Q4 2021 Fifth Third Bancorp Earnings Call
Okay.
Good day, Thank you for standing by and welcome to the fifth third Bancorp fourth quarter 2021 earnings conference call.
At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
To ask a question. During this session you will need to press star one on your telephone.
If you require any further assistance. Please press star zero. Thank you I would now like to hand, the conference over to your Speaker today, Mr. Chris Doll director of Investor Relations. Sir. Please go ahead. Thank you operator good morning.
Everyone and thank you for joining us today, we'll be discussing our financial results for the fourth quarter of 2021.
Please review the cautionary statements on our materials, which can be found in our earnings release and presentation. These materials contain reconciliations to non-GAAP measures along with information pertaining to the use of non-GAAP measures.
Well as forward looking statements about fifth third's performance, we undertake no obligation to update any such forward looking statements. After the date of this call.
This morning, I'm joined by our CEO , Greg Carmichael, President, Tim Spence, CFO , Jamie Leonard and Chief Credit Officer, Richard Stein.
Following prepared remarks by Greg and Jamie We will open the call up for questions.
Let me turn over the call now to Greg for his comments.
Thanks, Chris and thank all of you for joining us this morning.
Earlier today, we reported full year net income.
Two $8 billion or $3 73 per share.
We delivered strong financial results throughout the year, while fully supporting our.
Customers, our communities and our employees.
We generated full year adjusted Oro TCE.
Scooting, a OCI of 19%. Additionally, excluding the provision benefit in excess of charge offs or Aro TCE exceeded 16% and approved more than 130 basis points from last year driven by record financial results throughout the franchise.
We generated record revenue of nearly $8 billion in 2021, which increased 4% compared to 2020 highlighted by strength in commercial retail wealth and asset management. Our performance was led by record adjusted fee revenue, which increased 8% net interest income was stable compared to last year. Despite the.
And environmental headwinds as we have been disciplined deploying excess cash.
Full year adjusted expenses increased just two 5% compared to last year, reflecting disciplined expense management throughout the company.
As a result of our strong financial performance, we achieved positive operating leverage excluding security gains and losses and generated adjusted efficiency ratio below 60%.
Credit quality remains strong with historically low full year net charge offs of just 16 basis points. Additionally, nonperforming loans and criticized assets.
Due to improved throughout the year.
Clearly the fourth quarter.
Our credit results demonstrate our disciplined client selection conservative underwriting and continued benefits from fiscal and monetary government stimulus programs.
For the fourth quarter, we reported net income of $662 million or <unk> 90 per share our reported EPS included a negative 3% impact from the items shown on page two of our release.
Putting these items adjusted fourth quarter earnings were 93 per share.
Our quarterly financial results reflect the strong momentum in most of our businesses, we saw improved revenues compared to the third quarter.
We generated record commercial banking revenue record Treasury management revenue and record wealth and asset management revenue in the quarter, we expect a positive momentum in our business to carry forward into 2022 and beyond.
Our commercial business record loan production of $8 $2 billion.
<unk> approximately 50% sequentially with record performances in both corporate banking and middle market.
Despite the ongoing challenges, we're hearing from our customers, including supply chain constraints and labor shortages production was broad based across our regions and verticals.
From a regional middle market perspective, we generated strong production this year in several markets, including Chicago, Carolinas, Indiana, Georgia, and our expansion markets.
From an industry vertical perspective, healthcare renewables retail technology and financial institutions, all continued to outperform.
All of our record production a record new client relationships, we generated C&I loan growth excluding P. P. P of 7% on an average basis or 11% on a period end basis compared to last quarter.
The acceleration of commercial loan growth at the end of 2021 our strong pipeline new commitment growth production anticipated from provide and continued investments in capabilities and talent will all support accelerated loan growth in 2022.
In our retail business, we once again generated consistent peer leading consumer household growth in excess of 3% year over year highlighted by our Chicago and South East markets. We continue to add households in every region, reflecting the ongoing success and momentum banking as well as our branch expansion and digital initiatives.
Our success throughout our retail business comes down to three factors.
First we are generating some more scale in our local markets.
This quarter, we opened 18 vacant centers are a key southeast msas.
Consolidating four locations throughout our footprint.
We have also closed an additional 40 locations in the month of January primarily legacy markets.
We will continue to leverage our geospatial analytics to optimize our overall branch network will take into account evolving customer preferences.
We continue to target a branch network allocation of approximately 35% in the southeast by 2025.
Second we offer differentiated products and services like momentum banking, which includes features that enable customers to avoid overdraft fees and good access to short term liquidity when needed I'd like to point out with respect to <unk>, we have been the lowest among peers with significant consumer banking operations for several quarters.
And third we are delivering an outstanding customer experience as shown by leading third party surveys we have improved from the bottom quartile five years ago to top quartile today, we are recognized as the number one bank.
Top 25 banks for taking care of our customers during the pandemic.
Our balance sheet horsepower remain very strong last night to support continued acceleration of our growth and profitability, we announced the acquisition of dividend finance, a leading fintech point of sale consumer lender, providing solutions for the highly attractive and growing renewable energy industry.
They have strong relationships with a robust contract network.
Offer sales and project management solutions through a state of the art technology platform.
The customer footprint focused on prime and Super Prime borrowers.
Do you have a coast to coast footprint with targeted growth initiatives in the southeast.
<unk> assumed renewable energy solutions combined with our existing leadership in providing renewable solutions to commercial clients. Since 2012 were supporting the country has transitioned to a more sustainable economy and furthering our ESG leadership position among peers.
As Julien bake among peers early leadership score from CDP for three consecutive years, we are intensely focused on leading the transition to a sustainable future. Our focus has been recognized with several prominent ESG providers, including MSCI, which recently gave us a three notch rating upgrade.
Well, there's our sustained peer leading household growth top quartile key metrics balance sheet management were strong diversified fee revenues. We have established a track record of doing what we said we were going to do our execution ultimately produces superior consistent and sustainable.
Actual performance.
