Q1 2025 Fifth Third Bancorp Earnings Call
Kate: Thank you for standing by. My name is Kate and I will be your conference operator today.
Kate: At this time, I would like to welcome everyone to the Q1 2025 Fifth Third Bancorp Ernie's Conference Call.
Kate: All lights have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time,
Speaker Change: If you would like to withdraw your question, Preston won again. Thank you. I would now like to turn the call over to Matt Curoe, Director of Investor Relations. Please go ahead.
Matt Curoe: Good morning, everyone. Welcome to Fifth Thirds' first quarter, 2025 Eurings Call. This morning our Chairman, CDO, and President Tim Spence and CFO , Brian Preston, will provide an overview of our first quarter results and outlook.
Speaker Change: Our Chief Credit Officer, Greg Schroeck, has also joined the Q&A portion of the call.
Matt Curoe: Please review the cautionary statements in our materials, which can be found in our earnings release and presentation.
Speaker Change: These materials contain information regarding the use of non-GAAP measures and reconciliation to the gap results.
Matt Curoe: as well as former booking statements about Fifth Thirds performance. These statements speak only as of April 17th, 2025, and Fifth Third, no obligations to update them.
Speaker Change: Following prepared remarks by Tim and Brian , we will open up the call for questions. With that, let me turn it over to Tim.
Tim Spence: Thanks, Matt, and good morning, everyone. At Fifth Third we believe great banks distinguish themselves, not by how they navigate benign environments, but rather by how they navigate uncertain ones.
Tim Spence: I say this at the start of every investor communication, but it is particularly relevant today.
Tim Spence: I'm very pleased with our performance this past quarter and confident that we are positioned to deliver stability, profitability and growth in that order in the many potential scenarios that could play out over the remainder of the year.
Tim Spence: This morning we reported earnings per share of 71 cents or 73 cents excluding certain items of the outline on page 2 of the release exceeding consent assessments.
Tim Spence: We group PPNR by 5% year-over-year and have achieved an adjusted return on equity of 11.2%.
Tim Spence: Group tangible book value for share, 15% over the prior year, despite the 10-year treasury rate being unchanged.
Tim Spence: And on the trailing 12 month basis, our return on assets, return on equity, and efficiency ratio remain among the best of our peers.
Tim Spence: In the quarter we sustained our positive momentum on loan growth, net interest margins, net charge
Tim Spence: Total loans for 3% year-over-year driven by strong middle-market CNI production, a pick-up and leasing activity, and balanced growth across consumer-secured lending categories.
Tim Spence: Her charge operate was stable following sequential improvement over the second half of last year.
Tim Spence: Court deposits were stable, even with our continued progress on deposit costs, supported by 2% total household growth, and 5% growth in the Southeast.
Tim Spence: NII grew faster than our balance sheet grew at 4% over the prior year as net interest margins
Tim Spence: The despite market-related impacts to our capital markets business, adjusted fees, excluding securities, gains, and losses were up 1% versus the prior year.
Tim Spence: Commercial payments grew 6% driven by new one in our managed services offerings and wealth and asset management revenue grew 7%, supported by 10% growth in AUM.
Tim Spence: Continue progress on our value streams and disciplined expense management held expenses flat versus the prior year and we again deliver positive operating leverage.
Tim Spence: We're pleased that our first quarter results reflect the strength of our franchise.
Tim Spence: But today we are focused on what is in front of us as opposed to what is behind.
Speaker Change: In my annual letter to shareholders in February , I wrote that the global economy and the complex adapted systems and the complex systems react to change in unexpected ways.
Speaker Change: What we can do is to ensure that our business mix is more naturally resilient, run our balance sheet responsibly and maintain optionality so that we can react quickly as conditions change.
Speaker Change: C&I loaned to me in softens in the second half of the year. We have more avenues than most to manage our balance sheet.
Speaker Change: Our diverse national and origination platforms give us flexibility on how and where to generate loan growth and our multi-year investments in Southeast branches and growth in commercial payments will continue to produce granular operational deposit funding.
Speaker Change: We believe credit concentration limits boost resiliency and the quality of client selection. And as a result, we are well diversified across asset classes, industries and regions.
Speaker Change: We are clear-eyed about risks when they emerge and have been consistent about moving proactively to ensure charge-offs are well-reserved before they materialize
Speaker Change: At 2.7%, our ACL coverage ratio is among the highest of all our peers.
Speaker Change: On fee income, our focus on diversification and recurring versus transactional revenue sources should help to mitigate the potential for a continued capital markets disruption.
Speaker Change: Five different fee categories each contributed more than 10% of total fee income in the first quarter.
Speaker Change: Finally, we manage our business day-to-day in a fashion that maximizes optionality.
Speaker Change: We define multiple tasks to achieving our revenue targets, model a broad range of scenarios, including low growth, stagflation, and recession scenarios, and wear options to deliver sustainable profitability.
Speaker Change: We always plan to keep a tight lid on expenses because it is easier to invest more in a stronger than expected environment than it is to cut in a weaker than expected in life.
Thank you for having me.
Speaker Change: Bryan will provide more detail on her outlook for the remainder of the year, but I would like to highlight a few points.
Speaker Change: First, we expect to achieve record NII within our existing guidance range, even if there are no rate cuts and no further long growth.
Speaker Change: Second, we can deliver full-year positive operating leverage even if the capital markets do not recover given the expense levers we have at our disposal.
Speaker Change: Third, Hit the Forward Curve, Israelize. We expect to grow tangible book value per share by 10% for the full year from AOCI accretion alone. In addition to the growth we will generate from earnings.
Speaker Change: Last, our capital priorities continue to be farming organic growth, paying a strong bit event and share references in that order.
Speaker Change: Before I hand it over to Brian , I want to say thank you to our employees for all you do and for your dedication to our clients.
Speaker Change: Your commitment to getting 1% better every day is the reason Fifth Third was recently recognized by atmosphere as one of the world's most ethical companies.
Speaker Change: by EuroMoney as the best US private bank, and by J.D. Power as number one in retail customer satisfaction in Florida for the second consecutive year.
