Q1 2025 Earnings Call Transcript

Thank you for standing by. My name is Kate, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q1 2025 Bancorp earnings conference call. All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you.

I would now like to turn the call over to Matt Carroll, Director of Investor Relations. Please go ahead.

Good morning, everyone. Welcome to Fifth Third's first quarter 2025 earnings call. This morning, our Chairman, CEO, and President, Tim Spence, and CFO, Bryan Preston, will provide an overview of our first quarter results and outlook. Our Chief Credit Officer, Greg Schroeck, has also joined the Q&A portion of the call.

Please review the cautionary statements in our materials, which can be found in our earnings release and presentation. These materials contain information regarding the use of non-GAAP measures and reconciliations to the GAAP results as well as forward-looking statements about Fifth Third's performance. These statements speak only as of April 17, 2025, and Fifth Third undertakes no obligation to update them. Following prepared remarks by Tim and Bryan, we will open up the call for questions.

With that, let me turn it over to Tim.

Thanks, Matt, and good morning, everyone. At Fifth Third, we believe great banks distinguish themselves not by how they navigate benign environments, but rather by how they navigate uncertain ones. I say this at the start of every investor communication, but it is particularly relevant today. I am very pleased with our performance this past quarter and confident that we are positioned to deliver stability, profitability, and growth in that order with the many potential scenarios that could play out over the remainder of the year.

This morning, we reported earnings per share of $0.71 or $0.73 excluding certain items outlined on page two of the release, exceeding consensus estimates. We grew PPNR by 5% year over year and achieved an adjusted return on equity of 11.2%. We grew tangible book value per share by 15% over the prior year despite the ten-year treasury rate being unchanged. And on a trailing twelve-month basis, our return on assets, return on equity, and efficiency ratio remain among the best of our peers.

In the quarter, we sustained our positive momentum on loan growth, net interest margins, net charge-off rate, and operating leverage. Total loans grew 3% year over year, driven by strong middle market C&I production, pickup in leasing activity, and balanced growth across consumer secured lending categories. Our charge-off rate was stable following sequential improvement over the second half of last year. Core deposits were stable even with our continued progress on deposit costs, supported by 2% total household growth and 5% growth in the Southeast.

NII grew faster than our balance sheet grew at 4% over the prior year as net interest margins expanded for the fifth consecutive quarter. This despite market-related impacts to our capital markets business, adjusted fees excluding securities gains and losses were up 1% versus the prior year. Commercial payments grew 6%, driven by new lines in our managed services offerings, and wealth and asset management revenue grew 7% supported by 10% growth in AUM. Continued progress on our value streams and disciplined expense management held expenses flat versus the prior year, and we again delivered positive operating leverage.

We are pleased that our first-quarter results reflected the strength of our franchise. Today, we are focused on what is in front of us as opposed to what is behind. In my annual letter to shareholders in February, I wrote that the global economy is a complex adaptive system and that complex systems react to change in unexpected ways. Despite our best efforts to understand the implications, today we cannot predict what the final tariff policies will look like, much less what the second-order effects on economic activity, fiscal policy, and monetary policy will be.

What we can do is to ensure that our business mix is more naturally resilient, run our balance sheet defensively, and maintain optionality so that we can react quickly as conditions change. If C&I loan demand softens in the second half of the year, we have more avenues than most to manage our balance sheet. Our diverse national loan origination platforms give us flexibility on how and where to generate loan growth. And our multiyear investments in Southeast branches and growth in commercial payments will continue to produce granular operational deposit funding.

We believe credit concentration limits boost resiliency and the quality of client selection. And as a result, we are well diversified across asset classes, industries, and regions. We are clear-eyed about risks when they emerge and have been consistent about moving proactively to ensure charge-offs are well reserved before they materialize. At 2.7%, our ACL coverage ratio is among the highest of all our peers.

On fee income, our focus on diversity to mitigate the potential for continued capital markets disruption. Five different fee categories each contributed more than 10% of total fee income in the first quarter. We finally manage our business day to day in a fashion that maximizes optionality. We define multiple paths to achieving our revenue targets.

We model a broad range of scenarios including low growth, stagflation, and recession scenarios, and weigh our options to deliver sustainable profitability. We always plan to keep a tight lid on expenses because it is easier to invest more in a stronger-than-expected environment than it is to cut in a weaker-than-expected environment. Bryan will provide more detail on our outlook for the remainder of the year, but I would like to highlight a few points. First, we expect to achieve record NII within our existing guidance range even if there are no rate cuts and no further loan growth.

Second, we can deliver full-year positive operating leverage even if the capital markets do not recover given the expense levers we have at our disposal. Third, if the forward curve is realized, we expect to grow tangible book value per share by 10% for the full year from AOCI accretion alone, in addition to the growth we will generate from earnings. Last, our capital priorities continue to be funding organic growth, paying a strong dividend, and share repurchases in that order. Before I hand it over to Bryan, I want to say thank you to our employees for all you do and for your dedication to our clients.

Your commitment to getting 1% better every day is the reason Fifth Third was recently recognized by Atmosphere as one of the world's most ethical companies, by Fortune as one of America's most innovative companies, by Euromoney as the best US private bank, and by J.D. Power as number one in retail customer satisfaction in Florida for the second consecutive year. I love being part of your team. With that, Bryan will provide more detail on the quarter and our outlook.

