Fifth Third Bancorp (FITB) Earnings Call Transcript & Summary

Great. Welcome to the third and final day of Barclays 20th Annual Global Financial Services Conference. Thank you for sticking through it. This morning, we got 5 regional banks in this room. We've got several panels in the room next door. And then please stick around for lunch. We're going to have a full analyst recap panel and some more fun with ARS from a macro perspective. Very pleased to kicking off Day 3 is Fifth Third. From the company, we have Tim Spence, CEO as of July 5; as well as Jamie Leonard, Chief Financial Officer. Tim?

Thank you, Jason. And thanks to everybody who braved the early morning hours to join us here in New York. It's nice to be with you in person at this time. As Jason mentioned, I'm joined by our CFO, Jamie Leonard, and we're looking forward to discussing Fifth Third's current positioning and strategic priorities with you. I'm going to cover the prepared remarks and our presentation. And after that, we'd be happy to answer any questions that you have. At Fifth Third, everything we do is rooted in our purpose, which is to improve the lives of our customers and the well-being of our communities. We believe we can only be successful over the long term if we generate sustainable value for customers, communities, employees and shareholders alike. I am very proud of the company we run. We activate our purpose every day through our core values and our vision to be the one bank that people most value and trust. If there are 2 things you take away from our presentation today, I hope they are these. First, we are extremely well positioned now and into the future. And second, we have a proven high-quality organic growth engine. These both support our belief that we can consistently deliver superior financial results through the economic cycle. The greatest change for Fifth Third since the financial crisis has been our balance sheet positioning from both an interest rate and a credit quality perspective. We've worked diligently to position the balance sheet to deliver less volatile results with lower overall credit losses. We believe we've achieved this through a decade of disciplined client selection and deliberate emphasis on portfolios that are more resilient under stress. Because of this, we believe our credit losses will perform very well relative to peers. I will share specific proof points related to both consumer and commercial credit in a moment. We have also managed the balance sheet in order to produce strong and stable PPNR. We added securities and derivatives to hedge beyond the next few years under an environment where the Fed eventually transitions to easing rates. Our acquisitions of Provide and Dividend also have added granular fixed rate loan generation engines. These actions should support a longer-term NIM floor of around 3% even in the event that the Fed eventually lowers rates back to 0. We are prudently positioned from an expense standpoint. We have one of the lowest efficiency ratios among peers, reflecting our disciplined approach to continuous improvement and our expenses have grown less than 2% annually over the past 2 years, well below our peers. Now let's turn to organic growth. In the Consumer segment, we have generated strong household growth significantly above the U.S. average for the past 5 years. We have taken share in every one of our metro markets. We continually or continue to strategically expand our Southeast branch presence in key MSAs. Over the past 3 years, we have opened more branches in the Southeast than all banks besides JPMorgan. These next-gen branches are 40% smaller than our legacy branches, are positioned in desirable locations, and provide an inviting atmosphere. Over the next 3 years, we expect to add approximately 100 more branches in these same Southeast markets. In our Commercial segment, we have generated record levels of new quality relationships, leading to record loan production and fee revenue growth, particularly in treasury management, M&A advisory and financial risk management. In our Wealth and Asset Management segment, excluding tax payments, we generated positive AUM flows in every one of the past 12 quarters. We continue to invest in our wealth business through new capabilities and key sales force talent additions. Our prudent approach and persistent focus on maximizing long-term value throughout the company has consistently resulted in top quartile results among our peers. As an aside, my personal philosophy and the message I deliver throughout the company is if we want to be great, we have to measure ourselves against the best and, in turn, continually raise our level of expectation. We challenge ourselves to get better on an ongoing basis, which is what great companies do. Slide 5 summarizes our strong regional banking footprint. Approximately 80% of our deposits are in markets where we have a top 5 market share. Our footprint affords us the ability to take advantage of the 2 secular trends in the economy, the resurgence in manufacturing in our Midwest and Southeast markets, and demographic migration to the Southeast. We maintain the #2 market share in our core Midwest franchise and are ranked sixth by locations in our Southeast markets. Given our Midwest roots, we are a leader among peers in manufacturing lending. The Midwest possesses logistical advantages, skilled labor and a low