Q4 2022 Fifth Third Bancorp Earnings Call
Good morning, My name is Rob and I will be your conference operator today at this time I would like to welcome everyone to the fifth third Bancorp fourth quarter 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
Like to ask a question during this time simply press star followed by the number one on your telephone keypad. If he would like to withdraw your question again press Star one.
Thank you Crystal head of Investor Relations at fifth third Bancorp you May begin your conference.
Good morning, everyone and welcome to fifth third and fourth quarter 2022 earnings call. This morning are president and CEO , Tim Spence and CFO , Jamie Leonard who will provide an overview of our fourth quarter results and outlook.
Our Chief Credit Officer, Richard Stein, and Treasurer, Brian Preston have also joined the Q&A portion of the call.
Please review the cautionary statements in our materials, which can be found in our earnings release and presentation.
These materials contain information regarding the use of non-GAAP measures and reconciliations the GAAP results.
As well as forward looking statements about fifth third's performance.
These statements speak only as of January 19th 2023, and fifth third undertakes no obligation to update them.
Following prepared remarks by Tim and Jamie We will open the call up for questions.
With that let me turn it over time.
Thanks, Chris and good morning, everyone.
To start I would like to thank our employees for the job they did in supporting our customers communities and shareholders in 2022.
You really held true to our core values and our vision to be the one bank people most value and trust.
<unk> capital and CNBC recently released their annual study of America's most just companies a comprehensive ranking that recognizes companies who do right by all stakeholders, that's fine by the American public.
Fifth third ranked 20 <unk> out of the <unk>.
Roughly 1000 companies covered in the study and was the highest ranked category for bank. It's a great achievement. Thank you for it.
Earlier today, we reported financial results for the fourth quarter and full year 2020 to the.
The strength and quality of our franchise are evident in the numbers.
We generated record full year revenue of $8 4 billion up 6% over the prior year.
We managed expenses down 1% year over year, producing positive operating leverage of 700 basis points and an efficiency ratio of 56% net.
Net charge offs for the year were below 20 basis points. As a result, we achieved a full year return on tangible common equity ex Aoc.
A 16, 5%, which places us in the top quartile of our peer group.
Just as importantly, we did what we said we were going to do.
We have a culture of accountability and fifth third and it makes me proud that our full year results exceeded the guidance. We provided you last January in every major caption, including total revenue expenses and net charge offs as a result, P. PNR increased 18% compared to our original guidance of 7%.
We also made important progress on our growth strategies in 2022.
Through consumer households, at a peer leading organic growth rate of around two 5% led by our southeast markets at 7% and surpassed last year's record for new quality relationships in our commercial segment.
We opened 18, new branches in the southeast in 2022, bringing our three year total to over 70, new branches in those markets.
During the year, we also made meaningful progress on our technology modernization initiatives and enhanced our peer leading digitally enabled treasury management managed services and our momentum banking product offerings.
You may have seen that most recently, we extended momentum early pay feature to include income tax refunds.
Our fintech platforms dividend financing provide continued to scale and achieve top national market shares with dividend ranking third and provide ranking second in their respective markets.
Our fee generating businesses are better diversified than most peers and continued to be a key focus for investment.
Strong performance in our capital markets business related to helping client hedging activities mortgage servicing and Treasury management, all helped to offset market headwinds that all bank space.
Did continued net inflows in our wealth management business.
During 2022, we remain focused on delivering stable long term results instead of chasing short term earnings.
We maintained our discipline in our credit underwriting with continued focus on granularity and diversification.
Outcomes of this are evident in our NPA NPL and early stage delinquency ratios all of which have remained well behaved and well below normalized levels are.
Our balance sheet management approach remains centered on providing strong and stable NII performance across various rate environments.
We extended our advantage in our securities yield by waiting to deploy excess liquidity until we were able to earn positive rail yields and we added derivatives to provide hedge protection through 2031.
These actions will provide significant long term benefits in the event of a lower rate environment.
With respect to capital given our strong PNR growth and benign credit losses, we exceeded our target CET one ratio in the fourth quarter and resumed share repurchases.
Our capital priorities for 2023 are to maintain a nine 5% CET, one ratio and support organic balance sheet growth.
Our strong dividend and continue our share repurchase program.
We expect repurchases to steadily increased each quarter for a total of approximately $1 billion during the year.
Jamie will provide you with the detail on our financial outlook for 2023, but it is a strong one that is consistent with our priorities stability profitability and organic growth.
We expect to produce another year of strong revenue growth and operating leverage with full ERP PNR growth in the mid to high teens, a return on tangible common equity ex Aoc exceeding 17% and an efficiency ratio below 53%.
We will continue to invest in organic growth and efficiency initiatives.
Add another 30% to 35 branches in our southeast markets, including our first three in Charleston, South Carolina, and several more in the Greenville, Spartanburg, South Carolina corridor.
We will continue to increase investments in marketing and product innovation to accelerate household growth and we will invest in scaling dividend and provide.
Lastly, we will make significant progress on our tech modernization journey and begin to realize savings and improve the client experience by leveraging these investments to drive automation into our most labor intensive processes.