Thanks, Tim, and thank you to everyone for joining us today. Our first-quarter results demonstrated the ongoing strength and momentum of our adjusted revenue, which increased 3% year over year, as our well-positioned balance sheet led to continued margin expansion driven by robust loan growth, continued fixed-rate asset repricing, and proactive liability management. The revenue performance combined with our ongoing expense discipline resulted in a 5% increase in pre-provision net revenue and 175 basis points of positive operating leverage on an adjusted basis compared to the first quarter of last year.

Our core deposit-funded balance sheet and diversified revenue sources provide us with flexibility and resiliency to deliver stable through-the-cycle results. Our strong profitability allowed us to maintain our CET1 ratio at 10.5%, consistent with our near-term target, while growing our period-end loans by $2.4 billion, executing a $225 million share repurchase, and absorbing the 7 basis point impact from the final CECL phase-in. As Tim mentioned, tangible book value per share inclusive of the impact of AOCI grew 15% from the prior year despite the ten-year treasury rate being effectively unchanged.

Our strategy in our investment portfolio to focus on investments with known cash flows through bullet and locked-out securities will continue to contribute to tangible book value per share growth as these positions pull to par. Net interest income continued its positive momentum with NII flat sequentially despite two fewer days in the quarter, and net interest margin expanded by 6 basis points. Proactive balance sheet management resulted in a 20 basis point reduction in the cost of interest-bearing liabilities sequentially. These actions, along with the continued loan growth and the repricing benefit on fixed-rate assets, more than offset the decrease in yield on our floating-rate assets.

Loan growth also continued positive momentum in the first quarter. Average loans increased by 3%, the largest sequential growth in nearly three years, and period-end loan growth grew by 2%. Commercial loans grew 3% on a period-end basis and 4% on an average basis compared to the fourth quarter, driven by continued strength in production in middle market lending across our regions, led by Western Michigan, Georgia, and Cincinnati. Utilization improved by about a point to 37% sequentially.

Utilization has continued to increase slowly during the first half of April. Consumer loans were up 1% on a period-end basis and 2% on an average basis from the prior quarter, led by continued strength in secured lending products such as auto and home equity lending. Shifting to deposits, average core deposits decreased 2% sequentially, driven primarily by normal seasonality in commercial. Our strong liquidity profile continues to provide us the flexibility to actively manage our overall funding costs.

Interest-bearing core deposit costs were 2.39% in the first quarter, down 25 basis points from the fourth quarter, representing a core deposit beta in the low 60s. Demand deposit balances as a percent of core deposits improved slightly to 25% during the quarter. Demand balances were down 1% on an average basis and flat on a period-end basis compared to the prior quarter. We believe this balance level will be relatively stable over the near term.

We ended the quarter with full category one LCR compliance at 127%, and our loan-to-core deposit ratio was 75%, up 2% from the prior quarter. Our focus remains on prudently managing total funding costs and maintaining a strong liquidity position. Our investments in Southeast branches will add momentum in gathering low-cost stable retail deposits. This approach will continue to provide us with the flexibility needed to manage uncertainty and to deliver a record 2025 NII despite the volatile environment.

Moving on to fees, highlighted on page two of our release, our reported results were impacted by the valuation of the Visa total return swap. Excluding the impacts of the swap and securities gains and losses, adjusted non-interest income for the first quarter increased 1% compared to the same quarter last year, driven by growth in wealth and commercial payments. Wealth fees grew 7% over the prior year to $172 million due to $6 billion of AUM growth and increased transactional activity at Fifth Third Securities. Commercial payments increased 6% year over year to $153 million, driven by net fee equivalent growth, which was up 8%.

Managed services and new lines provided over half of this growth. Capital markets fees declined by 7% from the year-ago period, primarily due to a slowdown in loan syndications and M&A advisory revenue, given the increased volatility and economic uncertainty. The securities losses of $9 million included a loss of $4 million from the mark-to-market impact of our non-qualified deferred compensation plan, which is offset in compensation expense. Moving to expenses, adjusted non-interest expense was flat compared to the year-ago quarter and increased 7% sequentially, slightly below our prior expectations.

As is always the case in the first quarter, the sequential comparison is impacted by seasonal items associated with the timing of compensation awards and timing of payroll taxes. The previously mentioned deferred compensation mark-to-market reduced expenses by $4 million for the quarter compared to a $7 million benefit in the prior quarter and an $11 million increase to expenses in the year-ago quarter. Excluding the impact of the deferred comp mark-to-market, year-over-year expenses increased 1% as revenue-related compensation expense and ongoing savings generated by our value stream efficiency programs offset our continued investments in technology, branches, and sales personnel.

Shifting to credit, the net charge-off ratio was 46 basis points at the lower end of our expectations for the quarter and flat sequentially. Commercial charge-offs were 35 basis points, up 3 basis points sequentially. Consumer charge-offs were 63 basis points, down 5 basis points, primarily due to seasonal improvement in credit performance in auto. Our NPA ratio increased 10 basis points sequentially, primarily driven by two ABL credits in our C&I portfolio.

The CRE portfolio continues to perform well, with total CRE NPAs declining from 46 basis points to 38 basis points, including only 7 basis points of NPA in our non-owner-occupied portfolio. In solar lending, our NPAs decreased by over 50%, primarily due to our work to support customers where installers have gone out of business. For these borrowers, we assisted them in getting their solar installation projects completed, and these loans are now current with sustained payment history. For the second quarter in a row, commercial criticized assets decreased with a $20 million reduction, bringing criticized levels to their lowest level in the past five quarters.