cost of doing business that will enable it to benefit disproportionately as companies strengthen domestic supply chains and onshore production. Two recent examples of this are just around the corner from our headquarters. In Columbus, Ohio, Intel just broke ground on what will be the world's largest and most advanced semiconductor production facility. It's expected to create over 10,000 jobs. In Cincinnati, Amazon recently completed construction of a $1.5 billion prime air hub facility, the center of Amazon's U.S. cargo network. We're seeing similar investments from the auto industry as major manufacturers retool supply lines for electric vehicles and domestic battery production. We also continue to take share in our high-growth Southeast markets. As I mentioned, we've added 57 branches in the Southeast over the past 3 years, and we generated household growth of 6% in the Southeast last year, which is 8x the industry average in those markets. Slide 6 provides more detail on our Southeast footprint and our high-priority metro markets, including North and South Carolina, which led the way with 10% household growth last year. We ranked fourth in the Charlotte market and now operate 47 locations. In the Raleigh-Durham Chapel Hill Research Triangle, we are planning to go from 5 branches a few years ago to approximately 25 branches in 2024. In Greenville, South Carolina, we entered the market 10 years ago with a commercial loan production office and recently added our first retail branch in 2020. We expect to have 10 branches in Greenville and Spartanburg in 2024. And now, Charleston is our most recent focus market, with the first branch opening early next year and growing to over 10 branches by the end of 2025. Stepping back to look at our overall deposit franchise on Slide 7, we are in a strong liquidity position. Our loan-to-deposit ratio remains well below historical trends and our deposit strength is the result of our strategic focus on generating primary relationships. This gives us the confidence in our ability to fund loan growth with core deposits. We were clear with our intent to let $10 billion in surge deposits leave the bank in the first half of the year, and we have remained disciplined from a pricing standpoint. We ranked fourth lowest in deposit costs among our peer group. This is an area where we've made considerable progress and it contrasts with 2015 when Fifth Third was one of the highest among peers in terms of deposit costs. Our depositors use their Fifth Third accounts for daily banking activities more than we see at peers, as shown on the bottom of the slide. We ranked #1 in the ratio of annual ACH origination volumes versus deposit balances at nearly 4:1 while some peers are less than 1:1. Additionally, our depositors increased the volume of ACH credit received transactions, an industry proxy for direct deposit share by 10% last year. Again, #1 among our peers. Slide 8 highlights the strength of our consumer and commercial deposit franchises individually. In Consumer, we ranked #1 in terms of the allocation of retail deposits in the stable category, among all institutions that report as part of the LCR rule. Our consumer deposit portfolio also provides granularity and stability to the balance sheet given the large proportion of stable deposits. We ranked third among our peers and our mix of deposits of $250,000 or less and second among our peers in our mix of deposits to individuals. Our commercial deposit franchise is led by our peer-leading treasury management business. We have the highest percentage of TM fees relative to total loan commitments among our peers. We ranked #2 through #9 nationally in most payment types, as shown in EY's annual cash management survey. Business momentum in treasury management remained strong as gross treasury management revenue increased 7% year-over-year in the second quarter and has continued to be strong throughout the third. We expect our spot deposit balances to be stable from June 30 to September 30. The dynamic of inflows and outflows throughout the quarter will likely result in an average decline in the third quarter of another couple billion or so than we originally communicated, but we expect to return to growth in the fourth quarter. Moving to Slide 9. Over the past few years, we have established ourselves as a leader in providing innovative software-led solutions that meet customer needs. Our momentum banking platform and TM managed services address our consumer and commercial clients' everyday banking needs. In a world where software is the product, it's critical to continually improve your offerings. Momentum is an illustration of this. It was launched in 2021 and was the first fintech equivalent everyday banking solution among traditional banks. Shortly after its launch, we launched Algorithmic Savings. Then we extended our 2-day Early Pay feature to include gig workers, government payments and retirement accounts. And in the fourth quarter of this year, we'll be adding several new capabilities as part of a ground-up rebuild of our mobile app. We just surpassed 1 million Momentum households this quarter. Momentum resonates most strongly with millennial professionals with a median age of 36 and average deposit balances of $10,000. In our treasury management business, we focused on building software-enabled solutions that digitize and automate the order-to-cash and