Fifth Third Bancorp (FITB) Earnings Call Transcript & Summary

7:30 on the dot. So we'll keep this conference this traditional staying on schedule. Good morning. I'm Jason Goldb. I cover the U.S. large cap banks at Barclays. Thank you for attending our 24th Annual Global Financial Services Conference. As a reminder, to my left in the middle of the room are our marketing decks and posters. So please grab them on your way out. We have a very jam-packed morning. I think we're in this room for 7 presentations through lunch, and then we got more in the afternoon. But very pleased to have kicking off today's festivities as Fifth Third Bancorp. From the company, Bryan Preston, Chief Financial Officer; and Jamie Leonard, Chief Operating Officer. Good morning, guys. Well, I know you just had a really busy week over the Labor Day weekend converting Comerica. I just thought I'd start with guidance and get that out of the way.

I know last night, you posted a slide deck kind of reiterating the guidance you gave in the third quarter. But within that, there were some regions. So maybe just with the conversion now complete, maybe just talk to how the quarter is progressing relative to plan and maybe what's coming a little bit worse, a little bit better than expected?

Yes. Thanks, Jason. Quarter is coming together nicely. We're quite pleased with the progress we're seeing out of the company right now. The slide, if you look at it, it's the same guidance that we provided back at earnings, but we're actually coming in now at the upper end of our NII guide, the upper end of our fee guide and the lower end of our expense guide and right in the middle from a charge-off perspective. So we feel really good about what we're seeing from the performance of the company perspective. Loans are coming in as expected, and we've seen quite a strong quarter from a deposit growth perspective as well. So the trajectory of the business and the expectations that we're expecting to get out of Comerica, both from a revenue growth and an expense synergy perspective are coming in right as expected. So we're set up quite well for the fourth quarter, delivering on the deal model in terms of 19-plus percent ROTCE being in a position to deliver a run rate, 53% efficiency ratio, as we head into 2027. So the trajectory is in really good shape.

Sounds good. We're going to unpack that as we go through the session. But maybe just take a step back and just give us your outlook kind of for the national and local economy Fifth Third serves. And just sort of your commercial customers telling you about they're willing to expand and borrow? And what are you seeing in line utilization?

Yes. Line utilization has actually been steady this quarter. We've not seen really much volatility there. From an activity perspective, gross pipelines are very, very strong right now. I would tell you the rate environment and some of the recent volatility is certainly causing some customers to pause a little bit. But for the most part, we're seeing activity continue to come through. It's in line with what we've said from a loan growth perspective. I think a lot of customers, the feedback they'll tell you is that they just can't wait any longer. Yes, they would like to have a little bit more productive interest rate environment, but the reality is it's time to go. They have to do some investment. . I think on the margin with the higher rates, some of the M&A activity could slow down a little bit from a financing perspective, but that's not really been the core of our business. We're primarily a working capital lender. We've seen commitment growth. We've seen line utilization stability. So we think that activity is going to continue to go.

Got it. And then maybe on to the conversion, right, system conversions for Comerica went [indiscernible] over the weekend. 600,000 customers. I think almost 200 branches, that one is at a Fifth Third platform. We read your CEO's all positive commentary on LinkedIn, but maybe behind the scenes, any surprises kind of in the first day post conversion? .