Across all of our businesses our strategic parties are unchanged, we remain focused on leveraging technology to accelerate our digital transformation.
Does seem to drive growth and profitability.
Expanding our market share in key geographies and maintaining discipline throughout the company.
Turning it over to Jamie to discuss our financial results and our current outlook I would like to once again, thank our employees I very much appreciate the way you have continued erosion to the occasion to support our customers communities and each other.
Our frontline employees that we were able to keep with a 99% of our branches opened since the onset of the pandemic.
We gave a special both of these employees on the quarter in recognition of their extraordinary and ongoing efforts to provide essential banking services for our customers. This is more of a second time during the pandemic. We have recognized the work of our frontline employees through a special bonus.
In summary, we believe our strong and highly asset sensitive balance sheet diversified revenues and continued focus on disciplined management throughout the company, we will service well this year and beyond we expect to generate positive operating leverage again for the full year 2022 without adjusting for PPP or other known headwinds.
We remain focused on growing strong relationships and manage the balance sheet with a through the cycle perspective to generate sustainable long term value for our stakeholders and maintain our position as a top performing regional bank with altura or Jamie to discuss our financial results and our current outlook.
Thank you Greg and thank all of you for joining US today are strong quarterly financial results reflect focused execution throughout the bank. The reported earnings included a negative <unk> <unk> impact from the two items noted in the release.
We generated solid revenue growth, which resulted in record fee income combined with another quarter of strong credit quality. As a result, we produced an adjusted Aro TCE, excluding OCI of over 18%.
Improvements in credit quality resulted in the $85 million release to our credit reserves in an ACL ratio of 185 basis points compared to 200 basis points last quarter.
Combined with another quarter of historically low net charge offs, we had a $47 million net benefit to the provision for credit losses.
Moving to the income statement net interest income up approximately $1 $2 billion increased 1% sequentially, reflecting C&I loan growth $10 million in seasonal mutual fund dividends at $18 million in prepayment penalties received in the investment portfolio as well as a reduction in long term debt.
These items were partially offset by lower loan yields and a decline in PPP related income, which was $36 million this quarter compared to $47 million in the prior quarter excluding.
Excluding PPP NII increased $19 million or 2% sequentially.
On the funding side, we reduced our total interest bearing liabilities cost three basis points this quarter.
Compared to the prior quarter reported net interest margin decreased four basis points, reflecting a $2 $6 billion increase in interest bearing cash and lower loan yields partially offset by prepayment penalties that mutual fund dividends from our investment portfolio excluding.
Excluding the impact of excess cash NIM was flat sequentially.
Total reported non interest income increased 1% compared to the year ago quarter. As we discussed in early December reported results included negative valuation marks totaling $22 million or.
Attributable to a $5 million negative MSR valuation as well as a $17 million Fintech investment unrealized loss recorded in securities losses that occurred since its October IPO.
Similar to our previous holdings of public companies, we will exit our position at the appropriate time.
Adjusted noninterest income results exclude the impact of security gains and losses, the visa swap as well as prior period business disposition gains and losses.
Adjusted noninterest income increased 4% sequentially driven by another quarter of record commercial banking revenue, we generated record M&A advisory fees, notably in our healthcare vertical reflecting successful outcomes from our coker and <unk> teams combined with strong business lending and syndication.
These items were partially offset by lower corporate bond fees.
We also generated solid fee revenue growth in Treasury management card and processing and wealth and asset management, where we generated record net AUM inflows in both the fourth quarter and the full year.
We were recently recognized as one of the world's best private bank for the third consecutive year by Global Finance magazine and our results reflect it.
Additionally, mortgage banking revenue decreased $51 million compared to the third quarter, which included a $12 million unfavorable impact from our decision to retain $350 million of retail production during the quarter.
Compared to the year ago quarter, adjusted noninterest income increased 2% with improvement in every single fee caption, reflecting both the underlying strength of our lines of business as well as the robust economic rebound over the past year.
Noninterest income represented 40% of total revenue in the fourth quarter.
Reported non interest expenses decreased 2% compared to the year ago quarter, primarily driven by lower occupancy expense as well as lower processing expense, reflecting contract renegotiations.
Adjusted expenses increased 2% driven by higher performance based compensation, reflecting strong business results from record AUM inflows in commercial loan production.
Elevated medical benefits due to the pandemic loan servicing expenses and continued technology investments.
Our expenses this quarter included mark to market impacts associated with nonqualified deferred compensation of $10 million compared to less than $1 million last quarter.
For the full year total adjusted fees increased 8% compared to just two 5% expense growth.
Commercial banking revenue increased 21% card and processing revenue increased 14% wealth and asset management revenue increased 13% and TM revenue increased 9% offset by a $28 million reduction from lower TRA income and a 16% decline in mortgage banking.
On the expense side, the largest contributor of the growth was elevated performance based compensation technology investments and loan servicing expenses.
These items were partially offset by the actions we took about a year ago to streamline the organization, including process reengineering vendor renegotiations and divestitures of noncore businesses, such as property and casualty insurance HSA deposits and 401K recordkeeping.
Moving to the balance sheet.
Total average portfolio loans and leases increased 1% sequentially, including the PPP headwind excluding.
Excluding PPP portfolio loans and leases increased 3% on an average basis and increased 5% on a period end basis.
Average total consumer portfolio loans increased 1% compared to the prior quarter as continued strength in auto was partially offset by declines in home equity and other consumer loan balances.
Average commercial portfolio loans and leases increased 2% compared to the prior quarter, reflecting growth in C&I loans, excluding PPP average commercial loans increased 4% with C&I loans up 7%.
As Greg mentioned commercial loan production was robust across the board up nearly 50% compared to the prior quarter, reflecting strong corporate and middle market banking production, which was well diversified geographically as a result period and C&I loans, excluding PPP increase.
11% sequentially.
Revolver utilization of 33% increased 2% compared to the prior quarter.
Average CRE loans were down 3% sequentially with lower balances in mortgage and construction driven by elevated payoffs in areas most impacted by the pandemic.