I'll have to be in part of your team.
Speaker Change: With that final, provide more detail in the quarter and I'll have one.
Bryan Preston: Thanks Tim, and thank you to everyone for joining us today.
Bryan Preston: Our first quarter results demonstrated the ongoing strength and momentum of our company.
Bryan Preston: Adjusted revenue increased 3% year-over-year as our well-positioned balance sheet led to continued margin expansion, driven by robust long growth, continued fixed rate asset repracing and proactive liability management.
Bryan Preston: The revenue performance combined with our ongoing expense discipline resulted in a 5% increase in pre-provisioned that revenue and 175 basis points of positive operating leverage on an adjusted basis compared to the first quarter of last year.
Bryan Preston: Our core deposit funder balance sheet and diversified revenue sources provide us with flexibility and resiliency to deliver stable through the cycle results.
Bryan Preston: Our strong profitability allowed us to maintain our CDT1 ratio at 10.5% consistent with our near-term target while growing our period in loans by $2.4 billion.
Bryan Preston: Executing a $225 million share of purchase and absorbing the seven basis point impact from the final Cecil phase-in.
Tim Spence: F10 mentioned, the tangible book value for share, inclusive of the impact of ALCI, who is 15% from the prior year despite the 10-year treasury rate being effectively unchanged.
Tim Spence: The strategy of our investment portfolio, the focus on investments with known cash flows.
Tim Spence: Through bullet and mocked out securities, we'll continue to contribute to tangible books that you appreciate growth as these positions pull to par.
Tim Spence: Net Interest Income, Continuous Positive Momentum, with NII flat sequentially, despite two fewer days in the quarter, and net interest margin expanded by six basis points.
Tim Spence: Proactive balance sheet management resulted in a 20 basis point reduction in the cost of interst?ing liability sequentially.
Tim Spence: These actions, along with the continued long growth and the repricing benefit on fixed rate assets, more than offset the decrease in yield on our floating rate assets.
Lungroth also continued positive momentum in the first quarter
Tim Spence: Average loans increased by 3%, the largest sequential growth in nearly three years, and period and long growth grew by 2%.
Tim Spence: Commercial loans grew 3% on a period and basis and 4% on an average basis compared to the fourth quarter driven by continued strengthen production and middle-market lending across our region led by Western Michigan, Georgia and Cincinnati.
Utilization improved by about a point to 37 percent sequentially.
Tim Spence: Utilization has continued to increase slowly during the first half of April .
Tim Spence: Consumer loans were up 1% on a period and basis, and 2% on an average basis from the prior quarter. Led by continued strength and secured lending products such as auto and home equity lending.
Shifting to deposits
Tim Spence: Average court deposits decreased 2% sequentially, driven primarily by normal seasonality and commercial.
Tim Spence: Our strong liquidity profile continues to provide us the flexibility to actively manage our overall funding costs.
Tim Spence: Intersparing cord deposit costs were 2.39% in the first quarter, down 25 basis points from the fourth quarter, representing a cord deposit beta in the low 60s.
Tim Spence: Demand the positive balances as a percent of court deposits improved slightly to 25% during the quarter.
Tim Spence: The main balances were down 1% on an average basis and flat on a period end basis compared to the prior quarter.
Tim Spence: We believe this balance level will be relatively stable over the near term.
Tim Spence: We entered the quarter with full category 1 LCR compliance at 127 percent, and our loan-to-core deposit ratio was 75 percent, up 2 percent from the prior quarter.
Tim Spence: Our focus remains on prudent managing total funding costs while maintaining a strong liquidity position.
Tim Spence: Our investments in Southeast branches will add momentum in gathering low-cost, stable retail deposits.
Tim Spence: This approach will continue to provide us with a flexibility needed to manage uncertainty and to deliver a record 2025 NII despite the volatile environment.
Moving on to seats.
Tim Spence: Highlighted on page two of our release, our reporting results were impacted by the valuation of the visa total return swap, excluding the impacts of the swap and secure these games and losses.
Tim Spence: Adjusted non-interested income for the first quarter increased 1% compared to the same quarter last year, driven by growth and wealth and commercial payments.
Tim Spence: In wealth, fees grew 7% over the prior year to $172 million, due to $6 billion of AUMGRO and increased
Tim Spence: Commercial payments increased 6% year-over-year to $153 million, driven by that sea equivalent growth, which was up 8%.
Tim Spence: Manage Services and New Line provided over half of this growth.
Tim Spence: Capital Market Speeds, declined by 7% from the Euroville period, primarily due to a slowdown on loan syndications and M&A advisory revenue, given the increased volatility in economic uncertainty.
Tim Spence: The securities losses of $9 million included the loss of $4 million from the marked market impact of a non-qualified deferred compensation plan.
which is offset in compensation expense. [inaudible]
moving to expenses.
Tim Spence: Adjusted non-interest expenses flat compared to the year ago quarter, an increased 7% sequentially, slightly below our prior expectations.
Tim Spence: As is always the case in the first quarter. The sequential comparison is impacted by seasonal items associated with the timing of compensation awards and timing of payroll taxes. [inaudible]
Tim Spence: To previously mentioned, Deferred Compensation marked a market reduced expenses by $4 million for the quarter, compared to a $7 million benefit in the prior quarter, and an $11 million increase to expenses in the year of no quarter. [inaudible]
Tim Spence: Excluding the impact of the deferred cop marked a market, the over-year expenses increased 1% as revenue-related compensation expense.
Tim Spence: and Hongon Savings, generated by our Value Stream Efficiency Programs. Offset our continued investments in technology, matches and sales personnel.
Tim Spence: shifting to credit, the net chargeoff ratio was 46 basis points.
Tim Spence: at the lower end of our expectations for the quarter and flat sequentially.
Commercial charge-offs with 35 basis points. [inaudible]
Top 3 Basis Points Equentially.
Consumer charge offs were 63 basis points, down 5 basis points.
Primarily due to the seasonal improvement in credit performance in Ado.
Tim Spence: Our NVA ratio increased 10 basis points sequentially to 81 basis points.
Primarily driven by two ABO credits in our CNI portfolio.
