Q2 2019 Earnings Call
Thanks, Jay and I will be your conference operator for today.
At this time I would like to welcome everyone to the fifth third Bancorp second quarter 2019 earnings Conference call.
All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad.
And if you would like to withdraw your question press to bounce.
Thank you.
It is now my pleasure to during today's program over to Mr., Craig Dahl director of Investor Relations, Sir the floor is yours.
Thank you Jay good morning, and thank you all for joining US today, we'll be discussing our financial results for the second quarter of 2019.
Please review the cautionary statements in our materials, which can be found in our earnings release and presentation.
These materials contain reconciliations to non-GAAP measures along with information pertaining to the use of non-GAAP measures as well as forward looking statements about fifth third performance.
We undertake no obligation to and would not expect to update any such forward looking statements. After the date of this call.
This morning, I'm joined by our President and CEO , Greg Carmichael, CFO Typhoon Rammasun, Chief operating Officer, Lars Anderson, Chief Risk Officer, Frank Forest, and Treasurer, Jamie Leonard.
Following prepared remarks by Greg in touch soon we will open the call up for questions.
Let me turn the call over now to Greg for his comments, thanks, Chris and thank all of you for joining us this morning.
Third today, we reported second quarter 2019, net income available to common shareholders of $427 million or 57 cents per share.
Our reported EPS included negative 14 cents impact from the Unims shown on page two of our release.
Mostly due to merger related expenses associated with MB financial excluding these items, our adjusted second quarter earnings were 71 cents per share.
Our financial results were very strong exceeded our previous guidance and reflect the progress we are making on our four strategic priorities.
To leverage technology to accelerate our digital transformation.
Invest to drive organic growth and profitability expand market share in key geographies and maintain credit expense and capital discipline.
The strong performance also reflects our continued focus on driving profitable revenue growth, probably managing our expenses and the improved profitability, resulting from MB financial.
During the quarter, we completed the MB financial customer conversion.
Which represents a significant milestone we remain very optimistic about our post acquisition growth prospects.
Both in our retail and commercial franchises.
Additionally, net interest income fee income and expenses all performed better than our April expectations as a result, or adjusted efficiency ratio improved more than 250 basis points from a year ago quarter to 58.5%.
Our net interest margin, which include the expected positive impact from MB financial expanded nine basis points and was in line with our previous guidance. Despite the challenging interest rate environment.
Net charge offs were 29 basis points improved sequentially and year over year, reflecting the ongoing benign credit environment in previous balance sheet actions.
Our adjusted ROTC, excluding the impact of AOCI.
Due to the significant unrealized investment portfolio in cash flow hedge gains was 15.8% in the second quarter.
For before providing an update on the progress with MB financial in our key strategic priorities.
I'd like to make a few observations about the macroeconomic environment.
As I mentioned that a research Investor Conference, we continue to see a generally healthy economic backdrop consumers continue to benefit from a combination of a strong labor market and limited inflationary pressures, resulting in strong wage growth.
In commercial clients are being more cautious and have expressed concerns about both current and potentially more punitive future tariffs affecting their growth plans.
Due to the higher.
And the quarter pay downs or loan origination volume was somewhat tempered relative to our previous expectations.
However, we continue to have a robust pipeline, particularly in middle market lending, which position us well for the second half of the year.
However, we will not chase loan growth for the sake of growing.
We will remain disciplined in our approach to client selection by focusing on the balance between credit quality and profitability.
For instance, we continue to reduce our exposure to non relationship commercial leases and are maintaining a cautious approach to commercial real estate lending at this point in the cycle.
Our balance sheet management philosophy of focusing on improved performance through the full economic cycle positions us well for the future for the rest of 2019 continued expect generally stable credit quality will potentially quarter fluctuations given the current low absolute levels of charge offs.
Now an update on MB financial acquisition.
In early May we completed the SMB customer conversion, we successfully converted the majority of systems less than two months after closing the merger.
As with any conversion, we continue to follow up with customers and employees to ensure a smooth transition.
We have already completed 46 of the Chicago area branch closures, which consisted of a mix of fifth third and then b locations.
We will close the last branch related to the transaction by the end of this month.
Our best of breed approach throughout the acquisition has been the key to the successful outcomes, we have achieved so far.
As a result, we have experienced.
No material employee attrition.
91% of legacy MB employees, who were offered position with fifth third or so here today.
We have also experienced a material customer client attrition in fact.
The commercial client attrition rates since the conversion has been lower than the MB legacy attrition rate during the past 24 months, leading up to the acquisition and has continued to improve over the past two months.
During the second quarter, we generate end of period loan growth and Chicago region of more than $100 million in deposit growth of more than $200 million, both increasing approximately 1% from the prior quarter.
We continue to receive positive overall feedback from our new MB retail customers.
They now have access to nearly 200 branches the third largest network in the Chicago area. In addition to advanced digital capabilities sophisticated wealth client solutions and access to our expanded network over 50000 fee free ATM.
We are focused on maintaining the positive momentum in the Chicago market. We recently unveiled a new Chicago marketing campaign. It pays homage to both NVS legacy and our dedication to serving our commercial clients and has been very well received.
In addition, we have begun utilizing our next generation brands design in select Chicago locations.
We believe we can offer greater convenience and even better customer experience does more efficient and more automated.
We remain very pleased with our progress we have made and are confident in our ability to deliver the financial synergies as previously communicated.