As we have discussed before we continue to have the lowest CRE concentration as a percentage of total capital compared to peers.
Given the rate environment towards the end of the fourth quarter, we began investing a small portion of our excess cash with the average securities portfolio balances increasing 1% sequentially.
Average other short term investments, which includes our interest bearing cash remained elevated reflecting continued growth in core deposits compared to the prior quarter commercial transaction deposits increased 5% and consumer transaction deposits increased 2%.
Moving to credit as Greg mentioned, our credit performance. This quarter was once again strong with fourth quarter net charge offs remained historically low.
Nonperforming assets declined 6% sequentially with the NPA ratio declining five basis points.
Criticized assets declined 13% sequentially, reflecting a significant improvement from Covid high impact industries. Additionally.
Additionally, criticized assets declined in virtually every region and vertical and also improved in our leveraged loan portfolio.
From a product standpoint, we continue to closely monitor CRE, including office and hospitality exposures given the ongoing effects of the pandemic.
Moving to the ACL.
Our baseline scenario assumes the labor market remains stable with unemployment ending our three year reasonable and supportable period at around three 8%.
We did not change our scenario weights of 60% to the base and 20% to the upside and downside scenarios given the continued uncertainty during the pandemic.
Our ACL release this quarter came primarily from commercial reflecting the improved risk profile of the portfolio.
If the ACL, where based 100% on the downside scenario, the ACL would be $960 million higher if the ACL, we're 100% weighted to the baseline scenario the reserve would be $213 million lower.
While the economic backdrop in our base case expectations point to continued strength in the economy. There are several key risks factored into our downside scenario, which could play out given the uncertain environment.
In addition to Covid, we continue to monitor the economic and lending implications with the supply chain and labor market constraints that currently exist. Our December 31 allowance incorporates our best estimate of the economic environment.
Moving to capital our capital levels remained strong with the CET, one ratio ending the quarter at nine 5%.
During the quarter, we completed $316 million in share repurchases as part of our capital plan, which reduced our share count by seven 3 million shares.
Now that we have reached our nine 5% CET. One goal we are returning to our 2019 CET one target of 9% based on our improved credit risk profile and the economic outlook.
It is worth noting that combining regulatory capital credit reserves and unrealized gains we have one of the highest overall loss absorbency rates among peers.
As Greg mentioned last night, we announced the strategic acquisition of dividend finance strategically dividend furthers, our existing indirect consumer point of sale capabilities with a tech forward platform.
Dividend pioneered the financing model, which improves economic outcomes for customers and contractors. This helps accelerate dividends growth in the solar industry, which is expected to continue growing at a double digit CAGR over the next several years.
Dividend will improve fifth third's loan portfolio granularity geographic diversification and balance between consumer and commercial loans. Furthermore, while not modeled we expect to generate synergies over time, and our mortgage and home equity business as well as with our existing commercial clients.
The transaction is also financially compelling in 2021.
Dividend gained market share in originated over $1 billion in loans, which increased 40% compared to 2019.
We expect total origination volume of around $1 billion in 2022 post close dividend finance previously utilized an originate to sell model and as a result, the closing of the acquisition will not include a material transfer of loan balances. However, post close fifth third will retain all.
All loan originations.
Given the scalability of the business, we expect a life of loan ROA of 3% plus.
<unk> of 30% plus and an efficiency ratio below 20%.
Our modeling conservatively assumes a market share consistent with dividend finances recent history no extension of the federal solar investment tax credit and the annualized net charge offs around 130 basis points.
The acquisition is expected to close in the second quarter and will utilize approximately 30 basis points of capital.
Our long term capital priorities remain unchanged.
First deploy capital into organic growth initiatives, then evaluate strategic non bank opportunities continue paying a strong dividend and finally execute share repurchases with excess capital.
Given the strong loan growth and the acquisition of dividend Finance, we currently expect to resume share repurchases sometime in the second half of the year.
Moving to our current outlook our full year guidance includes the financial impacts from dividend finance, which is expected to close in the second quarter. We expect full year average total loan growth between five and 6% compared to 2021, including the expected headwinds from PPP and the Ginnie Mae forbearance loans, we add.
Throughout last year.
Excluding these items, we expect total average loan growth between 10%, 11%, reflecting robust pipelines salesforce additions the dividend and provide acquisitions and only a 1% improvement in commercial revolver utilization rates over the course of the year.
This should result in commercial loan growth of 12% to 13% excluding PPP.
Additionally, we expect total average consumer loan growth between 6%, 7%, excluding the Ginnie Mae loans.
On a sequential basis, we expect first quarter average total loan growth of 3% to 4%, excluding PPP and Ginnie Mae loans.
Including those impacts we expect average total loans to increase 1% to 2% compared to the fourth quarter.
Our outlook reflects continued strength in commercial given our production and pipelines, we expect 6% average C&I growth in the first quarter excluding PPP.
We expect CRE balances to be stable sequentially in the first quarter and as a result expect average total commercial loan growth of 4% to 5% sequentially excluding PPP.
We expect average consumer loan balances to increase around 1% sequentially, excluding the Ginnie Mae impacts we provide our expectations for this portfolio in our presentation appendix.
Given our loan outlook, we expect full year NII to increase 4% to 5%.
It is worth noting that our outlook incorporates the impacts from the PPP and Ginnie Mae portfolios, which will result in a $220 million headwind next year or about four five percentage points, meaning we would have expected close to double digit growth in NII, if not for those portfolios, which have served there.
Our purpose to help bridge us to the more productive rate environment.
Given that current rate environment, our forecast assumes growth in our securities portfolio of approximately $1 billion per quarter and includes three rate hikes beginning in may do.
Due to the evolving economic outlook, our forecast and balance sheet management strategies are subject to change.
As a reference point, we estimate that a 25 basis point incremental rate hike would increase NII by approximately 30% to $35 million per quarter or seven basis points of NIM when fully realized.
The ultimate impact to NII of incremental rate hikes will be dependent on the timing of short term rate movements balance sheet management strategies, including securities growth and hedging transactions and realized deposit betas.