You have my commitment that we will continue to make decisions with the long term in mind to invest where we can strengthen the value and resiliency of our franchise and to hold ourselves accountable for doing what we say we will do with that I'll now turn it over to Jamie to provide additional detail on our fourth quarter financial results and our current outlook for 2023.
Thank you Tim and thank all of you for joining us today our.
Our quarterly and full year financial performance reflect focused execution and resiliency throughout the bank we.
We generated strong loan growth in both commercial and consumer categories and generated record revenue.
<unk> was positively impacted by higher market rates as deposit repricing has lagged the repricing of our earning assets combined with the benefits of fixed rate asset generation at higher rates.
Fee income has remained resilient despite the market related headwinds and expenses were well controlled while we continue to reinvest in our businesses.
We achieved a full year adjusted efficiency ratio of 56%, which improved throughout the year with the fourth quarter adjusted efficiency ratio below 52%.
Our fourth quarter, <unk> grew 12% compared to last quarter, and 40% compared to last year.
Net interest income of approximately $1 $6 billion was a record for the bank and increased 5% sequentially and 32% year over year.
Our NIM expanded 13 basis points for the quarter.
Interest bearing core deposit costs increased 64 basis points to 105 basis points, reflecting a cycle to date interest bearing core deposit beta of 24% in the fourth quarter.
Total non interest income increased 9% sequentially driven by our TRA revenue and commercial banking fees.
That growth in commercial banking fee income was primarily driven by higher M&A advisory revenue and client financial risk management revenue and it was partially offset by softer results in mortgage banking origination fees.
Noninterest expense increased just 1% compared to the year ago quarter. This expense growth was driven by our acquisition of dividend financed during the year combined with continued investments and provide compensation associated with our minimum wage hike as well as higher technology and communications expense reflect.
Our focus on platform modernization initiatives.
Excluding the impacts of dividend and provide total expenses would have been down 1% year over year.
Moving to the balance sheet total average portfolio loans and leases increased 1% sequentially.
Average total commercial portfolio loans and leases increased 1% compared to the prior quarter, reflecting an increase in C&I balances.
Growth was led by our corporate bank and robust in almost all of our industry verticals among.
Among our verticals production was strongest in energy, including renewables, which increased over 50% year over year.
Health care growth was led by provide with provide balances up 150% year over year.
The period end commercial revolver utilization rate remained stable compared to last quarter at 37%.
Yeah.
Average total consumer portfolio loans and leases increased 1% compared to the prior quarter led by dividend finance as well as growth in home equity.
This was partially offset by a decline in indirect secured consumer loans.
Average total deposits increased 1% compared to the prior quarter as an increase in commercial deposits was partially offset by a decline in consumer deposits.
Period end deposits increased 1% compared to the prior quarter.
After the deliberate runoff of surge deposits in the middle of the year, we have achieved solid deposit outcomes throughout the second half of 2022, reflecting our strong core deposit franchise.
Moving to credit.
Tim mentioned credit trends remain healthy and our key credit metrics remained well below normalized levels the <unk>.
<unk> ratio of 44 basis points was down two basis points sequentially and our commercial NPA ratio has now declined for nine consecutive quarters.
The net charge off ratio increased just one basis point sequentially to 22 basis points within our guidance range.
The ratio of early stage loan delinquencies 30 to 89 days past due also increased only two basis points sequentially and remains below 2019 levels.
From a balance sheet management perspective, we have continually improve the granularity and diversification of our loan portfolios through a focus on high quality relationships.
In consumer we are focused on lending to homeowners.
Our 85% of our consumer portfolio.
We also have maintained the lowest overall portfolio concentration and non prime consumer borrowers among our peers.
In commercial we are maintaining the lowest overall portfolio concentration in CRE.
Across all commercial portfolios, we continue to closely monitor exposures, where inflation and higher rates may cause stress and continue to closely watch the leveraged loan portfolio in office CRE.
We are focused on positioning our balance sheet to deliver strong stable NII through the cycle, our strong deposit franchise, our investment portfolio positioning and our cash flow hedge portfolios will provide protection against lower rates well beyond just the next few years as well as the addition of the fixed rate lending.
Capabilities from both dividend and provide should continue to support our strong through the cycle outcomes.
Moving to the ACL, our ACL build this quarter was $112 million, primarily reflecting loan growth dividend finance loans contributed $96 million to the ACL build.
As you know, we incorporate moody's macroeconomic scenarios when evaluating our allowance.
The base economic scenario from Moodys assumes the unemployment rate reaches four 2%, while the downside scenario underlying our allowance coverage incorporates a peak unemployment rate of seven 8%.
Given our expected period end loan growth, including continued strong production from dividend Finance. We currently expect a first quarter billed to the ACL of approximately $100 million, assuming no changes in the underlying economic scenarios.
Moving to capital our CET, one grew from nine 1% to nine 3% during the quarter. The increase in capital reflects our strong earnings generation, which was partially offset by the impact of a $100 million share repurchase completed in December .
