Q3 2024 Fifth Third Bancorp Earnings Call
J.L.: Thank you for standing by. My name is J.L. and I will be your conference operator today. I'd just time I would like to welcome everyone to the fifth third bank or third quarter 2024 earnings conference call. All the lines have been placed on mute to prevent any background noise.
J.L.: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, follow by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Now I'd like to turn the conference over to Matt Curoe, Senior Director of Investor Relations. You may begin.
J.L.: Thanks for watching!
Matt Curoe: Good morning, everyone. Welcome to fifth third, third quarter 2024 earnings call. This morning, our Chairman, CEO and President Tim Spence, and CFO Bryan Preston, will provide an overview of our third quarter results in outlook. Our Chief Credit Officer, Greg Trek, has also joined the Q&A portion of the call.
Speaker Change: Please review the cautionary statements in our materials, which can be found in our earning-to-release and presentation.
Speaker Change: Space Materials contain information regarding the use of non-gap measures and reconciliation to the gap results.
Speaker Change: As well as Ford looking statements about fifth-thirds performance. The statements speak only as of October 18, 2024, and fifth-third undertook no obligations to update them. Following prepared remarks by Tim and Bryan, we will open up the call for questions. But that, let me turn it over to Tim.
Tim Spence: Thanks, Matt. Good morning, everyone. At 6-3, we believe great banks distinguish themselves not by how they perform in benign environments, but rather by how they navigate uncertain ones.
Tim Spence: Our focus on stability, profitability and growth in that order that served us well in this dynamic operating environment and continues to produce strong and predictable results.
Tim Spence: This morning we reported earnings per share of 78 cents, or 85 cents, excluding certain items outlined on page two of the release, exceeding the guidance we provided in our second quarter earnings call.
Tim Spence: We produced a return on equity of 12.8% but best among peers who have reported thus far and the most stable on a training 12-month basis.
Tim Spence: Our job to the efficiency ratio improved to 56.1% in the third quarter.
Tim Spence: Headcount declined 1% year over year despite continued investments in our growth strategies.
Tim Spence: We achieved sequential positive operating leverage for the second consecutive quarter without the need to expend shareholder capital on an investment portfolio restructuring charge. And are in a position to achieve positive operating leverage on both a sequential and a year over your basis in the fourth quarter.
Tim Spence: Despite changes throughout the year on interest rates, economic activity, and market demand. As we come into the home stretch for 2024, I am pleased to say that 5-3 should deliver N.I.I. fees, expenses, and credit costs within the full year guidance ranges we provide it back in our January or year mix call.
Tim Spence: Before I hand the call over to Bryan to provide additional detail on our financial results and outlook, I would like to take a minute to highlight the ways in which our strategic growth investments should have been consistent over several years, a providing long-term organic growth that is not macro-environment dependent.
Tim Spence: In our consumer bank, consumer households grew 2.7% over the prior year, punctuated by 6% household go from the south east.
Tim Spence: The release of the FDIC's annual summary of deposits during the quarter provided an additional means to benchmark our performance.
Tim Spence: The second year in a row, fifth third was number one among all large banks, and year over year retail deposit growth, measured on a cap to branch to deposit basis.
Tim Spence: We maintain our improved our market position in every market where we compete.
Tim Spence: In our Midwest markets, we maintained our number two overall position behind JP Morgan.
Tim Spence: and our Southeast markets, we maintain our number six overall position and significantly close the gap to our top five goal.
Tim Spence: We grew retail deposits nearly 16% year over year and gained meaningful market share in 14 of our 15 focus MSAs in the Southeast.
Tim Spence: We will open up 19 de novo branch locations in the fourth quarter and plan to accelerate the pace of openings through 2028. At which time we will have nearly half our network from more than 500 branches in total in the southeast.
Tim Spence: In our commercial bank, we continue to expand our metal market presence and to invest in commercial payments.
Tim Spence: Over the past 12 months, we have increased relationship manager head count by over 20% in our Southeast and expansion markets, including opening commercial banking offices in Birmingham, Kansas City, and in the Central Valley.
Tim Spence: Third quarter, middle market loan production was the highest in five quarters, led by the Southeast market, which will up 20% sequentially and over 30% over the prior year.
Tim Spence: Our commercial payments business grew net fee equivalent revenues by 10% year over year in the quarter and we processed 4.3 trillion in dollar volume.
Tim Spence: New line in our managed service offerings continue to lead the way in terms of growth that is viewing from our balance sheet.
Tim Spence: Over 40% of all new commercial payments relationships out of this year have been payments led with no credit attached.
Tim Spence: In our wealth and asset management business, we achieved record quarterly revenues, growing by 12% year over year. Total assets under management have grown 12 billion dollars in the past year, or up 21% to 69 billion.
Tim Spence: Our fifth third private bank, fifth third securities, and fifth third wealth advisors business units all continue to generate strong performance.
Tim Spence: Turning to capital, our strong profitability and discipline balance sheet management are providing growth capacity and the opportunity to increase capital return to shareholders.
Tim Spence: This quarter, we increased our common dividend by 6% to 37 cents per share, and executed $200 million in share of purchases.
Tim Spence: Even with these actions, our CET-1 ratio increased to 10.8%.
Tim Spence: This will allow us to increase share of purchases in the fourth quarter to 300 million with the potential to increase further depending on the level of long growth realized during the quarter.
Tim Spence: Looking ahead to the remainder of the year in the beginning of next, while we feel more optimistic today about the near-term outlook for the economy. We also recognize that cross currents, including reversals and interest rate rallies, volatility and jobs reports, stickiness and inflation, and geopolitical uncertainty could produce a wide range of potential economic outcomes.
Tim Spence: We will continue to manage fifth-third with the focus on stability, profitability and growth in that order and to stay liquid and conservatively positioned while investing with the long-term amount.
Tim Spence: Lastly, I'd like to take a moment to express our sympathies to all those who have been impacted by Hurricane Helen and Hurricane Milton.
Tim Spence: who recognized the hardships that arise from such devastating events.
Tim Spence: and I would like to also thank all our employees who have answered the call to support our customers and communities at this time.
Tim Spence: In the day since the hurricanes, he worked tirelessly to reopen branches and check in on customers.
Tim Spence: Staffed the fifth third financial empowerment bus to enable those who lost power in your net access to apply for FEMA disaster relief.
Tim Spence: Your dedication to serve in the face of these natural disasters is inspiring. Thank you for living our core values.
Speaker Change: With that, I will turn it over to Bryan to provide more detail on the quarter and the outlook.
Speaker Change: Thanks to them and thank you to everyone joining us today.
Bryan Preston: We'll play for our third quarter results once again demonstrate the strength of our company.
Bryan Preston: Our well-position balance sheet and diversified D&C streams drove 3% sequential adjusted revenue growth.
Bryan Preston: That revenue performance combined with our ongoing expense discipline resulted in 5% sequential pre-provision that revenue grew in the third quarter on an adjusted basis.
Speaker Change: As Tim mentioned, our profitability remains strong, which allowed us to continue to create capital, while we're purchasing chairs, and raising the quarterland common dividend 6%.
Speaker Change: Our CEP1 ratio grew to 10.8% at the end of the quarter, and our tangible book value per share, inclusive of ASCI, increased 14% compared to June 30th and 47% from a year ago.
Speaker Change: I like it on page two of our release.
Speaker Change: Our reporter results were impacted by certain items, including costs related to the visa master card interchange litigation, and some severing, tracking measuring the quarter as we continue to work to drive deficiencies in automation.
Speaker Change: That interest income to the quarter was over $1.4 billion and increased 2% sequentially, and that interest margin improved two basis points.
Speaker Change: and Chris Fields on new loan production with a primary driver of this improvement and more than offset the impact of the increased interstering quarter-posit cost.
Speaker Change: which were well managed and up only two bases points compared to the prior quarter.
Speaker Change: With the Fed Fund's great cut at the end of the quarter, in September, we experienced our first month-of-a-month decrease in interest-pair and core deposit cost during this rate cycle.
Speaker Change: While total average portfolio loans and leases were flat sequentially, we are seeing some signs of life.
Speaker Change: Loan production rebounded for both middle market and corporate banking, with strong contributions from the Georgia and Chicago regions, as well as the energy and TMT verticals.
Speaker Change: For the commercial portfolio, average loans decreased 1% primarily due to increased pay-downs and softness in revolver utilization, which declined 1% during the quarter to 35%.
Speaker Change: Average total consumer portfolio lawns and leases were up 1% from the prior quarter. Primarily reflecting an increase in indirect auto origination.
Speaker Change: which continued to be a significant contributor to our fixed, great asset repricing.
Speaker Change: During the quarter, we saw a 200 basis points of pickup on the front book back book repricing in this portfolio.
Speaker Change: Diving further into the faucet.
Speaker Change: Average code deposits were up 1% sequentially, driven by higher money market balances, offset by a decrease in savings and CDs.
Speaker Change: This quarter-potset balanced performance combines with our well-timed long-term debt issuance during the quarter has allowed us to pay down higher cost short-term wholesale borrowers. As a result, our rates paid on total interest-faring liabilities decreased one basis point sequentially.
Speaker Change: Our current focus remains on prudently managing the pause of costs as we have officially entered the right-cutting cycle.