On the topic of deposit betas, our current outlook assumes a deposit beta of around 13% over the first 100 basis points of rate hikes, including less than 10% for the first couple of hikes.
We have updated our NII sensitivity disclosures in the presentation appendix, which now incorporates a dynamic beta repricing assumption rather than static beta approach previously utilized.
The information in the appendix uses modeled approaches to estimate the impacts of various rate scenarios based on decades of historical data.
These model betas are 30% for the first 100 basis point scenario and 36% for the plus 200 basis point scenario.
For the first quarter, we expect NII to be down 1% sequentially impacted primarily by day count as well as lower prepayment penalty PPP and Ginnie Mae income, partially offset by strong loan growth.
Given the January 3rd forward curve did not consider a march rate hike. If the fed were to move in March with a run up in benchmark rates, we would expect first quarter NII to be stable sequentially.
We expect adjusted noninterest income to increase 3% to 5% in 2022, reflecting continued success taking market share due to our investments in talent and capabilities, resulting in stronger Treasury management revenue in capital markets fees and wealth and asset management revenue.
Additionally, we expect strong processing revenue, reflecting both the economic environment and continued household growth.
Mortgage revenue should improve modestly in 2022, reflecting elevated servicing revenue from MSR purchases throughout 2021, and moderating asset decay, partially offset by a meaningful decrease in production revenue.
We expect TRA and private equity income to be stable compared to 2021 levels.
We expect first quarter adjusted noninterest income to be stable year over year or a decline of around 8% to 9% compared to the fourth quarter.
Excluding the impacts of the TRA, we expect fees to be down approximately 3% sequentially, reflecting seasonal factors a decline in private equity income and lower leasing revenue, we expect full year adjusted noninterest expense to be up around 1%, excluding the impact of dividend financed.
Compared to 2021.
We're up 2% to 3% including dividend.
We expect compensation expenses to increase around 3% or so reflecting wage pressures and salesforce additions.
Actually offset by lower performance based compensation and certain areas such as mortgage given the outlook for lower origination volumes.
We also continue to invest in our digital transformation, which should result in technology expense growth of around 10% consistent with the past several years.
We also expect marketing expenses to increase in the mid single digits area. Our outlook also assumes we add 20% to 25, new branches and our high growth markets, which will result in high single digit growth of our southeast branch network.
We expect these items to be partially offset by the savings from our process automation initiatives reduced servicing expenses associated with the Ginnie Mae portfolio.
A decline in leasing expense given the revenue outlook and continued overall expense discipline throughout the company.
We expect total adjusted expenses in the first quarter of 2022 to be up around 3% to 4% compared to the year ago quarter or up 5% to 6% compared to the prior quarter.
As is always the case for us our first quarter expenses are also impacted by seasonal items associated with the timing of compensation awards and payroll taxes.
Excluding these seasonal items, we expect first quarter expenses to be down approximately 2% compared to the fourth quarter.
Additionally, our first quarter expense outlook is impacted by a broader and larger special equity grant for eligible employees to reward the record performance in 2021 and to provide a retention incentive over the next several years and this competitive labor market.
As a result, our full year 2022 total adjusted revenue growth is expected to exceed the growth in expenses, resulting in more than a one point improvement in the efficiency ratio our outlook for positive operating leverage reflects continued success growing our fee based businesses recent acquisition.
<unk> expense discipline and strong balance sheet management.
It also considers the known revenue headwinds from PPP, and our Ginnie Mae portfolio.
We would have guided to positive operating leverage on a standalone basis, even without any rate hikes. We expect 2022 net charge offs to be in the 20% to 25 basis point range and we expect first quarter net charge offs to be in the 15 to 20 basis points range.
In summary, our fourth quarter and full year results were strong we achieved positive operating leverage in 2021, and a challenging interest rate environment, while maintaining discipline throughout the company.
We have a highly asset sensitive balance sheet, which should perform very well in a rising rate environment.
We have over $30 billion of excess cash and continue to grow and diversify our fee revenues all of which support our through the cycle outperformance.
We are deploying capital in order to maximize long term profitability and are committed to generating sustainable long term value for our shareholders with that let me turn it over to Chris to open the call up for Q&A.
Thanks, Jamie before we start Q&A as a courtesy to others. We ask that you limit yourself to one question and a follow up and then return to the queue. If you have additional questions.
We will do our best to answer as many questions as possible in the time, we have a lot of this morning.
Operator, please open the call for questions.
Thank you and as a reminder to ask a question you will need to press star one on your telephone you withdraw your question you May press detailing.
You may begin.
Okay.
My first.
Question.
Our first question comes from the line of Jeff Carney.
From Evercore your line is open.
Good morning.
Good morning.
On the loan growth front, clearly on the commercial side and C&I very robust in the period growth of 11% ex PPP impacts can you give us a little more detail on the on the drivers.
In terms of the businesses I know you mentioned corporate and middle market and then also.
Did you see any impact from borrowers pulling forward.
Demand for borrowing into the fourth quarter, given the changes from LIBOR too so.
Hey, John This is Greg I'll start off and with those attendees prepared with a lot of color to your question. We were expecting of course first off we've made significant investments over the last five years, a real strategic markets in the southeast or West Coast, Texas.
Verticals in town and so forth. So we would expect to see this type of outcome as we go into last year into this year. So we're very pleased with the performance. We're very pleased with momentum we have going into it once again I think it's a byproduct of the investments we've made in talent.
Our expenses in these geographies and just the way we've approached this business over the last five years, we started to see the outcomes with Tim will give you more kill as far as the market's itself and will receive any outcome, yes sure.
Happy to do it so let me anchor it to the numbers so ex PPP as he mentioned C&I loan growth was about 11%.
On a dollar basis. It was about $4 9 billion point to point in the quarter.
So of that about one third of it came from an increase in utilization on existing revolvers and then a full two thirds of the growth. We are a byproduct of either of the record production. We had we had a record quarter. In addition to it being a record year in both corporate banking and in the middle market.
