Q3 2024 Earnings Summary
- Branches in the Southeast are generating strong returns, with IRRs of 18% to 20% and break-even times of a couple of years; Fifth Third plans to accelerate investments in this proven strategy.
- A normalization of the yield curve, particularly a steepening, would be very powerful for Fifth Third's net interest income, enhancing the balance sheet portion of their revenue.
- Fifth Third maintains confidence in their earnings trajectory, enabling them to dynamically allocate capital, including share buybacks, while continuing to generate necessary capital for organic growth.
- Increased competition in the Southeast from recovered competitors and big banks investing heavily in technology and digital services may make it tougher for Fifth Third Bancorp to expand and take market share.
- The company acknowledges that a low and flat yield curve is a challenging environment for the banking system, potentially impacting profitability.
- Fifth Third may be losing lending opportunities to private credit lenders who are willing to engage in riskier lending practices, potentially affecting loan growth.
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Impact of Yield Curve Changes on NII
Q: How would a normal yield curve affect NII growth in 2025?
A: Bryan Preston stated that if the yield curve steepens and the inversion ends, it would significantly boost their net interest income (NII) in 2025. They expect relief on liability costs and potential benefits from fixed-rate asset spreads. A normal curve would also allow them to enhance economics from their securities and swap portfolios, leading to a significant expansion of net interest margin (NIM). Timothy Spence added that such an environment would be very favorable for their balance sheet revenue. -
Record NII in 2025 and Loan Growth
Q: Can you update us on achieving record NII in 2025 and required loan growth?
A: Bryan Preston expressed confidence in generating record NII in 2025 without needing "heroic loan growth". They are seeing increased activity and believe that commercial loan decreases are behind them, with strong tailwinds in consumer businesses driving loan growth. While some loan growth would be helpful, the NII outcome is dependent on the environment and shape of the yield curve. -
Loan Growth Expectations and Drivers
Q: Why was loan growth flat despite highest production in five quarters?
A: Bryan Preston explained that loan paydowns of about $900 million and a 1% utilization headwind (approximately $800 million) offset their loan production. They do not expect these pressures to continue and have seen utilization stabilize, anticipating loan growth moving forward. Earlier capital markets activity contributed to paydowns, but they expect a return to normalized levels, which should support loan growth. -
Deposit Betas and Repricing
Q: What's the expected cadence of deposit beta repricing over the next quarters?
A: Bryan Preston noted that achieving their target cumulative deposit beta in the high 50% range will take about two quarters due to the maturity of certificates of deposit (CDs). 75% of their CDs, amounting to $13 billion, will mature between now and the end of the first quarter. Retail deposit repricing lags commercial deposits due to promotional guarantee periods and CD maturities. Maintaining a 150 to 200 basis points deposit spread seems achievable, depending on curve shape and loan growth opportunities. -
Capital Allocation and Share Buybacks
Q: How will capital returns to shareholders be managed under new regulations?
A: Bryan Preston stated their target dividend payout ratio is 35% to 45% in a normalized environment. Share buybacks depend on capacity relative to organic growth opportunities. Currently, $200 million to $300 million in share buybacks feels appropriate. With expected loan growth next year, they might reduce buybacks to invest more in organic opportunities. -
Competition from Non-bank Lenders
Q: Are you seeing increased competition from private credit lenders?
A: Timothy Spence acknowledged competition at the margins, mainly in leveraged lending. Private lenders are engaging in practices like payment-in-kind lending, which comprises 25% to 33% of portfolios at major private credit shops. Fifth Third avoids such practices, focusing on maintaining portfolio quality. -
Credit Quality and Risks
Q: What's causing NPAs to reach normalized levels, and are there credit concerns?
A: Greg Schroeck noted that non-performing assets increased due to five loans across five different industries. Delinquencies remain at all-time low levels, and criticized assets decreased by $8 million quarter-over-quarter. In consumer lending, there is some softness in auto and RV portfolios, particularly in the 2022 and 2023 vintages, but they are outperforming securitization data by 50 to 60 basis points. Overall, they are not seeing signs of credit weakening.