Speaker Change: Since mid-2023, we have been increasing our testing of price sensitivity in our deposit book to be well prepared for this phase of the cycle.
Speaker Change: We remain confident in our ability to manage our ability cost to drive meta-interstant-come performance in the fourth quarter and beyond.
Speaker Change: The man to pause the balance is a percent of court deposits, we're 24% during the third quarter, down 1% from the prior quarter. This level is consistent with our expectations from July, and we expect DDA mix to stay around 24% for the remainder of the year.
Speaker Change: By segment, average consumer and wealth deposits were stable sequentially, while commercial deposits increased 3%.
Speaker Change: We end of the quarter with full category 1 LCR compliance at 132% and are loaned to quarter positive ratio with 71% down 1% from the prior quarter.
Speaker Change: Moving on to feed.
Speaker Change: Exploding the impact of the security gains in the visa total return slot, adjusted non-interest income, increased 2% compared to the year ago quarter. As Tim mentioned, our commercial payments and wealth businesses delivered strong few results, with both achieving double-digit revenue growth over the prior year, driven by our sustained strategic organic growth investments in products and sales personnel.
Speaker Change: In commercial payments, revenue increased 10% as we continue to acquire new clients and traditional treasury management products are managed service offerings and a new line.
Speaker Change: In wealth, our AUM increased to $69 billion, up 21% over the prior year, driven by strong inflows from fifth-third wealth advisors and market performance.
Speaker Change: Fees of 163 million this quarter were a record high led by strong transactional activity at 5-3 securities and the feed benefit from the AUM growth.
Speaker Change: Our capital markets business rebounded this quarter as bond issuance and trading, as well as rate hedging activities picked up.
Speaker Change: Bees grew 9% over the prior year, also led by our day capital markets business.
Speaker Change: The security gains of $10 million, or from the Markham Market Impact of our non-qualified deferred compensation plan, which is more than offset in compensation expenses.
Speaker Change: Moving to Expenses.
Speaker Change: Exclude in these items noted on page 2 of our release, are adjusted non-entrous expense.
Speaker Change: was up 3% from the year ago quarter and increased 2% sequentially. Primarily due to increases in performance-based compensation due to the strong feed generation, the impact of the previously mentioned non-qualified deferred compensation mark to market, and continued investments in technology, branches, and sales personnel.
Speaker Change: Chifting to Credit, the net charge offer HEO was 48 basis points.
Speaker Change: Slightly better than our expectations from early September and down one basis points to punch away.
Speaker Change: Commercial charge-offs for 40 basis points, down 5 basis points sequentially, and consumer charge-offs for 62 basis points, up 5 basis points from a seasonally low second quarter.
Speaker Change: Early stage for Lincoln Seas, 30 to 89 days past due, D-Creece, two basis points to 24 basis points, which remain near the lowest levels we have experienced over the last decade.
Speaker Change: NPA's increased 82 million people are in the quarter, and the NPA ratio increased 7 basis points to 62 basis points.
Speaker Change: in line with our tenure average and remains below the peer median level.
Speaker Change: from MRSA-NPA's increased $60 million from the prior quarter. Within our CNI portfolio, NPA's increased $20 million due to increased info activity, which given the nature of the commercial business will be uneven from quarter to quarter. On a year or a year basis, CNI NPA's are down $7 million.
Speaker Change: Our CRA portfolio continues to perform well, with no net charge officer in the quarter, and an NPA ratio of only 46 basis points.
Speaker Change: The increase in our commercial mortgage in NTAs is related to a single senior living credit in our
Speaker Change: Consumer MPA's increase to $20 million from the prior quarter. Approximately half of this increase was driven by a recent change in policy Related to our consumer and on accrual processes.
Speaker Change: The better align our policies across asset classes, and primarily impacted are returned to a cool timing for loans that are paying in full and current.
Speaker Change: Overall, we are not seeing any broad credit weakening across industries or geographies.
Speaker Change: From a credit perspective, we do not expect Hurricane Haleen to have a material impact on losses and we are continuing to assess the impact of Hurricane Milton.
Speaker Change: Our ACL coverage ratio increased one basis point to 2.09% and included an 18 million dollar reserve bill.
Speaker Change: We continue to utilize Moody's macroeconomic scenarios when evaluating our lungs and made no changes to our scenario ratings.
Speaker Change: Moving to capital, we end of the quarter with a CBT-1 ratio of 10.8% significantly exceeding our buffered minimum of 7.7% reflecting strong capital levels.
Speaker Change: Our pro-forma CT1 ratio, including the ALCI impact of the security sportholio, is 8.7%.
Speaker Change: We expect to continue to improve Matt and the unrealized losses and our security sportfolio, given that 59% of the AFS sportfolio is in blocked out securities, which provides a high degree of certainty to our principal cash law expectations.
Speaker Change: The summing the forward curve is realized. Approximately 24% of the AOCI related to security losses will accrete back into equity by the end of 2025, increasing tangible book value per share by 6% before considering any future earnings.
Speaker Change: 61% of the security-related AOCI should have creed back to equity by the end of 2028.
Speaker Change: During the quarter, we completed $200 million in sharing purchases.
Speaker Change: which reduced our share count by 4.9 million shares.
Speaker Change: As we assess our capital priorities, we continue to believe that 10.5% is an appropriate near-term operating level.
Speaker Change: Moving to our current outlook.
Speaker Change: We anticipate continued growth in NI and NM during the fourth quarter, with NI up 1% sequentially reflecting the impact of lower to positive rates and the continued benefit of fixed rate asset repricing, partially offset by the decrease in yield from our floating rate loan portfolio.
Speaker Change: This outlook assumes a 25 basis point cut in November and a 50 basis point cut in December.
Speaker Change: We would not expect any change to this outlook if your rate cuts were to occur.
Speaker Change: We expect average total loan balances to be stable to up 1% from the third quarter, with metal market and auto production offsetting mixed demand in other asset classes.
Speaker Change: Fourth quarter, adjusted non-interesting commas anticipated to rise 3 to 4% compared to the strong third quarter. Largely due to a continued rebound in capital markets revenue and continued growth in commercial payments.
Speaker Change: Additionally, we expect fourth quarter TRA revenue to be $10 million, down from $22 million in the fourth quarter of 2023.
Speaker Change: Fourth quarter, total adjusted non-interest expenses are expected to be stable compared to the third quarter, as the increases in revenue-based compensation and the investments in branches and technology are largely offset by efficiencies achieved in other areas.
Speaker Change: Fourth quarter net charge-offs are projected to be similar or slightly down from the third quarter.
Speaker Change: Give them the expected increase in loans during the fourth quarter. We anticipate an ACL build a 20 to 40 million dollars assuming no major change to the economic outlook.
Speaker Change: We expected to deliver positive operating leverage in the fourth quarter, on both the sequential and a year-rear basis, and our PPNR guidance for the full year remains in line with our guidance from back in January.
Speaker Change: Our net interest income trajectory, Aged in the year, continues to position us for record results in 2025. But certainly no major economic or interest rate outlook changes.
Speaker Change: Finally, moving to capital. With our consistent and strong earnings, we now expect to increase our share purchases in the fourth quarter to 300 million dollars.
Speaker Change: With potential further repurchases depending on the level of longer throughout the quarter.
Speaker Change: In summary, with our well-position balance sheet growing revenue streams and disciplined expense and credit risk management, we are set to generate strong and stable capital accretion, top quartile profitability and long-term value for shareholders, customers, communities and employees.
Speaker Change: With that, let me turn it over to Matt to open the call up for Q&A.
Matt Curoe: Thanks, Bryan. Before we start Q&A, given the time we have this morning, we asked you to limit yourself to one question and one follow-up, and then return to the queue if you have additional questions. Operator, please open the call for Q&A.
Speaker Change: Thank you. The floor is not open for questions. If you have dialed in and would like to ask a question, please press star one on your telephone, keep at the raise your hand and join the queue. If you would like to withdraw your questions, simply press star one again.
Speaker Change: If you're called upon to ask you a question and are listening via loudspeaker on your device, please pick up your handset to ensure that your phone is not on mute when asking a question. Again, we asked that you limit yourself to one question and one follow up and rejoin the queue for any follow up questions. Thank you. Your first question comes from the line of the end of the video.
Speaker Change: Scott Seafers of Piper Sandler, your line is open.
Speaker Change: Morning, everyone. Thanks for taking the call. I was hoping you, hey, I was hoping you might be able to discuss sort of just the main puts and takes you see in the fourth quarter and I got in particular. Here's about how you're thinking about the further trajectory of deposit data and sort of how that evolves over time given that you've had been very transparent about it and have an optimistic outlook there as well.
Speaker Change: Yeah, absolutely. We continue to feel really good about the trajectory of the NI as well as the performance of the positron. As you know, we've spent a lot of time being prepared to this point in the cycle and things are playing out basically as we expect it.
Speaker Change: and we look at both always all some pure results, you know the natural transition that you would expect is, welcome to the positive, also a funding borrow-ins, to start to come down, that's what we're seeing at the scene.
Speaker Change: and play out.
Speaker Change: and then also then to start to see when that has been fully realized, that movement in the beta, and that's exactly what we're seeing from us and the competition for us. 35 billion dollars of the index deposits, we were able to get the beta out of those as expected to date. We're about in the mid 40s in terms of the beta that we've achieved since the 50 basis point rate cut, and we still have 13 14 billion dollars of CDs, that will be approaching in the 70s, 75% of our CDM, total.