procure-to-pay cycles. This has become a large business for us with total managed services ecosystem revenue of approximately $175 million in 2022, which we expect to grow at a double-digit CAGR going forward. Our managed services business is also a tip of the spear offering for us. One-third of new treasury management relationships are TM led. Dividend Finance supports customers who are improving their homes, primarily through rooftop solar and energy storage. Dividend is a top 5 national residential solar lender. And since acquiring Dividend, we have added several national contractors, and rising energy costs plus the recent federal programs should only grow the total addressable market and opportunities for our business, provide our other fintech platform, assist medical professionals in starting or buying their own practice, provide focuses on dental, veterinary and vision segments and delivers a best-in-class experience through its digital capabilities. We continue to expect strong origination volumes exceeding our original business plans, reflecting a healthy pipeline, added product capabilities and key talent hires. This is also a relationship business for us with over 80% of Provide customers also signing up for a payment service or a deposit account, and the average customer is maintaining deposit balances of roughly $130,000. These are just a few examples of how we have continued to prioritize the needs of our customers with a commitment to best-in-class products and services. Moving to Slide 10. Fifth Third's approach to platform modernization is centered around our ability to accelerate our speed to market, maximize efficiencies and better serve our customers. As you know, technology runs deep in Fifth Third's DNA, and we understand what it takes to make these conversions successful. Job 1 in the conversion is simplifying your products and processes, and Job 2 is limiting the customization of the new platform. Today, we have only 11 consumer checking and savings accounts compared to the hundreds that were in our back book as recently as 2015, and which is likely still the case at many other banks. We also recently eliminated roughly 50% of our treasury management billing codes, which will drastically simplify the IT conversion process on that side as well. We have good discipline as it relates to limiting customization on these new hosted platforms. This matters because achieving the efficiency and speed-to-market benefits you get from a new platform requires that you be able to accept ongoing code releases without laborious testing and implementation. Our nCino commercial loan implementation is a good example of this. Our instance has less than 5% customization compared to the majority of our peers having 10% and some having substantially more. We expect the modernization of our most significant core systems will be completed by 2025 as indicated on the slide. Slide 11 highlights the credit resilience of our consumer loan portfolio. Our portfolio is a little bit different than many peers in that we have less than 3% of the total allocation to sub-660 FICO borrowers and 85% of our overall consumer loans are to homeowners, including 75% homeownership rates in our auto and credit card portfolios. More than 80% of our consumer loan portfolio is represented by consumers who earn more than $60,000 a year compared to just 50% among the U.S. population. All these factors should provide differentiated outcomes for Fifth Third in an environment of inflation and rising rates. Moving to Slide 12. We have also deliberately positioned our commercial portfolio for a through-the-cycle return perspective. The portfolio is well diversified across subsectors and geographies. Over the past decade, as I mentioned, we have transformed our approach to credit risk management, centralizing credit underwriting with geographic sector and product level concentration limits. In addition, we've exited commercial relationships that didn't fit our risk-return profile, focusing instead on high-quality relationships with more diversified and resilient business models. We proactively monitor our commercial portfolio for signs of stress, and our underwriting process includes stressing a borrower under a 200 basis point rate shock over and above what is already assumed in forward curve. Credit quality remains benign, and we don't see any signs of elevated stress relative to the outlook we provided in July. We've maintained our credit discipline and expect to outperform peers if and when the cycle turns. We've also continued to monitor portfolios with industry-specific risk. We've deliberately lowered our allocation to commercial real estate, which is continually ranked among the lowest relative to peers as a percentage of total risk-based capital. Furthermore, we've deliberately lowered our highly monitored leveraged loan portfolio over the past several years given the risk return profile. In summary, we will maintain our disciplined -- our management discipline throughout the bank and our focus on generating organic relationship growth. This includes maintaining our discipline about deploying capital with a focus on supporting organic growth, providing for a strong dividend and funding small nonbank acquisitions, followed by share repurchases. Bank acquisitions are not a priority at Fifth Third. With that, Jamie and I are happy to take your questions. Thank you.

