Fifth Third Bancorp Earnings Call Nuggets: 1Q Growth Rates and Main Points of Uncertainty

Fifth Third Bancorp (NASDAQ:FITB) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

1Q Growth Rates

Ian Foley – Jefferies and Company: It’s actually (Ian Foley) for Ken. First question, on the commercial loan growth, obviously huge growth towards the end of the quarter, I was wondering if you could provide any details on just timing and how that could impact 1Q growth rates?

Kevin T. Kabat – President and CEO: Let me just start and then Dan can finish in terms of talking about forward perspective. It was strong in the end of – and you noticed in terms of our end-of-period loans. It was very broad; came from a wide swatch across our geographies. It was strong particularly in terms of healthcare, energy, manufacturing; we feel very good about that. Pipeline was good and we were able to really work hard through year end to accommodate our clients and our client needs. That, as Dan mentioned, really does give us a good foundation and a good jump-off point relative to starting the quarter. So, that feels pretty good. I don’t know there’s anything else Dan you’d like to say in terms of that point?

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Daniel T. Poston – EVP and CFO: No, not a lot more. As Kevin said, fourth quarter was very strong. Some of that may have been some acceleration of some transactions, but overall, we expect that we will continue to post quarterly loan growth that’s consistent with what we’ve seen over the past several quarters, and you can see our annual expectations for loan growth for mid-to-high single-digit growth for the year, and I’m not sure we’re necessarily expecting there to be significant variations during the year. So, I think we would expect continue consistent solid loan growth throughout 2013.

Kevin T. Kabat – President and CEO: And the only other thing I would just conclude with in terms of that point is, look, we’ve made a lot of investment in this space. Our folks are doing a very good job. We brought in some real talent to supplement the strategic focuses that we’ve had. We’ve talked about the energy vertical, for example. Healthcare continues to be a very, very strong and very good line of business for us and vertical for us as well and we feel good about the manufacturing business going on around us. So, again, I think that we’re well positioned to take advantage of where we’re seeing some strength in this modest, but continuing slow recovery. So, I think we’re well positioned to take advantage of that.

Ian Foley – Jefferies and Company: My second question is a follow up to the loan growth guidance. Just wondering if you could put down context of overall earning assets and how you expect loans to earning assets to shift over the next year?

Daniel T. Poston – EVP and CFO: We continue to favor loan growth over growth in the investment portfolio, we don’t believe that the current environment provides good risk return trade-offs for our shareholders to grow the investment portfolio. So, earning asset growth almost exclusively will reflect loan growth looking forward.

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Ian Foley – Jefferies and Company: But do you think you’d actually pull down the securities portfolio as a result of the loan growth, given that deposit growth is stabled up modestly?

Daniel T. Poston – EVP and CFO: No, I expect the investment portfolio size to remain stable at the moment.

Main Points of Uncertainty

Brian Foran – Autonomous: I think the fee growth guidance is clearly better than most people would bake in and you gave a good color and helpful detail on buying line item. I guess, maybe if you could just – if I could ask as a follow up where the main points of uncertainty are mortgage, you feel pretty confident about the first quarter, and I guess the sub question would be if you could just remind us how you book revenue and if it’s mostly funding a rate lock that’s seeding into that confidence? Then just more broadly, I mean, with all the moving parts in fees what are the one or two things we should watch for deltas as we move through the year?

Kevin T. Kabat – President and CEO: Clearly, there is probably more uncertainty with respect to mortgage results than any of the other line items. We booked the majority of revenue at rate lock, but there is some revenue that is booked upon the sale of those loans. I think in the other fee categories, we are expecting growth uniformly through all of our line items. I think as Kevin mentioned that growth is primarily driven by investments and actions that we’ve taken over the past several years. So, we continue to see very solid results in corporate banking. We’ve changed our focus or increased our focus on mid-corporate lending and we’ve had concerted efforts to be in a position to be in the lead position on transactions that has resulted in a greater fee income contribution and more opportunities for corporate banking revenues. You’re seeing that in our results, and I think our expectation is you’ll continue to see that into 2013. On the consumer side, obviously, the fees over the last several years have been impacted by a number of regulatory headwinds. I think we’ve turned the corner there. We talked about that in the third quarter – that we thought consumer deposit fees had bottomed out. I think that’s been proven out by our fourth quarter results where deposit fees were up 5%. We’re expecting continued growth there. We’ve got the full implementation of our new set of deposit products is coming online in 2013. Obviously there’s some uncertainty with respect to that program. But we’ve been piloting that for some six months now and we have a high degree of confidence in our ability to produce the kind of results that are embedded in our guidance, given the results of those pilots. So, overall we’re feeling pretty good.

Brian Foran – Autonomous: As a follow-up, I was wondering if I could ask about auto-lending, and I know you focus on prime industry statistics we look at, I mean that suggest underwriting standards are easing quite a bit across that market, but it’s harder to get a broad perspective, I guess, or 10 kind of years of perspective of whether the market just kind of rebased to a more normal level or whether are people are getting over their skis a little bit. So, I guess just, what are you seeing on the ground from a competitive standpoint? Is the market just normalizing or is it getting a little bit looser than you’d like in auto?

Unidentified Company Speaker: I think credit conditions in auto in the market are easing up a little bit because the competition at the very high end level of FICO spectrum is very, very strong. So, the risk return trade-off is up in the sort of (7, 75, 780) plus type FICO scores is driving margins down. The other thing to keep in mind is that this product behaved very well from a credit perspective through the credit crisis. I think originators have some confidence as to the expected credit behavior. On our side, we have not changed our underwriting standards much. I mean we continue. We have a platform that is probably capable to originate more loans but we’ve kept the discipline in the business to make sure that we don’t compromise credit standards and we book loans that provide a good risk return trade-off. So, the overall profile of our originations has not changed. We are aware of some of the market trends that you are pointing to, but I am confident that moving forward in 2013 we will keep the same type of discipline in the business.

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Brian Foran – Autonomous: If I could sneak in a very quick last one; the NIM doing worse in the first half of the year than the second. Is that just the timing of CD repricing and deposit repricing more broadly, or is there some kind of expected inflection in asset yields as well?

Unidentified Company Speaker: So, if you look historically, you will see that first quarter Q4 to Q1 change is most likely going to be similar this year compared to last year. There is some support in the second half from CD – consumer CD repricing in Q3 and Q4. In general, Q1 tends to be a bit weaker from a fee perspective that goes into the margin line, and we would expect that to stabilize in the second half and we are not currently assuming any meaningful – as Dan stated, any meaningful improvement in the rate environment sort of an ongoing current conditions. We don’t see anything unusual than what we typically see in Q1 this year.

Daniel T. Poston – EVP and CFO: Yeah, the only thing I would add to that is we saw the impact on the rate environment from QE3 in the third quarter of 2012. That has had an impact on margins over the latter part of 2012 and that’s not fully baked into our portfolios at this point, but that will become more and more baked into the portfolios as we move through the first half of 2013, and absent any other kind of event that has a large impact on rates, we would expect the impact of that would begin to subside as we move into the latter part of the year.

A Closer Look: Fifth Third Bancorp Earnings Cheat Sheet>>