Q2 2022 Fifth Third Bancorp Earnings Call
Speaker 1: at this time.
Speaker 2: I would like to welcome everyone to the
Speaker 2: two earnings. So, here's a line of noise. There will be a question and answer session.
Speaker 2: If you would like to ask me a question, do you have time? Simply start with a question. If you want to, again, press star one. Thank you.
Speaker 2: I would now like to turn a conference over to Chris Dahl, Director of Investor Relations. You may begin your conference. Good morning, everyone. Welcome to fifth, third, second quarter, 2022 earnings call. This morning, our president and CEO Tim Spence and CFO Jamie Leonard will provide an overview of our second quarter results in outlook.
Speaker 2: Our chief credit officer Richard Stein and treader Brian Preston have also joined for the Q&A portion of the call.
Speaker 2: Please review the cautionary statement on materials which can be found in our earnings release and presentation.
Speaker 2: These materials contain information regarding to the use of non-GAAP measures and reconciliations to the GAAP results as well as forward looking statements about fifth-thirds performance.
Speaker 2: These statements speak only as of July 21st, 2022, and fifth-third undertakes new obligation to update them.
Speaker 2: Following prepared remarks by Tim and Jamie, we will open the call up for questions.
Speaker 2: With that, let me turn it over to Tim. Thanks, Chris, and thank you all for joining us.
Speaker 3: Just being right.
Speaker 4: First, the earnings call is CEO of Lightful, a great either less trusted car. Credit. Earlier today, we reported a solid second quarter reflecting our focus on profitability, organic growth and through the cycle returns.
Speaker 4: We generated record adjusted revenue and maintained our expense discipline, producing adjusted the PPRR growth of 11% compared to last year.
Speaker 4: We extended our track record for strong organic growth, adding new quality relationships in commercial and new households in consumer, and both our recent acquisitions, and the dividend finance and provide achieved record originations. The dividend finance and provide achieved record originations.
Speaker 4: Charge offs remained low, NPAs and early stage delinquencies approved sequentially, and we saw no decline in the liquidity buffers that our consumer households built during the pandemic.
Speaker 4: With that said, there is no question in my mind that the economic outlook is blurrier today than it was at the start of the year.
Speaker 4: Due to the potential forward economic challenges, we are maintaining a prudently cautious on credit as reflected in our reserve coverage. This begun in last 4 Centurystatement, phYOIRSA Control Centre, facing effect upon lockdown reasons, daily health risk may increase increasing, while increasing you
Speaker 4: Turning to the balance sheet, Lone Growth was solid and diversified across our franchise.
Speaker 4: Average commercial loan growth was driven by CNI, which included a 1% increase in utilization on revolving lines of credit.
Speaker 4: We generated robust loan growth and nearly all our corporate banking verticals and our Chicago, Cincinnati, North and South Carolina and Florida regions let the way in the market lending. And Florida regions let the way in the market lending.
Speaker 4: Average consumer loans grew in almost all categories.
Speaker 4: Our results include a small benefit for our mid-May closing of dividend finance. We're very excited about dividend as rising energy costs and the trend of homeowners improving their existing homes versus trading up only enhances our market opportunity.
Speaker 4: Switching to deposits are second quarter results where in line with our prior commentary, with average balances intentionally down $6 billion sequentially and stable from the prior year, as we focused on margins over volume, and given our overall liquidity position. We have given our overall liquidity position.
Speaker 4: We have a very strong deposit base with a higher allocation to consumer deposits in the stable retail category than any institution that reports as part of the LCR rule.
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Speaker 4: sequentially and improve your sense on a year open by continued growth and momentum banking and double-digit deposit balance growth in our southeast markets.
Speaker 4: Commercial transaction deposits were down sequentially, partially reflecting the anticipated movement of excess balances to higher yielding alternatives, combined with some seasonal impacts.
