitability and unit economics in a changing capital environment. It contrasts the approach of Fifth Third Bank with private lenders in the leveraged lending space, particularly with practices like payment-in-kind (PIC) or negative amortization lending, which Fifth Third avoids. The text refers to a Financial Times article noting that such lending is prevalent among major private credit firms, something Fifth Third finds unusual given the economic conditions. Bryan Preston and Ebrahim Poonawala discuss a $31 billion PIC portfolio that has decreased by 11% year-over-year and suggest it may be nearing its lower limit.

The paragraph discusses the perspectives of Bryan Preston, Tim Spence, and Ebrahim Poonawala on capital allocation and production trends. Preston anticipates a moderation in production declines and expects an eventual increase in production to offset decreases. Spence highlights that the CIB and middle market pipelines are at record levels, suggesting an upswing in production that could positively impact loan balances. Poonawala questions the strategy of accelerating stock buybacks amid improving economic conditions, arguing for holding excess capital as a buffer. Preston responds positively about their stock’s value and expresses confidence in the company's ability to generate sufficient capital for organic growth, allowing flexibility in capital allocation decisions.

The paragraph discusses the company's approach to capital allocation, emphasizing flexibility in capital distribution, particularly through share buybacks, depending on opportunities and defensive needs. The speaker highlights the high cost of holding excess capital due to the 10% cost of equity and expresses confidence in the company's strong trajectory and ability to regenerate capital as needed. The dialogue then shifts to a Q&A session, where Erika Najarian from UBS questions Bryan Preston about deposit betas and the impact of recent interest rate cuts. She inquires about the expected pace of index deposit repricing over the next five quarters and how the company anticipates adapting to a potential neutral interest rate environment of 2.75% to 3%. Bryan Preston acknowledges the complexity of the question and notes the importance of the interest rate curve shape in such scenarios.

The paragraph discusses the pacing and factors influencing the beta of commercial and retail deposits, focusing on promotional offerings and CD portfolio maturities. It notes that 75% of CDs will mature by the end of the first quarter, impacting their cumulative beta target in the high 50s, which will take about two quarters to achieve. The challenge in estimating the natural level of deposit spread is highlighted, with expectations of some spread compression at peak rates. However, maintaining a 150 to 200 basis point deposit spread is seen as potentially achievable. The conversation then shifts to the impact of loan growth on deposit management and Net Interest Income (NII) improvement. Erika Najarian acknowledges this strategic focus and poses a question to Tim, noting positive investor feedback on his forward-looking approach.

The speaker addresses expectations for 2025, emphasizing their proactive approach to tackling future challenges early, akin to the "hustle" associated with Cincinnati's Pete Rose. They note their success in turning around net interest margin (NIM) and net interest income (NII) before competitors by not cutting back on crucial investments, despite a need to manage expenses. They continued building over 30 branches and modernizing platforms, positioning themselves advantageously for future growth.

The company has been focusing on acquisitions in the commercial payment sector and expanding its sales force in wealth management and the middle market. These initiatives will continue into the next year, with self-funding through other efficiency measures. Strategic planning is viewed as a resource allocation process rather than an investment request. The bank's annualized expense run rate has historically been around 3%. In response to a question about index deposits, Bryan Preston explains that while customers may negotiate deposit costs, the bank manages this well. Index deposits offer a better spread due to market movement risks, compared to managed accounts which allow for wider spreads due to greater management control.

In the paragraph, Greg Schroeck addresses concerns about credit normalization and assures that despite some softness in specific consumer asset classes like dividend and RV portfolios, the overall credit conditions remain stable. Delinquencies are at all-time lows, and criticized assets have decreased. Although certain 2022 and 2023 consumer originations are underperforming, their performance is still better than industry indexes by a significant margin. Schroeck expects any elevated levels to normalize soon and highlights the portfolio's diversity and stability. Overall, borrowers continue to behave well, and there are no major concerns on the credit side.

The paragraph discusses the company's strategy for expanding its commercial real estate portfolio and geographical presence. It highlights the minimal delinquencies and non-performing assets in their current portfolio, attributed to their strategic diversification. Tim Spence, responding to Matt O'Connor's question, explains that their approach to shifting the regional mix involves organically growing their branch network without acquisitions. They plan to achieve this through consistent branch development, marketing, and product strategies. The company is currently building 30 to 35 branches annually, with an expectation to increase this to 40 to 50 branches. Existing branches are performing predictably well, with those already established expected to continue growing over the next five years.

The paragraph discusses the outlook for net interest margin (NIM) and retail deposit growth. It suggests that maturation of current initiatives will significantly impact performance, as noted by Matt O'Connor, referencing FDIC data. Tim Spence and Bryan Preston discuss factors influencing NIM, including holding $20 billion in cash, which affects NIM by a basis point per $1 billion. They highlight opportunities for improving NIM through loan portfolio deployment and asset repricing. Preston indicates that with some economic relief, it's possible to achieve a NIM of 315 to 325 again in a reasonable timeframe.

In the paragraph, Christopher Marinac from Janney Montgomery Scott asks Tim Spence about the potential business opportunities that arise when large banks face regulatory orders, and if it benefits their growth. Tim responds by noting that such situations can create opportunities for well-positioned banks to grow, as others might be limited in their growth. Christopher then asks about the impact of lower interest rates on returns, to which Bryan Preston replies that lower rates, along with a normalized yield curve, would be beneficial. Mike Mayo from Wells Fargo Securities follows up with a question about the bank's investment in growth and the returns from those investments.

The paragraph discusses investment strategies and considerations for Southeast branches and commercial payments. Tim Spence explains that return on investment (IRR) and time to breakeven are key metrics in evaluating opportunities. Southeast branches have an IRR of 18-20% with a breakeven time of a couple of years, while smaller acquisitions for commercial payments aim for IRRs in the 20s due to their nascent nature. They aim for returns in the 15-25% range, adjusting for execution risk. He notes that while JPMorgan and Fifth Third have aggressively expanded in the Southeast, his organization is strategically investing at a rate they deem appropriate for their size compared to larger competitors like JPMorgan and BofA.

The paragraph features a discussion about investment strategies and market competition between bank executives. Bryan Preston discusses accelerating the bank's branch-building efforts and improving strategies due to increased confidence, though they face pressure regarding positive operating leverage. Mike Mayo challenges this by pointing out that competitors, including some from the Southeast and large banks investing heavily in technology, are rebounding and that the future may pose more challenges than the past. Tim Spence responds by questioning whether the Southeast was ever truly uncompetitive, emphasizing the need for the bank to continually assess its investments relative to its value proposition compared to competitors. Although large banks are heavily investing in technology, he questions whether this translates to a significantly better value proposition for consumers, especially when comparing checking account offerings.

The paragraph discusses the competitive nature of the banking industry, highlighting that regional banks, including Fifth Third, have been leaders in consumer-friendly product innovation. It is emphasized that the bank is focused on gaining market share in highly competitive environments. The speaker anticipates that the level of competition will remain constant. The Q&A session concludes, and Matt Curoe thanks participants, inviting them to reach out to Investor Relations for further questions, before the call is disconnected by the operator.

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