I guess I'll start with not bearing the lead, which is that it was a very successful conversion. We were able to complete all of the core system migration from Comerica, including all of the employee infrastructure as well. So all of their employees are now inside the Fifth Third umbrella. The next steps on the conversion would be the wealth conversion is scheduled for Halloween. You like to do those on a month end that is not a fiscal quarter end, and the HR systems conversion will be January 1 because you don't want to reset people's FICO in the process. So that went very well. Our goal heading into this was deliver a perfect conversion for every customer. And that might be an unattainable goal, in my 27 years, we've done 9 bank conversions. And I think this conversion was as close to perfect as I've seen at Fifth Third. There are always a few wrinkles and a few hiccups in terms of surprises. We had a lightning strike on a Fifth Third branch that burns circuitry. So that branch was closed. So those customers had to go to the nearest Comerica branch. And obviously, that makes for a very busy day inside that branch. But if you look back how this conversion unfolded, if you look at how old Kent was, it was a multi-geographic play with rolling conversions over 3 months. And then you look at our last conversion with MB, where it was a little more straightforward with a single city, predominantly a commercial bank, 90 branches. And then you look at Comerica, it's the most complicated conversion we've had and the largest transaction in the company's history. And so it's a little bit of both in terms of how we went about doing it. We pre-converted as much as possible. Everything from swap dealer conversion on legal day 1, capital markets over the summer, syndicated loans over the summer, PM preview period, all of the ATMs, all of that was done ahead of Labor Day. But Labor Day was a very busy and successful week and coming out of it now all of these customers, and we can watch login activity has been great. The activity we're seeing with the customers playing around in [indiscernible] and with some of the other tools that we have, it's very encouraging. And I think ultimately, we'll do a great job of driving primacy. And I think the best data point besides my being here today in terms of how well the conversion went was if you look at MB, we had -- it was May 6, 2019, and we had a 5 business day week, and we were a much smaller company then. You look at Friday of last week versus the Friday of the last week of MB, with Comerica, we added -- there were 352 branches. We had to consolidate roughly 60 of those. So we turned on 293 Comerica branches. So we have a bigger branch network. We've obviously had all of the growth at Fifth Third from a household perspective since MB through Comerica. And one of the big changes we made in order to cover the West Coast is we have extended call center hours, so 3 extra hours per day. So bigger customer base, longer window for somebody to call. And on Friday of last week versus the Friday of the first week of MB, we have 15% fewer inbound phone calls. So I would call that a very big success for us.

Interesting. I guess, in that being, on the second quarter earnings call, you were talking about customer retention running ahead of plan. I think the commercial retention was 99.4%, and the consumer base was a net positive. Conversion on kind of any updated thoughts around attrition?

Yes. So I'll take it in 2 parts. So first, there's just the gross attrition. And so in commercial, gross attrition continues to run sub-1%. It's a very loyal customer base. and Comerica was a very strong middle market lender. And that means you will end up with very low attrition, and that has played out perfectly. On the consumer and small business side, the attrition levels are also very stable and very muted there. The Comerica attrition within the retail book and the small business book are in line with or better than Fifth Third's normal attrition rates. So that's on a gross basis. On a net basis, both the commercial book of business and the consumer book of business have grown, and they've grown pretty substantially over the past year. So we're very pleased about our ability to grow the franchise. And obviously, we'll talk revenue synergies later.

Yes. maybe stick on expenses for a moment because after that growing review, I think you gave another follow-up question. But you talked to $850 million of run rate expense [indiscernible] from Comerica. I think that's 35% of their base in the fourth quarter, conversion now complete went well? Any upside potential today, the $150 million? .

So we have never in my 20 -- at least in the last 20 years, we have not missed an expense number bogey we have put out there as part of a transaction. So we hit the $850 million. The hay is in the barn. Did the team overachieved. We overachieved a little bit. However, Bryan will be quick to point out, $850 is the number that will drop to the bottom line in 2027 from an annual expense there are opportunities to deliver those revenue savings that we would like to have some additional investments in, whether it's branches, marketing, sales expansion. And so building out the Southwest similar to how we built out the Southeast is a big priority for us. So we will deliver the $850 million. That is money good. And from there, it's then choosing the best path forward on growth and returns. .

Part of what Comerica needed was capacity for growth investment. And to us, that is the priority from a near-term perspective. There's so much opportunity in those markets. whether it's the branch builds as we transition from building 50 branches a year to 100 branches a year, the talent acquisition, when you think of both just bankers and market, on middle market and wealth product partners. When you think about coverage from a capital markets perspective, from a treasury management perspective, there is so much opportunity for us to invest in those markets from a growth perspective that we are going to focus on putting the company in a better position to grow faster and take advantage of the demographics that are available in those markets. There's so much opportunity for Fifth Third in the Southwest and in the California market. .

