Fifth Third(US:FITB)2023-01-19 19:05Financial Data and Key Metrics - The company expects the full-year 2023 net interest margin (NIM) to increase by approximately five basis points compared to the fourth quarter of 2022 NIM [1] - Net interest income (NII) in the first quarter is expected to decline by 1% to 2% sequentially due to a lower day count and stable loan balances [1] - Full-year adjusted non-interest expense is projected to increase by 4% to 5% compared to 2022, driven by FDIC insurance assessment rate changes, mark-to-market impacts, and the full-year expense impact of Dividend Finance [2] - The company achieved a full-year adjusted efficiency ratio of 56%, with the fourth quarter adjusted efficiency ratio below 52% [69] - Fourth-quarter PPNR grew 12% sequentially and 40% year-over-year, with net interest income reaching a record $1.6 billion, up 5% sequentially and 32% year-over-year [69] Business Line Performance - The commercial loan portfolio is expected to grow in the mid-single digits in 2023, with strong production in energy (including renewables) and healthcare (led by Provide) [92] - Consumer loan growth is expected to be modest, driven by Dividend Finance and home equity, offset by declines in auto and mortgage loans [114] - Dividend Finance is expected to generate over $200 million in gross income growth in 2023, with originations projected at $4.5 billion, heavily weighted toward solar (90%) [163] - The company's treasury management business is performing well, providing significant deposit support and growth [21] Market Performance - The Southeast market is a key growth driver, with consumer deposits growing over 6% in 2022 and plans to add 30 to 35 new branches in 2023 [126][134] - Commercial real estate performance remains stable, with multifamily and industrial sectors showing strong demand, while office space faces some pressure due to declining occupancy and lease rates [177][38] Strategic Direction and Industry Competition - The company is focused on long-term value creation through strong PPNR growth, disciplined credit risk management, and strategic investments in technology and digital transformation [3][66] - Investments in FinTech platforms like Dividend Finance and Provide have positioned the company as a market leader, with Dividend ranking third and Provide ranking second in their respective markets [66] - The company is leveraging its strong deposit franchise, investment portfolio positioning, and fixed-rate lending capabilities to deliver stable NII through various rate environments [112] Management Commentary on Operating Environment and Future Outlook - Management anticipates a shallow recession but believes the banking sector, particularly Fifth Third, is well-positioned due to derisking efforts over the past decade [14] - The company expects continued deposit competition, with total interest-bearing deposit costs projected to increase in the first half of 2023 before stabilizing around 2% in the second half [95] - Management is cautious about the Fed's ability to lower rates quickly and emphasizes the need to position the balance sheet for tepid growth and higher rates over the next three to five years [8] Other Important Information - The company's CET1 ratio increased to 9.3% in the fourth quarter, with plans to maintain a 9.25% CET1 ratio in 2023 and resume share repurchases totaling approximately $1 billion [81] - The allowance for credit losses (ACL) increased by $112 million in the fourth quarter, primarily due to loan growth, with Dividend Finance contributing $96 million to the build [84] - The company expects first-quarter adjusted non-interest expenses to increase by 6% to 7% sequentially, driven by seasonal factors, but excluding these, expenses are expected to decline by 2% [115] Q&A Summary Question: Outlook on loan loss reserves and commercial customer sentiment [136] - Management does not foresee a significant downturn in the second half of the year, citing optimism among manufacturing clients regarding raw material costs and supply chain improvements [137] - Labor costs and availability remain challenges, with businesses looking to pass on rising debt service costs over the next 18 to 24 months [97] Question: AOCI accretion and securities portfolio yields [138] - The AOCI earns back approximately $1 billion of TCE per year, with significant improvement in the first 19 days of January due to lower 10-year rates [9] - The securities portfolio is expected to yield around 3.05% on average for the year, with new investments entering at approximately 4.75% [138] Question: Recession outlook and reserve assumptions [140] - Management anticipates a shallow recession but emphasizes the uncertainty around the duration and recovery trajectory, with unemployment potentially peaking at 4.2% in the baseline scenario [149] Question: NII guidance and securities portfolio management [148] - The company's NII guidance reflects years of balance sheet positioning, including fixed-rate loan origination platforms and $15 billion in received fixed swaps, providing downside protection [36] Question: Fee income trajectory and capital markets recovery [147] - Fee income is expected to remain relatively stable, with growth in treasury management, wealth management, and capital markets fees offsetting headwinds from higher earnings credit rates [156] Question: Credit trends in commercial real estate and home equity [185] - Commercial real estate delinquencies remain low, with office space being the primary area of concern due to declining occupancy and lease rates [38] - Home equity delinquencies are seasonal, with no significant credit quality concerns, and the portfolio is expected to normalize over time [167] Question: Dividend Finance growth and loss rate assumptions [176] - Dividend Finance is expected to generate $4.5 billion in originations in 2023, with loss rates modeled at 125 basis points annually over an eight-year life [173]