Thanks, Tim. As Tim takes the seat, maybe we'll come up with the first ARS question that we've been asking for each of the companies. Just what's your current position in the shares of Fifth Third?

For the record, I'm overweight.

I was just going to say we're long...

I guess, Tim, as they're answering, you've been in your new role for a few months now, obviously not new to the company. But I guess, first, like any surprises as you take down that role? And I realize it's no major strategic shift based on your presentation, but kind of a new kind of points of emphasis we should be looking out for.

I mean I think the biggest surprise is my jokes got a lot funnier on July 5 than they were prior to that. No, as you said, I'm new to my role, not new to the company and spent several years responsible for the bank strategy and then increasingly more and more of the business lines. So the message inside the company has really been one of continuity, right, and of the embrace of what we now have the potential to achieve in the future. I think I am exceptionally proud of the progress the bank made over the course of the last decade, both as it related to derisking and then in particular, with the focus on the core profitability and the return profile. What we have built that I think we're probably less appreciated for at the moment is a really powerful organic growth engine. And as I look across the company, I look at the prospects for the bank in the Southeast markets, I look at the degree to which we're well positioned against the sort of secular trends of green energy with Dividend and our commercial solar business or with the resurgence of U.S. manufacturing. And otherwise, I just think we have a very bright future.

Got it. Why don't we put up the next ARS question? With the new CEO at the helm, what do you think his #1 priority should be? And as the audience answers, we'll move on to my next question. But as you know, I read a lot of the local newspapers. Tim, you seem to travel a lot to the regions. You had quoted by a lot of the local papers in various markets. But as you go out and talk to customers, I guess, what do you hear? Obviously, we hear high inflation, rising interest rates, but maybe more on the ground, what are their concerns, prospects? And how do you just feel about the help of...

Yes. We are big believers in the value of having executive leadership close to the business, right? There's nobody who has a better view of how well your company is or isn't doing than the folks who have to interact with clients every day. So you're right, we spend a lot of time out in the markets. And I find it to be valuable in terms of the input that you get, just in informing big business decisions. At the moment, we hear the same basic things that I think everybody does as it relates to the impacts of inflation, supply chain concerns, labor supply, and otherwise. Some of that has been a little bit of a tailwind as it related to the utilization, right? What -- I think we're hearing more of, we're hearing less in the way of folks holding out hope that the geopolitical environment will result in what settled down or a result to return to these componentized global supply chains and much more focused on the way in which they can build domestic capacity to serve the U.S. market. The issue they have, right, is that the labor challenges that we're all facing right now are not a short-term issue. The great resignation was sort of a head fake. The bigger issue is the U.S. has now 1 of 40 companies around the world where the labor force is going to shrink every year, for then at least the next decade because of the shape of the demographic pyramid. And because we're big in manufacturing and logistics, I think the thing we're talking to our clients about is labor productivity. How do you make investments in your factory or in your warehouse to reduce your reliance on labor, right? Whether you are running a distribution business or a component manufacturer or I think I mentioned this on an earnings call, a commercial laundry business. Everybody has to find ways to do more with fewer people going forward. And for banks like Fifth Third, who are good at equipment leasing and who are good at understanding the manufacturing business, that's going to be a big tailwind for us regardless of what happens overall in terms of the outlook.

Interesting. I think you'd be happy to see first place is organic growth and the last place is inorganic growth, consistent with what we heard from the podium.

I'm just happy that there's a balance, because this is like asking me to choose between my children, right?