Tim Spence: The CRD portfolio continues to perform well with total CRD NDA declining from 46 basis points to 38 basis points.
Tim Spence: including only seven basis points of NPA in our non-order occupied portfolio.
Tim Spence: In solar lending, our NPA decreased by over 50%. Primarily due to our work to support customers where installers had gone out of business.
Tim Spence: For these borrowers, we assisted them in getting their solar installation projects completed and these loans are now current with sustained payment history.
Tim Spence: For the second quarter in a row, commercial criticize assets decreased. With the $20 dollar reduction, bring criticized levels to their lowest level in the past five quarters.
Tim Spence: Additionally, early stage delinquencies, 30-89 days past due, increased just six basis points, and remained near the lowest levels we have experienced over the last decade.
R. Portfolio remains diversified across industries and geographies.
Tim Spence: Despite some increases in MPAs given the impact of the rate environment and economic uncertainty, we have not seen broad-based weakening trends in individual industries or geographies. [inaudible]
Tim Spence: Our provisional expense for the quarter resulted in a $38 million billed in our allowance for credit losses.
Tim Spence: This bill was primarily attributable to continued growth in period loans and a deterioration in booties macroeconomic scenarios
Tim Spence: These increases were partially offset by improvement in the overall risk profiles of the portfolio, as indicated by the reduction in criticized assets and the previously mentioned reduction in NPAs in our solar lending portfolio. [inaudible]
Tim Spence: Our ACL coverage ratio was 2.07% down one basis point sequentially.
Tim Spence: We made no changes to our scenario weightings during the quarter.
Tim Spence: Moving to Capitol, we enter the corridor with a C-21 ratio of 10.5%, exceeding our buffered minimum of 7.7% and consistent with our near-term target.
Tim Spence: Our pro form of CET-1 ratio, including the AACI impact of the security portfolio, is 8.3%, 52 basis points of year over year.
Tim Spence: Given that approximately 53% of the fixed rate securities in our AFS portfolio are in bullet or lockout structures which provide the high degree of certainty to our principal cash law expectations.
As Ken said, assuming the forward curve is realized.
Tim Spence: Pangeable book value per share should grow by about 10% for the full year before considering any future earnings as the AOCI related to the security losses will accrete back into equity.
Tim Spence: During the quarter, our $225 million sharey purchase reduced our share count by 5.2 million shares.
Moving to our current outlook.
Tim Spence: Despite the uncertain environment, we remain confident in our ability to achieve record and eye-on in full-year positive operating leverage.
Tim Spence: We expect four-year NII to increase five to six percent consistent with our guide in January .
Tim Spence: The outlook uses the forward curve at the start of April , which assumed 25 basis point rate cuts in June , September and December .
Due to the resiliency of our balance sheet.
Tim Spence: We would expect to achieve record NII and achieve our four-year guide with no further long growth and no interest rate cuts.
Tim Spence: Give their quarter in loan balances, we now expect full-year average total loans to be up 4 to 5% compared to 2024.
Tim Spence: would be increased primarily driven by loan production and line utilization in CNI combined with the continued growth and auto loans.
Tim Spence: We are assuming that the cash position, securities portfolio and commercial revolver utilization all remain relatively stable through the remainder of 2025.
Tim Spence: Full-year adjusted non-interest income is expected to be up one to three percent, as continued economic uncertainty has slowed down capital markets activity.
Tim Spence: Wealth and asset managed revenues are also impacted by the recent sell-off and equities.
Tim Spence: Commercial Payments Revenue is growing as expected, and its technology-led product offerings continue to ramp from growth in new relationships.
Tim Spence: As a result of lower customer activity, we expect to manage full-year adjusted non-interest
to be up just two to three percent compared to 2024.
Tim Spence: Mark Spence Outlook assumes no change to the accelerated branch openings in the Hygros Southeast markets.
Tim Spence: and continuing Salesforce editions in middle market, commercial payments, and wealth to increase our production capacity to support our strategic growth objectives.
Tim Spence: In total, our guide implies full-year adjusted revenue to be up 4% to 5% and PPR to grow in the 67% rate.
and Positive Operating Revenge of 150 to 200 basis points. [inaudible]
Tim Spence: Moving to credit, we still expect 2025 net charge-offs to be in the 40 to 49 basis point ring.
Thank you very much. Thank you.
Tim Spence: The timing of charge-offs for individual credits may impact a particular quarter.
But our four-year expectations will make consistent with our January God.
Tim Spence: Given economic uncertainty and volatility in projected economic scenarios, we will no longer be guiding on provision bills.
Moving to our outlook for the second quarter.
Tim Spence: We expect NII to be up to the 3% from the first quarter due to the benefits of long growth, fixed rate asset repricing, day count, and the continued management of interest-burning liability costs.
Tim Spence: We expect average total loan balances to increase 1% due to the full-quarter impact of the FI and I production in the first quarter and continued momentum and auto.
Excluding the impacts of securities losses. [inaudible]
We expect adjusted non-interest income to be up to 6% sequentially.
Tim Spence: The wider range is due to increased economic uncertainty impacting wealth and capital markets for everything.
Tim Spence: We expect strength and consumer banking to do the fusionally higher cards then.
Tim Spence: Second quarter adjusted non-interest expense, is expected to be down 5% compared to the first quarter, due to the feasal impact from the timing of compensation awards and payrolls taxes in the first quarter.
We expect continued investments in technology and marketing.
Tim Spence: We expect second quarter charge-offs to again be on the 45 to 49 basis point range.
Tim Spence: Finally, we continue to believe granular organic loan growth represents the best use of capital to generate strong returns for our shareholders.
Tim Spence: Based on our current projected balance sheet growth, we expect to repurchase four to five hundred million dollars of stock during the remainder of 2025, likely in the second half of the year.
Tim Spence: We will continue to target our CET-1 ratio at 10.5% and the ultimate amount in timing of future shared approaches will be dependent on realized long growth.
Tim Spence: In summary, with a resilient balance sheet, diversified revenue streams, and disciplined expense and credit risk management.
