As published in the June 1, 2020 Toledo Business Journal
In mid-May, Toledo Business Journal interviewed Greg Carmichael, chairman, president and chief executive officer, Fifth Third Bancorp, to obtain insight into a large financial institution during this difficult period with a focus on the corporation’s financial position.
1. Can you discuss Fifth Third’s Balance sheet position?
Fifth Third entered this downturn from a position of balance sheet strength. In 1Q20, our key financial metrics performed in line or better than our guidance for the quarter (net interest income, net interest margin, fee income, expenses, and credit losses were in line with expectations). Our January and February balance sheet results were tracking ahead of expectations. The dramatic events of the last half of March, and the severe impact on the economy impacted all banks, of course, but we were still able to deliver a strong quarter.
Our results reflect the strength of our balance sheet and the results of our strategic decisions.
A. Including loan to deposits position?
We believe the Loan to Core Deposit ratio is the more relevant metric for assessing the strength of our balance sheet and overall liquidity position; as reported in our 1Q20 earnings, our loan to core deposit ratio of 89% was the lowest it has been in more than 15 years. Our deposit growth exceeded loan growth during the quarter despite the record increase in commercial line draws (which have stabilized since quarter-end).
B. Including the bank’s equity capital position in relation to its risk-weighted assets?
Our regulatory capital ratios remain very strong, and all significantly exceed the well-capitalized requirements. Our common equity tier one as a percentage of risk-weighted assets was 9.4%, and was over 40% higher relative to the comparable capital ratio heading into the last downturn.
2. Can you discuss the Bank’s revenue outlook over the next year and results of revenue diversification efforts?
Given the unprecedented macroeconomic environment and heightened level of uncertainty with respect to many things – including the impacts of the fiscal and monetary stimulus, the timing of the recovery period, etc. – like many companies we withdrew our full year guidance. It is very difficult to predict with a high degree of conviction a year out from now until we get more visibility on the economic environment.
However, the investments we have made in our businesses to improve and diversify our revenues over the past few years are clearly visible in the financial results, including the first quarter, and we would expect to benefit from those diversification benefits going forward.
We have made significant investments in talent, technologies, and process improvements in many of our businesses to grow and diversify our fee-based businesses, including but not limited to capital markets, mortgage, middle market banking, and in wealth and asset management. These areas will help partially offset the headwinds from lower rates affected net interest income.
3. Can you discuss the issue of loan defaults and write-offs in this environment?
As mentioned above, we only are able to provide near term charge off guidance at this point. In April, we provided guidance for the second quarter charge-offs to be in the range of 45-50 basis points, which would result in a modest increase from the first quarter, and not meaningfully impacted by the recent economic fallout from the coronavirus. The outcomes of the large scale hardship relief programs, in addition to the government stimulus and relief such as PPP, remain uncertain. However, we increased our credit reserves to 2.13% of loans, to better prepare us given the weakening macroeconomic backdrop.
In terms of defaults in the near-term, the hardship programs should provide borrower flexibility to hopefully limit widespread defaults. As we mentioned before, we are providing relief in the form of payment deferrals and forbearances to customers across a wide array of lending products. We also suspended vehicle repossessions and home foreclosures. We will continue to take proactive and aggressive measures to help mitigate the effects of the downturn, and to help be part of the solution.
4. What do you see in terms of expectations for Fifth Third dividend payments for the coming year?
We recently declared a 27-cent common dividend in March, with the next dividend to be decided by the board in June. We believe our capital position is strong enough to maintain our current dividend if these conditions persist through the end of the year, while remaining well capitalized, and our board will continue to evaluate based on the data available.
While we are entering this downturn from a position of strength with the ability to withstand severe downturns, that does not mean that dividends will be sustainable in all scenarios.
We are also cognizant of the political dynamics given the recent Congressional testimony where legislators scrutinized bank dividends, the outcome of which is out of our control.
5. What will the Bank’s approach be to stock buybacks during the coming year?
We temporarily suspended share repurchases as announced on March 16, along with many other large banks. The decision on share repurchases is consistent with our objective to use our capital and liquidity to provide support to individuals, businesses, and the broader economy through lending and other important services.
6. Are plans to add new call center and other employees continuing to move forward?
We have added about 1,000 people, who we needed on-site for call centers and other critical operational functions.
We are still in the “middle of the hurricane” so to say, and will continue to assess our needs as the situation evolves.
7. Is there anything else that you would like to address?
Specific to the Payroll Protection Program (PPP), we are very proud of the work of our bankers and larger teams. They have demonstrated incredible commitment and worked tirelessly to help small businesses.
Over 33,000 PPP applications have been approved by the SBA (and counting as we continue to take and process applications until there is funding). This represents a total loan amount of $5.5 billion between rounds one and two. This helps preserve the jobs of 565,000 employees of small businesses across the communities we serve and helps restart the economy.
I also wanted to highlight that our four strategic priorities – accelerating our digital transformation, investing organically for future growth, expanding market share in key geographies, and maintaining our disciplined approach throughout the Bank – remain intact.
That being said, clearly in this type of environment, certain growth initiatives will be under review. We will put the appropriate level of prioritization and focus on the areas that have the highest probability of driving long-term financial success. We recognize that as we navigate this environment, investments and projects with lower returns will need to be re-prioritized which gives us the ability to evaluate a wide range of potential actions.
We have been focused on maximizing our returns through the full cycle rather than generating lower-quality short-term balance sheet growth. Our continued philosophy of focusing on improved performance through the full economic cycle positions us very well in this environment.