I guess, Jamie, maybe shift to you. It sounds like a move to automation among your customer base is a loan growth opportunity. Maybe kind of just segue that into -- in terms of just kind of -- we had pretty strong loan growth in the first half of the year. Maybe talk about your prospects in the back half of the year into next as you think about lending into a potentially slowing economic scenario.

Yes. Tim mentioned the first half of the year was very strong growth -- loan growth, primarily driven by C&I and one of the benefits to that loan growth was the line utilization uptick that we saw. So the second half of the year, the C&I growth, we expect to occur at a slower pace, in part because line utilization, we expect to be stable. And frankly, through yesterday in the third quarter, we are stable at 37%. So that's playing out as expected. Some of the borrowing activity has tempered a little bit on C&I. But overall, we'll hit our guide of loan growth of 1% for the third quarter. We expect to be up 5% to 5.5% on a full year basis. And what's bolstering a little bit of the slowdown in C&I is the improvement in Dividend. The Dividend Finance is just off to a tremendous start. They'll do over $800 million of production in the third quarter, over $1 billion in the fourth quarter. So we really like the asset. It will have CECL implications, obviously, with the ACL because it's a long-dated asset. So it draws a higher ACL build. But frankly, we're very pleased with what we're seeing from loan growth and again, just consistently hitting the numbers and hitting the guide.

I guess loan's up 5% to 5.5% of the year. I think you said 6% on the call so...

Yes, we're getting a little bit tighter as the days are behind us. So I think loans, within the guide, but now that we're into September, we can tighten that up for you. Just to hit some of the other items on the guide, we expect to be at the high end of the revenue guide. We said 7 to 8. I'd put that at 8 at this point. Expenses, we expect to be stable for the year. So that's slightly worse than our stable to down 1%, and I'll explain why in just a moment. And then PPNR will be at the very high end of our guide on the 17% to 19% on a full year basis. So overall, the results we're delivering are tremendous. It's a record level PPNR for the company. We'll have over $1 billion of PPNR in the quarter. We'll have a record level of returns, over $1 of EPS pre-ACL. We've never done that before. So the things that we can control are going very well inside the company. We're just cautious on the things that are outside of our control. And so that's why some of the loan growth is tempered a little bit as we pull back on the edges, just given the uncertainty in the environment. Not for now, but for down the road. And then within the quarter, as Tim mentioned in his prepared remarks, the deposit outflows are running at a higher level and have remained a little bit suppressed for a longer period of time. So the average is -- I would expect our deposits to be down about $5 billion on an average basis. But before everybody gets sticker shock on that, we've helped clients move over $4 billion into our money market portal where we generate fee income. We continue to focus on price and let higher beta deposits run off, which is why our NII for the third quarter will be $10 million or so better than the guide. And our jumping off point on NIM in the fourth quarter as opposed to the 3.30 to 3.35 level, we expect to be in the 3.35 to 3.40 level in the fourth quarter. And again, we expect deposits to grow in the fourth quarter. And frankly, if you look at our deposit balances this week, from June 30 on Monday, we were off about $700 million from the June 30 levels. On Tuesday, it was about $1 billion off June 30. So what's happened is we've had this trough, and now we're coming back up. And as Tim said in his prepared remarks, we are very good deposit generation company, but we are managing the balance sheet to deliver strong price performance and balance sheet efficiency, and you see that in the NIM improvement and the higher guide on NIM.

A lot in there.

We thought it would be better to explain it in person and put a slide that tried to address it, and then everybody would only focus on that slide as opposed to all the other things we have going on in the company. Could we just delve into...

So I guess for 3Q, you had the guide of net interest income up 11% to 12%. So we do up 12% plus $10 million?

Sure.

For net interest income. And then the deposits down on average $5 billion in the third quarter starts to grow in the fourth quarter. And do we think we can grow that into next year?

Yes. Absolutely.

Yes. That's right. The NIM is 5 basis points better than expected in the fourth quarter?

Yes. The range is up 5 basis points.