Tim Spence: We expect 2025 to achieve record at ION, positive operating leverage, and strong returns for our shareholders as we continue to invest for the long term.
Tim Spence: With that, let me turn it over to Matt to open up the call for Q&A.
Matt Curoe: Thanks, Brian . Before we start Q&A, given the time we have this morning, we ask that you 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.
Your first question comes from blind
Algerald Cassidy, with RBC Capital Markets, please go ahead
I Tim, Hi, Brian . Good morning.
Tim, can you share with us?
Matt Curoe: You're interactions with your commercial customers and since obviously the changes in the economic environment and the outlook is very uncertain due to the tariffs.
Can you talk to us about-
Matt Curoe: You know, how uncertain your clients are, number one, but number two,
Matt Curoe: Can you also play into that? Are the customers, your commercial customers in a better position today because they went through the pandemic they needed to get lean during the pandemic and the lessons they learn there can be applied today as we go forward in this uncertain environment. Thank you very much.
Yeah, hey. [inaudible]
That's a great question.
Speaker Change: I wish I could say I had the crystal ball and it's the reason we scheduled my travel the way we did, but ironically, Gerard, I have been in five of our regions.
Matt Curoe: since the Liberation Day Announcements. They had the opportunity to speak with something on the order of 50 different business owners, most of which ironically were in materials, manufacturing, transportation, logistics, energy. [inaudible]
Matt Curoe: and a few folks in automotive and healthcare and other sectors.
Matt Curoe: I would say that magnitude of the tariff announced some cop them all by surprise, the base level 10% in Port Tariff wasn't surprising, it was all of the other activity.
Matt Curoe: who interpreted the announcements as a negotiating tactic and believed that we're going to settle out.
Matt Curoe: in a much more reasonable place that may actually give American producers better access to foreign markets.
Matt Curoe: and the 50% who are really nervous that the tariff in particular, the tariff.
Matt Curoe: that impact major supply chain countries, China, Vietnam, the Pacific Rim and otherwise.
are going to stack out more elevated levels and...
Matt Curoe: I would say universally their belief is that the only way they really have to respond in the near-the-medium term is to push prices so folks with international supply chains
Matt Curoe: at, you know, we'll need to push prices to cover tariffs that can't absorb it in margins.
Matt Curoe: Many of them are tossling with retail distribution partners who are pressuring to absorb some or all of the costs but they believe that because these are structural changes that manufacturers really do believe they're going to be able to push.
Speaker Change: The Price. What was maybe a little bit interesting to me is that the folks that have domestic supply chains were also saying they have to move.
as well.
and the Run Their Businesses. [inaudible]
Speaker Change: The other thing I would say is most of them are not waiting for the tariff rates to be finalized to start work on pricing, a lot of them require their contracts with their distribution partners, require 60-plus-day price change notices.
and therefore they're going to have.
to move. [inaudible]
Speaker Change: who are going to try to figure out how to make changes to supply chain, that we have the benefit of having had COVID as a fire drill, but the winners there are the single biggest shifts.
Speaker Change: Really were folks diversifying out of China and into countries like Vietnam that now have very high reciprocal tariffs.
Speaker Change: Or in the routing of the logistics, right? A lot of the goods came out of China and hit a port in Mexico, and then we're trapped over to the border. And if the broader paraphrasing steps, there really isn't going to be a way to reconfigure your supply chain to avoid it, you know, entirely.
Speaker Change: So what a lot of them are doing is moving on price and then holding on any sort of major structural plans.
because the timeline...
Required the Gats [inaudible]
Speaker Change: Like a plant opened in the U.S., or the move your production so that you're producing Asia for Asia and the U.S. for the U.S. and Europe for Europe .
do the call.
Ivan Durable. [inaudible]
Speaker Change: Yeah, so my own if I get the silver lining here, there wasn't a single client who indicated that they are working on layoffs, like that the client and legal immigration since the beginning of the year has meant they're just aren't as many job seekers. So I think we'll see at the client and job openings but
Speaker Change: If our clients are an indicator that unemployment rate may be a little bit more range bound than at some of the economists are fiddling, but...
Speaker Change: It does feel like barring a significant change in terms of the proposal versus whatever terrorists become effective in many days.
Speaker Change: We're going to see the inflation pick-up, we're going to see growth come down down.
But we may see unemployment in order. So.
Speaker Change: That's where I'm here. Very good. Yeah, no, no, very helpful. I appreciate all the color. Thank you very much.
Speaker Change: The economy slowed down further, you know, credit's always a discussion point with all the banks, not just your organization, but putting that aside for a second. If we stay in this slower growth environment, maybe there is a shallow recession or worse, what are some of the other areas aside from credit that you guys are...
Speaker Change: Looking at closely that you can manage to enable you to get through a slowdown more effectively than maybe in the past downturns.
Speaker Change: Yes, I mean, Craig, it's number one, right? I think if you buy the-
Speaker Change: I'll call it the listen to the crowd psych offices. I laid out earlier that the implication for monetary policy is likely that the Fed doesn't have a lot of room to move, if unemployment's tethered and inflation goes up.
Speaker Change: So your deposit funding is, you know, a critical point of focus that remains a really core point of focus for us and then lastly it's expensive, right?
Speaker Change: You know, we have tried to be very deliberate, and I know we've communicated this [inaudible]
Speaker Change: that we don't allow expenses to grow on the basis of market benefits. We try to keep expenses tethered because it's always easier to spend more and the events that things work out well. And that's resulted in us having much lower expense growth than others like that.
Speaker Change: Games, we've gotten there. They come from the automation that comes out of the technology that goes in from the lean manufacturing disciplines that underpin the value streams.
Speaker Change: and I think as reflected in our guidance, we don't believe that it's credible to think that the capital markets will recover sufficiently to cover up the softness that we're all going to see in the first half of the year, so if these are them expenses, you know, are going to come down as well.
Very good. Thank you. Yeah
Speaker Change: Your next question comes from the line of Ebrahim Poonawala of Bank of America, please go ahead.
Averym, take good money.
Speaker Change: I guess maybe Tim, perhaps taking with credit, just looking to slide 10.