Speaker Change: on the terrific one Matt.
Speaker Change: Now, on the end of the first quarter, as well as some additional promos that we'll see maturities on, and we'll continue to grind through the deposit costs and other areas of the book. So, continue to feel really good about that as the trajectory plays out, and then the fixed rate asset we're facing, and that benefit continues to be a sequential tailwind for us, and that's going to continue on to the fourth quarter next year.
Speaker Change: and that'll be a big deal out of the increase in that odds.
Speaker Change: Okay, perfect. Thank you. Maybe looking at a little further, I know you've discussed generating record NII in 2025. We'd love to hear any updated thoughts there. I guess including what kind of lending rebound might be required to achieve that. It sounded like maybe a bit more optimistic on what lending demand might look like. Given some of the signs of life you refer to in your opening remarks.
Speaker Change: Yeah, we are seeing some more activity there. We don't need, we don't need heroic loan goes to deliver record in our eye.
Speaker Change: How the NII is delivered is obviously going to be a very environment dependent. So, shape of the code is going to matter. We do expect to start to see some tailwinds on the long growth side given what we've seen. The bee creases from a commercial perspective, we've been to the most part of behind us. And we're seeing nice tailwinds and the consumer businesses that will be a big driver of how we transition into a long growth from here. So, we would like to see a little bit of a long growth that certainly would be helpful. A long chip in terms of delivering that record in our eye, but we feel good about trajectory from here. [inaudible]
Speaker Change: Thank you very much, Ryan.
Speaker Change: Your next question comes from the line of Gerard Cassidy of RBC Capital Markets. Your line is open.
Bryan Preston: Hi Tim, I'm Bryan.
Bryan Preston: Gordon.
Gerard Cassidy: Can you guys, I pose this question to when he appears yesterday and when I framed it out, part of the response was there was a rosy outlook so I'll give that as a caveat to you. But can you share with us, I'm curious and we're not, I'm not asking for a specific 25 guidance, but if the Fed continues with
Gerard Cassidy: Dropping rates the way they appear to be in terms of the forward curve and their own outlook. And we actually go from an inverted yield curve that was lived with for over two years now to a positively sloping curve with the front aim drops to 33.5 a long and stays around 4 to 4.5. Can you share with us what kind of impact that may have on your net interest income growth for 25?
Unknown Executive: Yeah, obviously, Gerard, we'll give more detail in next year on 2025, but if we can actually give a little bit more steepness in the curve, if the inversion out of the curve, that is very powerful for us, feminine eye perspective from here, because we would expect to see some release on the liability side of the balance sheet. We do continue that confidence that we will get off, and the thing that's not reflected in our flow of our guidance right now is an assumption that we're going to be able to maintain the fixed rate assets, spreads. We do assume that there is compression, as rates come down, and if we were to get to a normal shaped curve, there would be more benefit than from the fixed rate asset replacing, and we would also have a little bit of opportunity to get some a little bit more economics out of duration in the security portfolio, and then the swap portfolio over time.
Speaker Change: Yeah, obviously, George, we'll give more detail in next year on 2025, but if we can actually give a little bit more steepness in the curve, if the inversion out of the curve, that is very powerful for us, some of them and I respect it.
Speaker Change: from here, because we would expect to see some relief on the liability side of the balance sheet. We do continue to have confidence.
Speaker Change: and the thing that's not reflected in our flow of guidance right now is an assumption that we're going to be able to maintain the picture.
Speaker Change: street
Speaker Change: Fred, we do assume that there is compression, as rates come down, and if we were to get to a normal shape curve, there would be even more benefit than from the fixed rate asset replacing. And we would also have a little bit of opportunity to get some a little bit more economics out of duration in the security portfolio, and then the software portfolio.
Unknown Executive: So that'd be a really productive environment for us, and we would see it over time; you would see a significant expansion to do that.
Speaker Change: Robert Tom, so that'd be a really productive environment for us and we would see it over time you would see a significant experience.
Unknown Executive: Yeah, yeah, and at least for what it's worth, Gerard, I don't know that I see your outlook as being overly rosy in that regard. I just think it's probably a reflection of what both the Fed's actions and the data would tell us is realistic. It probably feels rosy because we just haven't seen it in an environment like that over a very long time, but it was a very long time period, quite 20 years or something like that, right? Either we had absolute rates at zero on the front end and a little bit of slope, but we had this situation now where the front end was elevated, and you had a historic level of diversion without a recession.
Speaker Change: Andrew, yeah, yeah, at least for what it's worth to learn. I don't know that I see your outlook is being overly rosy in that regard. I just think it's probably a reflection of...
Speaker Change: What both the Fed's actions and the data would tell us is realistic. It probably feels rosy because we just haven't seen an environment like that over a very long time. Very long time period, 20 years or something like that, right? Either we had absolute rates at zero on the front end and a little bit of slope, but we've had this situation now where the front end was elevated and you had a historic level of inversion without. Now, let's see if we can get out of here.
Unknown Executive: If the Fed manages to land the plane here, the front end comes down. I think our view that has done that the 10-year was probably going to be stickier, just you're talking about on an intermediate term basis. You know, inherently more inflationary dynamics, including the domestic manufacturing, industrial policy, the green energy transition, and the historic level of fiscal deficits that were running, like those are all things that should work against the long end of the curve moving meaningfully lower, and potentially even you could see if the Fed settles out of the three or three and a half, the long end of the curve move up a little bit, so you get more of a normal term premium.
Speaker Change: A Recession.
Speaker Change: If the Fed manages to land the plane here, that front end comes down, I think our view.
Speaker Change: That has been that 10-year was probably going to be stickier, it's just you're talking about
Speaker Change: on an intermediate term basis, you know, inherently more inflationary.
Speaker Change: Dyniamx, including the domestic manufacturing industrial policy, the green energy transition. They get historic level of fiscal deficits that we're running like those are all things that should work again.
Speaker Change: The long end of the curve moving meaningfully lower, and potentially even you could see, you know, if the Fed settles out of the, you know, three or three and a half, the long end of the curve move up a little bit. So you get more of a normal term premium. That sort of an environment, if it doesn't come along with, you know, some other issue would be a really wonderful one for the balance sheet portion of our, you know, of our revenue.
Unknown Executive: That sort of an environment, if it doesn't come along with some other issue, would be a really wonderful balance sheet portion of our revenue.
Unknown Executive: Can you guys remind us, you talked about lifting up the buyback in the fourth quarter, branding, you talked about how the tangible books, value, accretion, how it's going to come through just to burn off of that port in the security portfolio for the end of 25.
Speaker Change: Very good. And then, can you guys remind us, you talked about lifting up the buyback a bit in the fourth quarter, Brian , you talked about how the tangible book value or creation, how it's going to come through just the burn off of that port in the security portfolio for the end of 25. Can you remind us in an environment where you know what the Basel 3 end game requirements are, which hopefully we will, obviously by this time next year, what should we expect in terms of how much of the capital that you guys are comfortable giving back to shareholders as a percentage of earnings, for example, indivisiveness in buybacks.
Unknown Executive: Can you remind us, in an environment where you know what the Basel III end-game requirements are, which hopefully we will obviously buy this time next year, what should we expect in terms of how much of the capital that you guys are going to be able to give back to shareholders as the percentage of earnings, for example, in dividends and buybacks. Yeah, our target right now in normal life environments, we'd like range from a dividend payout ratio perspective. The sheer buyback, ultimately, is driven by how much capacity we have relative to organic growth, because we do our preference would be to continue doing best on the organic thought.
Speaker Change: Yeah, our target right now in normal life environments we like being in say 35 to 45% range from a dividend, pay out ratio of respect.
Speaker Change: it
Speaker Change: The sheer buyback ultimately is driven by how much capacity we have relative to organic roads. Because we do our preference would be to continue doing best on the organic thought. When we see a good disc adjusted returns, and then with what's left, we manage capital via the sheer buyback.
Unknown Executive: And then we see good, good adjusted returns, and then with what's left, we manage capital via the sheer buyback, continue to feel good about the capital generation that we've been seeing, that two to three hundred million dollars a sheer buyback, feel about the right level.
Speaker Change: Continue to feel good with the capital generation that we've been seeing, that two to three hundred and ninety dollars of share buybacks feel about the right level. This quarter, we saw a little bit of benefit in RWA, which allows us to potentially have a little bit more share buyback but with some longer coming in next year, hopefully we'll be talking about a little bit lower by back of the time just because we've got a lot more organic opportunity.
Unknown Executive: And this quarter, we saw a little bit of benefit in our WA, which allows us to potentially have a little bit more sheer buyback, but with some longer coming in next year. Hopefully, we'll be talking about a little bit lower buyback of the time, just because we've got a lot more organic opportunities to invest in.
Unknown Executive: Very good. Thank you, guys.
Speaker Change: Burgas, thank you guys.
Mike Mayo: Your next question comes from the line of Mike Mayo of Wells Fargo Securities; your line is open. All right, just to follow up on the, he said, the loan production is the highest in five quarters, and then quarter of a quarter longer off the flat, all right. So if you could just give a little bit more detail, like how much would bones have grown without pay downs, and why aren't you seeing more of this, that it sounds like you said there's times of life, but, you know, it's a bigger than a bread box, sort of what you think might come ahead.