Speaker 4: As of yesterday, total deposit balances have remained stable since mid-May, despite the fed rate heights that occurred late in the second quarter.
Speaker 4: As a result of our loan growth and deposit pricing discipline, that interest income increased 12% sequentially or 15% excluding the impacts of PPP, Jenny May and the Securities Prepayment Pelletianca.
Speaker 4: As we indicated in the investor conference last month, fees were softer for the quarter, reflecting the impact of market conditions on debt capital markets, mortgage and wealth management.
Speaker 4: I am however quite pleased with the strength and diversification of our underlying fee growth engines.
Speaker 4: In payments, our gross treasury management revenue increased 7%, and credit card spend grew 10%, both compared to the year-ago quarter.
Speaker 4: In capital markets, financial risk management revenue increased 18% and M&A advisory revenue grew 30%.
Speaker 4: The majority of which was sourced from existing middle market relationships.
Speaker 4: In wealth management, despite the market volatility, personal asset management revenue was up 3% to date and we generated our fourth consecutive quarter of positive net AUM flows.
Speaker 4: We continue to manage expenses very diligently throughout the bank, reflecting our multi-year continuous improvement discipline, which has funded a significant portion of our organic growth and tech modernization strategies for the capital, for the poor capital, for the poor capital, for the consequences of the past, and for the future, for the future, for the future, for the future, for the future, for the future, for the future, with risk to capital, we recently announced our 2.5% stress capital buffer requirement from the fed stress. We recently announced our 3.5%
Speaker 4: share repurchases for the remainder of the year at this time.
Speaker 4: While credit quality remains benign, we remain cautious of the impact that the feds continue to aggressive monetary policy and geopolitical dynamics could have on the economy. And geopolitical dynamics could have on the economy.
Speaker 4: Over the past several years, we have built fit third to be resilient and to produce strong results under any market environment. And to produce strong results under any market environment.
Speaker 4: We have been consistent in our strategic priorities and have had the discipline to fund investments in geographic expansion, product innovation, and technology through continuous improvement and pruning non-core businesses.
Speaker 4: We have continually improved the granularity and diversification of our loan portfolio with a focus on high quality commercial relationships and on homeowners, which are 85% of our consumer portfolio.
Speaker 4: We maintain the lowest overall portfolio concentrations in commercial real estate and in non-prime borrowers among our peers.
Speaker 4: and 93% of the mortgages on our balance sheet are fixed rate.
Speaker 4: We have protected an eye to a series of actions, including our securities portfolio positioning, adding cash flow hedges to protect the down rate scenario for the next decade, and by maintaining a strong deposit franchise with a focus on primary relationships. This won't allow me to fully take a peek aboutris on how the final take can vary from?? Virtua to fruitage to any of other 5 different cases will Prophet intuitive action only, but be bestute, not. Healsteenwond and great statements. Let's get ready on the stage. For the last round we have furtherama repessel this next round should largely be unconst?able to certan wheat practical image and scrub, remember to apply this article, you
Speaker 4: Through the dividend and provide acquisitions, we added fixed rate loan origination platforms that will be especially powerful in a lower rate environment. That will be especially powerful in a lower rate environment.
Speaker 4: Our allowance for credit losses provides greater loss absorbercy than virtually any of our peers.
Speaker 4: Under my leadership, you should expect us to continue to make decisions with the long-term in mind, to hold ourselves accountable to what we say we are going to do, and to invest in product and service innovations that generates sustainable long-term value for customers and shareholders alike.
Speaker 4: closing on behalf
Speaker 4: I'd like to say thank you to our employees who are listening today. As you know, banks inhabit a special place in the communities where they operate, and with that comes a special responsibility to be a proponent for positive change. You work hard every day to live our purpose, including delivering eight million meals.away when the key budget continues to grow. and meals.
Speaker 4: to fight hunger across our footprint as part of Fifth Third Day, as well as positioning us to achieve our new $100 billion environmental and social finance commitment.