Or yes, it was new clients funding commitments that were extended in earlier quarters. This year consistent with that.
Dana we have been sharing on commitment growth.
So on the utilization front.
Middle market, the lower end of our block tends to move in terms of utilization faster than the corporate banking side, we did see that middle market and business banking had the best pick up in utilization rates at which is probably at least in part a byproduct of the manufacturing and logistics centric nature of the Midwest markets and the drivers there when you talk to clear.
Since we're really inventory levels.
There are some tax distributions are always business expansion related people investing in capex or acquisitions.
On the corporate banking side, it was really to fig vertical but drives there where most concentrated in the mortgage servicer segment.
On the two thirds of the growth that came from production and I think as Greg mentioned, they were literally basically entirely driven by the strategic investments so on corporate banking it was industry verticals.
In the middle market. It was really the sales force expansion in the southeast or the additions of California, and Texas and it was strong performance from provide as they got into the run rate.
In total eight it really is new relationships matter more than it is folks pulling forward that transitioned to sulfur. So we added 551, new relationships in commercial in 2021, it was about 30% more than our prior high Mark at any one point.
But we feel very good about as these really arent just loan only relationships. They are the driver of what you saw in the strong growth we had in both Treasury management and capital markets.
I think if you look forward I was looking at the bottoms up pipelines earlier this week and they were about 75% larger than where they were at the same time last year and almost 90% larger than that first quarter of 2019. So we feel very good about our ability to sustain our robust loan growth.
And the drivers there again or that strategic investment Chicago is the biggest.
Yes year over year improve her as we continue to see strength.
And the benefits of that synergies from the AMB merger and then it's markets like Tennessee, North, Florida, California, and Texas and in the regions.
And then on the vertical side, it's the stalwart verticals for us healthcare and TMT along with continued really good growth in renewables and then as we talked about.
In the past that mortgage warehouse segment that we launched.
Recently.
I think haven't haven't been out in the markets. The energy is really really good there I think there's a strong sense for us that between the investments we've made.
And the fact that we've really been able to focus on execution and collaboration haven't had our people back in the office.
Ed for longer than most and not having the distractions of that.
Merger integration.
Or otherwise it really has been it's been nice to see the pickup.
Got it alright, Thanks, Tim and then quickly Greg just on M&A wanted to get your updated thoughts on on deals I know you indicated that non bank acquisitions would be more of a priority.
And if so what additional businesses outside of what you just did on the dividend finance side.
Other businesses in terms of bolt ons and then maybe a quick comment just on whole bank deals. Thanks.
First off thanks for the questions our strategy hasn't changed it's really as you said, it's the board opportunities non big transactions, just like we did with dividend, which we couldn't be more pleased about that acquisition, how it fits into our portfolio of opportunities strategically, but more of those type of opportunities. We will continue to look for so point of sale on the consumer side.
In addition to that we continue to focus on wealth and asset management opportunities that might emerge.
Obviously on the mortgage side on the advisory side of the house, there's other verticals that we're looking for.
Partners in that space.
David a advisory perspective, so we will continue to focus on those opportunities Fintech plays and maybe advisory it fits with some of the additional verticals wealth and asset management would be the areas of opportunity that we continue to stay focused on and when you think about a bank acquisition right now, especially given all the challenges that complexity of what we're seeing in.
On the regulatory front in Washington, with some of the movements that are underway right now and the challenge to get a large transaction done or a bank transaction for banks over 100 billion.
That's out there so it's on our on your mind as you think about timing to get transaction done, but once again at this point right now our focus is to be relevant in the strategic markets that we're already banking in theirs.
Maybe there's opportunities that exist right now so once again, it's not a primary focus of ours today and I don't see that in the near future also as we as we think about the rest of this year.
Great. Thanks, Greg.
Yes.
And our next question comes from the line of Erika.
Julian <unk> from UBS Your line is open.
Hi, good morning.
My first question is for Jamie Jamie you have been.
Vocal in the past.
Uh huh.
Guiding or giving us a sense of what kind of deposit attrition we could expect.
In a rising rate backdrop, one of your biggest competitors mentioned that.
Negative deposit growth at all.
A quick positive deposit growth with.
This rate cycle, and I'm wondering, especially in light of your commentary that you're deploying about 1 billion of cash per quarter. If you have changed your tune as to the duration of the excess deposits that you gather during the pandemic.
Thanks, Erika and welcome back to the coverage of fifth third so I appreciate the question.
Let me take it in two parts. So first when it comes to the macro view and for the industry. You go back over the last 100 years I think there's only been two years, where deposits didn't grow in the industry. So.
I do believe that there.
Can be deposit growth as the fed tightens in history proves that so when it comes to fifth third the more idiosyncratic view that we have is that.
We would be comfortable having up to a third of our excess cash.
Cash.
Migrate away from fifth third deposit products, and then to more productive vehicles for those customers so with that said.
When we look at.
Our deposit betas on our deposit pricing outlook for the rate hikes on the horizon, we're going to be very disciplined on those.
Deposit rates and therefore, if deposits leave.
It's a very manageable outcome for us However, I will tell you given our strong commercial client acquisition, our strong Treasury management growth and our strong household growth as we sit here today, even with <unk>.
Balance.
Disciplined deposit betas, we still expect deposit growth this year at fifth third and Thats, even with continuing to run down.
Our CD portfolio so.
As much as I would be comfortable with a little bit of deposit outflow I think.
Given all our sales success, we will have deposit growth this year.
Got it and my second question is for Greg I thought it was Jerry.
Striking and telling that Jamie said during his prepared remarks that you would have generated positive operating leverage.
Right.
Yeah.
The earning season has really put Ceos and <unk> Tam.
One.
Those that are spending the rate hike.
And second does it are more allowing it to fall to the bottom line.
As you think about fifth third and.
Fifth third.
In the middle of a normalizing rate cycle.
What is your view of <unk>.
Reinvesting later years right after the P. P P headwinds dissipate.
First was taking that generated additional income and reinvesting it.