We continue to expect a realized a $255 million in annual expense synergies by the end of the first quarter of 2020 and have already completed many of the key expense actions, we will achieve approximately 80% of the run rate savings by year end.
We also continue to expect to generate meaningful revenue synergies from the acquisition.
We've been pleased with the initial success turning additional revenue opportunities since the customer conversion.
And our national asset based lending business, we have already generated a robust pipeline of new client relationships to accelerate future growth.
Furthermore, we have seen early signs of success leveraging MBS leasing capabilities.
To provide value added client solutions across our markets.
We continue to expect revenue synergies to generate approximately $60 million to $75 million in annual pre tax income net of expenses by 2022.
In addition to the combined power of our enhanced ABL leasing capabilities. We also expect synergies to come from the complementary focus on middle market lending and from deploying fifth thirds capital markets digital banking and Treasury management solutions capabilities.
We believe that fits our Chicago is known as the significant position of strength that allow us to generate stronger deposit household and revenue growth going forward.
Well, we have devoted a significant amount of energy on the MB acquisition to deliver for our clients employees and shareholders. We also remain focused on executing on our key strategic priorities to produce strong financial results.
First we continue to leverage technology, such as our data analytics capabilities.
To accelerate our digital transformation will continue to modernize our systems and infrastructure.
We are prioritizing investments that improve the customer experience.
Go ahead grow households, and drive further operational efficiencies.
We have also made considerable investments over the past several years to modernize simplify and rationalize our infrastructure. This allows for faster and more data driven insights.
We're also investing in advanced fraud, and cyber security technologies.
As a topic of concern our investments include providing alerts and real time monitoring to detect and respond to threats quickly. These investments have resulted in a year over year decline in fraud losses.
Second we continue to invest in our business to drive profitable organic growth. We have made several recent investments in technology and talent to support our growth plans, including key additions to our sales teams and strategic areas of the company.
For instance, in Middle market Bank, and we have added key talent in our new geographies, including California and Texas.
Also in our corporate <unk> as we continue to see positive outcomes from our ongoing investments in both our Salesforce and technology and expect sniffing growth in our commercial fee based businesses going forward.
And wealth and asset management, we are focused on leveraging partnerships across other lines of business as well as end market, our IEI in talent acquisitions to maximize revenue opportunities.
We have been very successful generating new business and have experienced positive a UN inflows for six consecutive quarters.
In retail we are successfully leverage Jing, our targeted marketing campaigns and our preferred banking program to grow households in the mass affluent segment.
As a result of our strategic investments across our retail franchise.
We have generated total customer deposit growth of more than 6%.
Over the past year, excluding the benefits from NBC, which has significant growth in almost all of our peers.
We leveraged our one bank operating model to collaborate across all of our businesses in order to provide holistic client solutions, we will continue to invest in our businesses to diversify revenue and accelerate growth.
Our third priority is to expand our market share in key existing markets.
Now do we have the necessary scale in the Chicago market. We are continue to optimize our branch network in our legacy footprint in order to support our faster growing southeast markets.
By the end of this year, we will have completed approximately two thirds of the planned 100 legacy branch consolidations and opened 25% for the 100 planned openings in the southeast markets.
Lastly, we are focused on maintaining our disciplined approach to credit expense and capital management throughout the company.
As I mentioned earlier credit discipline remains as important now as ever.
We are focused on maximizing through the cycle returns rather than generating lower quality loan growth, we have demonstrated our ability to deliver and manage our expenses while investing in areas of strategic importance. We remain focused on continue continuing to generate positive operating leverage.
We also continue to allocate and manage our capital prudently.
We deploy capital based on what we believe will generate the highest long term return for our shareholders.
I assume we'll share more details regarding our current capital return expectations.
Our clearly defined set of strategic priorities are designed to enhance revenue growth as well as general expense efficiencies in order to meet our financial and strategic objectives.
Like to once again, thank all of our employees for their hard work dedication and for always keeping the customer at the center.
Is because of our employees that we were honored to be named best Regional bank by Kiplinger for the second year in a row.
They also recognize our next generation branch design, knowing that it creates a more modern and friendly atmosphere.
I was pleased that we were again able to deliver strong financial results. We remain very confident our ability to outperform through the cycle and create significant value for our shareholders.
With that I'll turn to touch soon to discuss our second quarter results in more detail and our current outlook.
Thank you Greg Good morning, and thank you for joining us today, let's move to the financial highlights on slide four of the earnings presentation.
Reported results for the quarter were negatively impacted by two notable items and $84 million after tax impact from MB merger related charges and a $17 million after tax negative mark related to the visa total return swap.
Excluding these items and other items from prior periods as shown in our Wrecos reconciliation tables, including MB related merger charges and prior period Worldpay games.
Pre provision net revenue increased 29% on a year over year basis, and increased 24% from the prior quarter.
Our financial performance also reflected a full quarter benefits associated with the acquisition of MB.
Our adjusted results for the second quarter were very strong with net interest income non interest income and expenses, all performing better than our April guidance.
The area, where we are significantly outpacing the peer group is our NII and NIM performance.
We have been very deliberate and comprehensive in our actions over the past 12 months and longer in managing our interest rate risk, including our strategies in managing the investment portfolio, our preference not to grow our residential mortgage portfolio and the timing of the hedge transactions that we have executed ahead of the rate downturn.
These were well thought out and well executed decisions with a longer horizon view that put our performance ahead of others.