So $850 million expenses fall to the bottom line. I guess, any sense of what kind of the gross expense save number could be?

I mean we're probably north of $900 million at this point. .

I know exactly what it was. I was just curious.

Okay.

And maybe as a follow-up, as Comerica's expenses get reflected in the run rate, what does the path to a sustainable efficiency ratio near 53% look like through next year? And just how you're balancing reinvestment in technology, ibranches, sales force expansion against 53% that you're targeting when you announced the deal. And then -- and it's 53% the right number or could give you better than that? .

Yes. 33%, when we think about where we want to run the company from a long-term perspective, we think that 53% is a good spot right now. It is an industry-leading amongst our peer group from an efficiency perspective, puts us in a position to be leading our peer group in terms of return on capital as well. And it gives us capacity to continue to invest in the company. We just see that there is so much potential, and we're going to invest prudently. I think that's the thing that everyone always needs to recognize. The decisions that we're making are based on our view that can we grow in a responsible way that delivers better returns on capital for our shareholders so that we can actually compound book value growth faster. That's the goal. And if those are -- if those opportunities aren't there, we'll have the opportunity to let a little bit more of that -- those savings and that efficiency dropped to the bottom line. So we like to maintain a lot of optionality. And we think that the path that we're heading down puts us in a good position to be able to take advantage of those opportunities there. But in terms of sustainable 53%, we're there. Like we just have to continue to execute the play that we're on to deliver those numbers.

Got it. And then Jamie touched on the revenue synergies, I think in slide deck, you related $500 million plus over the next 3 to 5 years, which levers could you prove out basis post conversion and which require most execution?

There's a lot of -- I mean, there's a lot of near-term deposit growth opportunity. I mean we're seeing that from the initial deposit campaigns, and Jamie can spend a little bit of time talking about what it means from a consumer perspective. But that is one that has been out the gate that is going to create opportunities for us. From a loan growth perspective, in the middle-market franchise, the ability to offer -- we have the capacity from a balance sheet perspective to be able to grow a little bit faster. We're not having to rational liquidity. Our balance sheet is incredibly liquid right now. To be able to offer the right product partner capabilities, we're seeing great opportunities out of the gate in ABL lending and equipment finance. We're also seeing a lot of opportunity in the capital markets businesses. Those are all things that are -- that can come relatively quickly. There are some areas where it does take a little bit more time, some of the wealth investments as we think about growing banker or wealth investment advisers over time. That can take a little bit more time to come to fruition, but we've got a nice staggering of near-term opportunities, but also longer-term opportunities as we make some investments that will continue to grow and give us an ability to see some great opportunities over time. One of the other areas, and we've talked a lot about the $410 billion deposit growth opportunities. We think there is a lot of opportunity in the innovation banking space. That's one that will take some time to build out as well. As we're growing the capabilities in that space. Comerica had a great foundation in their tech and life sciences business. But that's one where that team needs to grow over time, and we need to continue to grow our capabilities. So that will take a little bit more investment, but we're excited about what that can be over the next 5-plus years.

You want to talk consumer? Do you want to consume a little bit?

I would love to take 25 minutes more on cost. The fastest revenue synergy we will see from Comerica on the consumer side will be tied to our ability to deliver a one bank experience. The Comerica franchise had limited investment and limited what we would call branch partners able to help drive fee business and lending activities out of the branches. So just in the Southwest, the roughly 200 branches that they have today, the biggest opportunities will be in mortgage, we'll actually this year do about 5x the mortgage volume that Comerica did in 2025. And we've hired to help deliver that. Those MLOs sit in the branch and help branch production, investment executives and what we would call a preferred banking program, where we focus on customers with $100,000 to $2 million in liquid assets, and that's a program Comerica did not focus on. There's a large opportunity there. Home equity, I was in branches in Detroit, the Monday before Labor Day. And one of the branch managers in Detroit had just gone through the Fifth Third home equity application and her comment to me was, I think I did it wrong because it was so easy, and she said it and it actually was perfect. So home equity will be another nice opportunity. So all of those things don't take additional investment. They just take leveraging the technology and process and the people leadership that we already have in place. The longer-term revenue synergy will be the construction of the 150 branches in the Southwest as we continue to finish out the remainder in the Southeast.