And then for the full year, revenue at the upper end of guide, I guess...

And expenses.

And expense is stable. I guess as we think about -- I don't -- why don't we have the full year guide of the quarter, but maybe just talk about how the interplay, I guess, on the full year revenue guide between net interest income and fee income in terms of where the upside?

So on NII, the upside, obviously, the lower beta is driven by the management of the deposit book. And then investment portfolio continues to perform very well in this environment. From a fee perspective, Tim mentioned, treasury management continues to do very well, and it is outperforming the July guidance. And then, one of the items that I think we've done very well but not talked very much about has been our balance sheet management and interest rate management in the mortgage business. So our mortgage fees for the back half of the year are going to be very strong, and it's driven not as much by origination and gain on sale. Origination is down a little bit, gain on sales a little bit better, but not a lot of movement there. It's more about the servicing asset. And if you go back from the end of 2019 to the start of this year, we intentionally grew our servicing asset 25%. We grew from $80 billion of UPB to $100 billion, a little over $100 billion. And so what that has afforded us given the run-up in rates and the slowdown in prepayments is that in 2021, our servicing fees net of the amortization of the servicing, right, was a negative $35 million. This year, it will be a positive $135 million. And so we have a $1.6 billion asset that is a 10% yield and may do even better as this environment unfolds. And so that is one of the bigger drivers of the improvement in our fee business to focus on the negative then because fees are running a little bit higher, expenses are going to be higher from a compensation perspective as well as an acceleration of the IT initiatives that Tim laid out for you as we go on this platform or continue our platform modernization journey. The challenge for the reported fees this quarter is that there'll be a large -- not a large, but a $20 million to $25 million mark to market on 2 publicly traded securities that we hold as a result of their going IPO through our private equity investments. So just given market dynamics this quarter, we'll have security losses on those equity instruments of about $20 million to $25 million. So NII, $10 million better than the guide. Fees, on a core basis, better but offset by that mark-to-market. Expenses, a little bit worse because core fees, comp and IT expense. Net-net, it all comes out in the wash as in line with guide. But more importantly, that momentum into the fourth quarter on a core basis is very strong, and that's why the full year guide comes up.

We've shared this in the past, that I think one of the things that is serving us very well now is the diversification of the fee income streams that the bank has, right? We, for very deliberate reasons, walked away from punitive consumer fees several years ago and have among the lowest fees, I think the lowest fees as a percentage of total for any bank with a large consumer franchise and therefore, don't have the same level of headwind that others do. And you look across the other line items and whether it's capital markets, where financial risk management is performing exceedingly well in an environment where M&A is a little bit choppier and where the bond markets are less accommodating, right, or mortgage servicing, as Jamie mentioned, where we're getting a big pickup there as an offset to slower top line mortgage performance or the treasury management business we mentioned, which is incredibly stable and which has really become a growth engine for the bank despite the fact that if you look at market growth on treasury management, it's -- call it GDP, right? It's generally 2%, 2.5% a year. You get a real GDP growth rate out of that business is in the industry overall. So we have been deliberate about creating that sort of diversity so that we could perform well and have lower volatility of those earnings through the cycle and the servicing asset, in particular, at the moment is really coming through for us.

Why don't we put up the next ARS question, the pivot. Where do you see Fifth Third's net interest margin. Peers are guiding to 3 to 3.35 by 4Q. But as I just said, it's 3.5 to 3.4.

This is a question of -- were you listening to us?

Well, it's also the most clever way to get somebody to talk about 2022 guidance without being so direct with the question. It's good because our next one is also on 2023 guide. So we'll make sure we get to that one right after. Maybe we'll hold this up here to get your thoughts. I guess maybe just kind of a question on this topic is, you kind of showed your interest cost of interest-bearing deposits kind of below peers. Some would say that's good. Other would say maybe not so good because deposits are declining. And when you need those deposits, are we going to have to see kind of see a catch-up and see a greater acceleration of the increase in deposit costs into next year?