Speaker Change: Thank you.
Speaker Change: Your next question comes from the line of Mike Mayo of Wells Fargo Securities, your line is open.
Mike Mayo: Hi, just to follow up on the loan production as the highest in five quarters.
Mike Mayo: and then the quarter of a quarter longer off the flat, right? So if you could just give a little bit more detail, like...
Mike Mayo: Now, how much would bones have grown without pay downs and why aren't you seeing more of this? It sounds like you said there's times of life, but you know, it's a bigger than a breadbox, sort of what you think might come ahead at thanks.
Unknown Executive: Thanks. Well, yeah, thanks, Mike. The pay downs for the quarter were around $900 million, you know, bit elevated from what we were typically seeing in some of the portfolios, as well as we had a utilization headwind of about 1% because we did see them at all the utilization moved down. That 1% decrease with another say, $100 million to the combination of those two were decent driver. Ultimately, from a overall average loan growth and the period of longest perspective, we're not expecting continued pressures at this point, and we've seen utilization stabilize in the second half of a quarter, and in the beginning of this quarter, so that doesn't feel like a headwind for us right now. The capital market activity, you know, obviously it was a very robust capital market activity in the second quarter compared to the third quarter. We do think that set into some of the pay downs behaviors that we're seeing, but from here, we're expecting to get back to a little bit more normalized, love on. We think that helps them with one growth from here.
Mike Mayo: Thanks, Mike.
Speaker Change: Paydowns for the quarter were around $900 million, a bit elevated from what we would typically see in some of the portfolios, as well as we had a utilization headwind of about 1% because we did see the overall utilization moved down, that 1% decrease was another say $100 million. So the combination of those two, with decent driver, ultimately, from an overall average lung growth and an repeated longer percentage. We're not expecting continued pressures at this point and we've seen utilization stabilized in the second half of the quarter and in the beginning of this quarter. So that doesn't feel like.
Speaker Change: Headwind for us right now. The Capitol Market's activity, obviously it was a very robust Capitol Market's activity. In the second quarter, the third quarter, we do think that fed into some of the pay down behaviors. [inaudible]
Speaker Change: Anderson.
Speaker Change: But from here we're expecting to get back to a little bit more normalized level and we think that helps then with lung growth from here.
Unknown Executive: And as far as the end of Pennsylvania had expectations, you know, the next several quarters over the next year, are you willing to, because any number yet, you know, be more than 1% or 2% or, I mean, I'm sure you're going to hear it. We gave average loan growth guide, obviously up 1% sequentially. We'll get into 25 and more to become next year. But in general, our objective would be to grow with a market plus a point or two. Historically, the banking industry grows in mind with, you know, GDP, nominal GDP type levels, and if we get back to that kind of environment, then the industry gets back to a little while I really grow. We would expect to be in mind.
Speaker Change: and as far as the dear depends on what you're talking about.
Speaker Change: kind of expectations, you know, for the next several quarters over the next year, are you willing to go as any number yet? You know, be more than one percent or two percent? I mean, I'm sure you're going to get. We get, we get average long growth guide, obviously, of up one percent sequentially, we'll get into 2025 and more detail next year, but in general our objective would be to grow with a market plus a point or two, historically the banking industry grows in mind with your GDP nominal GDP type.
Speaker Change: Babones.
Speaker Change: and if we get back to that kind of environment and the industry gets back to overall, I agree, growth, we would expect to be in mind if not outperform.
Unknown Executive: John, this one out before the end. Yeah, I think that's, yeah, like it's, and I, that one thing I, maybe I'd add here, I am of the view that the factors that would lead to a more favorable environment for long growth inside the banking system are potentially in front of us, subject to one who wins the election and probably more importantly what of the things that both candidates are campaigning on actually make their way into policy and how they elect to govern. What we hear from clients when I'm out in the field is that it's a one that elevated level of rates have been challenging because there's a capital investments that don't make sense that just don't pencil out in an environment where rates are higher to because they are uncertain about what we're going to see in the election.
Speaker Change: the strum
Speaker Change: Yeah, I think I think it's like it's one thing I'd be able to add.
Speaker Change: Peter.
Speaker Change: I am of the view that the factors that would lead to a more favorable environment for long growth inside the banking system are potentially in front of us. Subject to one who wins the election and probably more importantly what of the things that both candidates are campaigning on actually make their way into policy and how they elect to govern what we hear from clients when I'm out. So stay in the field.
Speaker Change: is that it's one that elevated level of rates have been challenging because there's a capital investments that don't make sense, that just don't pencil out in an environment where rates are higher to because they are uncertain about what we're going to see in the election. They have been using cash flow from the businesses to pay down debt in lieu of investing in other places. And three, you have this big build up in inventory. In the 21, 22, 23 timeframe associated with people moving, I think we refer to it as the shift from just in time to just in case.
Unknown Executive: They have been using cash flow from the businesses to pay down debt in lieu of investing at another places in three. You have this big build-up in inventory at the 21, 22, 23 timeframe associated with people moving. I think we refer to it as the shift from Just in Time to Just in Case. In inventories, as rates came up that we have seen the, I think the term for it that one of our distribution clients are also distribution clients use one of the last week with defaulting. So less inventory, less build material across supply chains, which in turn, and a focus on more inventory turns just get in the balance sheet to work harder, which reduces the revolving credit borrowing needs.
Speaker Change: in Inventories. As rates came up, we have seen, I think the term for it, that one of our distribution clients are also distribution clients used when I was out in the last week with destocking. So less inventory, less bill material across supply chains, which in turn, and a focus on more inventory turns, just getting the balance sheet to work harder, which reduces the revolving credit borrowing needs. Like that can't go to zero, so you're not going to have a head on there. If interest rates come down, and more M&A and capital investment starts to make sense, that hasn't worked, you should see a pickup on that front.
Unknown Executive: Like that can't go to zero, so you're not going to have a head when there. If interest rates come down and more M&A and capital investments starts to make sense that hasn't worked, you should see a pick up on that front. And then if we continue to see, you know, more certainty as it relates to the trajectory of the economy and have the uncertainty attached to the election of the equation. I think we could see a better environment across the banking system, and that coupled with the sales head counts that we continue to make. We referenced that in the prepared remarks should support the, you know, act to above market growth rate on the lending side of the equation that Brian referenced earlier.
Speaker Change: And then if we continue to see, you know, more certainty as it relates to the trajectory of the economy and have the uncertainties after the election had the equation, I think we could see a better environment across the banking system and that coupled with the sales head counts that we continue to make we reference that in the prepared room.
Speaker Change: Mark, should support that, you know, at to above, market growth rate on the lending side of the equation that Bryan referenced earlier.
Unknown Executive: Great. Thank you.
Ebrahim Poonawala: Your next question comes from line of every him Punawala of Bank of America; your line is open. Good morning. Morning. I guess there's a couple of follow-ups. One, maybe starting with loan group. Tim, you mentioned two things. One from a fifth, third standpoint. Are we still laughing? Deal is king or running off the shared national credit book. I think it's down 11% year over year. Just give us your sense of is that book going to continue to decline as you kind of reduce your exposure there. And secondly, in your business, are you seeing any competition from nonbank, direct lenders, private credit?
Speaker Change: Great, thank you.
Speaker Change: Your next question comes from line of Vibrihim Punawala of Bank of America. Your line is open.
Speaker Change: Good morning.
Vibrihim Punawala: Morning. I guess there's a couple of follow-ups. One, I may be starting with lone group, Tim, you mentioned. Two things. One, from a fifth, third standpoint, are we still lapping, de-risking or running off the shed national credit book? I think it's down 11% year over here. Just give us your sense of, is that book going to continue to decline as you kind of reduce exposure there? And secondly, it's going to continue to decline. [inaudible]
Vibrihim Punawala: In your business, are you seeing any competition from non-bank, direct-landers, private credit, that looks different today than it would have three, four, five years ago.
Unknown Executive: That looks different today than it would have three, four, five years ago.
Unknown Executive: Yeah, sure. Good question. So we should be at the inflection point on the sort of impact of the RWA diet by the end of the year. I think we talked last year about the fact that we were trying to get everything done in the fourth quarter. There would be a little bit of a spill over into the first as you just got through normal timing, but we should be reaching the inflection point on that front where you don't have. The, you know, the, I let's be risking, you bring them that focus on what would the profitability, the unit economics of those relationships look like in a world where you had a different perspective on capital levels.
Speaker Change: Yeah, sure. Good question. So we should be at the inflection point on the sort of impact of the RWA diet by the end of the year. I think we talked last year about the fact that we were trying to get everything done in the fourth quarter. There would be a little bit of a spill over into the first, as you just got through normal timing. But...
Speaker Change: We should be reaching the inflection point on that front where you don't have the, you know, the, I need less to be risking you bring it in a focus on what would the profitability, the unit economics of those relationships look like in a world where you had a different perspective on capital levels. And the value of the corporate cash that comes along with some of those larger relationships.
Unknown Executive: And the value of the corporate cash that comes along with some of those larger relationships. As it relates to private credit, but we do see it at the margins, principally, and leveraged lending space. What I would tell you has happened is their focus on less structure, faster execution, then has a little bit of a bleed over in other areas. And there is no question that, you know, that things that some of the private lenders are willing to do are not in line with the way that we want to run our probability. It was a financial time, the Journal, but there was a piece about a week ago in the paper that talked about payment and kind.