Moving to our current outlook.
We expect full year average total loan growth between three and 4% compared to 2022.
We expect most of the growth to come from the commercial loan portfolio, which is expected to increase in the mid single digits in 2023.
We expect line utilization to be stable in the first half of 2023, but then declined slightly to 36% as capital markets conditions improve a bit in the second half of the year.
We expect total consumer loans to increase modestly as unexpected increase from dividend finance and modest growth from home equity and card will be mostly offset by a decline in auto and mortgage reflecting the environment.
For the first quarter of 2023, we expect average total loan balances to be stable sequentially, we expect commercial loans to increase 1%, reflecting strong pipelines in middle market and corporate banking and assuming commercial revolver utilization rates remained generally stable.
We expect consumer balances to be stable to down, 1%, reflecting lower auto and residential mortgage balances, partially offset by dividend loan originations of $1 billion or so in the first quarter.
From a funding perspective, we expect average core deposits to be stable to down 8% sequentially, reflecting seasonal factors before resuming modest growth in the subsequent quarters of 2023.
We expect continued migration from DDA into interest bearing products throughout 2023 with the mix of demand deposits to total core deposits and mainly year in the low thirties.
Shifting to the income statement, given our loan outlook and the benefits of our balance sheet management.
We expect full year NII to increase 13% to 14%.
Our forecast assumes our securities portfolio remains relatively stable from the second half of 2022 levels and reflects the forward curve as of early January with fed funds, increasing two 5% in the first quarter and the first 25 basis point rate cut are occurring in the fourth quarter of 2023.
Our current outlook assumes total interest bearing deposit costs, which were 112 basis points in the fourth quarter of 2022.
The increase in the first half of 2023 before settling in around 2% or so in the second half of 2023.
Our outlook contemplates an environment of continued deposit competition.
Which would result in a cumulative deposit beta by the end of 2023 of around 42% given the two additional rate hikes in our forecast over our October guidance.
The future.
Impacts of deposit repricing lags combined with the dynamics of our loan portfolio should result in our full year 2023, net interest margin, increasing five basis points or so relative to the fourth quarter of 2020 to NIM.
We expect NII in the first quarter to be down 1% to 2% sequentially, reflecting the impact of a lower day count in the quarter combined with stable loan balances.
We expect adjusted non interest income to be relatively stable in 2023, reflecting continued success taking market share due to our investments in talent and capabilities, resulting.
Resulting in stronger gross Treasury management revenue capital markets fees wealth and asset management revenue and mortgage servicing to be offset by the market headwinds impacting top line mortgage revenue and higher earnings credit rates on Treasury management as well as subdued leasing remarketing revenue.
If capital markets conditions do not improve we would expect to generate improved NII and lowered expenses in the second half of 2023.
We expect our fourth quarter TRA revenue to decline from $46 million in 2000 $22 million to $22 million in 2023.
Our guidance also assumes a minimal amount of private equity income in 2023 compared to around $70 million in the prior year.
We expect first quarter, adjusted noninterest income to be down 6% to 7% compared to the fourth quarter, excluding the impacts of the TRA largely reflecting seasonal factors.
Additionally, we expect to continue generating strong financial risk management revenue, which we expect will be offset by a slowdown in M&A advisory revenue and the.
<unk> of higher earnings credits and softer top line mortgage banking revenue given the rate environment.
We expect full year, adjusted noninterest expense to be up 4% to 5% compared to 2022.
Our expense outlook includes a one point headwind each from the FDIC insurance assessment rate change that went into effect on January one.
The mark to market impact.
Our non qualified deferred compensation plan, which was a reduction in 2022 expenses and the full year expense impact of dividend finance.
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 assumes we closed 25 branches in the first half of 2023 that will deliver in year expense savings and also add 30% to 35, new branches in our high growth markets, which will result in high single digit growth of our South East branch network.
We expect first quarter total adjusted noninterest expenses to be up 6% to 7% compared to the fourth quarter.
As is always the case for us our first quarter expenses are impacted by seasonal expenses associated with the timing of compensation awards and payroll taxes.
Excluding these seasonal items expenses will be down approximately 2% in the first quarter.
In total our guide implies full year adjusted revenue growth of 9% to 10%.
Resulting in <unk> growth in the 15% to 17% range.
This would result in a sub 53% efficiency ratio for the full year, a three point improvement from 2022.
We expect 2023 net charge offs to be in the 25 to 35 basis point range with first quarter net charge offs in the 25 to 30 basis point range.
In summary.
With our strong PNR growth engine disciplined credit risk management and commitment to delivering strong performance through the cycle. We believe we are well positioned to continue to generate long term sustainable value for customers communities employees and 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 given the time, we have this morning, we ask that you limit yourself to one question and a follow up and then return to the queue. If you have additional questions. Operator, please open the call up for Q&A.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Our first question comes from the line of Gerard Cassidy from RBC. Your line is open.
Good morning, guys how are you.
Good morning Gerard.
Can you share with us Tim when you talk to your business customers.