Looking at the disclose information prior to today, our net interest margin excluding purchase accounting accretion is above the median of the peer group banks.
Our adjusted return metrics were also strong during the second quarter with an adjusted Aro AE of 1.33% an increase of 12 basis points from last quarter.
Also we achieved a return on tangible common equity of 15.1%.
It is important to note that given the current rate environment and our prior actions to shield the portfolio from higher prepayment speeds, the unrealized infat investment portfolio gain as well as the hedge portfolio again have increased significantly.
Consequently, our ROTC was impacted by elevated AOCI high levels.
Given the interest rate outlook, we expect these items to continue to affect our reported return on tangible capital.
In the second quarter, our AOCI as a percent of total shareholders' equity was 5.7%.
By comparison, the median for the peer banks that announced prior to today was negative 1.5%, which makes a very meaningful difference when comparing return metrics.
Therefore, we are providing you with our ROTC, excluding AOCI of 15.8% in the second quarter.
During the quarter, we successfully completed the MB customer conversion.
Therefore, our future reported growth rates should provide a clear depiction of our firm wide core growth performance.
Our second quarter results also indicate that we are tracking slightly ahead of our expense savings space associated with MB financial.
In line with our previous guidance, we expect to achieve approximately 80% over the run rate expense savings by year end and realize our annual expense goal of $255 million beginning the second quarter of 2020.
Our second quarter credit performance continued to reflect the benign macroeconomic environments.
The net charge off ratio of 29 basis points decreased 12 basis points from last year and decreased three basis points from last quarter.
Commercial losses remain near historically low levels and the consumer loss rate improved nine basis points sequentially.
We remain focused on maintaining credit discipline at this point in the economic cycle.
Moving to slide five.
All of our balance sheet captions were impacted by the MB financial acquisition on a year over year and sequential basis.
In our commercial business the growth patterns in portfolios, we are prioritizing look very encouraging.
In the second quarter, we have seen good growth in our middle market banking business.
National large corporate loans in our verticals also grew albeit at a small slower pace and we have seen declining balances in commercial real estate reflective of the cycle and risk environment.
As well as in large ticket indirect leasing where we halted new originations in early 2018.
End of period commercial real estate loans were flat from last quarter.
Our balances as a percentage of total risk based capital remained very low at less than 80%.
Which keeps our commercial real estate exposure relative to capital near the bottom of our peer group.
Average commercial loans and leases increased 25% from the year ago quarter, and 16% from the prior quarter.
Commercial loan production increased 3% sequentially driven by strong middle market lending originations.
Second quarter middle market loan production outpaced the previous quarter and eight of our 13 markets.
In our Chicago region total end of period loans increased more than 1% sequentially.
Payoffs and Paydowns at the very end of the quarter had a larger impact on our national corporate banking portfolio.
Total commercial line utilization decreased 1% sequentially, but increased 2% year over year.
Our pipelines throughout the business remains solid.
Would a good start to the quarter, we expect to generate strong cnine loan growth in the second quarter, partially offset by declines in CRT and commercial lease businesses.
Average total commercial loans should be stable on a sequential basis in the third quarter compared to the second quarter.
We are mindful of the risks associated with the current environment and believe that we need to continue our prudent client selection and underwriting process as loans with aggressive pricing and structures at this point in the cycle may not necessarily be in the best interest of our shareholders.
Having said that we are confident that we will continue to prudently grow our portfolio within our current risk and profitability profile.
Excluding the positive impact of MB on a year over year basis, we have grown our cnine loans at 7.1% above the peer median.
For the full year, we continue to expect average total commercial loans to increase approximately 20% compared to 2018 again impacted by the MB acquisition.
Average consumer loans grew 9% from the same quarter last year.
Apart from MB, our core growth rate was strong driven by auto loan production of $1.4 billion during the quarter.
We are seeing continued decline in home equities growth in line with the industry and credit card growth in indirect auto and a flat residential mortgage portfolio in line with our view of the current rate cycle.
In the third quarter, we expect total average consumer loan balances to increase approximately 2% sequentially.
For the full year, we expect average total consumer loans to increase approximately 8% compared to 2018.
Combining the commercial and consumer portfolios. We currently expect full year 2019 average total loans to increase approximately 15% to 16% compared to 2018, which is unchanged compared to our previous guidance.
Moving on to slide six compared to the prior quarter and III increased.
$164 million or 15%.
Adjusting for purchase accounting accretion from the non PCI Mb loan portfolio, and III increased $149 million sequentially or 14%.
Our second quarter Eni benefited from a $16 million of PAA or five basis points of NIM.
The adjusted second quarter NIM of 3.32% increased four basis points from the first quarter consistent with our annual guidance.
As I mentioned before we are very pleased with the outcomes from the actions that we have taken with respect to our prudence and long term oriented interest rate risk management.
With these actions we have been able to protect our rate exposure to lower short term rates and particularly with our investment portfolio positioning so a flatter long end of the curve.
We have not executed any new hedges in the second quarter and a portion of the swaps that we executed last year have effective dates this quarter and the first quarter of 2020 with five year terms and at an average fixed rate of 3.14%.
In addition, the 2.25% one month LIBOR floors that we executed in late 2018 become effective December of this year again with a five year term.
We have included additional information related to our interest rate risk profile and investment portfolio positioning in the presentation appendix.