Speaker Change: As it relates to private credit, but we do see it at the margins, principally in leverage lending space. What I would tell you has happened is their focus on less structure, faster execution, then has a little bit of a bleed over in other areas. There is no question that, you know, that things that some of the private lenders are willing to do or not in line with the way that we want to.
Speaker Change: on our popularity was the financial.
Speaker Change: Time.
Speaker Change: The Journal, but there was a piece about a week ago in the paper that talked about payment and kind.
Unknown Executive: Or where I come from, negative amortization lending was between the order and the third of the portfolio. That most of the major private credit shops, that is definitely not something you would ever see at Fifth Third. In an environment where the economic backdrop is benign. And where you don't have, you know, a large percentage of your companies operating at distress levels. It's just odd to see that amount of pick lending going on. So, you know, they're willing to do those things, and we're not. My definition, they're going to scrape the most indebted companies out of the banking sector.
Speaker Change: or where I come from, negative amortization lending was between a quarter and a third of the portfolios at most of the major private credit shops. That is definitely not something you would ever see at Fifth Third in an environment where the economic backdrop is benign and where you don't have a large percentage of your companies operating at distress levels. It's just odd to see that amount of pick lending going on. So you know they're willing to do those things and we're not by definition they're going to scrape the most indebted companies out of the banking sector.
Unknown Executive: And even the clients, we put a little bit of detail on the next portfolio on slide 24 of our slides. And you know, 31 billion, our portfolio is down 11 percent year over year. So we are still facing laughing from the last one. But was the point that we had at a point where the 31.2 is close to where this book should what amount. I think you're going to continue to see some runoff, but we do think is getting back to the point where you'll start to see some production coming in and offsetting. Not may not be exactly at the floor, but the details should definitely be moderating.
Speaker Change: and even in the headlines, we've put a little bit of detail on the SNF portfolio on slide 24 of our slide, and the 31 billion portfolio is down 11% year over year.
Speaker Change: here. But we are still facing lobbying some of that, at one.
Speaker Change: But was the point that we had at a point where the 31 point is close to where this book should bottom out.
Speaker Change: I think you're going to continue to see some runoff, but we do think you're getting back to the point where you'll stay at the season production coming in and off.
Speaker Change: Not, you may not be exactly at the floor, but the decreases should definitely be moderating. The CIB pipeline, the middle market pipeline, which I think we referenced in response to Mike's question, is that an all time record level and the CIB pipeline, which would be where the majority of the shared national credits would originate is at the highest level it has been in the year. So that you're seeing the turn there. Which should support the decline and runoff increase in production and an inflection point in one balance.
Unknown Executive: The CIV pipeline, the middle market pipeline, which I think we referenced in response to my question, is that an all-time record level 10. The CIV pipeline, which would be where the majority of the shared national credits. What originate is at the highest level it has been in the year. So that you're seeing the turn there, which should support the decline and runoff increase in production and then in flexion point one balances.
Unknown Executive: And just the other question on capital allocation means you stocks done well. I'm not saying it's expensive, but it stayed well on tangible book when you look at it.
Speaker Change: And just the other question on capital allocation means you're stocks done well. I'm not saying it's expensive, but it's stayed well on tangible work when you look at it. Why not hold excess capital as opposed to picking up the piece of buybacks given that we might be in an improving economy if that happens more capital good for growth. If it's worse, it adds defensibility just talk through in terms of how you go through capital allocation and the whole. [inaudible]
Unknown Executive: Why not the whole excess capital as opposed to picking up the piece of buybacks given that we might be in an improving economy? If that happens, more capital good for growth; if it's worse, it adds defensibility. Just talk to in terms of how you go through capital allocation and the whole discussion or analysis around holding on and building some more excess die power and opposed to accelerating buybacks from here. Yeah, we feel really good to talk about the earnings trajectory of the company, and we think, given that, we feel like our stock is you can use to be a good bargain for us, and we think it's a good investment for us from a corporate perspective.
Speaker Change: Discussion or analysis around holding on and building some more access, die power and opposed to accelerating by-backs from here.
Speaker Change: Yeah, we feel really good to talk about the earnings trajectory of the company and we think given that, we feel like our stock is, it can use to be a good bargain for us and we think it's a good investment for us from a corporate perspective, we look at a couple things on that front, we're generating a lot of capital every quarter and so that actually gives us the ability to be very dynamic with our capital allocation decision.
Unknown Executive: We look at a couple of things on that front; we're generating a lot of capital every quarter, and so that actually gives us the ability to be very dynamic with our capital allocation. Division decisions. We have a lot of confidence that we're going to be able to generate the capital necessary for organic growth. And then if we wanted to slow down capital district, we shouldn't be a share-by-backed because we see market coming through, and we need to get no defensive. We would be able to do that. Another component is just, you know, when you think about our industry and the 10% cost of equity, sitting on access capital is a high cost for our shareholders.
Speaker Change: We have a lot of confidence that we're going to be able to generate the capital necessary for organic growth and then if we wanted to slow down capital distribution, be a share bybacks, because we see more opportunity and we need to get in the defensive we would be able to do that.
Speaker Change: and another component is just when you think about our industry and the 10% cost of equity, sitting on XS Capital is a high cost for our shareholders. And so being in a position as we are right now and being able to go ahead and make some decisions and deploy at a time where we can seem to be a really positive about our future.
Unknown Executive: And so being in a position as we are right now, and being able to go ahead and make some decisions and deploy at a time where we continue to feel really positive about our future vector as a company, and knowing that we have the flexibility with the income profile and the stability that we have going forward. To be generated the capital needed to, and if we think different opportunities with the income themselves, that's really the thought process on how we're thinking about capital allocation. Yeah.
Speaker Change: and beer as a company.
Speaker Change: and knowing that we have the flexibility with the income profile and the stability that we have going forward. To be generated to capital when we need to, and if we think different opportunities would present themselves, that's really the thought process on how we're thinking about capital allocation.
Unknown Executive: No, thank you.
Erika Najarian: Your next question comes from the line of Erica, Nigerian of UBS; your line is open. Hi, good morning. My first question is for you, Bryan. So you indicated that your deposit beta so far on the recent cuts are in the mid 40s. You know, as you think about the speed of index deposit repricing, and then retail, could you give us a sense of what you think the cadence could be as it goes through the next five quarters? So a few of your peers have noted that it might not be a straight line, you know, pass to the terminal beta, given how quickly corporate can reprise, and, you know, retail has sort of been awoken, so to speak, in terms of higher rates.
Speaker Change: Thank you.
Speaker Change: Your next question comes from the line of Erica, Nigerian of UBS, your line is open.
Speaker Change: Hi, good morning!
Speaker Change: My first question is for you, Bryan, so you indicated your deposit beta so far on the recent cuts.
Speaker Change: are in the mid-40s. You know, as you think about the speed of index the positive repricing.
Speaker Change: and then retail, could you give us a sense of what you think the cadence could be as it goes through the next five quarters?
Speaker Change: So a few of your peers have noted that it might not be a straight line, you know, path to the terminal data given how quickly corporate can reprise and, you know, retail has sort of been awoken so to speak in terms of higher rates. You know, two and three quarters are three percent. What do you think your natural spread is or natural natural deposit rate is in that environment?
Bryan Preston: So if you could speak to that, and you need to speak a little bit to, as you think about your deposit, you know, we haven't seen a neutral rate that's not zero for so long. So maybe help us get a sense of if we get a neutral rate of, you know, two and three quarters or three percent, what do you think your natural spread is or natural, natural deposit rate is in that environment? Yeah, and the matter is that is obviously a very interesting question. The shape of the curve is going to matter a lot in that scenario as well.
Speaker Change: Yeah, the matter is that is obviously a very interesting question. The shape of the curve is going to matter a lot in that scenario as well. When we think about the pacing of how the beta will come through, like you said, it is the commercial deposits will come through very quickly. The retail takes a little bit longer, the two primary drivers for us on that. It is the guarantee periods on the promotional offerings, which tend to be between 45 and 90 days.
Bryan Preston: You know, when we think about the, when we think about the pacing of how the beta will come through, like you said, it is the commercial deposit will come through very quickly. The retail takes a little bit longer between primary drivers for us on that. It's the guaranteed periods on the promotional offerings, which tend to be between, say, 45 and 90 days, and then it's the maturity of your CD portfolio. And as I mentioned earlier, 75 percent of our CDs will mature between now and the end of the first quarter. So to get the rest of the beta and get to that kind of cumulative beta that we have been targeting where you have five to five 50s kind of beta.
Speaker Change: and then it's the maturity of your CEO portfolio and as I mentioned earlier, 75% of our TVs will
Speaker Change: Richard.
Speaker Change: is now in the end of the first quarter. So, to get the rest of the beta and get to that kind of cumulative beta that we have been targeting where high-suppyed 50s kind of beta. For us, it'll take about two quarters because the CD repricing is going to be a component of that, now that that's 13 billion.
