Fifth Third Bancorp Earnings Call | $FITB | 🔴 WATCH LIVE

Morning everyone and thank you for joining us. At Fifth Third, we believe great banks distinguish themselves not by how they perform in benign environments, but how they navigate uncertain ones. In a strong macro environment like this one, our job is to stay disciplined and to build durable franchise earnings, not simply to enjoy the cyclical boost. As we always say, it's stability, profitability, and growth in that order.

Today we reported earnings per share of 83 cents or $1.12 excluding certain items outlined on page two of the release. When we announced our merger with Comerica nine months ago, we made three commitments: to produce no tangible book value per share dilution, to become an even more profitable company, and to create an even better platform for long-term growth. While we are still in the middle of integration and not every metric is yet where it will be, our trajectory and long-term potential are visible in this quarter's results. Tangible book value per share increased 10% year-over-year, 1% sequentially and 7% since the announcement of the transaction.

Our adjusted return on tangible common equity improved to 19%. Our adjusted return on assets improved to 1.3% and our adjusted efficiency ratio improved to 57%. Even with most of the expense synergy still yet to be captured.

As importantly, our organic growth strategies continued to deliver on the broader footprint and opportunity set that Fifth Third and Comerica together possess. End of period consumer and small business deposits increased 4% sequentially driven by strong new customer acquisition. In the Southeast, consumer checking households grew by 7% year-over-year, approximately four times the rate of underlying market growth. We open more than one branch per week during the quarter and remain on schedule to open 55 new branches in the Southeast for the full year.

Encouragingly, Comerica's Texas, Arizona, and California markets grew checking households by 4%, the first net new household growth in several years, and added $2.5 billion in deposits, more than double the $1 billion expectation that we shared in our last earnings call. We also opened our first Fifth Third branded branches in Texas and California during the quarter. Following conversion, we expect Southwest household growth to accelerate further as Comerica's existing branches see the full benefit of Fifth Third's products, digital channels, and analytically driven direct marketing. We will also see the pace of new branch opening accelerate in Texas having now secured 101 of the 150 additional locations we targeted to build by the end of 2029.

Turning to commercial lending, end of period C&I loans grew 2% sequentially. Comerica's legacy markets and specialty verticals grew C&I loans with Texas, California, Michigan, environmental services, dealer services, and tech and life sciences all showing growth. Overall, we continue to see demand in sectors and markets benefiting from infrastructure investments as well as in aerospace and defense. Our largest businesses hit important milestones during the quarter with commercial payments and wealth and asset management each achieving a $1 billion plus annualized fee run rate and capital market fees reaching $600 million annualized pace.

NewLine continued to drive growth in commercial payments with fee revenue increasing 35% year-over-year and the technology behind it earned 2026 top financial innovation awards from both the American Banker and Global Finance. We also shipped the first Direct Express cards in our new platform during the quarter with 66,000 new beneficiaries and all participating federal agencies now live.

Behind the scenes, our product and technology teams had a strong quarter both in terms of integration and innovation. On the integration front, we executed our second mock conversion in June with good outcomes. We remain on track to execute systems conversion on Labor Day weekend, the last step to unlock the $850 million of annualized run rate synergies we committed to deliver in the fourth quarter.

On the innovation front, NewLine extended its model context protocol server capabilities with skills, standardizing how AI models can use our tools and workflows. And our consumer team shipped a new AI powered interface within our mobile app designed to streamline navigation and task completion for our customers. We also launched Fifth Third for Business during the quarter, a banking experience designed to help small businesses manage working capital and get paid faster. This solution includes several differentiated tech-enabled elements, including crediting eligible payments such as merchant receivables and government payments up to two days early for free, enabling business customers to accept payments via Zelle and tap to pay directly on their smartphones, and providing access to working capital through the same award-winning digital interface that powers Provide.

Internally, Fifth Third colleagues continued to make significant use of AI tools to boost quality and productivity, executing more than 1 million prompts in the month of June alone. In technology, the prompt accepted rate per new code was 45% during the quarter, and over 87% of unit testing was automated by AI. While it's early days and we have much yet to learn about how best to harness the power of these tools, I am looking forward to what we will be able to do after our technical conversion is complete.

Before I hand it over to Brian, I would like to take a moment to thank our team members. The work you do is detailed, demanding, and important, especially now as we serve existing customers and communities along with executing the largest merger in our history. We are building a Fifth Third that is not just bigger but better, more differentiated and more resilient. That's why earlier this morning, Euromoney recognized you as their best US bank in 2026. Congratulations. With that, I'll turn it over to Brian.

Thank you and good question. A lot there. So yeah, I think we feel very good going into the Labor Day systems conversion. I think we've talked before about the fact that the mantra here on any sort of a big program, whether it's a thing like this or the organic expansion, is think slow, act fast. So we elected to do three mocks as opposed to two, which I think is generally where people are. So we got through the second mock in June and that went very, very well. We actually have built some pretty cool tech tools for this conversion, effectively an intelligence layer that sits on top of the Microsoft project plan hard deck that is able to monitor the conversion in real time and then helps the teams coordinate, including having AI essentially listening into the teams' Slack feeds and monitoring for any sort of sign that there may be a delay and then helping us to think through the contingencies and whatnot. So we feel very good about being able to get the conversion done on Labor Day, which then to your point unlocks the last large wave of synergies both as it relates to real estate and to people and then obviously to the elimination of the systems.