First of all we're always going to you are going to invest in the future of this company. We're in for a long haul we never do anything to focus on the quarter or even for a full year. So we will continue to invest nuclear technology investments has been running around 10% you can expect to continue to do that we're also going to continue to invest in our ability to expand this franchise both.
Geography product sets through.
Through our verticals of capabilities in our talent capabilities. So we'll continue to invest in those areas, obviously wages or another area that we're going to continue to step up on and be aggressive law, which we have bid as a law.
Leader in the minimum wage goes up from 12 to $15 to $50 <unk>, we took that paid before most of our peers did but we certainly know we saw the need to do that.
So as you think about our investment we're going to continue to invest.
But we also believe a lot of the the <unk>.
So we're giving right now this year when you think about the first three to four 5% increases.
On the right side of the house most of that will fall to the bottom line is we've already got our investment structure put in place for 2022.
And that will continue to to think about our investments as necessary. You can expect some of that then we will start to continue to turn into future investments, but I think as you look at this year. The guidance. We provided most of that would fall to the bottom line.
Great. Thank you.
And our next question comes.
Sorry comes from the line of Ken <unk> from Jefferies. Your line is open.
Hi, good morning.
Yes, Jamie you've been steadfast in your view of holding back on liquidity deployment and we see that again this quarter just wanted to as we've seen quite a change in what the potential outlook for rates looks like.
Different views here about how you expect to use excess liquidity and look at the securities book going forward.
So in the prepared remarks, we talked about deploying a $1 billion.
<unk>.
Per quarter into the investment portfolio.
A little more detail around our thinking there is that we've been patient we were fortunate to be able to be patient, we have a very well positioned portfolio heading into the pandemic and so it's afforded us this opportunity to wait.
We've always said, we wanted to get to the 2% entry points than us.
We got that.
That visibility at the back half of December and so we put some money to work in December and then we've continued to do that here in January and expect to do it as the year progresses should.
Rates continue the curve continues to steepen.
We perhaps could choose to move a little bit faster than if they dip back down we may choose.
To step off the gas a little bit in terms of the investment, but what we're investing and we're really focused on structure right now.
We finished the year with the bullet and locked out cash flows at 59% I would expect that number to get a little bit higher as we deploy a portion of the excess cash so let's call it 40 to.
50% of the.
Not meant that we have for the security portfolio currently of $10 billion. So we'll reinvest cash flows will add a little bit of leverage during the course of the year.
And look for us to do that.
More structured product.
Great and my follow up is just.
275 exit on your securities portfolio yields and following on that point you just made about the locked out cash flows can you help us understand how you see that $2 75 trajectory inside your overall NII outlook and the amount.
Yeah. Thanks, very good question, we expect yields for the portfolio to be in the $2 60 to $2 70 range. This year and that's with reinvesting in adding the additional leverage the one component to the portfolio yield that has a little bit lumpy as the.
Prepayment penalties, that's one of the advantages you get from the bullet.
Structure.
That we have and we were the beneficiaries of it in the fourth quarter, we've had a little bit thus far in January and we would expect some of that as the year.
Progresses, but that's the one item that makes it a little more challenging but I would expect.
Call It <unk>.
Five to eight basis points of erosion as the year progresses, but then.
Some prepayment penalties bolstering the yield so.
So that we end up in that $2 60 to $2 70 range for the year.
Great. Thank you.
Yes.
And your next question comes from the line of Gerard Cassidy from RBC. Your line is open.
Good morning, Greg Good morning, Jami, we're drawing hi, Gerard.
Jamie can you elaborate you gave some interesting numbers on the dividend the acquisition when you talk about the <unk>.
License.
Loans.
In terms of the ROE and profitability can you give us some more information around the future library, and how you're going to grow that business.
Wind that profitability appears to be so high in that business.
I'll start and then I'll turn it over to Tim to add a little more color, but thanks for the question Gerard in terms of the loans and why they screened so profitably.
Right now it's.
Offered as a 20% to 25 year term the coupon the customers pain is in the 3% range, but the tax incentives are significant.
<unk> allows a merchant discount to be paid and that merchant discount could add as much as five percentage points to the yield given that.
The loans end up being.
About a five year life. So you end up in the 'twenty.
'twenty two 'twenty, 3% type of.
Federal benefit as part of the energy tax credit program. So there are some moving parts here the yield will ebb and flow as a result of how that merchant discount.
Plays out and the ultimate weighted average life, but that is why on the surface. It is a very profitable business more.
More so than.
Some of the other.
Consumer origination channels that we have and this is an area that.
We even talked about several of the conferences in 2021 is a key challenge for fifth third is really improving the technology and the distribution around home equity lending and other consumer point of sale origination channels. So yes, yes.
Yes, I think to Jamie's point, I mean, one Gerard as it relates to the way that you grow it is.
It's Alex easier to grow when you have a strong tailwind in there is no question. When you look at the level of investment that's going to go into.
<unk> improvement over the course of the next five to 10 years focused on sustainability. There is really significant opportunity mean dividends business today has been primarily on the solar panel side of the business, but in addition to that there storage which is.
Fast growing sector, there is energy efficiency related investments, whether that's H back or windows.
Or.
Landscaping.
Or otherwise.
And then I think as we continue to see this push toward electric vehicles. There is a dynamic as it relates to high voltage currency into different parts of the homes than you needed previously so all of those categories are going to be big drivers of secular growth.
In the broader home improvement sector, and with dividends positioning and the investments that have been made in this end to end technology platform. I think we believe they are pretty uniquely positioned to benefit and to continue to gain share. There I mean this is ann.
To call it a point of sale platform is.
Is almost to understate what it is it's a fully integrated end to end solution that allows contractors to drive quoting.
Specify that sort of technical details around the installation itself. There are third party data checks on the appropriateness of what is being installed given the weather environment and that power generation potential and the local utility rates, which are obviously very customer friendly, but also a good garden.
Rail for the contractors themselves.
They have API is directly into the largest contractors CRM system. So.