It seems like there's a real disconnect between everybody's outlook for loan loss Reserve building, we understand of course, it's seasonal and you're going to be proactive life of loan losses.
And you and your peers are building up the reserves, but then you look at the the spreads in the high yield market Theyre coming in one of your competitors yesterday pointed out that the commercial loan spreads havent widened out.
Where is the disconnect or are we just going to fall off a cliff, possibly in the second half of the year, but can you share with us what are your commercial customers seeing in their day to day business and are they seen the weakness that everybody is projecting that will happen later this year yeah.
Sure Gerard Thanks for the question I don't think were in a fall off a cliff in the second half of the year and Thats certainly not consistent with what I hear I was out and went and looked at the calendar.
Get into eight of our 15 markets.
In the fourth quarter of this past year, I think I, probably saw 40 or 50 clients, while I was out there.
I mean, here's what I hear like if you look at the manufacturing clients as an example, they're all feeling much more optimistic about moderation as it relates to raw materials, and I think by and large they solve the supply chain issues that they were facing either that through inventory build.
We're three restructuring supply chain.
Or because.
Overseas suppliers that they were relying on I'll come back online or there isn't an issue in the ports or otherwise I think the issues, they're running into are twofold. One labor continues to be a challenge.
It is labor cost, but it's also just labor availability.
Two because they solve their supply chain challenges through building inventory.
When you think about lower inventory turns you add and rising interest rates now that service costs to revenue or a higher proportion and so while they got the costs associated with raw materials through this last year and price increases they're all look into the next 18 to 24 months to try to.
Figure out how they pass on that just the sort of continued slow grind on labor and debt service costs.
The services clients are.
We're having no problem pushing through cost.
Which I think is evident in the inflation data an add personal need anybody that took a vacation over the holidays. This year and they continue to be optimistic because demand has remained strong I think.
What I hear more than anything else is that we're going to have a little bit of a slow grind down here in terms of growth.
And then if anything the thing I'm more worried about is not do we end up with plus five 5% GDP of minus <unk>, 5%, GDP, but rather that the market may be overly optimistic about how quickly the fad is going to be able to add.
To bring rates down and the byproduct of that is from an operating standpoint, you have to be thinking a lot more about how you position the balance sheet for the next three to five years and for more capex growth and higher rates than worrying about the next call. It 12 months.
In terms of the outlook.
Very good very helpful.
Jamie.
Circling back to you on one of your favorite topics.
Hi.
Can you share with us two things one.
What does the accretion look like coming into 'twenty three for the <unk> number and second in your Securities portfolio. I think you showed in your release that the taxable securities are yielding 3% today. What are you guys seeing in new yields as you put money to work.
Yeah. Thanks Gerard.
I know when we put you in the Q is going to get an ASC I question. So.
Living up to that.
In terms of the <unk>, if you look at year end level.
Levels with the 10 year at roughly $3, 87%.
Hi.
Orange back with our duration.
Five four turns back pretty evenly across that time period, so $1 billion or so of TCE earned back.
Per year, obviously, no capital impact given that we're category for if you fast forward to today and where the 10 year is certainly we had a significant improvement in the Sci.
Just in the first 19 days of January so that would be helpful to the TCE as well in terms of the securities yields obviously, we're very pleased with how the portfolio.
<unk> is positioned at a 3% yield I would expect that what's going to happen with the investment portfolio is that it will continue to grind higher each quarter and finished the year to $3 10 level. So the average for the year is probably in the 305 range because as we're reinvesting cash flows or seeing opera.
<unk> on new investments, we're looking at.
At entry points in that $4 75 area right now.
Great. Thank you.
Okay.
And your next question comes from the line of Mike Mayo from Wells Fargo. Your line is open.
Hi.
Mike I know you guys Mark I think it was your phrase that.
How the maturity securities where like being in the Roche Lasalle.
So I got that right.
Yes.
And.
You have harnessed legislate hardly any securities and held to maturity, which gives you flexibility.
And I'm not sure how much that matters.
And maybe just gives us more flexibility as you look ahead.
But youre also one of the few banks that are.
If you take the midpoint of your guidance, you're guiding for higher NII off fourth quarter levels.
And.
Is there a connection between how you're managing your securities book and that guidance or are they separate but.
The question is.
NII guide as it relates to your securities.
Yes, Mike It's Jamie, Yes, I did reference the Roach motel.
A few quarters back.
And I guess today's claimants.
The maturities more like a hide the maturity and it certainly helps having that flexibility to.
To reposition as environments change, but really there's no one thing that's driving the strong NII outlook and NIM expansion for US. It really is the result of years of hard work of deliberately positioning the balance sheet for really what is a range of outcomes that still could play.
Out given all of the uncertainty.
Yes.
It really is a total company effort and that comes from the household growth new commercial relationships product innovation in the Fintech acquisitions, and ultimately sales execution, both on loan pricing and deposit generation. So that's really.
What is giving us the ability to grow NII during the course of 2023 as well as expanding NIM at the same time.
And I think it's one of those.
