Fifth Third Bancorp's Impressive Financial Performance and Strategic Investments in 2023
2024-01-20
Fifth Third Bancorp, a leading regional bank, announced its impressive Q4 2023 earnings, exceeding expectations and showcasing strong performance. The company reported earnings per share (EPS) of $0.99, surpassing estimates by $0.09, while revenue reached $2.17 billion, surpassing estimates by $10.32 million.
Throughout 2023, Fifth Third Bancorp achieved exceptional results, driven by a defensive balance sheet, strong execution, and strategic investments. The company demonstrated top-quartile profitability, leading core deposit growth, and the best total shareholder return among its regional peers. Notably, they achieved an all-time record full-year revenue of $8.7 billion, with deposits growing by 5% despite an industry-wide decline of 3%. Additionally, credit performance remained robust, with net charge-offs below historical averages.
Looking ahead to 2024, Fifth Third Bancorp emphasized stability, profitability, and growth. Their focus was on maintaining a strong deposit market share by establishing new quality middle-market relationships. The company's liquidity position remained robust, achieving full compliance with Category 1 LCR standards. Furthermore, their tangible book value per share witnessed a significant growth of nearly 30% in the fourth quarter.
To mitigate potential volatility in accumulated other comprehensive income (AOCI) affecting capital, Fifth Third Bancorp transferred $12.6 billion of securities to held-to-maturity, representing a quarter of its available-for-sale (AFS) portfolio. The company also planned to resume share repurchases, targeting an amount between $300 million and $400 million in the second half of 2024. Additionally, they reduced their full-time equivalent employee headcount by 4% from its peak.
Fifth Third's Private Bank received prestigious accolades in 2023, including the Best US Regional Private Bank for the fifth consecutive year and the Best Private Bank for Entrepreneurs globally. The company expressed confidence in solid revenue trends for 2024 and positioned itself to perform well under a range of economic and interest rate scenarios.
In terms of financial performance, Fifth Third Bancorp delivered outstanding results in 2023, with industry-leading deposit growth, record revenue, and capital accretion. In the fourth quarter, their Common Equity Tier 1 (CET1) ratio increased to 10.3%, and the pro forma CET1 ratio, including the impact from unrealized losses on AFS securities, rose to 10.5%.
The company's commercial banking fees experienced growth, driven by strong institutional brokerage and improved corporate bond fees. However, this growth was partially offset by lower lease and marketing revenue. The decision to eliminate the extended overdraft fee resulted in a decrease in service charges on deposits. Non-interest income decreased compared to the previous year, primarily due to a reduction in Community Reinvestment Act (CRA) revenue.
Expenses in the fourth quarter decreased by 1% compared to the prior year, accompanied by a reduction in full-time equivalent employee headcount. The decrease in total average portfolio loans and leases was primarily driven by a decrease in average total commercial loans. The corporate banking business experienced a reduction in loans due to the RWA diet. The utilization rate of the commercial revolver at the end of the quarter decreased by 1% from the previous quarter. However, average core deposits grew, supported by growth in interest checking, money market, and customer CD balances.
The allowance for credit losses (ACL) balance decreased primarily due to lower period-end loans, with Moody's macroeconomic scenarios guiding the evaluation of the allowance. The company aimed for a CET1 ratio of 10.5% by June 2024 and held $12.6 billion of securities until maturity to mitigate the risk of potential capital volatility. They expected approximately 32% of the current loss position to accrete back into equity by the end of 2025. Share repurchases were anticipated to resume in the second half of 2024.
For the first quarter, the company projected a sequential decrease of 2% to 3% in net interest income (NII), primarily due to lower average loan balances, a lower day count, and higher deposit costs. Interest-bearing core deposit costs were expected to increase by 5 to 10 basis points. The terminal beta for interest-bearing core deposits was projected to be in the mid-50s for the rising rate cycle. Fifth Third Bancorp believed that they reached their NIM trough in the fourth quarter of 2023 and expected NII to stabilize and then grow sequentially throughout the remainder of 2024. Adjusted non-interest income was projected to grow by 1% to 2% in 2024.
The bank's mortgage origination faced challenges due to supply chain shortages and installer performance issues. The CEO expressed frustration with the media's reporting on economic activity, emphasizing the importance of considering regional recessions rather than national ones. Despite these challenges, the company managed to achieve expected outcomes within the middle of the distribution, benefiting from robust economic growth and stickier inflation.
Fifth Third Bancorp's loan-to-deposit ratio stood in the mid-70s, down from the mid-80s pre-pandemic. The company aimed to surpass GDP by a couple of percentage points on an annualized basis and was actively making investments across the Southeast to drive growth. Their consumer franchise was outpacing population growth in the Midwest and Southeast markets. Over the next five years, they planned to make 25 additional investments.
The bank anticipated a slower initial rate cut and believed that a stronger economy could materialize in the first half of the year. They aimed for a 3% front-end and a spread of 100 to 200 basis points between the front end and the 10-year rate in an ideal rate environment. Fifth Third Bancorp's NII outlook for the year included betas on the way down in the range of 60% to 70%. The increase in non-performing loans (NPLs) in other consumer loans was primarily attributed to delays in solar panel installations and installer performance issues.
Overall, Fifth Third Bancorp reported robust financial performance, strategic investments, and a focus on stability, profitability, and growth. The company aimed to maintain its market share, manage expenses, and perform well under various economic and interest rate scenarios.