Interest bearing core deposit costs increased four basis points sequentially, which was below the peer average and was consistent with our previous guidance.
Our performance reflects our success in generating stable consumer deposit growth.
Our overall interest bearing liability costs continued to be very well maintained up only one basis points during the quarter.
Our outlook assumes 325 basis point rate cuts throughout the remainder of 2019 in July September and December .
In that environment, we assume that deposit betas will be in the high thirtys to 40 range.
As a result of these assumptions, we currently expect our third quarter Eni, excluding PAA to be up approximately 1% sequentially, reflecting the benefits of our larger earning asset base and day count.
Partially offset by continued market pressures from lower rates.
Our third quarter NIM.
Also excluding PA should be down approximately three basis points compared to the adjusted second quarter NIM of 3.32% due to the impact of lower short term rates.
We expect third the third quarter benefit from PPA declined to four basis points.
As a result of the expected three basis points decline in core NIM and a one basis point drag from lower accretion reported NIM should decline approximately four basis points compared to the reported second quarter NIM of 3.37%.
We have provided more detailed information in our presentation appendix related to our expectations for purchase accounting accretion, excluding the potential impact from prepayments as well as expected core deposit intangible amortization expense.
We expect full year, 2019, and III growth of approximately 15% to 16% compared to 2018, excluding PAA.
And including the impact from lower rates.
Should the fed cut rate to 75 basis points in the second half of 2019, we expect the NIM, excluding PAA on a full year basis to expand approximately seven point basis points in 2019 compared to our prior guidance of 10 basis points, which assumed static interest rates.
Moving on to slide seven.
Corporate banking fees were up 14% compared to the year ago quarter and up 22% from the prior quarter, reflecting the impact of leasing revenue from MB financial as well as solid core performance.
In capital markets, we experienced a less favorable environment during the quarter, which pressured revenues in debt capital markets and loan syndications.
For the third quarter, we currently expect our corporate banking revenue to increase approximately 7% compared to the second quarter, reflecting both the larger client base post MB and improved performance from the initiatives. We have previously discussed.
Card and processing revenue was up 10% compared to the year ago quarter, and increased 16% compared to the prior quarter, primarily reflecting increases in credit and debit transaction volumes, partially offset by higher rewards.
Wealth and asset management revenue was up 13% from the year ago quarter, and 9% from the prior quarter due to higher personal asset management revenue and institutional trust fees.
The sequential increase was partially offset by seasonally strong tax related private client service revenue in the prior quarter.
We are very optimistic about the AUM growth in the second half of the year, which also bodes well for growth in 2020.
Mortgage banking revenue was up 19% year over year and 13% sequentially.
Originated volume of $2.9 billion was up 76% from the last quarter and 36% from the same quarter last year.
The gain on sale margin from our retail channel increased from 235 basis points in the first quarter to 244 basis points in the second quarter.
Our total gain on sale margin up 166 basis points was down 10 basis points sequentially due to channel mix.
And was flat from the year ago quarter.
Deposit service charges increased 4% compared to the year ago quarter, and increased 9% compared to the prior quarter.
Performance from both the year ago quarter, and prior quarter reflected higher commercial deposit fees driven by the benefit of the MB client base, along with continued client acquisition the core fifth third franchise.
The growth in commercial deposit fees was partially offset by lower consumer deposit fees as we continue to focus on improving our product and service offerings.
For the third quarter, we expect total non interest income to increase approximately 2% from the adjusted second quarter of 2019.
And for the full year, we expect total noninterest income to increase 15% to 16% from the adjusted 2018 noninterest income.
Moving on to slide eight.
Second quarter reported expenses included merger related items from the MB transaction of $109 million as well as intangible amortization expense of $14 million.
Noninterest expense adjusted for these items and prior period items shown in our materials increased $102 million or 10% from the year ago quarter.
The expense growth for the quarter came in below the low end of our previous guidance demonstrating our continued commitment to maintaining expense discipline and achieving positive operating leverage.
Excluding the previously mentioned merger related items the year over year increase in expenses reflected higher compensation expenses and continued investments in technology.
The growth in expenses was partially offset by lower incentive based payments and the elimination of the FDIC surcharge.
We currently expect third quarter expenses to be flat sequentially from the adjusted second quarter 2019.
Also we expect full year 2019 expense growth of approximately 13% from an adjusted 2018 expense base of $3.865 billion.
All expense projections exclude merger related expenses and the impact of intangible amortization.
Our anti fee and expense outlook for the third quarter should continue to lower our efficiency ratio by another 50 basis points or so.
We are cognizant of potential challenges to the overall revenue growth expectations in light of the rate environment and recognize expense management as a tool to counter the impact of a weaker growth outlook.
We remain on track to deliver on the previously provided outlook for MB related expense savings.
We continue to expect to achieve $255 million in savings by the end of the first quarter 2020.
Our second quarter results reflected reflect approximately 40% of the total run rate expense savings targets.
Based on our current expectations at the end of the year, we are on target to capture 80% of the savings on a run rate basis.
Additionally, we continue to expect our total after tax merger charges inclusive of the merger related charges recognized in current and past periods as well as future projected charges to be approximately $250 million after tax.
Turning to credit results on slide nine.
Second quarter results.
The second quarter credit results continue to reflect the generally benign environment.
Our key credit metrics have remained stable and remain at or near historical lows.
The second quarter net charge off ratio of 29 basis points decreased 12 basis points from the year ago quarter, and three basis points from last quarter.