Additionally, early-stage delinquencies, 30 to 89 days past due, increased just 6 basis points and remain near the lowest levels we have experienced over the last decade. Our portfolio remains diversified across industries and geographies. Despite some increases in NPAs, given the impact of the rate environment and economic uncertainty, we have not seen broad-based weakening trends in individual industries or geography. Our provision expense for the quarter resulted in a $38 million build in our allowance for credit losses.

This build was primarily attributable to continued growth in period-end loans and a deterioration in Moody's macroeconomic scenarios. These increases were partially offset by improvement in the overall risk profile of the portfolio, as indicated by the reduction in criticized assets and the previously mentioned improvement in our solar lending portfolio. Our ACL coverage ratio was 2.07%, down 1 basis point sequentially. We made no changes to our scenario weightings during the quarter.

Moving to capital, we ended the quarter with a CET1 ratio of 10.5%, exceeding our buffered minimum of 7.7% and consistent with our near-term target. Our pro forma CET1 ratio, including the AOCI impact of the securities portfolio, is 8.3%, up 52 basis points year over year. We anticipate continued improvement in the unrealized losses in our securities portfolio, given that approximately 63% of the fixed-rate securities in our AFS portfolio are in bullet or lockout structures, which provides a high degree of certainty to our principal cash flow expectations. As Tim said, assuming the forward curve is realized, tangible book value per share should grow by about 10% for the full year before considering any future earnings, as the AOCI related to the securities losses will accrete back into equity.

During the quarter, our $225 million share repurchase reduced our share count by 5.2 million shares. Moving to our current outlook, despite the uncertain environment, we remain confident in our ability to achieve record NII and full-year positive operating leverage. We expect full-year NII to increase 5% to 6%, consistent with our guide in January. The outlook uses the forward curve at the start of April, which assumed 25 basis point rate cuts in June, September, and December.

Due to the resiliency of our balance sheet, we would expect to achieve record NII and achieve our full-year guide with no further loan growth and no interest rate cuts. Given our quarter-end loan balances, we now expect full-year average total loans to be up 4% to 5% compared to 2024, with the increase primarily driven by loan production and line utilization in C&I, combined with the continued growth in auto loans. We are assuming that the cash position, securities portfolio, and commercial revolver utilization all remain relatively stable for the remainder of 2025. Full-year adjusted non-interest income is expected to be up 1% to 3%.

Continued economic uncertainty has slowed down capital markets activity. Wealth and asset management revenues are also impacted by the recent sell-off in equities. Commercial payment revenue is growing as expected, and its technology-led product offerings continue to ramp from growth in new relationships. As a result of lower customer activity, we expect to manage full-year adjusted non-interest expense to be up just 2% to 3% compared to 2024. Our expense outlook assumes no change to the accelerated branch openings in the high-growth Southeast markets and continuing sales force additions in the market, commercial payments, and wealth increase our production capacity to support our strategic growth objectives.

In total, our guide implies full-year adjusted revenue to be up 4% to 5% and PPNR to grow in the 6% to 7% range, and positive operating leverage of 150 to 200 basis points. Moving to credit, we still expect 2025 net charge-offs to be in the 48 to 49 basis point range. The timing of charge-offs for individual credits may impact a particular quarter, but our full-year expectations remain consistent with our January guide. Given economic uncertainty and volatility, projected economic scenarios, we will no longer be guiding on provision builds.

Moving to our outlook for the second quarter, we expect NII to be up 2% to 3% from the first quarter, due to the benefits of loan growth, fixed-rate asset repricing, day count, and the continued management of interest-bearing liabilities costs. We expect average total loan balances to increase 1% due to the full quarter impact of the C&I production in the first quarter and continued momentum in auto. Excluding the impact of securities losses, we expect adjusted non-interest income to be up 2% to 6% sequentially. The wider range is due to increased economic uncertainty impacting wealth and capital markets revenue.

We expect strength in consumer banking due to seasonally higher card spend. Second-quarter adjusted non-interest expense is expected to be down 5% compared to the first quarter, due to the seasonal impact from the timing of compensation awards and payroll taxes in the first quarter. We expect continued investments in technology and marketing. We expect second-quarter charge-offs to again be in the 45 to 49 basis point range.

Finally, we continue to believe granular organic loan growth represents the best use of capital to generate strong returns for our shareholders. Based on our current projected balance sheet growth, we expect to repurchase $400 million to $500 million of stock during the remainder of 2025, likely in the second half of the year. We will continue to target our CET1 ratio at 10.5%, and the ultimate amount and timing of future share repurchases will be dependent on realized loan growth. In summary, with a resilient balance sheet, diversified revenue streams, and disciplined expense and credit risk management, we expect 2025 to achieve record NII, positive operating leverage, and strong returns for our shareholders as we continue to invest for the long term.

With that, let me turn it over to Matt to open up the call for Q&A.

Thanks, Bryan. Before we start Q&A, given the time we have this morning, we ask that you limit yourself to one question and one follow-up, and then return to the queue if you have additional questions. Operator?

Your first question comes from the line of Gerard Cassidy with RBC Capital Markets. Please go ahead.