Many cases there is in the third party point of sale at all it's just generated out of the iPad application that the contractor is using to begin with and then all manner of downstream.
Abilities, including not funding loans until Theres actually power coming off of the panels today that provide a really excellent customer.
The experience so as they come into fifth third they obviously have the benefit of our balance sheet. That's one last thing that the that the fintech credit mono lines, otherwise would need to do in terms of recruiting bank funding partners. So we should be able to improve the product innovation velocity. The way that we have will provide.
Bluntly I provides launch more products in the last six months than they had in the three years prior K on the on the financing side I think the other obvious benefit is while we are not believers in the way that some are in the opportunities associated with indirect lending to checking account cross.
So there are very obvious loan to loan opportunities here, whether it's the fifth third mortgage servicing portfolio and providing an extension of credit there or.
We're leveraging our ability to underwrite and manage home equity and to connect that with our Replenishable opening open to buy against what's an installment loan.
Or otherwise so I think that is how we first point of growth here is going to be make sure we get the talent and we.
We will continue to make investments in the technology platform benefit from the secular growth and then we're going to add capabilities that a bank can add in this case.
Very good and then as a follow up Jamie.
Looking at your balance sheet, obviously your loan to deposit ratio is quite low.
Industry.
Deposit growth you touched on what you think deposits could do what do you think is optimal loan to deposit ratio for fifth third and how long will it take to reach that level considering the.
Puts and takes of what's going on in the marketplace today.
Yes.
As you pointed out it is certainly a low loan to deposit ratio in the mid <unk> right now.
That's certainly far better than I think or at least in my career, our highest number was back in 2005, it was like 120% so.
I think the optimal ratio is probably somewhere in between I would like to operate the balance sheet and the 85%.
Or so.
Our range, which is why we would be willing to have some of the more rate sensitive deposits.
Run off.
During the fed tightening cycle, but also and more importantly is that we do expect significant loan growth as we talked about 10 plus billion.
Could be.
13, or $14 billion next year, and so that's going to help.
Given nice notch up.
The loan to deposit ratio, but it probably takes us a couple of years.
To.
Get back to the number that we would.
Think like to operate in that would be indicative of a very productive balance sheet.
Great appreciate the color. Thank you.
Okay.
And your next question comes from the line of Bill Quirk.
From Wolfe Research your line is open.
Thank you good morning, everyone.
Can you speak to whether there's a risk that some of the upward pressure youre seeing on expenses maybe out of your control. If you could just frame your confidence level in being able to manage for revenue environment, such that we continue to achieve positive operating leverage even under different inflation scenarios, yes.
We feel very confident.
And our ability to manage expenses, it's one of the things that's been a hallmark of the company under Greg's leadership is the expectation that every year every area has to get more efficient. It's just a base expectation when we go through our planning and you see it in the results so heading.
Heading into this year, there is a $125 million of savings that I am highly confident.
We will achieve through.
Through the lean process automation through the branch consolidations in the vendor savings.
But then as Greg pointed out we do want to invest in our employees and in our franchise.
To really drive that revenue growth. So I think we've got a good approach here, where we're balancing.
The revenue growth and sales expansion of the company, while leaning out the support functions and then to your <unk>.
Main point of the question when it comes to inflation.
Rages, we have a stronger miracle this year and we have the special equity grant that we mentioned earlier to help them improve retention, but that comes at a cost and that is baked into our guide and our guide was to be up 1% on a standalone basis, the dividend acquisition adds a point and a half or so to the.
<unk> expense number which is how we ended up in the 2% to 3% range.
But as Greg said, we're really focused on the long term performance.
Doing the right thing in the long run and I think our expense discipline helps drive that and it may appear to an outsider. When you look at the numbers, but theres not a lot of activity there because things are fairly stable. The reality is we are driving a lot of savings, but we're choosing to reinvest those savings to improve the company for the long run.
That's helpful. Thank you as a follow up for Greg I wanted to ask a strategic question. When you look at the success you've had with some of the bolt on deals you've done.
You see a time, where you'll want to continue to expand into new markets beyond those you already into digital channels without the need for traditional M&A and all the disruption in Quebec and bring or are the I guess the focus of the folks here you did your estimates on serving customers in your in your existing markets first.
Is there a relationship bank.
We really really live and breathe being a relationship bank as evidenced by our commitment to have our employees back in the office focus on taking care of the customers. So we need to get our digital channels, it's really about how we reach our customers and how we service our customers and doing that best in class.
So right now we're pleased with the expansion markets that we're focused on right now as we look at those there's probably a couple of other markets that we're interested in if we buy the right talent, we will go into those markets, but it's all based on the talent.
See as necessary, leading with a digital play at this point.
On the consumer side.
In markets that we're not in today with brick and mortar perspective, I don't see that happening in the near term I think we need to do that all that gets good business for us, but as we mentioned before we were flush liquidity, we get strong household growth.
The profitability of our retail franchise has never been stronger. So we think the model we have right now.
Which is provide the brick and mortar services <unk> services, both our digital capabilities is the best model for US today, obviously, we're not going to be naive or bury our heads as soon as what the future might hold but if that opportunity presents itself. It makes sense, we have the capabilities to do those expansions.
With our technology. They are designed for that but we'll take advantage of that opportunity. If it makes sense at some point in the future if it materializes.
Understood. Thank you for taking my questions Alright. Thank you.
Our next question comes from the line of Mike Mayo from Wells Fargo. Your line is open.
Hi.
Mike.
Alright.
The starting gun for loan growth.
What your group.
44% annualized commercial loans.
Up $9 billion and describe I guess, what one third drawdowns.
The split on middle market large corporate you talked about inventory build in capital expenditures. So I think you gave a nice summary of all that.
What happened to the supply chain disruptions.
The delay in loan growth.
Later.
The supply chain that perhaps didn't go away really the question is why now.
Yeah, I mean, Mike it's it's.
Tim Spence Hello.
I think that supply chain issues are still real and we have many clients, who say they'd like to be running at inventory levels that are above where they are at I. Just think we took share. This year I mean, that's the reason I anchored back to this point about are having record new relationship growth new quality relationship growth into the commercial bank.