I guess maybe following up on the Southwest expansion. I think you talked about a $2.5 billion deposit campaign, you more than doubled your target. You talked about 100 to 150 Texas branch locations you secured. Just maybe talk is that deposit performance sustainable? And just how should we think about the ramp in payback from the Texas build-out because it does seem to be an increasingly competitive market.

Yes. I think in order to look at the Southwest and what that opportunity is, you need to look at the Southeast and what we've been able to accomplish. The Southeast, if you just were to look at Florida, we have 218 branches and $13 billion in deposits just in the state of Florida. That compares to our largest state, Ohio, where we have 245 branches and $30 billion in deposits. And now Michigan is #2, 227 locations and $27 billion in deposits. So $13 billion in Florida is really incredible growth over the past 8 years as we've been on this expansion. But more importantly, it's a coiled spring that will continue to deliver and ultimately reach those levels of as a state, that opportunity, $25 billion to $30 billion in consumer deposits. And so we look at the de novo performance that we are -- for the total basket of de novos from 2018 through the end of 2025, we are at 125% of our deposit goals. So we're running ahead of pace over that period of time. And every vintage has gotten better and better and better as we continue to learn, we continue to make changes. We continue to adapt. The only year where that's not true with the 2020 year during COVID. And what we have found with de novos, when you get off to a slow start, it's hard to recover. And so the rest of those vintages better, better and better. And that is the play that we are running in the Southwest. We ran the marketing program in the second quarter to train some of our models on the Texas market and the California market. We tried a sampling of test and learn across Texas to see what drove the best responses, what drove the best responses in California. And we feel really good about our opportunity to both improve the existing branch network, which at the time was averaging about $30 million per location in deposits, whereas on the Fifth Third side, $90 million and up would be the target to get there over an extended period of time, but certainly getting over $50 million in 5 years is a nice barometer to use for what a de novo ought to be able to deliver. And so improve the performance of existing while building out the first wave of $150 million and that $150 million is split, Dallas and Houston at $60 million each and the remainder in Austin. And so that will be the wave we focus on over the next 3 years. We just opened our 32nd branch in the Southeast last week in Charlotte, and we'll do 55 in the Southeast this year, which then next year, the initiative will be 100 branches, 50 in the Southeast, 50 in the Southwest, and we see that playing out as the years go by.

Sounds good. Hope you can kind of circle back where we started to maybe delve more into kind of some of the financial trends. But you talked to net interest income at the upper end of the 3Q guide. Maybe just talk to kind of what gets you there? And then maybe more specifically, net interest margin expanded to 3.36% in the second quarter. Maybe just kind of puts and takes from the margin from here and just how much is delivered balance sheet management versus rates because I'm told that that's going to hike tomorrow and just how does that impact things looking out?

Yes, we're certainly fairly well positioned in the event of hike. We've talked for a while that we -- we moved a pretty asset-sensitive post the Comerica acquisition. We had concerns around just what could play out on the long end of the curve. So we're pretty deliberate on redeployment of duration, just given that we just had some concerns around where the rate environment could go. So we feel very strongly that we're going to deliver some really strong results as a result of that. The puts and takes rate environment overall and continued earning asset growth is part of what gets us there. We'll have a little bit of noise this quarter just because the deposit growth has come in so strong. We put about $2 billion of Comerica suite balances in our deposit book this quarter just to help ease the transition. So we are running a little heavy on cash right now. We've been north of $20 billion on cash for most of the quarter as a result of that. Every $1 billion of cash is about basis point a quarter on NIM. So I think NIM sticks in the mid-330s this quarter, and then we'll get back on that upward trajectory back to the 340 exit rate that we've talked about as that -- as we work through that conversion cash and the normal seasonality that we would see. But the rate environment certainly has helped us. And the fixed rate asset repricing has been part of that story as that's continued on.