Hi, Tim. Hi, Bryan.

Good morning.

Tim, can you share with us your interactions with your commercial customers and, you know, since obviously, these changes in the economic environment and the outlook is very uncertain due to the tariffs. Can you talk to us about, you know, how uncertain your clients are, number one? But number two, can you also play into that? Are the customers, your commercial customers, in a better position today because they went through the pandemic?

They needed to get lean during the pandemic. And the lessons they learned there can be applied today as we go forward in this uncertain environment.

Yeah. That's a great question. I wish I could say I had the crystal ball, and it's the reason we scheduled my travel the way we did. But, ironically, Gerard, I have been in five of our regions since the liberation day announcements.

I had the opportunity to speak with something on the order of fifty different business owners, most of which ironically were in, like, materials, manufacturing, transportation logistics, energy. And a few folks in automotive and health care and other sectors. I would say the magnitude of the tariff announcement caught them all by surprise. The base level ten percent reciprocal, the ten percent import tariff wasn't surprising.

It was all of the other activity. The magnitude's probably split basically fifty-fifty between those who interpreted the announcement as a negotiating tactic and believe that we're gonna settle out in a much more reasonable place that may actually give American producers better access to foreign markets. And the fifty percent who are really nervous that the tariffs, in particular tariffs that impact major supply chain countries like China, Vietnam, the Pacific Rim, and otherwise, are gonna stick at more elevated levels. I would say, universally, their belief is that the only way they really have to respond in the near to medium term is to push prices.

So folks with international supply chains will need to push prices to cover tariffs. They can absorb it in margins. Many of them are tussling with retail distribution partners who are pressuring to absorb some or all of the costs, but they believe that because these are structural changes that manufacturing really do believe they're gonna be able to push the price. What was maybe a little bit interesting to me is that the folks that have domestic supply chains were also saying they have to move prices in the US because they're expecting that if the tariffs hold, they're gonna experience volume losses in foreign markets, and they're gonna need to make up.

They require a certain amount of gross margin dollars just to be able to cover overhead and run their businesses. The other thing I would say is most of them are not waiting for the tariff rates to be finalized to start work on pricing. A lot of them require, like, their contracts with their distribution partners require sixty-plus day price change notices. And, therefore, they're gonna have to move.

I would tell you that they're probably the folks who are gonna try to figure out how to make changes to supply chain definitely have the benefit of having had COVID as a fire drill. But the winners there, the single biggest shift really were folks diversifying out of China and into countries like Vietnam that now have very high reciprocal tariffs, or in the routing of the logistics. Right? A lot of the goods came out of China and hit a port in Mexico and then were dropped over the border.

And if the broader tariff regime sticks, there really isn't gonna be a way to reconfigure your supply chain to avoid it entirely. So what a lot of them are doing is moving on price and then holding on any sort of major structural plans. Because the timeline required to get, like, a plant opened in the US or to move your production so that you're producing Asia for Asia and the US for US and Europe for Europe, it's, like, two to three years once you make the investment before you can even get something open and then five to seven years to get a return on investment. And nobody wants to make an investment like that if they're not convinced that whatever the tariff regime is that is supporting it, isn't durable yet.

So, you know, my only, to be honest, I guess, the silver lining here, there wasn't a single client who indicated that they are working on layoffs. Like, it says decline in legal immigration since the beginning of the year has meant there just aren't as many job seekers. So I think we'll see a decline in job openings, but if our clients are any indicator, that unemployment rate may be a little bit more range-bound than some of the economists are thinking. But it does feel like barring a significant change in terms of the proposal versus whatever tariffs become effective in ninety days, we're gonna see inflation pick up.

We're gonna see growth come down, but we may see unemployment, you know, in order. So that's what I'm hearing.

Very good. Yep. No. No.

It's very helpful. I appreciate all the color. Maybe another follow-up question. We know in this uncertain environment, and should the economy slow down further, you know, credit's always a discussion point with all the banks, not just at your organization.

But putting that aside for a second, if we stay in this slower growth environment, maybe there is a shallow recession or worse, what are some of the other areas aside from credit that you guys are looking at closely that you can manage to enable you to get through a slowdown more effectively than maybe in the past downturns?

Yes. I mean, credit's number one. Right? I think if you buy the, I'll call it the wisdom of the crowd hypothesis I laid out earlier, the implication for monetary policy is likely that the Fed doesn't have a lot of room to move.

If unemployment's tethered and inflation goes up, so your deposit funding is a critical point of focus that remains a really core point of focus for us. And then lastly, it's expenses. Right? And, you know, we have tried to be very deliberate.

I know we've communicated this, that we don't allow expenses to grow on the basis of market benefits. We try to keep expenses tethered because it's always easier to spend more in the event that things work out well. And that's resulted in us having much lower expense growth than others. Like, the gains we've gotten there, they come from the automation that comes out of the technology that goes in from lean manufacturing disciplines that underpin the value streams.

And I think as reflected in our guidance, we don't believe that it's credible to think that capital markets will recover sufficiently to cover up the softness that we're all gonna see in the first half of the year. So if fees are down, expenses, you know, are gonna come down as well.

Very good. Thank you.

Your next question comes from the line of Ebrahim Poonawala of Bank of America. Please go ahead.

Hey, Ebrahim.

Hey. Good morning. I guess maybe Tim, Maraj, speaking with credit, just looking to slide ten. You mentioned, I think, two ABL credits looking at sort of the sequential increase in non-performers.