You mentioned, I think-
Speaker Change: Two ABL credits looking at sort of the sequential increase in non-performers. Just talk to us in terms of, and I'm assuming this is nothing to do with the tariff overhangs.
Speaker Change: But if you can provide some more details on those ABL loans that go... [inaudible]
Speaker Change: NPLs higher. And even if we remain in a slower growth environment, do you see more migration into NPLs, more losses coming to the CNI book based on what you've seen and the work you've done? Yeah.
Speaker Change: Yeah, it's Greg. I'll take that one. Thanks for the question. Obviously something okay, a lot of attention to.
Speaker Change: and PAs. As Brian mentioned in the opening remarks, she was two credits, two ABL.
Speaker Change: Williams, that primarily drove our MPA increase. Our ADL portfolio is a traditional ADL portfolio lending against receivable inventory and the like. We do very little over-forming advance advances. It's very minimal. So we're well secured. We stay with an asset.
Speaker Change: It's a portfolio that over the last six years we've had very minimal loss content, like six basis points on average per annual loss rate.
Speaker Change: But as you know, as we work through borrowers that are experiencing financial difficulties, sometimes that means agreeing to work out plans that put these loans into not a cool status.
Speaker Change: However, that often leads to borrowers' regained financial stability and can ultimately lead to reduced losses.
Speaker Change: I'll also add, each of the credits in our NBA portfolio are individually evaluated. Financial risk assessment has already been captured in our results through recognized charge-offs or specific reserves that are included in the quarter end allowance for loan credit losses.
So I'm not overly concerned with the increase.
Bryan Preston: We obviously pay a lot of attention to it, but also as Brian mentioned, we're not changing the charge off guide for the second quarter, we're not changing it for the year. We're going to work through these credits.
Bryan Preston: We've got good visibility on about 40% of our total NPAs that we think will see resolution over the next couple quarters.
Bryan Preston: So we're making good progress, Brian mentioned, our criticized assets are down for the second consecutive quarter, you know, that tends to be a pipeline into NPAs.
Bryan Preston: So given current environment, I'm not seeing anything that would lead me to be concerned that we're going to continue to see increases in this NPA portfolio. And as I said, we got about 40% visibility on the NPA portfolio that we think is resolved.
and a relatively short period of time.
Bryan Preston: The overall portfolio remains an excellent shape. Brian mentioned our criticized assets, 87% of our criticized assets, including NPAs are current.
Bryan Preston: So I feel good about that. Consumer portfolio continues to perform very well. That charge offs 30 to 89 days to Lincoln Street, 98 to Lincoln Street, NPA, all on the consumer book down for the quarter. So overall I feel good about the overall health and performance of the portfolio.
That's helpful.
Speaker Change: and maybe while we have you Greg, I guess, just also address the...
Bryan Preston: solar panel lending business where things stand there, any policy risks that you say, I mean it comes up as an idiosyncratic risk factor for the third time and again just give us an update on where that stands, both on how you're thinking about growth in that book as well as credit list. Thanks. Thanks.
Thank you.
Bryan Preston: Maybe one, at one point, even then Greg should address credit risk.
Bryan Preston: The policy risk in the solar-wending portfolio is on future origination volumes.
Bryan Preston: It's not on existing credit performance. The tax credits on any solar panels that were installed previously intergenerating energy have been awarded. So, you know, we're mindful of where the investment tax credit settles out.
Bryan Preston: We have the ability because we're a bank and we are a bank, the largest bank in the market, to do some things with home equity product structures that should help us on the original nation's front. But it's less a policy.
Bryan Preston: Question on existing credit performance, then it is just how we're running the business operationally and the improvements that Jamie and Team have been able to make there, okay.
Bryan Preston: Yeah, I agree, that was going to say the same thing. Jamie and his team are making good progress, improving effectiveness of getting customers to PTO. As Brian mentioned, we had about a $34 million decrease in NPAs in the solar book in this quarter, so indicative of some of that progress. And we'll definitely bend the curve on charge-offs in the solar portfolio this year. It'll be the second half of the year, we've got to work through some of the 2022
2023 Vintages
We're still outperforming market in those manages.
Bryan Preston: However, we know we're going to have to work through those, but...
Speaker Change: I'm highly confident that we're going to see better lost content in the second half of the year, Jamie and team will continue to elect the right installers, continue to work with the consumer to get them to PTO, and that's why you're seeing some of the overall asset quality improvement.
Bryan Preston: Andy Rahamez, Brian from Production Perspective. We're seeing relatively stable production still in that business year of year.
Go ahead. Thank you all for the kind of appreciation.
Thank you.
Speaker Change: Your next question comes from the line of Scott Siefers with Bipersamber. Please go ahead.
Good morning. Thanks for taking me for a second.
Scott Safers: Either Tim or Bryan or something, you can maybe put a little more context around where you feel like you've got flexibility to cut costs without impairing some of the investments and expansion plans. I know Bryan and Tim both of you talked about costs related to lower revenue activities. I certainly get that some of that flex is naturally, but just curious for maybe a little more color on how you're thinking about the sort of dynamics. The dynamics.
Scott Safers: Yeah, I mean, especially the areas where we've seen reductions from a fee perspective, they tend to be areas that have higher variable based compensation associated with the revenue production. So that obviously is a natural offset to begin with.
Scott Safers: As I mentioned, we're going to continue to lean into the branch builds, we're going to continue to lean into customer acquisition, whether that's your sales portion of marketing.
Scott Safers: and it's really finding those areas on the margin, whether it's the marginal spending, some...
Scott Safers: some incremental savings that we'll be able to wean out of some of our operational activities, we're just being more disciplined day today on the spending from a vendor perspective. Those are the areas where we tend to have the best ability to get some incremental hostile. We'll be able to we'll be able to we'll be able
Speaker Change: Okay, perfect. Thank you. And Tim, I think you may have touched on some of these in your comments about...
Speaker Change: commercial customers a couple of questions ago. But when you think particularly on the capital market side, do you have a sense for how much things are going to need to calm down before customers are comfortable re-engaging in sort of discretionary activities? I mean, how much of this do we need to get through before people just sort of resume their more strategic plans? [inaudible] I'm sorry, I'm sorry, I'm sorry
Yeah, I spoke with a customer.