Bryan Preston: For us, it'll take about two quarters because the CD repricing is going to be a component of that, now that that's 13 billion dollars. From the natural, from the natural level perspective, I think that is really tough to estimate, and then we're sitting here. At peak grades, we were at a 2.99-ish was our peak interest rate in court of other costs, versus a 5.50 set on level. We would expect to see a little bit of compression potentially in that spread, but being able to maintain 150. Two hundred bases points of the Podis Fred, scenes like a potentially achievable scenario.
Speaker Change: House.
Speaker Change: From the natural level perspective, I think that is really tough to estimate. I mean, we're sitting here at peak rates, we were at a 2.99ish, was our peak interest rate in court of public cost versus a 550 set fund level. We would expect to see a little bit of compression potentially in that spread, but being able to maintain 150 to 200 basis points.
Speaker Change: and the father's friend seems like a potentially achievable scenario. One big question on that, Erica, another one that would obviously be a big question.
Bryan Preston: One big question on that, Erika; another one that would obviously be a big question that's just where it does. How does the magnitude of longer change over time? And if you've got a decent crochet, back to Gerard's question, and you've got opportunities for longer. You're going to have some opportunities to be a little bit more competitive to raise more deposits, and ultimately drive better NIMI. And at the end of the day, we're now managing to the positive beta, we're managing to NIMI and profitability trajectory, and those are the decisions from the trade-offs from that.
Speaker Change: was where it does, how does the magnitude of long growth change over time? And if you've got a decent crochet back to Gerard's question, and you've got opportunities for long growth, you're going to have some opportunities to be a little bit more competitive to raise more deposits and ultimately drive better NII. And at the end of the day, we're not managing to deposit the data, we're managing the NII and profitability project.
Timothy Spence: Got it. And my second question is for Tim; there's him to feedback from investors. Has always been quite positive in terms of the forward-looking way of how you look at the world. And as we think about 2025, I guess it feels like giving record NIMI and, you know, your fee income should benefit if activity levels come back in general in an even bigger way next year. It feels like the expense for a rate that you've posted year over year to this quarter to three percent times. It feels more appropriate.
Speaker Change: three and
Speaker Change: and those are the exceptions in the trade-offs one day.
Speaker Change: Got it. My second question is for Tim. There's him to feedback from investors. It has always been quite positive in terms of the forward-looking way of how you look at the world. And as we think about 2025, I guess it doesn't, it feels like given record NII and, you know, your fee income should benefit if activity levels come back in general in an even bigger way next year. It feels like the expense run rate that you post that year over year is this quarter to three percent. It feels more appropriate. You know, obviously assuming that revenues grow above that. You know, as we think about 2025, is it right for us to
Timothy Spence: You know, obviously assuming that revenue grow above that, you know, as we think about 2025, is it right for us to, you know, until we get guides from you, put gross and expenses as a placeholder, and as we think about 2025, what are the big projects that you feel like you're ready to retackle and revisit that you may have pulled back on in 24, because the NIMI dollars were coming down. Yeah. So, thank you. That I think there was a compliment in the question in there. I appreciate both. You heard me reference, I think, the old saying that Cincinnati invented hustle in the past, that dates back to Pete Rose's nickname and the fact that he sprinted to first base on a walk.
Speaker Change: and until we get guides from you, put gross and expenses as a placeholder. And as we think of that 2025, what are the big projects that you feel like you're ready to retackle and revisit? That you may have pulled back on in 24 because the NII dollars were coming down.
Speaker Change: Yes, I am.
Speaker Change: Thank you. I think there was a compliment in the question in there. I appreciate both.
Speaker Change: You heard me reference, I think they were saying that Cincinnati invented hustle in the past, that dates back to Pete Rose, his nickname and the fact that he sprinted to first base on a walk. I think that ethos is, I think, a part of the way that we try to run the company, right, is to sprint to first on a walk. So we try to work on next year's problems in the year after that, this year is opposed to waiting for that environment.
Timothy Spence: I think that that the ethos is, I think, a part of the way that we try to run the company, right, is to sprint the first on a walk. So, we try to work on next year's problems in the year after that. This year is opposed to waiting for that environment to materialize. And we have the part of why I think we made the NIM turn right on NIM trust and then grew in the first quarter before most of our peers. The NII inflected positive and the second quarter over the first quarter, which was before most of the peers.
Speaker Change: to realize. Part of why I think we made the NIM turn right, our NIM trough and then grew in the first quarter before most of our peers. The NII inflected positive in the second quarter over the first quarter, which was before most of the peers, we got to real sequential positive operating leverage this quarter versus the last quarter and we're saying we'll get there year over year next year. But none of that involved us holding back on investments. We thought we're very important to the company or would make sense, right? We're going to have built 30 plus branches this year in an environment where we were trying to manage expenses. We continued forward on the platform modernization.
Timothy Spence: We got to real sequential positive operating leverage. This quarter versus the last quarter, and we're saying we'll get there year over year next year.
Timothy Spence: But none of that involved us holding back on investments we thought were important to the company or would make sense. Right, we are going to have built 30 plus branches this year in an environment where we were trying to manage expenses. We continued forward on the platform modernization. The acquisitions we made on the commercial payment side of the company's last year, we continued to feed this year. And the hiring, as I mentioned, on the Salesforce and both in wealth management and in the mental market have been pretty significant. So you should expect us to do the same sorts of things next year and to expect the company, through other efficiency initiatives, to help self-fund.
Speaker Change: Acquisitions we made on the commercial payment side of FinTech companies last year, we've continued to feed this year, and the hiring, as I mentioned on the sales force, and both in wealth management and in the middle market, have been pretty significant. So you should expect us to do the same sorts of things next year, and to expect the company through other efficiency initiatives to help self fund the investments along the way, and we don't view strategic planning as an investment request process. It's principally a resource allocation process.
Timothy N. Spence: You know, the investments along the way, and we don't view strategic planning as an investment request process. It's principally a resource allocation process.
Unknown Executive: So I don't know that I helped you with a specific number for 2025; you have to wait till January to get there. But the annualized expense run rate of the bank over a period of time has been, call it 3%, if you look at it. So that certainly, if you were going to use the past average through more benign periods and more challenging periods, would be where you'd start. Galgen, thanks so much. Thanks a lot.
Speaker Change: So I don't know that I helped you with a specific number for 2025. You have to wait till January to get there. But the annualized expense run rate of the bank over a period of time has been call it 3% if you look at it. So that certainly if you were going to use the past average through more benign periods and more challenging periods would be where you'd start.
Speaker Change: Galen, thanks so much.
Manan Gosalia: Your next question comes from the line of men in Gufalia of Morgan Stanley; your line is open. Hey, good morning. I wanted to ask about index deposits. Can you talk about how they've behaved over time?
Speaker Change: That's what we're going to do.
Speaker Change: Your next question comes from the line of men in Gophalia of Morgan Stanley, your line is open.
Speaker Change: A good morning.
Speaker Change: I wanted to ask about index deposits. Can you talk about how they've behaved over time? So I guess the question is that as rates fall and the rates on those index deposits fall, is there a chance that some of those move into other deposit products with exception pricing, or does that not really happen based on historical experience?
Unknown Executive: So I guess the question is that as rates fall and the rates on those index deposits fall, is there a chance that some of those move into other deposit products with exception pricing, or does that not really happen based on historical experience? You'll see some people that try to do some negotiations on deposit costs. Those are things that always occur, but those are things that we are typically able to manage fairly well. The reality is you get paid a better spread as a deposit tour on an index deposit because you're taking the rest ultimately on market movements.
Speaker Change: You'll see some people that try to do some negotiations on the positive concepts, those are things that always occur, but those are things that we are typically able to manage for.
Speaker Change: Really well.
Speaker Change: The rally is you get paid a better spread as a depositor on an index deposit, because you're taking the rest ultimately.
Unknown Executive: Whereas on a managed account, it's typically a wider spread because we have more ability to manage it. So we was something that we had good experience with the heating controlling it through our pricing and through our discipline around that process. We're not overly concerned about reverse migration from index back in the mandatory being a headwind from a rate of percentages. Got it.
Speaker Change: on Market Movement, whereas on a managed account.
Speaker Change: Typically, a wider spread because we have more ability to manage it. We have something that we have had good experience with my heating, controlling it to our pricing and we're at this appointment around that process. We're not overly concerned about reverse migration from index back in the mandatory being a headwind from a beta perspective.
Unknown Executive: And then maybe just separately on credit on slide 28, you're showing NCOs and NPAs reaching normalized levels. I know you noted that you are not seeing any signs of credit weakening. Can you give us more color there? You know, what gives you some confidence that things are just normalizing here is that rates are going down to that help. You on the credit side, is it just what you're seeing on the roll rates, maybe you know what helps us this to stay alive from here. Yeah, it's great.
Speaker Change: Got it. And then, you know, maybe just separately on credit on Friday 28th, you're showing NCOs and NPAs reaching normalized levels. I know you noted that you're not seeing any signs of credit weakening. Can you give us a more color there? You know, what gives you some confidence that things are just normalizing here? Is it that rates are going down to that helps you on the credit side? Is it just what you're seeing on the role rates? Maybe, you know, what helps us this to stabilize from here?
Unknown Executive: I'll take that one couple things. You look at the link and see if the link continues to be at all-time well levels. I would criticize assets actually went down by $8 million quarter over quarter. We had we had the increase in NPAs. On the commercial side, those were driven by five names and five different industries. We've been very consistent in talking about a very diverse portfolio, and it continues to be very diverse. On the consumer side, we've seen a little bit of softness on dividend. They're a little bit of softness in the RV portfolio. And we look at the 2223 original nation venues.