Just talk to us in terms of, and I'm assuming this has nothing to do with the tariff overhang. But if you can provide some more details on those ABL loans that drove NPLs higher and even if we remain in a slower growth environment, do you see more migration into NPLs, more losses coming through the C&I book based on what you've seen and the work you've done.

Yeah. Yeah. It's Greg. I'll take that and thanks for the question.

Obviously, something I pay a lot of attention to is NPAs. As Bryan mentioned in the opening remarks, it was two credits, two ABL loans that primarily drove our NPA increase. Our ABL portfolio is a traditional ABL portfolio lending against receivable inventory and the like. We did very little over formula advance.

Advances and it's very minimal. So we're well secured. We stay within assets. It's a portfolio that over the last six years, we've had very minimal loss content.

Like six basis points on average per annual loss rate. But as you know, as we work through borrowers that are experiencing financial difficulty, sometimes that means agreeing to work out plans that put these loans into non-accrual status. However, that often leads to borrowers regaining financial stability and can ultimately lead to reduced losses. I'll also add each of the credits in our NPA portfolio is individually evaluated.

Financial risk assessment has already been captured in our results through recognized charge-offs or specific reserves that are included in the quarter-end allowance for loan credit losses. So I'm not overly concerned with the increase. We obviously pay a lot of attention to it, but also, as Bryan mentioned, we're not changing the charge-off guide for the second quarter. We're not changing it for the year.

We're gonna work through these credits. We've got good visibility on about 40% of our total NPAs that we think will see resolution over the next couple of quarters. So we're making good progress. Bryan mentioned our criticized assets are down for the second consecutive quarter.

You know, that tends to be a pipeline into NPAs. So given the current environment, I'm not seeing anything that would lead me to be concerned that we're gonna continue to see increases in this NPA portfolio. And as I said, we got about 40% visibility on the NPA portfolio that we think gets resolved in a relatively short period of time. The overall portfolio remains in excellent shape.

Bryan mentioned our criticized assets, 87% of our criticized assets, including NPAs, are current. So I feel good about that. Our consumer portfolio continues to perform very well. Net charge-offs, 30 to 89-day delinquencies, 90-day delinquencies, NPA, all the consumer book down for the quarter.

So overall, I feel good about the overall health and performance of the portfolio.

That's helpful. And maybe while we have you, Greg, I guess, just also address the solar panel lending business, where things stand there, any policy that's that you see, I mean, that comes up as an idiosyncratic risk factor for Fifth Third from the time. And, again, just give us an update on where that stands both on how you're thinking about growth in that book as well as credit risk? Thanks.

Yes. Maybe one point, Greg, and then Greg should address the credit risk. The policy risk in the solar lending portfolio is on future origination volumes. It's not on existing credit performance.

The tax credits on any solar panels that were installed previously and are generating energy have been awarded. So, you know, we're mindful of where the investment tax credit settles out. We have the ability because we're a bank and we are the bank, the largest bank in the market to do some things with home equity product structures that should help us on the originations fund. But it's less a policy question on existing credit performance than it is just how we're running the business operationally and the improvements that Jamie and team have been able to make.

Okay? Maybe talk about it.

I agree. I was gonna say the same thing. Jamie and his team are making good progress. Improving effectiveness of cost getting customers to PTO.

As Bryan mentioned, we had about a $34 million decrease in NPAs in the solar book in this quarter. So indicative of some of that progress. And we'll definitely bend the curve on charge-offs in the solar portfolio this year. It'll be the second half of the year.

We've gotta work through some of the 2022-2023 vintages. We're still outperforming the market in those vintages. However, we know we're gonna have to work through those. But I'm highly confident that we're gonna see better loss content in the second half of the year.

Jamie and team will continue to select the right installers. We're continuing to work with the consumer to get them to PTO, and that's why you're seeing some of the overall asset quality improvement. And Ebrahim, as Bryan, from a production perspective, we're seeing relatively stable production still in that business year over year.

Got it. Thank you all for the call. I appreciate it.

Your next question comes from the line of Scott Siefers with Piper Sandler. Please go ahead.

Morning. Thanks for taking the course I got. Either, Tim or Bryan, I was hoping you can maybe put a little more context around where you feel like got flexibility to cut costs without impairing some of the investments in expansion plans. I know Bryan and Tim, both of you talked about costs related to lower revenue activity.

So I certainly get to some of that flex flexes naturally, but just curious for maybe a little more color on how you're thinking about sorts of dynamics.

Yeah. I mean, especially the areas where we've seen reductions from a fee perspective. They tend to be areas that have higher variable-based compensation associated with the revenue production. So that obviously is a natural offset to begin with.

As I mentioned, we're gonna continue to lean into the branch bills. We're gonna continue to lean into customer acquisition, whether that's through Salesforce marketing. And it's really finding those areas on the margin, whether it's the marginal spending, some incremental savings that we'll be able to wean out of some of our operational activities. We're just being more disciplined day to day.

On the spending from a vendor perspective. Those are the areas where we tend to have the best ability to get some incremental cost out.

Okay. Perfect. Thank you. And then, Tim, I think you may have touched on some of these in your comments about commercial customers a couple of questions ago.