The commercial charge off ratio of 13 basis points increased slightly compared to last quarter and decreased 21 basis points from last year, while the consumer net charge off ratio of 59 basis points decreased nine basis points compared to last quarter.
The NPL ratio of 51 basis points declined one basis point compared to last year.
The H. Ablow ratio was flat sequentially at 1.2% with provision expense offsetting net charge offs due to slightly lower end of period loan balances.
Again, I would like to remind you that the current economic backdrop continues to support a relatively stable credit outlook with potential quarterly fluctuations given the current low absolute levels of charge offs.
Turning to slide 10.
Capital levels remained very strong during the second quarter, our common equity tier one ratio was estimated at 9.6% and our tangible common equity ratio, excluding unrealized gains and losses was 8.27%.
Our tangible book value per share was $20.03 this quarter up 11% year over year and 7%.
From the first quarter.
During the quarter, we initiated and settled $200 million in buybacks, which reduced common shares outstanding by approximately 7.2 million shares.
Additionally, at the end of the quarter, we settled the 1900 $913 million share repurchase initiated in the first quarter of 2019, which lowered share count another 2 million shares.
We also raised our common dividend two cents in June to 24 cents per share.
Through the first half of the year, we returned nearly 120% of earnings to shareholders through buybacks and common dividends.
At the end of June we announced our capital distribution capacity of approximately $2 billion for the period of July 119 through June Thirtyth, two up 2020.
This includes the ability to execute share repurchases as well as increased common stock dividends and exclude potential repurchases related to the remaining after tax gains from the previous sale of world pay stock.
As always our capital actions are subject to board approval and market conditions.
We continue to remain focused on disciplined capital management, we will continue caliber to calibrate our capital ratios through the risk profile of our balance sheet and business composition, which points to a lower level of capital than we currently have.
As always we will continue to take into account the prevailing macroeconomic conditions and peer group capital levels in our overall capital management approach.
Our medium term CD, one target is 9% to 9.5%.
Slide 11 provides a summary of our current outlook based on our third quarter and full year 2019 outlook. You can see we currently expect a strong finish to 2019.
The combination of our strong performance in the second quarter and the stable outlook in this challenging rate environment as encouraging even on there probably the most conservative rate outlook one can apply.
Reflecting the market expectation that the fed will most likely lower rates by 75 basis points by the end of 2019, we expect to generate a core ROTC of approximately 16.5% in the fourth quarter of 2019, excluding the impact of AOCI.
Furthermore, we expect our fourth quarter ROI to be in the 1.35% range with an efficiency ratio below 57%.
This is consistent with our previous guidance for the fourth quarter of 2019 with the exception of the impact of lower rates than what we previously expected.
We plan to provide more information regarding our revised 2020 return targets as late later this year as the future path of interest rates hopefully becomes clear.
In summary, I would like to reiterate a few items our second quarter results were strong and continue to demonstrate the progress we have made over the past few years towards achieving our goal of outperformance through the cycle.
Our execution on the MB acquisition is on track to meet our targets and guidance on both expense and revenue synergies.
Also we are on track to reposition our branch network to improve our market share in the southeast.
As always we remain intently focused on successfully executing against our strategic priorities.
And remain confident in our ability to achieve our financial targets.
With that let me turn it over to Chris to open the call up for M&A joining.
Thanks second before we start queuing AG as a courtesy dollars. We ask that you limit yourself to one question and a follow up and then return to the queue. If you have additional questions.
We will do our best to answer as many questions as possible in the time, we have a lot of this morning.
During the question and answer period. Please provide your name and that of your family operator.
Jay Please open the call for questions.
Thank you Craig at this time, if you will by Catholic question. Thank you press. The Star then the number one on your telephone keypad again Thats star one on your telephone keypad.
Our first question comes from the line of Scott Siefers of Sandler O'neill, Sir Your line is open.
Good morning, guys. Thanks for taking Alaska.
Okay.
Jeff I, just want to make sure I understand the guidance correctly I appreciate all the granularity just as I look specifically at the fee guidance for the full year.
Just given that we have happier.
Hi.
In the bag and then we've got the third quarter guide it looks like the fourth quarter.
Ramp would be just very very strong I wouldn't want to make sure I understand what all that.
The puts and takes are.
Sam I guess.
For the third quarter and now it sounds like corporate banking is going to be pretty strong with that ended the fourth quarter what would.
Drive that really big ramp.
Yes, so Scott the underlying.
Third quarter to fourth quarter growth is truly in corporate banking and a combination of overall capital markets as well as Treasury management as we look at our corporate Treasury management pipelines and the expected onboarding of some of those client revenues as well as in general our expectations with respect to just corporate banking fee activity.
That builds the basis for our outlook.
Okay. So it should be.
Well above $700 million I guess.
In fees in the fourth quarter, if I'm right mathematically that should be over $700 million that's correct yes.
Okay. Good all right. Thank you I appreciate that sure.
Our next question comes from the line of Ken Zerbe of Morgan Stanley . Your line is open.
Great. Thanks.
Just a question in terms of the March and I know the MB guys. Obviously helps you guys out a fair amount is there any way to separate out.
The benefit that you got on a core NIM basis, so ex the PAA.
From MB versus what fifth third would have done this quarter ex MD.
Yes, Ken its Jamie I would look at it as we left the first quarter. Our guide was we were going to grow from a 328 core NIM two or 332 core NIM, which is exactly what we posted.