Speaker Change: Who is a pipe manufacturer the other day and who has been working through what would be a pretty interesting acquisition for them. [inaudible]
Speaker Change: and his comment was, if I do the deal today, and they were close to getting a deal done, you know, I'm either a hero or an idiot, and I don't like the decisions where there are binary outcomes.
Speaker Change: You know, it's just very difficult if you're evaluating a major investment like that to make it in an environment where it's not clear what the rules of the road are going to be
Speaker Change: I think as it relates to hedging activities, volatility in the markets has actually generated a real pick-up in conversations as you know that's a bigger piece of our capital markets business.
that it is for most of the other regionals. [inaudible]
Speaker Change: So, no volatility was bad for that business last year. High volatility is good on conversations. We probably need commodities prices in particular to settle out enough for people to be able to execute here. Thank you very much.
Speaker Change: Just a modest decline in volatility helps that. And as it relates to debt capital markets and bonds, it's just that again to purely a function of what will clear the market and what pricing most of our clients. [inaudible]
Speaker Change: are very proactive about how they manage their funding and the byproduct of that is they start looking at entry points way in advance of when they need to be able to refinance.
Speaker Change: But it's just going to come down to there being a little bit more certainty for us to see the activity. That said, I think
Speaker Change: The way we stare at the forecast and we stare at, you know, what we hear from clients [inaudible]
Speaker Change: Our own view is, to reaffirm a full year fee guide after you have an environment where…
Speaker Change: There's less activity. You have to believe that the outlook for the second half of the year is even better than you thought it was in January . And I know some of our fears have gotten to that conclusion. We just can't figure out how. There's nothing to me that suggests that the outlook in April for...
Speaker Change: July to December is better than the outlook for July to December was back in January when we provided the guide.
Yeah, okay, perfect. Thank you for all the detail. Yep.
Speaker Change: Your next question comes from the line of Mike Mayo with Wells Fargo. Please go ahead.
Speaker Change: Hey Mike. Hey, I feel like I live in a multiverse. In one universe, there's a global trade war, the Fed Chair gives caution and there's $7 trillion of loss.
stock market value.
Speaker Change: and my other universe includes Fifth Third and a lot of the other banks.
Tim Spence: In your case, you were actually guiding for better long growth by 100 basis points this year. You said utilization is better through mid-April. You still guide for Record 25 NII. You said that a single clients talked about layoffs. [inaudible]
Speaker Change: You said credit, early stage delinquency, they're close to their decade low, and there's no change to your charge off guides. So as I toggle back and forth between one universe and the other, how do I reconcile that there's not a multiverse here?
Thank you.
Speaker Change: I hope you got the trademark for that, from the Marvel folks before you used it, Mike.
From my point of view,
Speaker Change: Like, we have to go with what we know, right? And I think what we shared with you earlier in terms of our outlook of hockey, you know, I pick up an inflation on the point of being more range bound, a decline in economic growth.
Speaker Change: It is the basis. I think there's an interesting question to be asked about whether you can have a deep slowdown in the US if you don't get a big pick-up in the unemployment, right? There's a just growth of grinds down or you have a shallow recession.
Speaker Change: I think as it relates to the credit performance inside the company, the expectations on loan growth, you start from where you are and then you work forward. So, if we had zero additional loan growth,
from June 30th, I'm sorry, from March 31st.
Speaker Change: forward through the rest of the year. We would already be in what was the low end of our loan guidance range.
Speaker Change: that previously, and we have the pipelines to be able to support...
Speaker Change: What we're projecting here with customers like the probability of default for the C&I loan production is the same or better than the portfolio overall.
Speaker Change: and we've done a lot of work on transitions and otherwise, and the ratings at the point of origination tend to be pretty stable from that point going forward. So we feel good about what we're originating from a loan perspective and as it relates to the charge-offs, I mean...
Speaker Change: You know, consumer runs like a conveyor belt. You see it at, you know, current 31 days pass, and it moves from one to one point, let's see, bucket to the next.
Speaker Change: So you have a sense for what your lost content looks like for the remainder of the year and I see an IK strike I handed over to you if you have anything else you want to have but we're just not seeing the stress and client financials that would suggest that you're going to have more losses and materialize now.
Greg Schreck: And the only thing I would add and the new stuff we're putting on is right in line are a little bit better, from an asset quality standpoint, from the rest of the portfolio. So we're not, we're not stretching, we're not, we're not loosening.
of the Underwriting Standards.
Greg Schreck: Yeah, Mike, I guess the other thing that I would call out is it's...
Greg Schreck: I think a lot of what is impacting the equity markets in particular is the risk to the future, and that is coming through an RACL estimate of the last two quarters, we've added a hundred million dollars to our reserve, just attributable to the economic forecast because we are seeing and mood is now projecting more risk in the environment. [inaudible]
Speaker Change: I understand you were, I think the first bank to actually highlight that and I was surprised, more banks can fall and actually it's fried, you didn't even build even more, so I guess
Speaker Change: You know, with the chief read officer there, have you done a name by name review? And I guess that'd be a first order review, but you don't really know what the second and third order review is and I'm not sure how anyone can get the other arms around this, but how do you manage to do it? [inaudible]
Speaker Change: We've got models, we've got tools, where we are doing bottoms-up review of our commercial portfolio. We've got tools for the consumer portfolio. Tim said earlier it starts. We look at the current condition, the face.
Speaker Change: You know, our portfolio was in good shape, good shape, today we've got, we've got, we've got it.
Speaker Change: Cam, balance sheets coming out of COVID are customers reacted and balance sheets are better today than they were five years ago, less leverage, consistent revenues and even us dreams. So it starts with that and then you start putting stress on them. And yeah, we are, we are looking at all the portfolios. We're looking at the industries that we think are going to have the most impact construction manufacturing, consumer spending. [inaudible]
Speaker Change: and we're looking at all those. My consumer portfolio, about 47% of our consumer portfolio is mortgage and home equity.