Capabilities of fifth third that we've proven over the past decade, perhaps underappreciated by the market and like you said the securities are certainly going to be.
A higher level of gross income over the course of 2023 in part because we were patient and deploying the excess cash that we had not buying securities on the 10 year was below two or even below 1% like some of the other banks.
I think one of.
The bigger differentiators for us will be the fixed rate loan businesses that we have in our ability to emphasize or deemphasize those businesses and right now we have a little bit of an emphasis.
Auto being able to generate roughly $6 billion. This year, and then dividend where the gross income on dividend.
We will exceed over $200 million of growth in 2023 relative to 2022, and so really when you package. It all together with an investment portfolio that is in a net discount position of about $1 billion of dividend portfolio that by the end of <unk>.
123 will have unamortized fees that will roll through NII of about $1 billion. We've got a lot of downside protection and a core franchise that with its ability to grow loans and deposits really is.
Helpful.
And within all of this guide, we do not assume spread widening so to the extent that were to happen is.
Tim mentioned that would only be upside to our guide.
And then Tim just a broader level.
Do you see a recession based on your bottom up analysis based on all of the markets you're visiting based on the clients you're talking to I mean.
We hear so much recession talk and then we hear.
And that your loan growth and everything else.
What are you what are you just saying from a high level standpoint, and then what are your assumptions for reserves in terms of unemployment.
Yes.
I'll, let Jamie field the question on the specific assumptions on reserves, Mike but.
I think I, probably lost my Crystal ball when he moved offices hurdle here at this past year. So.
Ed.
I have to rely on what I hear from clients or what we get from our friends in Moody's and otherwise if you ask me today I would tell you we're going to have.
A shallow recession I think.
But I don't know that Theres, a big difference between a half a percent of growth in a half a percent of GDP decline.
In particular, given the amount of Derisking, that's been done inside the banking sector and certainly inside fifth third over the course of the past decade.
I think the more interesting dynamic really is going to be this question about the duration of a recession, if we see it and.
What happens if we don't get it typical recovery right. If you have several years of below trend growth and inflation that sits above that.
Historic certainly above the historic 2% target.
Jamie you want to field that question on that the inputs on the reserves.
Yes, Mike as you know we use the Moody's scenarios.
<unk>.
Their baseline scenario and that drives 80% weighting and we've maintained our ratings at 810 10 with the upside.
In the S four either adverse scenario or 10% probability scenario. So in the adversely unemployment gets almost up to 8% in the baseline unemployment ratchets to ratchet up to four 2%.
And then we blend those scenarios together to drive the ACL, So I think that meshes well with what <unk>.
Tim's comments were of a shallower mild downturn in the economy and then a recovery.
So thats, 20% for the 8% unemployment and 80% for the four 2% unemployment.
And on the upside which is.
The upside scenario is that the fed delivers a soft landing saw unemployment stays in the high threes.
So 10% in the high threes, a baseline of $4 to peak and then the downside of 10.
Seven 8% unemployment.
Got it alright, thank you.
Your next question comes from the line of Scott Cyprus from Piper Sandler Your line is open.
Good morning, everybody. Thank you for taking the questions Jamie I guess it doesn't based on what you said it doesn't feel like you would get there anytime soon but in the past you've talked about sort of a 330 margin floor.
In the event of low rates, just curious given all the sort of the ebbs and flows we've had expectations and just.
<unk>.
Pardon me.
Moves you've made with your own balance sheet, how are you thinking about.
That lower bound.
As we as we go forward in that $3 30 level.
Yes, we feel very good about the ability to have a floor on the NIM at that $3 30 level and down 200 scenario should that play out given all.
All the work we've done on the investment portfolio with the bullet locked out cash flows along with being in the <unk>.
Fairly sizable net discount position and the duration that we have combined with the fixed rate loan origination platforms with <unk>.
Auto dividend and provide that.
Should all provide yield and then as we've talked in the past.
Layered in $15 billion of receive fixed swaps that will also provide additional protection from 2025 through 2032 and that may be one other differentiator for us relative to peers is that we've been focused more on protecting that downside over.
For a longer period of time, and therefore, the duration of our swap book as well as our investment portfolio.
Maybe a little better position should that downturn occur at the end of the decade.
Perfect. Thank you and then switching gears just a bit maybe some thoughts on kind of the trajectory of fees as we go through the year you guys always have the seasonality that helps fourth quarter hurts the first but it will be I think.
A pretty substantial ramp up starting in the <unk>. Just curious I think you alluded to capital markets kind of normalizing a recovering in the second half of the year just maybe your thoughts on main drivers as the year plays out.
Sure. Thanks.
When it comes to the fee income, we did say relatively stable over the course of the year and probably is helpful to look at it from two components.
The first would be the category I'll call the factors in our control.
Ed do deliver nice growth both from a strong.
<unk> acquisition perspective, as well as overall fee generation from <unk>.
Combination of the branch network, our wealth business, the commercial business that will drive.
Both credit card income as well as wealth and asset management fees in the mid single digit area.
Topline fee equivalent growth in the Treasury management area in the high single digit area, given our strong product lineup.