When you decompose the NIM benefits.
I think we said on the last call we would expect.
The Mb loan and deposit portfolios to be additive to NIM.
And the challenge with unmet seeing the paint this quarter on the benefit as that we made a lot of investment portfolio and funding actions.
In advance of.
The MB acquisition, but in total I would decompose the NIM that a combination of the balance sheet positioning funding actions investment portfolio, plus MB loan and deposit portfolio benefit was eight basis points.
And then our core deposit growth on a core basis at fifth third was up 2% and that added a basis point. So we had nine basis points of benefit and then that benefit was partially offset by a basis point.
From a headwind from day count.
Basis point impact from the billion three on balance sheet auto securitization, we did in April .
And then the three basis point erosion from market rates, which as we've talked about in the past is primarily related to the one month LIBOR to fed funds spread which cost us a little over $1 million per quarter per basis point and that contracted.
To six basis points during the quarter. So when you take all of that together.
That posted the core NIM of four beps, but it is getting harder and harder to break out what MB did exclusive of the other actions. We took on the balance sheet. Yes. This maybe one last time that we are doing this but it's going to be very difficult going forward from here on.
Got it understood now that actually the answer is actually very helpful. And then just a really quick follow up.
Are you guys in terms of the hedging strategy I know you didn't add any more hedges. This quarter are you guys now fully done comfortable where you're at with the hedging.
You are hedging portfolio.
So we're definitely pleased with what we were able to execute I would tell you in the fourth quarter of 2018, we did the 11 billion.
Of total hedges 3 billion and floors, eight and received fixed swaps as typhoon mentioned.
3 billion of those received fixed swaps were forward starting 1 billion began in June another billion will begin in the third quarter and the final 1 billion dollar leg of that is in January I would love to do more but not at the entry points. So what we did this quarter and actually over the last six months as opposed to adding more hedges because we didn't like the entry points.
We effectively repositioned the investment portfolio to the equivalent.
Interest rate protection of about $10 billion in notional swap. So we included.
An extra page in the slide.
Dec is page 20, just to highlight the additional positioning we've done.
With the investment portfolio to highlight the protection that it will provide and so that obviously helps during the second quarter and helps protect the outlook as we go forward. So.
A long answer.
To a simple question, but at the end of the day. There are a lot of tools, we have at our disposal and we've been.
I think very effective at.
Utilizing them, whether its swaps investment portfolio. The fact that our CD portfolio is 76% of it matures and under 12 months, so that should reprice.
Fairly fast.
The fact that we put on additional fixed rate auto. So the auto production was 1 million four for the quarter and should be about $5.8 million for the year. So we've done a lot behind the scenes to help protect to the low rates and thats starting to shine through in the results.
All right perfect. Thank you.
Thank you. Our next question comes from the line of Matto corner of Deutsche Bank. Your line is open.
Good morning.
Net revenue.
You mentioned, the four Q1 9 targets, assuming CE tier one migrating down to about 9% compared to the 9.6 that you're at right now is that implying some front ending of the buybacks of $2 billion that that you're targeting for the next four quarters.
Now we should be I mean, we we will be.
We are not necessarily.
Providing how we're going to execute those but more or less I think it's going to be even.
We also as you know have.
A portion of the world paying gains still waiting to be converted to buybacks potentially.
Okay, all right and then just separately.
On the early stage delinquencies there were up both Q2, and then especially year over year and is that being the store at all from the NBC deal.
There's there's a little bit of noise. There. Some of those are our matured facilities that were in the process of getting through the.
The Pike Theyre small facilities overall, we expect that to subside over the next quarter or so there's nothing there that portends a deterioration in credit leading to losses or anything like that it's it's just working through some of the backlog we need with the adjustments primarily on MB and again not delinquent, but more so were churned facilities that we've had a plan in place to work through and we've made a lot of progress so.
You'll see that come down in the next couple of quarters.
Okay Thats helpful. Thank you.
Sure.
Thank you. Our next question comes from the line of Ken often of Jefferies.
Hi, Thanks. Good morning, one question on an on just the loan growth commentary, Greg you made in your intro so that.
Caution I guess on the commercial side is that just talking points or is that something that youre seeing you mentioned still the strong pipelines in the back half. So can you talk about whether that's anecdotal or actually.
Coming through in terms of a change and then the amount the pipeline that you guys are seeing.
Can we haven't seen a show up in our pipelines, yet and actually we feel very confident about our ability to deliver on the commitments. We just made on an asset growth for the second half of the year, but the conversations are less optimistic and obviously with the noise. That's out there right now potential slowing economy the rate environment on what's happening with the chairs and so forth just act cautionary discussion.
We are picking that up but once you get that kind of ebbs and flows but right now we had much seeing it show up in our pipelines I'm actually production, we held up very well in the second quarter and as we talked about.
And we expect that to materialize again and continue forward in the third and the fourth quarter of this year.
Okay got it and my second question just on the deposit cost side that tough to see kind of the underlying core Jamie you mentioned it a little bit in terms of the the.
Hi effect, but you had four basis points interest bearing cost increase below peers, probably because it on part of the averaging just how do you think about the trajectory of that.
Deposit interest bearing deposit cost from here and terms and the ability to start controlling that if not showing a rate of decline at some point.
So the deposit costs in the quarter MBS bulk at the end of the year and you can look at their fourth quarter release their deposit costs were roughly in line with our deposit costs not not far off at all so our.