Speaker Change: Yeah, it's Greg, I'll take that one couple things, look at how the wave-on series of the wave-on series continues to be up.
Speaker Change: Both on low levels, I could have sized assets actually went down by $8.80 quarter over quarter.
Speaker Change: We had the increase in MPAs. On the commercial side, those were driven by five names and five different industry. We've been very consistent in talking about a very diverse portfolio and the continues to be.
Speaker Change: Very diverse. On the consumer side, we're seeing a little bit of softness on dividend. See a little bit of softness in the RV portfolio. You look at the 22, 23 origination damages. They're underperforming across many of the consumer asset classes. We see the same thing in the portfolio specifically in dividend and RV. But the securitization data from other originators would tell you the same thing. We're actually outperforming those indexes. The securitization data by almost 50, 60 basis points. The securitization data by almost 50, 60 basis points.
Unknown Executive: They're underperforming across many of the consumer asset classes. We see the same thing in the portfolio, specifically in dividend and RV. But the curization data come other originators will tell you the same thing. And we're actually outperforming those indexes. That's a curization data by almost 50, 50 basis. Police.
Unknown Executive: So, I would expect David to be a little bit elevated for the next quarter to the highly confident that it will work through those venues and it comes back down to more and more in the lives of the level and that's got one, one, one, five level. So, it's not seeing anything within the portfolio; it's commercial or consumer that's causing additional concerns. It's been pretty stable; our borrowers have continued to behave and seeing commercial real estate portfolio. We've got virtually no dual income schemes, very, very minimal non-performing assets in that commercial real estate portfolio. So, across the board, that's a vocation; that's strategic play of building out through the cycle of portfolio has played well for us, and I would expect that to continue in the future.
Speaker Change: So I would expect David in to be a little bit elevated, but the next quarter, too, that's going to be highly confident that it will work through those venues and it comes back down to more and more in the lives of level and that's got one, one, one, one, five, and level.
Speaker Change: So we've not seen anything within the portfolio as commercial or consumer that's causing additional concern. It's been pretty stable. Our borrowers have continued to behave, we've seen the commercial real estate portfolio. We've got virtually no delinquencies, very, very minimal non-performing assets in that commercial real estate portfolio. So across the board, that's diversification, that's strategic play of a building out a through the cycle portfolio has played well for us and I would expect that to continue in the future.
Matt O'connor: Great, thank you. Your next question comes from the line of Matt O'Connor of Deutsche Bank; your line is open. Good morning. On slide. Hey, Dan, you've got some pie charts show you showed before, just showing the mix shift from the Midwest to being more balanced. And I guess the question is, as we look out in that few years, we show this point getting to 50, 50, which is still a pretty meaningful reshift from here. So, how do you get there? It's a simply harvesting what you've done; the combination of harvesting and building, is you're a buy component of that as well?
Speaker Change: Great, thank you.
Speaker Change: Your next question comes from the line of Matt O'Connor of Deutsche Bank, your line is open.
Matt O'connor: Good morning. On slide ten, you've got some pie charts show you showed before just showing the mix shift from the Midwest to being more balanced. And I guess the question is as we look out the next few years, we show the split getting to 50-50, which is still a pretty meaningful reshift from here. So how do you get there? Is it simply harvesting what you've done, a combination of harvesting and building? Is there a buy component of that as well?
Unknown Executive: Yeah, there's no buy component in there. That's the whole fashion way, which is one new branch at a time in the right marketing and product strategies to support the increase in distribution. So, if you look at the branches, we build, Matt, they're performing very well. We talked in the past about the fact that performance at this stage and having built more than 100 of them is pretty predictable. And they reach up point where they sort of saturate their catchment area in about seven years, right? That continuing growth, so the average age of the denovo right now is going to be like, call it two years, two and a half years at most.
Speaker Change: Yeah, there's no buy component in there. That's the whole fashion way, which is...
Speaker Change: One New Branch at a time in the right marketing and product strategies to support.
Speaker Change: The Increase in Distribution, so if you look at the branches we build, Matt, they're performing very well. We talked in the past about the fact that performance at this stage and having built more than 100 of them is pretty predictable.
Speaker Change: and they reach a point where they sort of saturate their catchment area in about seven years, right? They break even within two and then they make this pivot to continuing growth. So the average age of the de novo right now is going to be like call it two years, two and a half years at the most. So there is a five year tailwind will get from the hundred that are already in the ground and operational. Plus we have been building about 30 to 35 a year that number should move up into the sort of 40 to 50 range on an annualized basis.
Unknown Executive: So there is a five-year tail wing; we'll get from the 100 that are already in the ground and operational. Plus, we've been building about 30 to 35 a year. That number should move up into the sort of 40 to 50 range on an annualized basis, just based on what we have in the pipeline. And as those branches come on, you will see that mix shift play out first in the allocation of the physical distribution and then behind that, over time, as they mature, the mix of the deposit base on the retail side overall.
Speaker Change: Just based on what we have in the pipeline, and as those branches come online, you will see that mix shift, play out first in the allocation of the physical distribution, and then behind that over time as they mature the mix of the deposit base on the retail side overall.
Unknown Executive: Okay, so that's super helpful. So a lot of maturing of what you've already done, well, we'll move the needle quite a bit. Well, I mean, just, I mean, you can see if you're here retail deposit growth that I cited from the FDIC summary in the deposits; it's visible there.
Speaker Change: Okay, super helpful. So a lot of the terrain of what you've already done will move the needle quite a bit. You will. And then just, yeah, we, you can skip to your retail deposit growth that I cited from the FDIC summary in the positives.
Unknown Executive: Right here, and then just separately, I noticed in a lot of the question on that, just income and kind of geographically of the NIM, and I'm sorry I missed it, but as you guys talked about this concept of like normalized NIMs, looking out a few years with these six straight out to be pricing and whatever it leads to a vehicle or a curve, any concept of normalized NIMs. Yeah, that's again, it's another tough one because what does the environment look like, what does the shape of the curve look like out in the future? If you just take the cash position that we're holding today, we're at $0.20 billion cash. We're up almost $9 billion here; every billion dollars of excess cash that we're holding is a basis point to have on that.
Speaker Change: It's visible there.
Speaker Change: Thank you. And then just separately, I know there's been a lot of discussion on the interest income and kind of drivefully open them. And I'm sorry I missed if I missed it, but have you guys talked about this concept of like normalize them? Looking out a few years, as you can see straight after repricing and whatever wait to break the bull occur any concept of normalize them.
Speaker Change: Yeah, I mean, that's, again, it's another tough one because what does the environment look like, what is the shape of the curve look like out in the future? If you just take the cash position that we're holding today, we're at, you know,
Speaker Change: at $20 billion of cash. We're up almost $9 billion here over the year.
Speaker Change: Every billion dollars of excess cash that we're holding is a basis point to have us.
Unknown Executive: So just getting 10 billion out over the next year, and hopefully having some opportunities to deploy that into the world and portfolio, that could add 15 to 20 basis points to our name alone. We're going to see them grow from here just with the continued repression of the portfolio, from a fixed rate asset perspective, that will continue to take that just takes a little bit more time to play out. But if you get a little bit of relief on the front end of a more known large curve, get the front end down on that. It's not, it's not on the remote to think we could be talking about, you know, getting back to what was a 315 to 25, then into any reasonable time or anything.
Speaker Change: Well, just getting 10 billion out over the next year and hopefully having some opportunities to deploy that into the loan portfolio. That could add 15 to 20 basis forms to our name alone. We're going to see them go here, just with the continued repressing of the portfolio. From a fixed rate asset perspective, that will continue to take, that just takes a little bit more time to fly out. But if you get a little bit of relief on the front end of a more normalized curve, get the front end down. It's not when we want to thank, we could be talking about getting back to what was 315 to 325.
Speaker Change: and then into an aggregationable time horizon.
Unknown Executive: Okay, that's all.
Christopher Marinac: Thank you very much. Your next question comes from the line of Christopher Marinac of Jamie Montgomery Stock; your line is open. Thanks. Good morning.
Speaker Change: Okay, it's up, we'll thank you very much.
Speaker Change: Your next question comes from the line of Christopher Marinac of Jenny Montgomery Stock. Your line is open.
Unknown Executive: I'm going to ask about some of the large banks who have been placed under regulatory orders this year. Does that create new business opportunities for you beyond your already organic pipeline? I mean, I think any kind there's a limit on someone else's ability to grow. It means that the rest of the industry has to have the capacity to be able to absorb the growth in the market. So I guess in that sense. Yes, that just tactically. I think more strategically; the more discipline you are about the way you run your business. The better you do in moments when there's any sort of disruption somewhere else, right?
Christopher Marinac: Thanks, good morning, I'm going to ask about some of the large banks who have been placed under regulatory orders this year. Does that create new business opportunities for you beyond your already organic pipeline?
Speaker Change: Thanks for watching!