So we have been very consistent in what we have communicated and what our actions have been on how we're managing the deposit book. We said on the first 225 of rate hikes, we're going to run it at 25 beta. We said on the next 75, the cumulative beta will go to 30 because those 3 incremental hikes would be in the 45% to 50% beta range. And now with our -- at least up until this week, our base scenario was that you'd have Fed funds at a 4% level at the end of the year. And so we thought those extra 75 basis points of movement would have a 55% to 60% beta. And so now if we finish in a 4% Fed funds area, that our betas would be in the high 30s. And so that's how we see it playing out. Right now, we've been able to do better than that. And therefore, you have some of that benefit showing up in NIM and NII. And that's perfectly fine. I think we could go buy deposits at 100 beta level and post a reported deposit number, but that's not the right thing to do for our shareholders. And so it's just one of those things that we were joking around about musical songs, and we've talked about patience with the investment portfolio. And now it's one of George Michael, you just got to have faith, that we know what we're doing, we got this, deposits will grow in the fourth quarter, but we will be able to deliver a very nice return to investors along the way.

Got it. And I guess, looking at the answers to the NIM, it seems like the most used answer was kind of a stable-ish NIM for 2023 with fourth quarter levels, although kind of a tail to the upside from there. I don't know if you want to have any observations, Jamie?

No?

I'll comment a little bit since you asked. We're going to finish in that 3.35 to 3.40 range. And obviously, when you're looking out at longer horizon, it really matters what is the environment that you're operating in. Right now, we're in an environment where the Fed is moving in a very disorderly manner, and that creates volatility. If things settle out in -- you will avoid a recession in the back half of 2023, you would expect NIM would have a little bit of bias to the upside from your fourth quarter jump off levels as some of the fixed rate loans build up, especially for us with Dividend and Provide and then as the cash flows from the investment portfolio get reinvested at higher levels. And so you think all things being equal, you'd be able to do a little bit better than how you jump off. But obviously, it really matters on the environment and what happens with the Fed action.

Got it. And then we'll go to the next ARS slide. Where do you see Fifth Third's net charge-offs for 2023? And I guess, as we put up the question, Jamie, you kind of updated us on a lot of your guide points for the full year and the third quarter. We didn't talk about credit in that aspect. You've talked about a charge-off rate, and I think 20, 25 basis points for the third quarter as well as for the full year. Just any thoughts in terms of what you're seeing because we keep on reading about this recession.

Right now, as Tim said in the prepared remarks, credit is very benign. We expect third quarter and the full year to be 20 to 25 basis points. We just walked our Board through our mid-cycle stress test results that continues to support, let's call it the right answer on this one is probably #4 in that 30 to 35 basis point range is where our mid-cycle stress test as 2023 would be. But that is certainly environment dependent. The other challenge in managing credit in this environment while charge-offs are very low, and we expect to continue to be very low, and they will normalize over time over the next year or 2. But the ACL builds certainly have an impact on reported earnings. And so that's one that we get asked a lot, just that given the strong dividend production, that will have an ACL impact. And then ultimately, the Moody's scenarios will dictate the level of the ACL build going forward as well.

I guess last quarter, we saw like a $50 million or so build because of Dividend. Is that kind of the number we should expect ongoing or...

Given the fact that they're going to produce $800 million or more this quarter, that $50 million should be higher. And then you would have a little bit higher, so in that $50 million to $65 million range. And then the Moody's scenarios certainly matter. And so we'll wait to see the -- how the models handle the...

Fair enough. And then in our last minute or so, just on capital. I think you were at 9% or so CET1 in the end of the second quarter, not buying back stock like some other banks. When do you think you can kind of -- where were you comfortable in terms of restarting the buyback?

Right now, our intention is to restart the buybacks in the first quarter of 2023. We want to accrete capital. And given our strong earnings levels and capital generation capabilities, we'll be north of 9.25 CET1 by the end of the year, and we'll resume buybacks in the first quarter.

Awesome. With that, please join me in thanking Tim and Jamie for their time today.

Thank you.

Thanks.