Up for.
It was as we guided to last quarter, we thought we'd be up for we were up four and Thats.
Really the fifth third book, So we think it's been.
Rate costs have been well maintained on the deposit side for our forecast. If we were to not have a fed cut at the end of July I think Arden a normal amount of deposit rate increase for us will be up a bit or two just given mix and.
Promotional rates on new acquisition, because we continue to have good deposit growth, but given that we have a July cut and a September cut in the forecast those numbers I think we'll be down a bit or two from the levels that you see in the second quarter.
Got it thanks, Jamie.
Next question comes from the line of Mike Mayo of Wells Fargo Securities.
Hi, This question might go in the category of no. Good deed goes unpunished, but why not guide for lower expenses in the third quarter versus second lien not like you're done with the merger savings and also at what point would you increase the expected savings from the merger.
Well Mike.
We still continue to invest in our company. We are very much interested in maintaining a healthy revenue growth.
We are interested in making all the necessary technology investments that we need to make so as much as we like the way we manage expenses. We also want to make sure that we continue to support the franchise in terms of the overall expense savings I mean, we will we will share those with you, but I think we've proven over the past two three years that we are good stewards of expense and we will continue to execute on those terms.
And just a separate question.
In terms of the hedges that you put on last October and November I mean that was ahead of the industry. What are you doing now and what caused you to put on those hedges before so many others.
Mike.
Hey, Jamie gave a good discussion on the way we are managing the investment portfolio.
I think lately since sort of the end of last year into this year.
We've executed a few actions to position the investments in the investment portfolio, we thought that it was a better choice between executing through to transactions and moving the portfolio.
And.
We look at it.
The environments and market expectations every day and.
As certain windows.
Open we may choose to.
Add more direct hedge protection, but at this point.
We have been favoring moves on the investment portfolio to protect the downside, but that may change its a very fluid.
Process and we are very careful.
And.
I think over the years, we have we have a great team they have provided.
A great perspective on economic growth.
As well as.
Central Bank actions and.
Adam It's that same team will continue to monitor the situation as closely as they have been over the years.
Alright, thank you.
Next question comes from the line of Gerard Cassidy of RBC.
Good morning, guys.
Andrew New journey.
Can you guys share with us maybe Greg the outlook when you look out over the next 12 months.
Certainly the MB financial transaction from the numbers that we're hearing today seems to have started out very well.
I know at the time of the announcement this year stock suffered because of the deal.
Some of the metrics that were included in the deal, but what is your view going forward on consolidation and acquisitions.
Yes first of all we're extremely pleased with the VNB of acquisition of partnership and I do want to thank all the employees.
For their great leadership through this transition. So we're very pleased with that we're very pleased also along with the quality of that business and our forward going expectations to achieve or expense synergies in our revenue synergies.
We feel very very confident and as such we mentioned in his comments, we're slightly ahead of the expense side ALS.
And we're very bullish on the on new on the revenue side of the house as we start to look at some of those pipeline start to come together.
It all starts with the people we got great people will then be in partnership with the particular team in Chicago to serve that market with that said job. One is to get this done right and deliver on the commitments that we made that would be the 400 basis points in improving our efficiency ratio, which were Warner way to do that the 200 basis points. The printer ROTC to 12 basis points of orally improvement, we want to deliver on those commitments as we said, we would and to our investors and that's going to be job, one and we want to get that done right and demonstrate that going forward.
So our focus is on that our focus is on continuing to build and expand our businesses organically.
Whether we'd be growing into new markets.
Like California, Texas, our investments in the southeast.
Products services and people are going to continue to do that and Thats really the focus is and be in organic growth. There's nothing out there on horizon right now that we were focused on beyond that.
Very good and then.
Thanks, Ron maybe can you give us an update on C. So what you think the day one impact might be come first quarter of next year.
Gerard we're not quite ready yet to share obviously, there is a lot of work thats still going on there's still a lot of work ahead of us.
Between now and year end, we are in the middle of these parallel runs my expectation is the earliest we will probably potentially given update will be our third quarter earnings but.
We're working very diligently.
To finish all the work.
Okay. Thank you.
Sure.
Next question comes from the line of selling my TNF PBF. Your line is open.
Hey, good morning, guys.
Also.
So I'm sorry, because it really simple question I, just want to make sure I understand the the fourth quarter financial targets.
That and how to read that too.
You know that the 75 basis points of cut.
Have a 70 basis point impact Rossi five basis points on our away yet you basically maintained your full year guidance for.
All of the all of the items, including net interest income so I mean should we be.
Should we basically.
Assuming that.
Your run rate your expected run rate for Eni, maybe a little bit lower.
I think what you had previously but the full year number doesn't really change in part because you you.
Are you basically outperformed in the second quarter. So I just want to make sure I understand what the fourth quarter targets imply for run rate.
Yes, I think in general so.
As you remember the guidance that we provided back in April .
These.
Numbers do line up very well.
Including the impact of lower interest rates now on ROTC. The additional impact is coming through the AOCI and Thats why we wanted to exclude that and gave you the 16.5% excluding the AOCI.
Overall, if you'd take at our Eni guidance.
Up about 1% from the adjusted Q2, you will see that.
We're not necessarily expecting.
A growth into the Q4 based on that third.
Right got assumption.
