FITB
#Good morning and thank you for joining us
I will start with the financial summary on slide four of the presentation
As <UNK> mentioned earlier, we are very pleased with our results for the quarter
During the quarter, the expansion of our underlying net interest margin, the sequential decline in our expenses and excellent credit quality reflect our continued commitment to driving improved financial performance
For the fourth quarter, there was a net positive impact of $0.01 per share resulting from several items; the most significant item was the $16 million pre-tax charge to provide refunds to certain credit card customers, offset by the previously disclosed Vantiv gain, a positive mark from our Visa swap and a tax benefit from the early adoption of an accounting standard
Our adjusted net interest margin which excludes the credit card charge, expanded three basis points sequentially
We maintained pricing discipline during the quarter and our asset sensitive position allowed us to benefit from the rising interest rate environment
Our reported NIM contracted by two basis points
Expenses remained tightly controlled as we continue to look for efficiencies throughout the organization
Credit quality was excellent as evidenced by our ongoing improvement in criticized assets and a decline in net charge-offs during the quarter
Our focus on improving our returns led us to deliberately exit certain commercial relationships and reduce indirect auto-loan originations
This led to a sequential decline in our total loan portfolio
In aggregate, we exited approximately $3.5 billion of commercial loans in 2016 and we expect to exit roughly another $1.5 billion in 2017. So with that, let’s move to slide five for the balance sheet discussion
Average commercial loan balances were down 1% sequentially and flat year-over-year
As I mentioned earlier, throughout the year we made deliberate decisions to exit lending relationships that do not meet our desired risk and return profile
This had a negative impact on C&I balances which decreased by 1% both sequentially and year-over-year
During the quarter, we maintained our origination spread levels as LIBOR increased, driving a five basis point increase in our C&I yield
We will continue to optimize the portfolio to achieve better returns while improving the stability of our credit performance
The sequential decline in average C&I balances was partially offset by 1% growth in commercial real-estate this quarter
As we have discussed in prior calls, in construction as well as in firm lending, our teams are cognizant of valuation and supply-demand dynamics
Our disciplined client selection and credit underwriting in commercial real-estate will continue to rely on stringent standards
Average construction loans grew by 1% sequentially in the fourth quarter
As a sign of healthy construction portfolio, loan run-off increased this quarter as underlying projects were completed and sold or refinanced
Our pipelines are diversifying away from multi-family and we are becoming more selective as the sector gets deeper into the later phase of the cycle
Average consumer loans were flat from last quarter and were down 2% year-over-year
Auto loans were down 3% from last quarter and 13% year-over-year in line with our reduced originations
Throughout 2016, we maintained a consistent focus on improving the profitability of this business
We are continuing to work on additional tactical changes to further improve the returns in 2017. Residential mortgage loans grew by 3% sequentially and 10% year-over-year as we kept jumbo mortgages, ARMs as well as certain 10 year and 15 year fixed rate mortgages on our balance sheet during the quarter
Our home equity loan portfolio decreased 2% sequentially and 7% year-over-year as loan pay downs exceeded origination volumes
Our originations this quarter were seasonally down 14% compared to last quarter and flat year-over-year
Our credit card portfolio grew by 1% sequentially but was down 2% compared to the fourth quarter of 2015 including the impact of the sale of the Agent portfolio in June
Excluding the sale of the Agent Bank portfolio in the second quarter of 2015, our credit card portfolio would have grown by 3% year-over-year in the fourth quarter
The introduction of two new credit card products last October and investments we are making to significantly upgrade our analytical capabilities should lead to faster growth in credit card outstandings
In addition to our new initiatives in credit card lending, our GreenSky partnership should support faster consumer loan growth as well
We started funding loans in October and are confident that our partnership will help us achieve a better balance between commercial and consumer loan growth
Average investment securities increased 3% sequentially in the fourth quarter, partially due to under investment during the previous quarter