Speaker Change: We like the values, we like the asset values there, we have virtually no losses. [inaudible]
in either of those two portfolios.
Last year.
Speaker Change: So it's going to get down from a consumer standpoint, card, and specialty or discretionary spending habits. You know, we think what will be most impactless, but...
Speaker Change: 75% of our co-op the car holders are transactors and are making more than the peer average monthly minimum payments.
Speaker Change: We're in that prime, super prime space and so we're just not seeing huge impacts there. I think from a commercial standpoint, we're well diversified our portfolio doesn't have concentration, geographic type of concentrations. [inaudible]
So
Tim Spence: You know, I feel good about the start, but the bottom line is, we don't know where this is going to go yet, from the tariff standpoint, we're staying very close to the customers, Tim got into it earlier in terms of what the customers are telling us and we'll continue to look at it. We'll continue to stress the portfolio with the tools that we have that incorporate both the internal data or our own data as well as external data.
All right, thank you. Thanks.
Speaker Change: Your next question comes from the line of Manan Gosalia, with Morgan Stanley , please go ahead.
Good morning.
Manon Gasaglio: Jim, thank you for that really detailed response and what you're seeing on the ground. I thought that was really helpful. Just given everything you said, you know, higher inflation but no layoffs, can you talk about how you're thinking about the US consumer in general and how you're thinking about the risks in your own consumer book?
Manon Gasaglio: Yep, that's a great question. And as I think I said before, in some ways we have a better view into the health of the US consumer through our checking account base because it's a pretty even slice.
of the cross-income bands. [inaudible]
Manon Gasaglio: where as our lending activity is essentially prime plus and super prime customers. We've said for a while that the consumers on the low end so folks with incomes below $75,000 in particular those who are renters. [inaudible]
Manon Gasaglio: were stretched, and you can still see that. The tax refunds every year provide a little bit of air for that population, but they have been running with deposit balances that are below pre-COVID levels. [inaudible]
Manon Gasaglio: and we hear from folks who are more active in that segment of population that that is reflected in early stage delinquencies.
Manon Gasaglio: because those folks don't have the margin of error to be able to overcome the sort of, I think the incremental impact that we could see from the resumption and random increases.
Manon Gasaglio: and then any sort of inflation and the things they buy which is basically food.
Manon Gasaglio: and Energy and a little bit of clothing on the margin.
at the upper end of the spectrum.
Manon Gasaglio: There's still a ton of liquidity among high-network individuals.
Manon Gasaglio: But you can see what we think is the early signal of the impact of equity market decline, so lifestyle spending in our private bank segment declines meaningfully year over year if you look at the first quarter
Manon Gasaglio: I think it's something on the order of about 30% in that decline in lifestyle purchases.
Manon Gasaglio: Some of that's probably down to the fact that the Fed cut interest rates last year so there are clients who were paying cash previously who went back to borrowing money. I wouldn't attribute that all to a concern about the equity markets.
Manon Gasaglio: But I do think you'll see those folks spend a little bit less. The folks in the middle, which is the broad middle of the population, right? So if you say bottom 10% or 15% in one bucket, top 10% or 15%
Manon Gasaglio: in the other. We saw very little change, like there's a little evidence of-
Manon Gasaglio: You know, Pre-Tera, you know, hard goods hoarding, like we had trips to home improvement stores. We do a lot of work on that data source called Place or AI, then we're pickups and purchases and warehouses, both purchases and warehouse stores.
Manon Gasaglio: at Home Improvement, and Department Stores, and immediately prior to the announcement of the terrorists, and then a decline year over year and purchases in those same locations.
Manon Gasaglio: Afterwards, but in general that segment of the population that we do business with is homeowners and homeowners are still doing pretty darn well because they fix their housing costs.
Manon Gasaglio: Three years ago, they missed the worst impact of inflation as a result of that, and wage increases of more than allowed them to keep up, so.
Manon Gasaglio: Where does that leave us? I think the bottom end of the population.
Manon Gasaglio: is going to continue to feel stress. The top end of the population is likely to slow down what they buy in the folks in the middle as long as we don't have a big, big, big up and unemployment. We'll continue to move forward.
Manon Gasaglio: I appreciate all the color there, thank you. Maybe as a follow-up, just given some of this uncertainty and
given the volatility on the long end as a curse.
Manon Gasaglio: Where do you want to manage on that CET-1, including AOCI numbers? So I think you noted that you're slowing by-backs versus what you did in the first quarter and mostly you're doing the by-backs in the back half of the year. Where would you expect to end the year on that marked CET-1 ratio?
Manon Gasaglio: We'd expect to end the year around 9% right now, based off of where the forward curve was playing out.
Manon Gasaglio: The investment portfolio of the AFS portfolio in particular continues to roll in the durations down to about 3.8 years right now and we're more sensitive in the belly of the curve today than we are in the long end of the curve. So we do expect to continue to have...
Manon Gasaglio: that AOCI creep down over time. So we feel good about that positioning, it's feel good about the known predictability of those cash flows and feel good that exiting the year around 9% is a good place to be.
daughter, thank you.
Speaker Change: Your next question comes from the line of Ken Austin with Atama Most Research. Please go ahead.
Welcome back in.
Ken Austin: Hey, thanks Tim. Appreciate it. I always appreciate your big picture perspective on the industry and just given the uncertain you guys mentioned. Thank you very much.
Ken Austin: and all the changes happening and the regulatory environment are just wondering your any updates you've thoughts about to industry consolidation and also what you're expecting to see and what you're hoping for from a fifth-third perspective from all the changes on the regulatory front. Thanks a lot.
Tim Spence: No, happy to do that. I can go a lot of directions with that question. Let me take what we're expecting to see from the regulatory front first and then I'll hit the industry consolidation point.
Tim Spence: You know, if you just step back and say, what's the thesis that the current administration is using?
on the way to drive.
Tim Spence: The country forward, like there's a strong belief everybody talks about in terraces, it's important for us to have a domestic manufacturing sector in strong border, that's important for national security, it's important in terms of ensuring that the benefits that you know are economy create to be available broadly.