But when you think particularly on the capital market side, you have a sense for how much things are gonna need to calm down before customers are comfortable reengaging in sort of discretionary activities. I mean, how much of this do we need to get through before people just sort of resume their more strategic plans?

Yeah. I spoke with a customer who is a pipe manufacturer the other day, and who has been working through what would be a pretty interesting acquisition for them. And his comment was if I do the deal today and they were close to getting a deal done, you know, I'm either a hero or an idiot. And I don't like decisions where there are binary outcomes.

So the first thing is there just has to be some certainty. As it relates to M&A-related activity in the capital markets, it's just very difficult if you're evaluating a major investment like that to make it in an environment where it's not clear what the rules of the road are gonna be. I think as it relates to hedging activity, the volatility in the markets has actually generated a real pickup in conversations. As you know, that's a bigger piece of our capital market business than it is for most of the other regionals.

So no volatility was bad for that business last year. High conversations. We just probably need commodities prices in particular to settle out enough for people to be able to execute here. But just a modest decline in volatility helps that.

And as it relates to debt capital markets and bonds, it's just that, again, purely a function of what will clear the market and what pricing. Most of our clients are very proactive about how they manage their funding, and the byproduct of that is they start looking at entry points way in advance of when they need to be able to refinance. But it's just gonna come down to there being a little bit more certainty for us to see the activity. That said, I think the way we stare at the forecast and we stare at what we hear from clients, and our own view is if for to reaffirm a full-year fee guide after you have an, there's less activity, you have to believe that the outlook for the second half of the year is even better than you thought it was in January.

And I know some of our peers have gotten to that conclusion. We just can't figure out how. Like, there's nothing to me that suggests that the outlook in April for July to December is better than the outlook for July to December was back in January when we provided the guide.

Yeah. Okay. Perfect. Thank you for all the detail.

Yep.

Your next question comes from the line of Mike Mayo with Wells Fargo. Please go ahead.

Hey, Mike.

Hey. I feel like I live in a multiverse. In one universe, there's a global trade war. The Fed chair gives caution, and there's $7 trillion of lost stock market value.

And my other universe includes Fifth Third and a lot of the other banks, and in your case, you're actually guiding for better loan growth by 100 basis points this year. You said utilization is better through mid-April. You still guide for record 2025 NII. You said that a single client's talked about layoffs.

You said credit early stage delinquency or closed to their decade low. And there's no change to your charge-off guide. So as I toggle back and forth between one universe and the other, how do I reconcile that there's not a multiverse here?

I hope you got the trademark for that from the Marvel folks before you used it, Mike. No. Listen. From my point of view, like, we have to go with what we know.

Right? And I think what we shared with you earlier in terms of our outlook of a pickup in inflation, unemployment being more range-bound, a decline in economic growth, it is the basis. I think there's an interesting question to be asked about whether you can have a deep slowdown in the US if you don't get a big pickup in unemployment. Right?

Is it just growth grinds down or you have a shallow recession? I think as it relates to the credit performance inside the company, the expectations on loan growth, you start from where you are, and then you work forward. So if we had zero additional loan growth from June 30, I'm sorry, from March 31 forward through the rest of the year, we would already be in what was the low end of our loan guidance range previously. And we have the pipelines to be able to support what we're projecting here with customers.

The probability of default for the C&I loan production is the same or better than the portfolio overall. And we've done a lot of work on transitions and otherwise, and the ratings at the point of origination tend to be pretty stable from that point going forward. So we feel good about what we're originating from a loan perspective. And as it relates to the charge-offs, I mean, consumer runs like a conveyor belt.

You see it at current to 31 days past due, and it moves from one delinquency bucket to the next. So you have a sense for what your loss content looks like for the remainder of the year, and in the C&I case, Greg, I'd hand it over to you if you have anything else you wanna add. But we're just not seeing that stress in client financials that would suggest that you're gonna have more losses materialize now.

And then the only thing I would add in the new stuff we're putting on is right in line or a little bit better from an asset quality standpoint from the rest of the portfolio. So we're not stretching, we're not losing the underwriting standards.

Yeah, Mike. I guess the other thing that I would call out is I think a lot of what is impacting the equity market in particular is the risk of the future. And that is coming through in our ACL estimates. I mean, over the last two quarters, we've added $100 million to our reserve just attributable to the economic forecast.

Because we are seeing and Moody's is now projecting more risk in the environment.

I understand you were, I think, the first bank to actually highlight that. And I was surprised more banks didn't follow. In fact, I was surprised you didn't even build even more. So I guess, with the chief credit officer there, have you done a name-by-name review?

And I guess that would be a first-order review, but you don't really know what the second and third-order review is. And I'm not sure how anyone could get their arms around this, but how do you manage to do it?

We've got models. We've got tools where we are doing bottoms-up review of our commercial portfolio. We've got tools for the consumer portfolio. Tim said earlier, it starts.

We look at the current condition, the base. Our portfolio was in good shape today. We've got down balance sheets coming out of COVID. Our customers reacted, and balance sheets are better today than they were five years ago.

Less leverage, consistent revenues, and EBITDA streams. So it starts with that, and then you start putting stress on them, and, yeah, we are looking at all the portfolios. We are looking at the industries that we think are gonna have the most impact, construction, manufacturing, consumer spending. We're looking at all those.

But consumer portfolio, about 47% of our consumer portfolio is mortgage and home equity. We like the values. We like the asset values there. We had virtually no losses in either of those two portfolios last year.