From there we are transitioning to mortgage that's actually going to be the largest growth item for us in 2023, and it really goes back to all the work that we.
Put into growing the servicing business in 2020 in 2021 when levels were more depressed there was a good buying opportunity and so given our strong mortgage servicing plan.
Platform will increase those fees from $125 million in 2022.
To the $160 million area. So that's a growth of almost 30%, whereas topline mortgage should be relatively stable off very low levels.
So we feel good about those items capital markets are certainly the wildcard in our guide given that we do expect mid to high single digits growth.
In the first half of the year.
Relative to the first half of 2022, and then we assume a little bit of additional growth in the back half of the year.
Under the assumption that the capital markets disruption should abate once the fed reaches its terminal fed funds level.
And again as I said in the prepared remarks, if that were to not happen. Then we would expect a little bit better loan growth a little bit better NII and lower expenses. So in terms of <unk> on a relative basis I feel confident in that.
Should the capital markets improvement not occur and then the other category when it comes to fees it would be the headwinds facing our sort of really.
Environmental given the increase in interest rates and Thats on the earnings credit we're managing earnings credits to about a 20 beta which is a little bit better than what we thought as we entered this cycle.
Even with that service charges ultimately will be down mid single digits for the year.
Which more than offset the strong topline fee equivalent growth.
On the consumer overdraft NSF side, we'd probably do a little bit better relative to peers, just given that we move sooner on some of those fee and structural changes, but overall the first half of the year will be a little bit softer as we lap those changes that occurred mid year 2022, and then.
As we said in the prepared remarks, the TRA will decline.
In 2023 as will our expectations on lower private equity income so that other fees will be down 20%, 25% or so.
If there's one thing I might add there.
While we expect capital markets to improve this year I would not say, we expect them to normalize or recover with the investments that have been made in that business a full recovery in capital markets would result in a substantially larger business.
And revenue footprint than we're anticipating this year, we just don't expect it to be as bad.
Whereas locked up as as we saw in 2022.
Excellent alright, that's terrific color. Thank you guys very much.
Your next question comes from the line of <unk> from Morgan Stanley . Your line is open.
Hey, good morning.
Good morning, I was wondering can you just walk through the puts and takes around deposit growth in 2023.
The expansion in the southeast.
Certainly a tailwind here. So how are you thinking about deposit growth, especially given the more challenging macro backdrop.
Yes. This is Brian .
Certainly we feel good about our franchise and the improvements that we've made over the years, we have a very strong new.
New customer origination engine, both across consumer and commercial we've got strong new new consumer household growth strong in <unk> from a commercial perspective.
Have a very high performing Treasury management business that provides a lot of deposit support as well as growth.
And as you mentioned, our southeast branch expansion, obviously is going to create a tailwind for us as well.
Finally, we have.
Proven and analog analytically driven customer offers that have done a really nice job through the cycle and driving new balances when we need them.
So we continue to maintain a lot of confidence in the environment that we're going to be able to deliver and gain our fair share of deposits as the environment changes.
Obviously, we can't grow in all environments, but we are cautiously optimistic and well positioned.
Just to put a number on that narrowly on the southeast slightly grew consumer deposits by over 6% in the southeast this past year to Brian's point that as Andy are small and that is has been a tailwind for us.
Got it helpful.
And then maybe the flip side of that is is the wholesale funding. We show you add some wholesale funding earlier, so those balances where you'd like them to be for now and how does that fit into the overall funding strategy.
Yes, we're very comfortable with where we are from a wholesale funding perspective, we continue to have very significant contingent liquidity sources to help us manage through uncertainty in the environment.
If we see decent deposit growth, we could see those wholesale funding balances come down over time, but we have a lot of flexibility across our funding base to help us manage through both liquidity needs as well as net interest income.
Great. Thanks, so much.
Your next question comes from the line of Ebrahim <unk> from Bank of America. Your line is open.
Good morning, I guess I just had one follow up question on <unk>.
Did Goldman <unk> Tim.
<unk> mentioned about the resiliency of the bank, but when we think about your scenario are higher for longer needs.
Think that begins to Leo new customers. When you look at it you did on C&I owner on the CRE book.
But the longer defense it has to stay at the five plus need.
The cost of equity capital is going higher demand is falling off and.
Does that lead to a lot more pain on credit maybe not even later in the year into 2024 absent fed rate cuts.
Yes.
Let me give you the quick answer and then I'll, let Richard comment.
I absolutely I think that is our view is that it is more of a slow grind dynamic here.
On a class writers.
So rod mentioned earlier and that the longer that we go with rates at elevated levels the more pressure than it places on.
<unk>.
Business commercial borrowers in particular, I think our consumer borrower is a little bit different because such a significant share of our consumer lending is done to homeowners.
They've had the ability to inoculate themselves a little bit from inflation because they locked in these historically low.
Fixed rate cost of housing for Richard do you want to talk a little bit about where.
Specifically, you think that grind may take until yes.
I think theres a couple of things here to your question specifically.