Tim Spence: and part of the way that they, but that they also recognize that fiscal discipline is going to be important, right, so the, I think the logic that,
Tim Spence: IC here is you've got to keep the tax rates low because it's important that we have money in people's pockets to keep the economy going and invest back in the businesses.
There's some reduction in spending associated with the DOJ initiatives.
Tim Spence: But the way then to get the fiscal balance back and worrier is probably a little bit in tariffs but maybe more importantly to reignite private sector growth, right? So they talked a lot about deregulation across sectors as a mechanism to ignite growth.
Tim Spence: I think they see Bank Regulation as really critical there because...
Tim Spence: that didn't happen. And if you say, hey, maybe we only got half of that, but that's two-and-a-half trillion bucks that could have gone in to investing in new capital equipment or jobs formation. Otherwise, maybe we wouldn't have needed terrorists to have resurgence in domestic manufacturing. [inaudible]
Tim Spence: So I think capital and liquidity are going to continue to be really top priorities for them as the leaders of these individual agencies are formally confirmed here. And that is good for everybody. I really do believe that the system is well capitalized. The system has more than ample liquidity.
Tim Spence: to support a wide range of scenarios. And we need the capacity to be able to support credit formation, if we're going to reignite the private sector growth.
Tim Spence: That said, you know, they've also been, you know, I think, pretty clear that
Tim Spence: The banks are going to need to compete with everybody, right? The deregulation is going to have at least a significant effect, and a fact on the non-bank sector, in particular as it relates to some of the things that are being done on compliance.
Tim Spence: We have the least consolidated banking sector in the world, right? So long-term, medium-term, there should be more consolidation. It's important for all of us to continue to try to get the overheads down.
Tim Spence: in the business, and to be able to make the investments that we've got to continue to make in AI and technology and all the other things that are so important to the way that we're going to serve customers in the future.
Speaker Change: Richemann, anything on the industry's totation point, and I'll leave it there.
Speaker Change: Yeah, just that I think you'll see, there's, there's, there's, I know a question on my mind in the future, they're gonna be fewer banks than they're out of day.
Anderson. Okay, got it. I'm sorry. Thank you. Look, a lot. Thank you.
Speaker Change: Your next question comes from the line of Peter Winder with DA Davidson, please go ahead
Peter Winter: Good morning. You guys have a nice history of being very disciplined on credit underwriting. When I look at slide 18, you've got your breakdown of the Shader National Credit portfolio, which is 27% of loans.
Peter Winter: Just in a downturn, there always seems to be market concerns about SNCC credits. Can you talk about your outlook in this portfolio in an economic downturn? [inaudible]
Speaker Change: Yeah, Greg maybe take that here in the minute. I think we hear it, and as you said, while we're very proud of the discipline we have in the underwriting and in the performance of Disney portfolio, we've been pretty clear that we want to be more granular. Thank you very much.
Speaker Change: in two years like we've grown the middle market by 5% during that same period and it included the RWA diet and about two-thirds of the production in this first quarter were middle market. [inaudible]
which by definition are not. [inaudible]
Speaker Change: Nick Credits, and that's where essentially all VRM editions have gone as well.
Speaker Change: So the SNCC portfolio is a good portfolio. I'm not worried at all about the quality there. Greg will give you a little bit more detail.
Speaker Change: But the strategy there has been to grow the granularity of the book by investing in the middle market and I think you should continue to expect this Nick Portfolio not to be the centerpiece of how we get our growth going forward.
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Speaker Change: Yeah, from an asset quality standpoint, it's performing in line or better than the rest of the portfolio, criticized levels, less than 5% compared to the rest of the portfolio, 60% of that is investment or near investment grade.
Speaker Change: to our standards. Average relationship size there is about $34 million in outstanding, so it's a very manageable, very diverse from an industry standpoint portfolio, and so we've maintained our disciplines, both in terms of whole levels as well as...
Industry Diverse Location.
Speaker Change: We've got very low leverage, we think about leveraged loans, we've got very little leveraged loans in that snake portfolio.
Got it.
Speaker Change: And just as a final question, you know, you up the average loan forecast and you've got very good momentum in the first quarter on that margin expansion, but didn't change the NII guidance, you know, just maybe talk about the puts and takes to the 5% 5% to 6% growth this year and where you think the margin could end the year? [inaudible]
Speaker Change: Yeah, thanks, Peter. You know, I would tell you that, you know, we continue to feel good and what we're seeing from a momentum perspective on an eye. The person takes, you know, we have a little bit of softness in the first quarter from the seasonality perspective and deposits.
Speaker Change: That was something that I talked about earlier this earlier in the first quarter so that you'd have a little bit of impact. The growth has come in at a little bit higher credit quality than we were originally expecting. The growth has come in at a little bit higher credit quality than we were originally expecting.
Speaker Change: Suspred for a little bit tighter because of some of the credit quality of the production. Thank you very much.
Speaker Change: And finally, the current forecast assumes three cuts for the year, which includes the December
Speaker Change: Ahead of that, but we won't get the deposit repracing until end of December and end of January . Those are the main drivers from a puts and takes perspective on why it's kind of in line despite a little bit better longer. [inaudible]
and any sense where the margin could end the year? [inaudible]
Speaker Change: We continue to expect a couple of few basis points of improvement from here to the end of the year, kind of like each quarter, kind of like we've experienced the last several quarters.
Speaker Change: I would tell you more than anything, the volatility around the potential cash balances, depending on where loan demand and deposit growth shows up, it's going to potentially be more impactful and just don't have a good line of sight of how we're thinking about where cash balances [inaudible]
Speaker Change: could be, but in general, the core business trends, I would expect to see a couple of few basis points of quarter steady increases from here.
Got it. Thanks, Bryan.
Matt Curoe: I will turn the call back over to Matt for closing remarks.
Matt Curoe: Alright, thank you, Kate. And thanks everyone for your interest in Fifth Third. Please contact the Investor Relations Department if you have any follow-up questions. Kate, you may now disconnect the call. Thank you very much.
Matt Curoe: Jason gentlemen, that concludes today's call to yell for joining, you may not disconnect for it.
Thank you. Thank you.