Our investment portfolio yield was stable with only a one basis point decline sequentially
We had three top priorities for 2016 in terms of managing our balance sheet
First, we wanted to make material progress in positioning our loan portfolio for improved and stable returns through the cycle; second, we sought to balance our interest rate risk exposure; third, we wanted to maintain a healthy level of liquidity on our balance sheet
We achieved all three goals by focusing on originating loans that met our targeted return requirements, exiting relationships with sub-par risk return profiles and optimizing our mix of liabilities
These objectives will also remain our top priorities for 2017. At this time, we have exited approximately two-thirds of the commercial lending relationships that did not meet our desired profile and have roughly another $1.5 billion to go
Excluding these deliberate exits, we expect to grow total commercial loans by 4% to 5% in 2017. Including these exits, we expect our commercial loan portfolio to grow by closer to 2% at year-end
We plan to maintain indirect auto loan originations at $3.4 billion in 2017 which will likely result in a roughly $1.5 billion decline in that portfolio
Including the impact of the auto run-off, we expect our overall consumer loan portfolio to grow modestly in 2017 on a period end basis
We also expect to maintain our investment portfolio at roughly the same level we are at today
Average core deposits increased 2% sequentially driven by increased commercial interest checking account balances and consumer money market account balances
Excluding the impact of the two market exits, Pittsburgh and St
Louis, average core deposits were up 2% on a year-over-year basis
Inclusive of the impact of the market exits, core deposit growth was approximately 1% year-over-year
Our modified liquidity coverage ratio of 128% at the end of the year was very strong and exceeded the new 100% minimum
Moving to NII on slide six of the presentation
Excluding the impact of the credit card charge, taxable equivalent net interest income increased $12 million or 1% sequentially
Including the charge, NII was down $4 million to $909 million
The impact of the credit card item was partially offset by improved short-term market grades in the fourth quarter and higher investment securities balances
Excluding the credit card charge, the NIM on an FTE basis increased three basis points from the third quarter to 2.91%
The impact of the charge was five basis points resulting in a two basis point contraction in our reported NIM
Fourth quarter margin performance was largely driven by an increase in short-term market rates during the quarter and continued pricing discipline in our loan portfolio
We expect the NIM to widen by approximately 8% to 9% basis points from the fourth quarter reported number to about 2.95% in the first quarter
On a full year basis, we expect the NIM to range between 2.95% and 3%
The low end of the range is based on the rate scenario with no additional Fed moves, while the upper end of the range assumes two additional Fed moves in June and September
We will continue to execute a balance interest rate risk management strategy as we have done over the last three years
Our risk management approach aims to limit a downside impact of low interest rates while maintaining an asset sensitive position
The cumulative increase in LIBOR over the last two quarters, and our ability to maintain pricing discipline have had a sizeable positive impact on our NIM
If the expectations for higher interest rates actually materialize, NIM expansion will be a function of deposit pricing lags and betas
Our disclosures on this topic are very transparent in terms of the impact of various interest rate and deposit balance scenarios
Including the impact of day count, we expect our first quarter net interest income to be up by 1.5% to 2% from the reported fourth quarter net interest income
With the background of our earning asset growth expectations that I detailed earlier, we are projecting full year net interest income growth of 3.5% to 5% bracketed by the two rate scenarios that I just outlined
Shifting to fees on slide seven of the presentation
Fourth quarter non-interest income was $620 million compared with $840 million in the third quarter
Our fee income adjusted for items disclosed in our earnings release was $608 million, up 2% from the adjusted third quarter level
Mortgage banking net revenue of $65 million was flat sequentially as lower production gains were offset by positive net MSR valuation adjustments during the quarter
Originations were seasonally down 5% from last quarter and up 54% year-over-year
During the quarter, 41% of our origination mix consisted of purchase volumes and 59% consisted of refinance volumes
Approximately 70% of the originations continued to be sourced from the retail and direct channels and the remainder were originated through the correspondent channel