Clearly higher interest rates for longer is going to put pressure across the board and I think that's frankly by design from a fed standpoint to get things to slow down.
The biggest impact is going to begin to leverage lending portfolio, we're starting with higher levels of leverage clearly higher interest rates impact free cash flow one of the things that we do is when we do our underwriting and frankly, our quarterly monitoring as we will we will go back and look at.
At the rate curve and in fact, we look at when we underwrite the rate curve forward curve, plus 200 basis points to make sure that there's enough cushion.
And free cash flow. So therefore, we're underwriting and taking on these loans. We can we believe these borrowers can withstand the pressure of higher rates through through their margins and free cash flow I think the other thing we're watching for.
And as we think about the economy and Tim referenced labor, both cost and availability.
That in certain segments continues to put pressure on margins, particularly for those industries that have a mismatch between the revenue management and expense management, So maybe they've got.
Term fixed price sales contracts.
They've got to manage through with short term labor and probably the most acute example of where this is happening is in some pockets of healthcare senior living and we've talked about.
Not for profit hospitals, which have low margins that the cost to deliver care and service has gone up pretty dramatically you can look at nurse nursing availability and wages as a really good example, and theres a lag there in the revenue cycle in terms of reimbursement rates, whether it's public or private.
Where these companies for.
For these companies to maintain margins profitability and so in those cases, we're looking at other things the quality of the balance sheet liquidity and liquidity burn rates, but no question that the higher rates are higher for longer and puts pressure on businesses. I think the last thing and this is part of client selection is understanding the ability of our borrowers.
To adapt and the resilience to these things. So it's not just a situation where rates are higher and companies don't adapt our consumers don't adapt and it's part of the relationship model and part of the way we go to market in terms of of the advice and counsel with our with our customers understanding what's happening looking for alternatives.
Finding new ways to finance these customers so that that resilience through the cycle, we will continue to enter.
That is helpful and I guess, just one quick follow up Jamie on dividend.
About $100 million of provisioning anything else around dividend finance in terms of growth outlook. This year versus last year that we should be <unk>.
There are things picking up or slowing down as we think about just the underlying growth in the business.
Yes, we feel very good about the business the dividend is doing especially on the solar.
Side of the aisle and for US, we're expecting roughly $4 5 billion of originations.
In 2023 with a weighting of <unk>.
90% solar 10% home improvement home improvement, we're less enamored with.
But again, it's a good product offering for other points in the cycle. So it's being de emphasized in solar continues to do incredibly well.
And if anything there's.
Perhaps a little bit of upside to our NII guide on dividend for.
For 2023, just given the strength of the business as well as the pricing power.
Thank you.
Your next question comes from the line of John <unk> from Evercore. Your line is open.
Good morning.
Good morning.
On the on the credit front I know you gave us really good detail.
On delinquencies.
Non accruals do you have.
Criticized assets during the quarter and what.
Areas of criticized.
Migrated negatively.
Yes. This is Richard Thanks for the question criticized assets were flat for the quarter, both nominally escalate a little bit of <unk>. So about three basis points of commercial credit improvement across the board I would also point out that in addition to credit being stable delinquencies 30 to 89 990 and.
And above Npa's and net charge offs were all down for the quarter on the commercial side I think the things, we're watching and I hit on it a little bit healthcare, specifically not for profit hospitals and senior living for the reasons. We just talked about we've seen some pressure there because of the mismatch between the revenue management and expense management.
A little bit of pressure and are watching in commercial specialty products consumer specialty consumer specialty products right. That's a function of consumers shifting from durables and discretionary to consumables and non discretionary.
And supply chain and inventory management issues, that's the trading down issue.
And that's where we've seen seen most of the movement the leveraged portfolio from an asset quality standpoint, it's been stable and operating within it within our expectations.
Okay. Thank you.
That's helpful and then sticking with credit just my follow up is around the corner.
Real estate and home equity and commercial real estate looks like.
You did see pretty noteworthy move up in delinquencies as well as the non accruals.
And so you can just talk a little bit about property types within commercial real estate, where you've seen a little bit of a stretch from where your loan to value.
Ratios are and then in home equity it looks like you also saw a pretty.
Noteworthy increase in delinquencies there just wanted to get color around that portfolio. Thanks.
Let me take commercial real estate I think when you when you think about the delinquencies.
Well if you look at the delinquencies and this is on slide deck on Slide 30, 90, plus it's still zero, we've got we've got none.
And movements in 30 to 89 six basis points, it's operating really really low low base. So it's not something that we're concerned about from a commercial real estate perspective I think.
The thing we're watching for.
We're watching I don't know allows people got questions on office, we're watching office, that's a small number for us.
In fact, our performance in an office, it's actually in line with or better than the rest of the commercial bank, but there is some there is some pressure there as soon as as occupancy attendants in lease rates.
Continue to sublease rates continue to fall I think theres a couple of things we've got a very small amount of urban and central business District office, that's where most of the pressure is in terms of subletting rates.
That for US is class a property I would also tell you that in addition to class vintage matters Thats all new product.
It's a new product in ESG.