So it's gonna get down from a consumer standpoint, card and specialty with discretionary spending habit. We think what will be most impacted, but 75% of our cardholders are transactors. And they're making more than the pure average monthly minimal payments. We're in that prime, super prime space, and so we're just not seeing huge impacts there.

And I think from a commercial standpoint, we're well diversified in our portfolio. Doesn't have concentration, geographic type of concentrations. So I feel good about the start. But the bottom line is, we don't know where this is gonna go yet from a tariff standpoint.

We're staying very close to the customers. Tim got into it earlier in terms of what the customers are telling us, and we'll continue to look at it. We'll continue to stress the portfolio with the tools that we have that incorporate both internal data, our own data, as well as external data.

Alright. Thank you.

Your next question comes from the line of Manan Gosalia with Morgan Stanley. Please go ahead.

Hi. Good morning. And thank you for that really detailed response and what you're seeing on the ground. I thought that was really helpful. Just given everything you said, you know, higher inflation, but no layoffs, can you talk about how you're thinking about the US consumer in general? And how you're thinking about the risks in your own consumer book?

Yep. That's a great question. And as I think I said before, in some ways, we have a better view into the health of the US consumer through our checking account base. Because it's a pretty even slice of the, you know, across income bands.

Whereas our lending activity is essentially Prime Plus and Super Prime customers. We've said for a while that the consumers on the low end, so folks with incomes below $75,000, in particular, those who are renters, were stretched. And you can still see that. The tax refunds every year provide a little bit of air for that population, but they have been running with deposit balances that are below pre-COVID levels.

And we hear from folks who are more active in that segment of the population that that is reflected in early-stage delinquencies. Because those folks don't have the margin of error to be able to overcome the sort of the incremental impact that we could see from the resumption in rent increases and then any sort of inflation in the things they buy, which is basic and energy and a little bit of clothing on the margin. At the upper end of the spectrum, there's still a ton of liquidity among high-net-worth individuals. But you can see what we think is the early signal of the impact of equity market declines.

So lifestyle spending in our private bank segment declined meaningfully year over year if you looked at the first quarter. I think it's something on the order of about 30% in the decline in lifestyle purchases. Now some of that's probably down to the fact that the Fed cut interest rates last year, so there are clients who were paying cash previously who went back to borrowing money. I wouldn't attribute that all to a concern about the equity markets.

But I do think you'll see those folks spend a little bit less. The folks in the middle, which is the broad middle of the population, right, so if you say bottom 10 or 15% in one bucket, top 10 or 15% in the other. We saw very little change. Like, there's little evidence of pre-tariff hard goods hoarding.

Like, we had trips to home improvement stores where we do a lot of with data source called Placer AI. There were pickups and purchases in warehouses but bulk purchases and warehouse stores. Home improvement, and department stores, you know, immediately prior to the announcement of the tariff. And then a decline year over year in purchases in those same locations afterward.

But in general, that segment of the population that we do business with is homeowners. And homeowners are still doing pretty darn well because they fixed their housing costs three years ago. They missed the worst impact of inflation as a result of that. And wage increases have more than allowed them to keep up.

So, you know, if that where does that leave us? Like, I think the bottom end of the population is gonna continue to feel stress. The top end of the population is likely to slow down what they buy, and the folks in the middle, as long as we don't have a big pickup in unemployment, you know, we'll continue to move forward.

I appreciate all the color there. Thank you.

Yeah. Maybe as a follow-up, just given some of this uncertainty and given the volatility on the long end of the curve, where do you wanna manage on that CET1 including AOCI numbers? So, you know, I think you noted that you're slowing buybacks versus what you did in the first quarter. And mostly you're doing it doing the buybacks in the back half of the year, where would you expect to end the year on that marked CET1 ratio?

Yeah. We'd expect to end the year around 9% right now. Based off of where the forward curve is playing out. The investment portfolio, the AFS portfolio in particular, continues to roll in.

The duration's down to about 3.8 years right now, and we're more sensitive in the belly of the curve today than we are in the long end of the curve. So we do expect to continue to have that AOCI creep down over time. So we feel good about that positioning. We feel good about the known and predictability of those cash flows and feel good that exiting the year at around 9% is a good place to be.

Got it. Thank you.

Your next question comes from the line of Ken Usdin with Autonomous Research. Please go ahead.

Welcome back, Ken.

Hey. Thanks, Tim. Appreciate it. I always appreciate your big picture perspective on the industry.

And just given all the changes happening in the regulatory environment, I'm just wondering here any updates you've got about just industry consolidation and also what you're expecting to see and what you're hoping for from a Fifth Third perspective from all the changes on the regulatory front. Thanks a lot.

Yeah. No. Happy to do that. I could go a lot of directions with that question.

Let me take what we're expecting to see from the regulatory front first. And then I'll hit the industry consolidation point. You know, if you just step back and say, what's the thesis that the current administration is using on the way to drive the country forward? Like, there's a strong belief everybody talks about in tariffs that it's important for us to have a domestic manufacturing sector and strong border.

That's important for national security. It's important in terms of ensuring that the benefits that, you know, our economy creates are available broadly. And but they also recognize that fiscal discipline is gonna be important. Right?