Gains on sale were down 51% sequentially reflecting the lower origination volume and 132 basis points aside of gain on sale margin
Net MSR valuation adjustments were positive at $23 million compared to a negative $9 million last quarter
Corporate banking fees of $101 million were down $10 million or 9% sequentially, reflecting the impact of election related volatility from the time of capital markets activity
Decreases in institutional sales revenue and lease remarketing fees were partially offset by an increase in foreign exchange fees
In 2016, we grew our capital markets fees by 14% reflecting strong performance in all of our investment banking products including M&A advisory, equity capital markets and corporate bank underwriting revenue
Additionally, adjusted for a lease residual impairment reported in 2015, our corporate banking fees were up 4% for the full year in 2016. These results suggest that our relationship driven model and our efforts to increase the scale and scope of our product offerings are bearing fruit
We expect corporate banking fees in the first quarter to be stable relative to the fourth quarter
Deposits service charges decreased 1% from the third quarter and 2% relative to the fourth quarter of 2015. This primarily reflected reduced monthly service charges as part of our new consumer checking account line up
Total wealth and asset management revenue of $5 million was down 1% sequentially
Our focus on reducing reliance on transactional revenue has resulted in nearly 80% of fourth quarter fees now being driven by recurring resources versus 73% in the fourth quarter of 2015. Revenues declined 2% relative to the fourth quarter of 2015 mainly due to lower retail brokerage fees
Result of the fourth quarter included $9 million pre-tax gain from the Vantiv warrant exit that we announced during the quarter
With this transaction, we have exited our remaining warrant position and the final tally on our Vantiv warrants is $812 million in pre-tax gains for our shareholders
Our recurring TRA payment of $33 million is also included in our total non-interest income
Third quarter results were affected by the TRA termination and settlement transactions
The Vantiv related transactions during the last two quarters were very beneficial in terms of managing the risk parameters around our financial interest in Vantiv and reducing volatility in our reported results
Excluding mortgage-banking revenue and non-core items shown on slide 14 of the presentation, we expect non-interest income to grow by 3.5% to 4% in 2017. In the first quarter of 2017, on the same basis, and excluding the annual $33 million TRA payment in the fourth quarter, we expect non-interest income to be roughly flat sequentially
In addition, we expect mortgage origination fees to decline by 10% to 15% in the first quarter
Next, I’d like to discuss non-interest expense on slide eight of the presentation
Expenses were well managed this quarter down $13 million or 1% compared to the third quarter to $960 million
As <UNK> stated earlier, we are making good progress in executing on key strategic initiatives while controlling expense growth
For the full year, our expense growth was under 3.5% year-over-year compared to our initial guidance of 4.5% to 5% at the start of the year
We expect expenses in 2017 to be up 1% compared to 2016. Our guidance includes incremental expenses associated with new initiatives under North Star
In the absence of North Star related expenses, we would have expected our total expenses to decline by about 0.5% in 2017. Over the past few months, we have stated that we intend to achieve positive operating leverage in 2017 and today’s guidance reflects that expectation
More importantly, we believe that we will achieve positive operating leverage, even if the Fed decides not to raise interest rates further
Once again, I’d like to remind you that our total expenses includes the amortization of our low income housing investments, which most of our peers reflect in their tax line
In 2016, this line item added 3% to our efficiency ratio
Our first quarter expenses will be more elevated this year relative to other years due to timing of certain expenses
We have changed the grand date for our long-term compensation award this year for all of our recipients which will pull forward about $15 million of expenses from the second quarter to the first quarter
In the first quarter, including a merit increase that will become effective during the quarter, we expect our total expenses to be approximately 2% higher year-over-year
Slide nine has a list of initiatives which we shared with investment community last month
As you can see, we are not and we were not expecting a significant revenue impact from these initiatives in 2017. They are in the execution phase and will be providing support for revenue growth in 2018 and beyond