And I mean, it's not like a big fall or anything like that but youre not going to expect another 1% growth over that in terms of.
Fee income.
Answered one of the earlier questions we are expecting.
A good amount of growth from the third quarter into the fourth quarter in terms of fee income and in terms of the expense outlook, it's not different these numbers.
Our large percentages because of the MB comparisons and therefore, you are not seeing the underlying movements, but.
Our expectation is that we had great performance in the second quarter with respect to Eni, we still expect very good performance in light of.
A lower rate environment, and we just kept our overall return targets pretty much intact. Despite.
The weaker.
Rate environment in because we just outperformed quite a bit in the second quarter I mean, thats really it has also a lot to do with.
Our ability to maintain our overall return targets.
Okay got it that makes sense.
That.
Just a follow up then on the deposit costs in the deposit beta assumptions.
I think you mentioned that we could expect with the with your rate assumptions.
A couple of basis points declined in the third quarter. We also mentioned that deposit betas, you're assuming your high Thirtys I think high Thirtys your low fortys.
If I if I recall.
How does that that high thirtys low fortys over what time period.
Does that play out so you're assuming 50 basis points to cut for example in the third quarter should we assume that deposit cost.
Then in the fourth quarter will reflect that beta assumption or does that deposit beta play out over over a multi quarter type of time horizon.
Yeah. Its very good question and unfortunately, the answers somewhat complicated because you have about 12% of our deposit book is index. The fed funds. So when the fed moves 12% is going to reprice immediately at 100% beta but then we have various offers that are out there that those deposit rates will come down over time, so it's really a blend.
That will deliver it and steffan mentioned over the three rate movements were modeling a 38% beta which.
Is exactly what our cycle to date made on was on the 225 basis points of fed funds increases.
Okay, and if I could ask maybe one final one on that that those index deposits were really baked in is in the other day time deposit.
It's across the board.
Yes, I'd say, it's fairly evenly distributed.
It's probably mess in other deposit franchise in more of a saving more and I think Laura.
I'm, sorry, what was that.
It's more in savings and IBT as opposed to other.
Got it and are they mainly commercial deposits.
Yes, yes.
Got it all right. Thanks, so much.
Yes.
Next question comes from the line of Marty Mosby off Vining Sparks Your line is open.
Thanks, Tom first let me maybe give you.
A little more credence, then you give yourself 'cause I'll listen to a lot of different calls every corner.
And your approach to net interest income of being neutral.
When everybody else was still enamored with being asset sensitive.
Gives you the flexibility to take advantage of those events when you solve them because youre goal at the end just trying to be as neutral as you can on what you see on the interest rate sensitivity numbers.
So I think that perspective gives me a lot of flexibility.
Horses trying to play whats happening even if it seems like the momentum is going to continue on the right direction. So always like listen your calls Hi Fi on Jamie I'll have done a great job of getting ahead.
By keeping that perspective.
In that.
Vein one of the things that you've done I think is being able to keep these cash flow securities out.
In a sense of as your cut off.
Moving from mortgage back into these locked out type of securities premium amortization. This quarter was pretty minimal so I just wanted to.
When you mentioned in your margin you didn't mention any premium amortization on mortgage backed securities. So is it true that this corner underneath all these numbers that would be a pretty minimal impact.
As we have been shifting the portfolio.
Yes, and I Didnt give that data point, but that's exactly what the repositioning accomplished I think we ran last year net premium amortization of $6 million.
Dollars a quarter I think this quarter, we were around $2 million, so that benefit definitely showed up in the quarter.
And when you compare that to other banks that went from like a six last year its probably four times that this this corner with all the prepayment speeds.
Accelerating that was a big kicker in the sense of how you outperform so dramatically on your and I because it took that risk out of the equation.
The other thing that I want to once it starts off a very easy question the wrap it up here.
If you look at operating leases you mentioned that in the income statement and expenses can you give us a little feel for what it was this quarter and what has been in prior quarters.
So the.
Approximates on out I'll give you the number on the revenue side.
Increase is probably about $20 million ish.
Quarter over quarter.
Q1 to Q2.
And what's the base this quarter, how much was it in total.
I doubt about 40 $45 million Marty.
Okay. Thank you.
Our last question comes from the line of Kevin seeing tier of PSP research Sir Your line is open.
Good morning, Thanks for taking my question.
Tetra and you mentioned that one thing that has benefited the NIM and your NII performance was the decision not to grow the the first mortgage portfolio.
You did guide to third quarter increase in consumer loans of about 2% has your thinking with the prospect of lower rates has your thinking changed there are you expecting growth in other loan categories, Yes, we're not.
Our.
Our outlook at least for the second half of this year.
Sort of matches the production patterns with respect to the re Fi environment.
I don't think that by the time, we get to year end, our residential portfolio outstandings will be much different from where we are today.
Gotcha, Okay, and maybe one final.
I noticed pretty stable.
Demand deposits period end quarter to quarter on the linked quarter could you speak to deposit attrition at at MB and how things are going there.
Yes, the deposit attrition at MB is.
Going fine it's.
Slightly less than the attrition they experience for the 28 months, leading up to the acquisitions no. It's right in line to slightly better.
Great. Thanks very much.
Thank you.
There are no further question at this time, Chris you May continue.
Thank you Jay and thank you all for your interest in fifth third bank give any follow up questions. Please contact the IR Department and we will be happy to assist you.
This concludes today's conference call you may now disconnect have a great day.