Q4 2023 Earnings Summary
- Strong Credit Quality with Disciplined Underwriting: FITB has maintained excellent asset quality, especially in commercial real estate, with underwriting at below 60% loan-to-value ratios, 90% recourse on the portfolio, and no significant wall of maturities, leading to confidence in their marks and overall asset quality.
- Positioned to Benefit from Potential Interest Rate Cuts: The bank expects deposit costs to decrease throughout 2024, especially if rate cuts occur, which could improve net interest income and net interest margin, leveraging their ability to reprice deposits lower and benefit from fixed-rate asset repricing of about $300 million of annualized run rate NII improvement.
- Strategic Growth Through Market Share Gains: FITB is gaining market share by investing in high-growth Southeast markets, expanding their middle-market relationships by 11% year-over-year, adding nearly 100 new quality relationships in Chicago alone, and growing deposits in the Southeast by 5% in the fourth quarter, driving deposit growth and customer acquisition beyond regional peers.
- Loan growth is expected to be limited due to cautious customer sentiment and lack of robust loan demand, potentially putting pressure on earnings growth.
- The bank anticipates operating with a lower loan-to-deposit ratio in the mid-70s, down from pre-pandemic levels in the mid-80s, which may impact profitability due to less efficient use of deposits.
- Higher deposit betas in commercial and wealth segments (ranging from low to high 80%), could lead to increased deposit costs and further net interest margin compression.
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NII Outlook and Deposit Betas
Q: What's the NII outlook and assumed deposit betas?
A: We expect deposit betas on the way down to be similar to recent hikes, in the 60-70% range. This assumption supports our NII outlook, anticipating that as rates fall, deposit costs will decrease accordingly. -
Capital Levels and Share Buybacks
Q: Are you sure about share buybacks amid capital requirements?
A: We are confident in our capital levels and expect to reach a CET1 ratio of 10.5% by mid-year. If proposed regulatory rules are eased, particularly around operational risk and credit risk RWAs, we could have additional capacity for share buybacks beyond the planned $300-400 million. -
Commercial Real Estate Exposure
Q: Why is your CRE exposure performing so well?
A: We are confident in our marks and asset quality. Our disciplined client selection includes underwriting office loans at below 60% loan-to-value with 90% recourse. Borrowers are supporting their projects, and we have evenly split maturities over the next 4-5 years, avoiding a wall of maturities. -
Loan Demand and Growth Strategy
Q: What's your expectation for loan demand this year?
A: Our customers are cautious but not pessimistic. We don't expect a big pickup in loan demand, so growth will come from market share gains. We're investing in middle market expansion, with our sales force in these areas up 20% over a three-year period. -
Economic Outlook Impact
Q: How would a stronger economy affect your plans?
A: A stronger economy isn't a remote scenario. If rates stay higher due to robust growth, the long end of the curve could move up, benefiting us with $300 million of annualized NII improvement from fixed-rate asset repricing. -
Loan-to-Deposit Ratio Expectations
Q: Is a 70% loan-to-deposit ratio the new normal?
A: We don't see 72% as our long-term target. Due to heightened liquidity expectations, we expect to operate in the mid-70s loan-to-deposit ratio over the long term. -
Commercial DDA Behavior in Rate Cuts
Q: How will commercial DDAs behave when rates fall?
A: We expect DDAs to stop migrating into interest-bearing accounts and begin growing as rates are cut. Typically, we model $500 million to $1 billion of DDA migration per 100 basis points of rate changes. -
Increase in Consumer Loan NPLs
Q: Why did other consumer loan NPLs increase?
A: The increase is mainly due to Dividend Finance. We've made decisions to support borrowers experiencing delays with solar panel installations, resulting in deferments or modifications. While there is some loss content, it's appropriately reserved and not expected to impact income significantly.