The important note related to these initiatives is that we are paying for these investments by cutting costs elsewhere
Turning to credit results on slide 10. Net charge-offs were $73 million or 31 basis points in the fourth quarter, an improvement from $107 million and 45 basis points in the third quarter of 2016 and $80 million or 34 basis points in the fourth quarter a year ago
The sequential decrease was primarily due to $36 million decrease in C&I charge-offs
Recoveries during the quarter were down $6 million from last quarter and $1 million from the fourth quarter of 2015. Total portfolio non-performing loans were $660 million, up $59 million from the previous quarter resulting in an NPL ratio of 72 basis points
The sequential increase was driven almost exclusively by a single RBL credit in our energy portfolio that is well collateralized and current on all interest
Our criticized assets were down $354 million quarter-over-quarter
Our criticized asset ratio has steadily declined over the last five quarters and continues to be at the lowest levels since before the financial crisis
The decline in criticized assets and low net charge-offs suggest that the credit quality should remain relatively stable
However, credit losses especially on the commercial side - also on a quarterly basis
Our loss position was $26 million lower than last quarter
Our resulting reserve coverage as a percent of loans and leases of 1.36% was one basis points lower than both last quarter and last year
At the end of 2016, our reserve coverage was among the highest in our peer group and well above the median
Our total net charge-offs in 2016 were $363 million or 39 basis points
Our previous guidance that net charge-offs will be range bound with some quarterly variability is unchanged
Also we continue to believe that our provision expense will be primarily reflective of loan growth
Moving on to capital and liquidity on slide 11. Our capital levels remain strong
Our common equity Tier 1 ratio was 10.4%, an increase of 23 basis points quarter-over-quarter and 58 basis points year-over-year
At the end of the fourth quarter, common shares outstanding were down approximately $5 million or 1% compared to the third quarter of 2016 and down 36 million shares or 4% compared to the last year’s fourth quarter
During the quarter, we executed an accelerated share repurchase of $155 million which reduced the share count by $4.8 million shares, primarily reflecting the decline in unrealized securities gains given the rising rate environment, our book value and tangible book value were down 3% and 4% respectively from last quarter
Book value and tangible book value were up 7% and 8% respectively compared to last year
As I mentioned perilously, our common equity Tier 1 ratio increased by 58 basis points from 9.82% at the end of 2015 to 10.4% at the end of 2016. This result, when combined with 1$ billion capital distribution to our shareholders during the year, demonstrates our ability to generate capital at Fifth Third
As we are now going through this year’s CCAR exercise, it is too early to give you meaningful color on our expectations, but sufficed to say, that we will remain good stewards of our shareholders’ capital
During the past four to five years, we targeted stable capital ratios entering the new CCAR cycle and in near term, we would expect to maintain the same approach
The composition of our capital distribution between dividends and share buybacks will be reviewed and approved by our board
With respect to our taxes, the early adoption of an accounting change had a positive impact on our taxes in the fourth quarter of approximately $6 million
We expect our first quarter and full year 2017 tax rate to be in the mid-25% range
Given the anticipation for meaningful changes in the corporate tax regime, there’s a lot of interest in how potential changes may impact our effective rates
It is clearly very early to confidently predict the nature of these potential changes
Our tax positions are similar to other financial institutions in the form of tax credits associated with low income housing, a small portfolio and a very small mini portfolio in some leasing activities
All else being equal, we believe that we should be able to allow a large percentage of any reduction in corporate tax rates to drop towards bottom line, but it is too early to define on the dynamics of the competitive environment and how that may ultimately impact bank’s ability to retain any potential benefits associated with the anticipated changes
Our 2017 financial plan reflects the benefits from our recent actions and provides the four core initiatives of the North Star
These initiatives will leverage our strength in middle market lending, industry verticals and specialty lending areas in our commercial business
In the consumer business, growth initiatives in mortgage banking, credit card and personal lending will provide support for more balanced growth in our overall loan portfolio