Speaker Change: Yes, Ted just tactically. I think more strategically, the more disciplined you are about the way you run your business, the better you do in moments when there's any sort of disruption somewhere else. Right. So I wouldn't wish significant regulatory problems on anybody. There's no fun to work through, but they do tend to create opportunities at the margins for other banks that are in a strong position and have the ability to grow out. So in an environment where others may not. [inaudible]
Unknown Executive: So I wouldn't wish significant regulatory problems on anybody. There's no fun to work through, but they do tend to create opportunities at the margins for other banks that are in a strong position and have the ability to grow in an environment where others may not. Great.
Unknown Executive: Thank you for that. Just a quick follow-up on sort of some of the returns over time. Does lower interest rates help you get your returns, or does it make it more challenging?
Speaker Change: Great Tim, thank you for that and just a quick follow-up on sort of festive returns over time. There's lower interest rates help you get your returns or it is a big and one-challenging.
Unknown Executive: Lower interest rates, as long as that comes along with a normalization of the yoga, would certainly be very helpful to return over time. A low flat curve, a low flat curve, is a challenging environment for the back industry. Great. Thank you, Brian. Appreciate it.
Speaker Change: Laura interest rates, as long as that comes along with a normalization of the Yoke would certainly be very helpful to return over time.
Speaker Change: A low flat curve, a low flat curve is a challenging environment for the decades of this week.
Michael Lawrence Mayo: Everybody. We have a follow-up question from the line of Mike mail of Wells Fargo Securities. Your line is open. Hey, I was just wondering. This is a big picture question. You guys give the sense that you're investing more for growth than others. Do you have any metric on how much you make in your organic investments and what sort of returns you get on those? I think I'm thinking about the Southeast branches or wealth or commercial payments.
Bryan Preston: Bryan. Great. Thank you Bryan. Appreciate it everybody.
Speaker Change: Who's that?
Speaker Change: We have a follow-up question from the line of Mike Mail of Wells Fargo Securities. Your line is open.
Mike Mayo: Okay, I was just wondering, this is a big picture question, you guys.
Mike Mayo: It gives a sense that you're investing more for growth than others. Do you have any metric on how much you make in your organic investments and what sort of returns you get on those? I think I'm thinking about the South East branches or wealth or commercial payments and kind of goes back to that earlier question. Maybe you shouldn't buy back so much stock if you have so many opportunities for growth. Okay.
Timothy Spence: And kind of goes back to that earlier question, maybe you shouldn't buy back so much stock if you have so many opportunities for growth or high-class problem if you get there. Yeah, I mean, we look at all of these things. The easiest comparable across the different investment types is probably just IRR, Mike, right? In time to break even, so the IRR of the branches in the Southeast has been running in the 18 to 20% range. And the time to break even's been a couple of years, right. If you were to look at the small acquisitions, we've made to support commercial payments, we were targeting IRRs in the 20s.
Speaker Change: You know, high-class problem if you get there.
Speaker Change: Yeah, I mean, we look at all of these things, the easiest comparable across the different investment types is probably just I or I or Mike right in time to break.
Speaker Change: Even. So the IRR of the branches and the southeast has been running in the 18 to 20% range and the time to break even's been a couple of years, right? If you were to look at the small acquisitions, we've made to support commercial payments, we were targeting IRRs in the 20s in those cases in part because you had a more nascent business and less predictable after it than, you know, when you built 100 branches and you know what you're going to get out.
Timothy Spence: In those cases, in part because you had a more nascent business and less predictable. After then, you know when you build 100 branches and you know what you're going to get out of the next location, big build. So, in general, we feel really good about anything that we can get done in that sort of 15 to 25% range, subject to the execution risk that's attached. The more uncertain, the more nascent the strategy, the higher the return you would expect to get out of it. And more proven strategies, you know, obviously the lower the execution risk premium that you would need to place on them.
Speaker Change: of the next 4K.
Speaker Change: Thank you, Bill, so in general we feel really good about anything that we can get done in that sort of 15 to 25% range.
Speaker Change: Subjected the execution risk that's attached, the more uncertain, the more nascent strategy, the higher the return you would expect to get out of it, and the more proven strategies.
Speaker Change: You know, obviously the lower the execution risk premium that you would need to place on them. I don't think we are...
Timothy Spence: I don't think we are constraining the investment rate. Like if you just look at the Southeast, JP Morgan has built the most branches down there over the course of the past five years; they're at 180 or something like that. I think Fifth, Third is number two. And I believe BFA is number three. And then there's a pretty wide gap between that and everybody else. And I know I don't have to tell you that we're a little bit smaller than BFA and JP Morgan. So we think being appropriately aggressive in terms of the investment rate down there.
Speaker Change: Constraining
Speaker Change: The Investment Rate, but if you just look at the Southeast.
Speaker Change: I, JP Morgan, has built the most branches down there over the course of the past five years, there at 180 or something like that. I think fifth third is number two and I believe B.A.A. is number three and then there's a pretty wide gap between that and everybody else.
Speaker Change: And I know I don't have to tell you that we're a little bit smaller than B of H and J. P. Morgan. So we are, we think being appropriately aggressive in terms of the investment rate down there. And at least at the moment, I don't know that if we said, hey, we're not going to buy back stock, we don't have an alternative use for that capital on an organic basis that we would be thinking, you know, that we would deploy it toward. And Mike, we are accelerating the investments as I mentioned on improving strategies, as part of why we're going from what was 20 to 30 branch build a year to 50 plus branch build a year. So if we have more confidence, that gives us an overview of an area we want to invest in.
Timothy Spence: And at least at the moment, I don't know that if we said, hey, we're not going to buy back stock. We don't have an alternative use for that capital on an organic basis that we would be thinking, you know, that we would deploy it toward. And like we are accelerating the investments, as I mentioned on the proving strategies, as part of why we're going from what was 20 to 30 branch build a year to 50 plus branch. So we have more confidence that gives us want to be of an area we want to invest in.
Timothy Spence: And then the other, the other limited process is always going to be on the analysts that are worried about positive operating. Because that's the trade-off we care about as well. I just to push back when that last point, I mean, I hear you if you get those sorts of IRRs and you're celebrating your branch build, but it comes at a time. But I think some of the Southeast competitors have, you know, woken up, recovered like you, less underlie securities losses, going from defense to offense. You have that change for the last few years. And you also have the likes of some of those big banks that you mentioned with spending so much more in technology and digital.
Speaker Change: and then the other, the other moment of advice is always going to be, and the animal is sort of worried about positive operating life.
Speaker Change: Dr. Richard, because that's the trade-off we care about as well.
Speaker Change: I just to push back when that last point, I mean, I hear you, if you get those sorts of IRRs and you're accelerating your branch build, but it's comes at a time, but I think some of the Southeast competitors have, you know, woken up, recovered, like you, less unreliable securities losses, going from defense to offense. You have that change for the last few years, and you also have the likes of some of those big banks that you mentioned with spending so much more in tech technology and digital, so I think it might be tougher in the next few years than it's been in the past few years.
Timothy Spence: So I think it might be tougher in the next few years, and it's been in the past few years. Well, I don't know. I don't think that the Southeast was on competitive the last five years, right? I think that what you're just you're constantly looking at is, are we making the right set of investments given the competitors that we have and R value proposition relative to others. I completely agree; the amount of money that is getting deployed into technology investment and a part of the large banks is eye-popping. But if you look at the value proposition, like go pull up the consumer lead consumer checking account offering for any of those large banks and for third or some other regional and tell me how that materialized into some substantially better value proposition.
Speaker Change: Oh, I don't know. I don't think that the selfies was on competitive the last five.
Speaker Change: Years, right? I think that what you're just, you're constantly looking at is, are we making the right set of investments given the competitors that we have and our value proposition relative to others? I completely.
Speaker Change: The degree, the amount of money that is getting deployed into technology investment and the part of the large banks is eye-popping. But if you look at the value proposition, like go pull up the consumer, lead consumer checking account offering for any of those large banks.
Speaker Change: or Fifth Third, or some other regional, and tell me how that materialized into some substantially better value proposition. I actually think in many cases what you would see is the opposite. If it's been the regionals who led on consumer press, friendly product innovation, I'd definitely been true or Fifth Third, but it's not just been Fifth Third in terms of the offerings there. So we are not running the bank to be able to take share an uncompetitive environment. And I expect the level of competition is going to stay high, not that it's going to get better or for that matter and yet worse.
Timothy Spence: I actually think in many cases what you would see as the opposite is it's been the regionals who read on consumer prayer-friendly product innovation. I've definitely been true or Fifth Third, but it's not just been Fifth Third in terms of the offerings there. So we are not running the bank to be able to take share in uncompetitive environments. I expect the level of competition is going to stay high, not that it's going to get better or, for that matter, yet worth.
Unknown Executive: All right, thank you. Yes, thank you.
Unknown Executive: That concludes our Q&A session. I'm going to turn the conference back over to Matt for closing remarks. Thank you, and thanks everyone for your interest in Fifth Third. Please contact the Investor Relations department if you have any follow-up or question. I'll bring you in. Now disconnect the call. Thank you. This concludes today's conference call. You may now disconnect.
Speaker Change: All right, thank you.
Speaker Change: Yep, thank you.
Speaker Change: That concludes our Q&A session. I'm going to turn the conference back over to Matt for closing remarks.
Matt: Thank you and thanks everyone for your interest in fifth third. Please contact the investor relations department if you have any follow-up calls or questions. I'll bring you away. Now disconnect the call. Thank you.