Anecdotally when you get into the ground there wasn't a geographic market that didn't add double digit new relationships. This year and you go out and you talk to those clients and it literally every day, we're in a house relationships at other places who either associated with the disruption or who.
Like they were not getting what they needed in terms of the breadth of capabilities.
Or who followed a banker that we managed to attract into our franchise at.
Over time, who chose to move from another financial institution to fifth third. So I think that is the reason that we managed to grow at the rate that we did despite the fact that there are still natural constraints to inventory building and that we haven't yet.
The pop quite at the level that we expect to see although we did get some benefit of that.
Associate it.
Yes.
M&A activity.
The one other thing I would tell you is there was an inflection point this year and our pipelines when we got people back into the office and we started seeing clients in person in April of this past year end.
The level of activity that we generate through our one bank model, which has that relationship management model. That's been in place here for more than a decade is really core to the way that we grow the business.
And I think we saw the outcome to that over the course of the year in terms of the acceleration of loan growth and production in particular.
So that's.
Not to put words in your mouth I'm looking for validation as it relates to loan growth the pandemic is over.
[laughter].
Like device I'd check with <unk>.
[laughter], whether they're all looking at each other trying to figure out it was going to take that one I do think the supply chain.
<unk> strengths I think of labor shortages and so forth are here to stay for a while I don't see that adding at all as we go into the year.
But I think people are adjusting corporations are adjusting I think they are figuring out ways to do things more efficiently.
Tim said.
There's another customer we talk to where labor is not an issue.
Customers, we've talked to where they wouldn't like to build more inventory faster, but I think we've just done a good job of banking those customers in taking those relationships, but it will still be a challenging environment as we move forward, but we're very optimistic and investments we've made in the geographies of people.
And capabilities and we just feel like we've got that we've got the right formula right now.
Yeah, Mike I would say that while the pandemic is not over we are navigating it quite well with all of the strategies that Tim and Greg have laid out and that we're very bullish on that loan growth for 2022. In addition to the provide acquisition now adding dividend finance to the fifth third.
Family.
And then just one clarification.
A clarification and so clearly you're pursuing bill not buy.
But part of that decision not to pursue bank deal you said it because.
The communication of Washington D C about the regulatory scrutiny on mergers over $100 billion back.
Great.
And you're back even if you wanted to.
But we I would tell you if we wanted to it if if we thought there was a right opportunity. Another if that's out there that make sense as actionable I would be very concerned as a CEO tried to introduce.
The opportunity right now.
Into into the regulatory environment with some of the constraints that are out there I think about how they're thinking about mergers until we get some some of those items address dealt with figured out I just think it's going to be problematic for a period of time.
Got it thank you.
Yes.
And our next question comes from the line of Matt O'connor from Deutsche Bank. Your line is open.
Hi, guys.
You talked about how overdraft or the unaffected or lower for you guys. In here I think it was last month on rolled out some changes just remind us what the impact to revenues.
It might be this year and kind of longer term.
And then is there any kind of additional changes are thinking of making given.
And then from a bigger bank as well yeah, Matt It's Tim Thanks again.
So just to recap I mean, we've talked a lot about the fact that we've been among the least reliant banks on punitive fees for a while now.
And about the fact that that really wasn't part of about a three to four year journey that we have been on to improve the checking value proposition and then.
But really.
Really to get out of the business charging customers when something went wrong as opposed to charging them, because we've added value and given them the tools to manage liquidity more effectively and it was because of all the forces you see people reacting to today. So I think we've been very clear about what's in the momentum banking proposition and the fact that it off.
Or has the broadest suite of tools to avoid an overdraft.
We talked a little bit about in the fourth quarter of the fact that we made changes in October including things like changing posting orders increasing the de minimis negative balance threshold lowering the limit on the number of daily current says I think.
Essentially the same things you are hearing from others today.
Lastly, the the one other item that has been on the road map that we are moving forward with is eliminating NSF fees and we do intend to do that at the end of the second quarter.
All of those changes are incorporated into the 2022 fee outlook. So you should not expect an incremental negative from fifth third associated with that.
The evolution of the way that we think about helping customers manage short term liquidity.
Okay. That's helpful and then separately a bit of a random question, but no.
We're a very big.
Auto lending bank for consumers.
And as we think about car prices being up somewhat especially as used cars have you thought about underwriting a bit different you've got really good disclosures in your appendix. The ltvs have come down a little bit might go up a little bit.
We need about used car prices up 40% to 45% discount.
For myself underwriting to that may not be a great idea.
I don't know, how youre thinking about that but its being a big player.
All of that.
Yeah. Thanks for the question is Richard from an underwriting standpoint.
We do think about how values have changed but I think it's important to understand.
We look at we look at loan to values, we look at the supply demand dynamics for autos I don't we don't think that's going to change.
In the near term certainly and I think the dynamics around how the Oems actually produce and sell cars are going to create a continued tightness. If you will in terms of supply.
Think the days of the Oems filling the factory and flooding the market with cars are done they're going to be more disciplined that's kind of give us that's going to give us more certainty around used car prices over time. The other thing I'll add is we are a prime and Super Prime underwriter from an auto perspective, and so while the collateral value is important it's the quality of the borrower.
That really stands tall for us and that Hasnt changed for us at all and we continue to see.
The tailwind is around the consumer from an app from a quality perspective to be strong so no real changes in terms of the underwriting criteria.
We're mindful of supply and demand dynamics.
<unk>, what what car prices will do in the future.
Okay, and remind me the mix of new versus used car.
One thing that you do.
Yes, 50, 842 used in 2021 and.
And I don't think its ever been outside of the 60 41 way or the other we live in that sort of roughly evenly balanced range.
Okay perfect. Thanks, so much.
And we have reached the end of our Q&A session I would like to hand, the conference back to Mr. <unk> for any closing remarks.
Thank you Louis and thank you all for your interest in fifth third please contact the IR Department. If you have any further questions.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
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