We continue to expand our capabilities in businesses such as capital market, insurance and wealth management which generate attractive returns
Our revenue growth outlook, our ability to achieve positive operating leverage without changing our risk appetite, our ongoing discipline of maintaining a strong balance sheet and a longer term strategic positioning of our business lines together provide a positive backdrop for our shareholders
We have included the updated outlook on slide 12 for your reference and with that let me turn it over to <UNK> to open the call for the Q&A
<UNK>, I think with the flat investment portfolio and the 2% year-over-year growth, earning assets will grow
It’s probably going to be closer to sort of 1% type number as the average the two dollar items
So on fees <UNK>, as we indicated before, we were not expecting much of a lift in 2017. These initiatives are underway, some of them will come to their final phases this year
For example, the mortgage system will go online the fourth quarter of this year, there are others on the capital market side
We are gradually executing that includes potential insurance etcetera
So our expectations with respect to fee income were focused on growth in 2018 and beyond
We have significant investments in our credit card and personal lending areas that would be encouraging both from a fee side as well as the balance sheet side in 2018 and 2019. So, my overall comment is whether it’s NII or fee income, in 2017, you are seeing the results of what we have done so far through the end of 2016. On the expense side, we clearly have started executing some of the expense initiatives earlier in 2016. Now if you include some of the exit strategies in commercial in 2017, those are more negative than positive for NII as you can imagine from – just the pure 2017 calendar year perspective
So that’s why some of the 2017 guidance appears to be a bit more muted, but we are pretty optimistic as we look forward into ‘18 and ‘19.
Yes, the mortgage income we expect the origination income to be 10% to 15% above I think we said last year’s levels
And that’s purely obviously was just an impact of interest rates actually in mortgage a number of our efforts as we get closer to year-end will boost our ability to support a higher origination level
We just need to manage that transition period between higher interest rates and our new system coming online in an efficient manner
That’s for sequentially, adjusted for the TRA payment and mortgage, flat sequential Scott
Yeah so without necessarily giving a precise guidance on total provision dollars, I would point out that this quarter’s provision as lower due to one significantly lower commercial charge off dollar number and two, the EOP over EOP declined in loan balances
So as loan balances grow, you clearly are going to – with these releases of growth in that line item and then <UNK> just talked about overall in terms of charge-off expectations
So I wouldn’t necessarily take the $28 million commercial charge-off and project that over the entire year on a quarterly basis which will guide your provision expectations a little bit
Thank you
I think we gave some indication as to how we go from the current level – I think the number that we’re looking for 2016 in terms of core ROTCE is probably about 10%
So, - and we will take you and I think we’ve given you some examples as to how that 10% gets to 12% to 14% and the combination of expense saves, balance sheet – and fee income growth
And <UNK> we will continue to clarify that path as we execute these initiatives
But obviously the current environment, it materializes whether it’s with respect to interest rates or the tax rates, our expectation is that we would clearly be closer to the upper range of that guidance because we clearly stated that we would reach the lower range of our guidance with no rate increases and a meaningful change in the environment
To kick off you mean for 2018 guidance?
I mean I think I don’t have the exact sort of necessarily split in terms of the revenue pick-ups in front of me right now, but you will start seeing those lifts as we get near the end of this year
The few areas where I think it will be more visible clearly personal lending will be one
I think as we sort of finalize the analytical investments in credit card lending, you will start seeing that in 2018. I think you will start seeing capital markets, you will also in addition to that seeing the impact of sort of the exits this year of $1.5 billion left will be coming to an end, so that will provide a built-in improvement in loan growth into 2018. So those are all pointing to a pretty good 2018, but we will continue to provide more details as this year goes on
I don’t have that number right in front of me, <UNK> but we will again just give us some time and we will quantify that
Correct