So I think the logic that I see here is you gotta keep tax rates low because it's important that we have money in people's pockets to keep the economy going and to invest back into businesses. There's some reduction in spending associated with the Doge initiatives, but the way then to get the fiscal balance back in order is probably a little bit in tariffs, but maybe more importantly to reignite private sector growth. Right? So they talked a lot about deregulation across sectors as a mechanism to ignite growth.

I think they see bank regulation as really critical there because if you just step back and look at the loan-to-deposit ratios from, like, call it twenty years ago to the current period, they're down twenty-plus percentage points, which equates to about $5 trillion in credit formation that didn't happen. Right? And if you say, hey. Maybe we only got half of that, but that's $2.5 trillion that could have gone into investing in, you know, new capital equipment or jobs formation or otherwise.

Maybe we wouldn't have needed tariffs to have a resurgence in domestic manufacturing. So I think capital and liquidity are gonna continue to be really top priority for them as the leaders of these individual agencies are formally confirmed here. And that is good for everybody. I really do believe that.

The system is well-capitalized. The system has more than ample liquidity to support a wide range of scenarios. And we need the capacity to be able to support credit formation if we're gonna reignite the private sector growth. That said, you know, they've also been, you know, I think pretty clear that banks are gonna need to compete with everybody.

Right? The deregulation is gonna have at least a significant sector. In particular, as it relates to some of the things that are being done on compliance. And we have the least consolidated banking sector in the world.

Right? So long term, medium term, there should be more consolidation. It's important for all of us to continue to try to get the overheads down in the business. And to be able to make the investments that we gotta continue to make in AI and technology, the other things that are so important to the way that we're gonna serve customers in the future.

Hey, Tim. On the industry consolidation point? I'll leave it there.

Yeah. Just that I think you'll see there's no question on my mind that in the future, there are gonna be fewer banks than there are today.

Understood. Okay. Got it. I'm sorry. Thank you.

Yep. Bye-bye.

Your next question comes from the line of Peter Winter with DA Davidson. Please go ahead.

Good morning. Yeah. You guys have a nice history of being very disciplined on credit underwriting. When I look at slide eighteen, you've got your breakdown of the shared national credit portfolio. It's 27% of loans. And just in a downturn, there always seems to be market concerns about SNC credits. Just can you talk about your outlook in this portfolio in an economic downturn?

Yeah. And Greg, maybe take that here in a minute. I think we hear it. And as you said, while we're very proud of the discipline we have in the underwriting and in the performance of the SNC portfolio, we've been pretty clear that we wanna be more granular, and I think we've actually made pretty good progress on that.

I mean, there's a highlight on that slide that talks about SNC balances being down 13% in two years. Like, we've grown the middle market by 5% during that same period. And it included the RWA diet. And about two-thirds of the production in this first quarter were middle market, which by definition are not SNC credits.

And that's where, essentially, all the additions have gone as well. So the SNC portfolio is a good portfolio. I'm not worried at all about the quality there. Greg will give you a little bit more detail.

But the strategy there has been to grow the granularity of the book by investing in the middle market. And I think you should continue to expect the SNC portfolio not to be the centerpiece of how we get our growth going forward.

Yeah. From an asset quality standpoint, it is performing in line or better than the rest of the portfolio, criticized levels less than 5% compared to the rest of the portfolio. Sixty percent of that is investment or near investment grade. I think it's important to remind everyone, we are underwriting our own SNCs whether we're a participant or not.

It's got to underwrite to our standards. Average relationship size there is about $34 million in outstanding, so it's a very manageable, very diverse from an industry standpoint portfolio. So we've maintained our disciplines both in terms of whole levels as well as industry diversification. We've got very low leverage.

When you think about leveraged loans, we've got very, very little leveraged loans in that SNC portfolio.

Got it. And just as a follow-up question, you know, you upped the average loan forecast and you've got very good momentum in the first quarter on that margin expansion. But didn't change the NII guidance. You know, just maybe talk about the puts and takes to the 5% to 6% growth this year. And where you think the margin could end the year?

Yeah. Thanks, Peter. You know, I would tell you that we continue to feel good in what we're seeing from a momentum perspective on NII. The puts and takes, you know, we had a little bit of softness in the first quarter from a seasonality perspective in deposits.

That was something that I talked about earlier in the first quarter. That did have a little bit of impact. The growth has come in at a little bit higher credit quality than we were originally expecting. So spreads were a little bit tighter because of some of the credit quality of the production.

And finally, the current forecast assumes three cuts for the year, which includes the December cut. And that December cut is costly from an interest income perspective as the loans will reprice ahead of that, but we won't get the deposit repricing in until the end of December and end of January. Those are the main drivers from a puts and takes perspective on why it's kind of in line despite a little bit better loan growth.

Any sense where the margin could end the year?

We continue to expect a couple of few basis points of improvement from here to the end of the year, kind of like each quarter, kind of like we've experienced the last several quarters. I would tell you more than anything, the volatility around the potential cash balances, depending on where loan demand and deposit growth shows up, it's gonna potentially be more impactful and just don't have a good line of sight of how we're thinking about where cash balances could be. But in general, the core business trends, I would expect to see a couple of few basis points a quarter steady increases from here.

Got it. Thanks, Bryan.

I will turn the call back over to Matt for closing remarks.

Alright. Thank you, Kate. And thanks, everyone, for your interest in Fifth Third. Please contact the Investor Relations department if you have any follow-up questions. Kate, you may now disconnect the call.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.