Speaker 4: I also want to thank you for the myriad of small things you do every day to improve our customers lives.
Speaker 4: With that, I'll turn it over to Jamie to provide additional detail on our second quarter financial results and our current outlook.
Speaker 5: Thank you, Tim, and thank all of you for joining us today.
Speaker 5: For second quarter results were solid. We generated strong loan growth in both commercial and consumer categories, deployed excess liquidity and insecurities that attract inventory points, and remained disciplined in managing our deposit costs.
Speaker 5: Expenses were once again well controlled even though we continue to reinvest in our businesses.
Speaker 5: Fees did underperform our April expectations due to the market volatility, but even with that softness, we generated core PP&R growth of 11% on a year-over-year basis.
Speaker 5: As a result, we achieved a sub 55% efficiency ratio and generated seven points of positive operating leverage from the second quarter of 2021.
Speaker 5: The ACL ratio increased five basis points sequentially to 1.85%, which includes a four basis point impact from the dividend finance acquisition.
Speaker 5: Combined with $62 million in net charge-offs, we recorded a $179 million total provision for credit losses.
Speaker 5: Moving to the income statement, net interest income of approximately $1.3 billion increased 12% sequentially and 11% year over year.
Speaker 5: As Tim mentioned, the underlying NII growth was around 15% compared to last quarter, of which approximately half of the growth was attributable to higher market rates, and half from the combination of investment portfolio growth and loan growth primarily in CNI.
Speaker 5: Our interest-bearing court deposit cost for wall control that does not face a point to this five basis points sequentially and help drive the 33 basis points of NIM expansion during the corner.
Speaker 5: Total reported non-interest income decreased 1% sequentially and increased 3% on an adjusted basis.
Speaker 5: Compared to the prior quarter, we generated improved financial risk management, card in processing, gross treasury management fees, and private equity income.
Speaker 5: which was partially offset by weaker performance from our market sensitive businesses, including commercial capital markets and mortgage, and the impact of higher treasury management earnings credit rates. and the impact of higher treasury management earnings credit rates.
Speaker 5: Non-interest expense decreased 9% compared to the prior quarter, driven by a decline in compensation and benefits expense from the seasonal peak in the first quarter.
Speaker 5: lower incentive-based comp in the current quarter due to market dynamics impacted fees, and overall continued expense discipline throughout the company.
Speaker 5: Expenses in the quarter included a $27 million benefit related to the market impact of a non-qualified, deferred compensation.
Speaker 5: which has a corresponding offset insecurity losses.
Speaker 5: This compares to a $12 million benefit in the prior quarter.
Speaker 5: Excluding the non-qualified deferred compensation impacts from both periods, total non-interest expense decreased $95 million or 8%.
Speaker 5: Non-interest expense decrease 4% compared to the year ago quarter.
Speaker 5: Moving to the balance sheet.
Speaker 5: Total average portfolio loans and leases increase 4% sequentially.
Speaker 5: including held-for-sale loans, total average loans increased 3% compared to the prior quarter.
Speaker 5: Average total commercial portfolio loans and leases increased 4% compared to the prior quarter, primarily reflecting growth in CNI loans.
Speaker 5: Commercial loan production remained robust throughout the franchise, outperforming our original expectations.
Speaker 5: Our production and pipelines are the results of our strategic investments and talent as we continue to see strength and new quality relationship generation during the second quarter. home bridge windings graded in October 2018.
Speaker 6: The conference center, please wait for the next available operator.
Speaker 7: Thank you for calling. May I have the name of the conference you're calling to join, please? Hi, sure. It's the C-Street Buncorp. Thank you. May I have your first and last name with the spelling, please? Rachel, R-A-C-H-E-L? S-S-M-I-T-H. Thank you. And your company name, please. A-Y-R-A-I-E-R-A. Thank you. Your line will be placed on a musical until the conference begins. One moment, please. Thank you.
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