Qualified LEED gold and platinum.
It has all the modern amenities. So we feel really good about those particular properties the rest of our office portfolio sits.
It's more in suburban markets.
Again. These are the same pressure from a from a lease rate sub lease rate and the tenant's perspective.
Across the board.
Across across the rest of commercial real estate.
Okay.
Multifamily continues to perform very well the demographic trends. The household formation continues to be strong rental rates continue to to accelerate faster than than than construction cost. So again theres a positive positive tailwind there same thing with industrial industrial demand in this kind of goes back to the re shoring thing.
<unk>.
Industrial demand is really strong continuous lease rates continue to hold and so we feel really good there hospitality is stable.
And that continues to be a good trend and then in retail are stable. So so feeling really good about where we are from a from an overall perspective.
And commercial real estate do you want to add a comment John .
John I, just was going to say on that.
Equity side, all Youre seeing I think in the consumer for us at the moment is just seasonality like a sequential comps from the third quarter to the fourth quarter or the wrong comparisons just given the natural seasonality in those businesses I think it's better just to look at year over year and I, we expect consumer credit to normalize over time, that's reflected in the guidance that we gave but.
Delinquency.
The dynamics there are really no different than what you would've seen pre pandemic other than the fact that there is still muted.
Relative to what we would've had in the past.
Home equity is not the area that's been wet.
As an area of focus for me and for certain yes, yes.
Yes, no I got that I just saw the reserve addition, as well to the program.
Allowance so that actually.
The dynamic there is that for the first time in as long as I've been at the bank, we actually had quarter over quarter home equity growth.
Oh.
That's what's driving that outcome.
Not a change in perspective for us on the quality of the creditor is a likely outcomes there.
Alright, good problem, Okay, alright, thank you.
Your next question comes from the line of Matt O'connor from Deutsche Bank. Your line is open.
Good morning, I might have missed.
<unk>.
Comment on the indirect auto loan growth expectations for this year can you just repeat that what the strategy is.
And what Youre seeing in our spreads there.
Yeah actually spread.
Done well.
<unk> are actually off to a.
Very solid start in 2023.
We finished the year in 2022 at $7 1 billion of production, if you take auto as well as the RV marine and specialty business combined so that fixed rate.
Consumer secured loan category our expectation.
For 2023 for that asset classes to be down to about $6 billion or so.
So loan balances in that caption, we would expect to be down however, yields we expect to improve about 100 basis points from the fourth quarter 2002 levels to fourth quarter 2023 levels. So it is a nice.
Accelerator to the earlier question around how are you able to.
Deliver both NII growth and NIM expansion.
That certainly is a helpful driver.
Got it and then just separately on the capital level.
Yes, we're seeing some divergence and targeted capital out there, obviously theres like upward pressure at the biggest banks not really relevant to you.
But then something.
Targeting closer to 10%.
I'm, certainly onboard with 9% assuming very high but I am wondering is there any kind of behind the scenes pressure, whether it's rating agencies or regulators just hold a little bit more arguments.
Given some of the macro uncertainty or anything else that we're that we're not saying yes.
Yes, great question, Matt Thanks for asking I would say that as this environment unfolds. It really is to your point going to create differentiation in both.
Performance.
Execution and overall balance sheet positioning.
For a number of quarters and years now been dis.
Discussing how cautious are outlook is on that has really informed what we're willing.
To do from a credit risk appetite perspective, so the capital levels ultimately.
Or a factor of.
The credit profile of what's on the sheet as well as the reserve levels that we have so the CET one level that $9 25 in an ACL level of 198.
Creates.
Very sufficient loss absorption.
Capacity.
Given our SCB level as the at the minimum but I think.
External.
Factors or forces would say that we're very well positioned from a credit profile perspective, as well as from a loss absorption capacity. So we feel good about the.
Okay. Thank you very much.
Your next question comes from the line of Ken <unk> from Jefferies. Your line is open.
Hey, guys. This is Ben <unk> on for Ken just a quick follow up on the dividend finance as as originations continue to ramp up and mortgage loans go on balance sheet. When do you ultimately see that NII benefit overcoming those reserve build and becoming accretive to earnings and then can you just remind us of what type of loss rates, you're assuming on this dividend loans.
Thanks.
Yes, great question.
<unk> levels for dividend will be.
Positive in the back half of or in 2023.
Net income of dividend post ACL will be.
Positive or accretive in 2024.
Certainly if prepayments accelerate faster than what we have modeled then that large.
The amount of unamortized platform fees will come through the P&L would it improve or accelerate the return profile, but for now thats.
How we have at play now.
And we model roughly an eight year life.
On the dividend asset and that we would expect to have loss rates in the 125 basis point area on a blended basis for the portfolio.
Per year over those eight years.
Great. Thanks for taking my questions.
And there are no further questions at this time, Mr. Chris Doll, I turn the call back over to you for some closing remarks.
Thank you operator, and thanks, everyone for your interest in fifth third please contact the Investor Relations Department. If you have any follow up questions. Operator, you can now disconnect the call.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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