Fifth Third Bancorp Earnings Call Nuggets: CCAR, Consumer Deposit Product Redesign

On Thursday, Fifth Third Bancorp (NASDAQ:FITB) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.


Ken Zerbe – Morgan Stanley: First question I had just on CCAR, I understand you can’t say why, but can you just address the – let’s call it the delay in when you plan to resubmit? I was under the impression it would be a 30 day resubmission process, seems like it’s taking a little bit longer now? And then just as a follow-up on that one, if you do get approved for what you’re asking for in 2012, should we just expect almost an acceleration of buybacks in the second half?

Kevin T. Kabat – President and CEO: Yeah. Relative to timing, I think, while the rules provide for a 30 – a minimum of a 30 day requirement, that’s not necessarily required, and I think, as we look at our resubmission, there’s a few things that are driving the timing. One is the fact that we’re going to use 3/31 data, so update the capital plan, so obviously we couldn’t start on that until we had the 3/31 data. We’re also using economic scenarios that are reflective of the 3/31 environment, and the expectations for the future as of 3/31, and as we get that information then we have to prepare – or we have to execute our stress test and then use those stress testing results to kind of build our capital plan to demonstrate the impact of our proposed capital actions on our capital. So that process takes some time, and as we mentioned in our prepared remarks, our current expectation is that we would submit that plan in late May or early June, and from that point forward of course the fed has to get through its review process, which I think the rules allow for a maximum review period of 75 days, so our current expectation is that we will receive a response from them likely in the month of August, so relative to the capital actions, as we said, we expect to submit a plan that has very similar capital actions to those proposed earlier. We think there is a lot of support for us doing that from a quantitative basis. You’ve seen the results of the prior submission, and we fared very well from a capital perspective even with those proposed capital actions. We’ve indicated that the fed’s objection was not related to quantitative matters, so the prior plan and those capital actions were acceptable on a quantitative basis, if anything the economic environment has probably gotten a little better, so as we – while we haven’t prepared our stress test and prepared our capital forecast, we would fully expect that the updated capital plan will easily support the capital actions that we proposed last time, and in that those are largely driven by capital levels and not necessarily related to time periods. I think that would result in capital actions that occur in a somewhat compressed timeframe, given that we would be starting a little later than we would’ve otherwise been starting.

Ken Zerbe – Morgan Stanley: That helps, and just one other question I had, in terms of the mortgage banking outlook, the lower expectations for revenue, is that because you’ve already started to see lower gain on sale margins or is that just your expectation for the quarter? Just curious on trends so far this quarter.

Kevin T. Kabat – President and CEO: I think, it’s a little bit of both. I think we have started to see the margins come down a little bit. I think that the guidance that we’ve given would reflect an expectation as they may come down a bit more from where they are now.

Consumer Deposit Product Redesign

Kenneth Usdin – Jefferies: I was wondering, if you could give us an update on consumer deposit product redesign and update us on your thoughts for mitigation and how that should show through the deposit fees?

Kevin T. Kabat – President and CEO: Yeah, Ken, I – what I can tell you at this point is we are really comfortable in terms of the approach that we’ve taken. As we’ve talked about publicly and as we’ve talked about in some of the conferences, our orientation has been to redesign toward a value-added, and so our expectation is that that will be well received in the marketplace and that we’re really progressing well. So, nothing new to report on that at this point, but certainly later in the year we’ll be able to talk more deeply about marketplace reactions and acceptance.

Kenneth Usdin – Jefferies: Okay. And I don’t want to make this so much a follow-up on CCAR, but any updated thoughts as it relates to just capital usage and management around M&A and the potential for M&A, and does anything change with regards to that vis-a-vis this whole CCAR process resubmission?

Kevin T. Kabat – President and CEO: If your question is does the qualitative objective (indiscernible) to CCAR change anything with respect to our M&A expectations, I think the answer to that is no. I think, if you look at the CCAR rules, any significant M&A activity would require a resubmitted capital plan anyway, so I don’t see the CCAR process presenting anything different now than we might have expected 90 days ago.

Kenneth Usdin – Jefferies: Okay. And last real quick one, you mentioned the comments about stabilizing the margin in the back half of the year, after the expected step down in the second quarter, can you just talk us through the ins and outs, what gets better, what gets worse, in terms of keeping it stable in the back half?

Kevin T. Kabat – President and CEO: Yeah. I’ll make a couple of comments, and then Tayfun Tuzun can addition any comments that he might have. I mean, in general, I think, we’re in a rate environment now that is creating some asset yield compression. I think, as those lower rates get reflected in our portfolio to a larger degree, as those rates stabilize which is what the expectation is from here forward, we’re not expecting significant changes in rates from here out, the impact on the portfolio becomes less and less as more and more of that lower rate environment is already baked into the portfolio. So, the asset yield compression will tend to decrease somewhat over time. The other thing I would point out is that relative to this quarter’s performance, we didn’t see a significant change or any change really at our overall funding costs, and that’s despite the fact that our average deposit cost considering kind of rate reductions, as well as mix changes within our deposit portfolio actually produce a 4 or 5 basis point decline in deposit costs. But that was completely offset by increases in wholesale funding costs, and while wholesale funding is now a significant component of our – or not as significant a component of our funding as it has been in the past, it still did have a pretty significant impact this quarter, and that was driven largely by the hedge ineffectiveness that we talked about, which we wouldn’t expect to continue and will ultimately reverse, as well as the impact of the debt offering that we did during the quarter, which while it increases the average cost a bit we were very, very pleased with the results of that offering, and believe that represents very favorable long-term funding for us, so the impact of those things we would expect to be muted as we move into the latter part of the year.