We are, if you just look at it mathematically, running a good bit ahead of the $850 million in synergies. Our plan, assuming that the environment holds the way that it has, has been to redeploy anything above the $850 into supporting revenue growth unless we just don't have opportunities to be able to do that. So at least as it stands today, the intent would not be to allow the additional synergies to fall directly to the bottom line in form of incremental efficiency. It would be investing.

The deposit campaigns in the Southwest went obviously extraordinarily well. I think when we talked to you in January, we said we were hoping post-legal day one to be able to get a half a billion to three-quarters of a billion out of the Southwest markets and we did the earnings call and the plan the programs were tracking ahead of plan. We said we hope to get a billion, we got $2.5 billion of incremental deposits into those Southwest branches. And so we're eager post-conversion to be able to turn on the checking household acquisition marketing and we expect to do very well. The unannualized sequential checking household growth in the Southwest was 4% as I mentioned in my prepared remarks, which, whatever, I won't make an effort to calculate the compound rate, but just multiply that by four, it's 16% annualized growth in incredibly robust markets and that's without the checking products that Fifth Third will bring and the incremental household marketing.

I think the other area is we intend to turn on the jets in the product specialists and in the relationship manager salesforce. We're ahead of the game on mortgage. We were able to move earlier there because Comerica really didn't have a large mortgage platform. We did the same amount in production in the Comerica footprint in two months that Comerica did in 12 months last year. And so that is evidence of where I think we'll be able to pick up. There we had some sizable commodities hedging relationships in metals and recycling come online aligned to Comerica's vertical. Comerica's vertical is in the second quarter about 10% of the Comerica payments salesforce production was Fifth Third products that Comerica didn't previously offer. I think that could be a lot more, that could be 50% by the time we're done there. And the AL product in particular in addition to equipment leasing continues to be quite successful. We had Comerica bankers win new quality relationships, not just servicing existing relationships but win new relationships with those products.

So I'm of the view that given that those things are materializing today pre-conversion, when it's still a little bit clunky to be trying to manage client relationships across two technology stacks, that when we get through to the other side of this, we should be able to show a pickup in both loan production but in particular fee production on the commercial side of the equation next year and that there's no reason not to take the household growth rates and to multiply it by four for the Southwest because we will invest in an environment where deposits continue to be important, where the demand continues to be ample. What incremental we generate above and beyond the $850 in the bottom line will drive up tangible book value per share growth.

Yeah. If I just add one thing, I think environments like this one favor people who have some sort of differentiated strategy, right? If you're just in the commodity markets for deposits, the competition dictates your margins. When you have differentiated platforms, in particular ones that are operational in nature because they're just harder to build quickly, you have optionality that others don't. So you know well that like a billion dollars is a yard in the bond lexicon. If you go through the numbers this past quarter, like we got two yards year-over-year from NewLine, we got three from Consumer, most of which from the Southwest and the Southeast, and then four yards for Direct Express. We get one more yard and we are at a first down, right? It's just but those are things that not everybody can play in. In the case of Direct Express, it's a unique attribute. In the case of NewLine, it's highly differentiated and there's a lockout. And in the case of consumer, there are a lot of people who will build branches, but not a lot of people who have been building branches and therefore have the benefit of the 150 in the southeast that have been built over the last handful of years, coupled with the fresh territory that we have in the southwest to be able to just grind away. Three yards in the cloud of dust I guess, right? When you get your first down and four.

Morning, Manan.

Yeah, I we feel very good about where we're going to end the year, right? And Brian reinforced that you know whatever the glide path we are almost at on the ROCE the original target we set for 2027 and then said we could get to in the fourth quarter and we made a huge step from first quarter to second quarter toward the target efficiency ratio. I would remind everybody seasonally the fourth quarter tends to be our most efficient quarter. So we should do better than the 19 and 53 that we had set for 2027 in the quarter. And when you take our guidance and work it through your models, I know it'll show that our belief is that at the level of profitability.

Are added there. Then secondarily will be a backbook conversion that we will be commencing this year that will scale the new platform but that essentially is moving deposits off of the old platform that Comerica operated onto the new solution that Fifth Third and FIS are offering. We are seeing pretty good underlying growth in deposits. Brian, you may want to reference the sort of pace with which deposits are growing. If you just look at the Direct Express portfolio in total, but in general, we're at the right point. Like the retirees are a good place to be focused on given the shape of the demographic pyramid in the US. And the byproduct of that is I actually think we're going to see pretty nice secular growth tailwinds there.

Hey Ryan,

Yeah, Ryan. You know, when we look at the numbers, it's I do want to highlight it is hard to see the moving parts just given that we're now comparing a full quarter impact of Comerica to two-thirds of a quarter impact as well as now and layering on top of that normal commercial seasonality. We saw if you look at and again this is information that is a little harder to see June average balances versus March average balances for the month we saw 1% sequential growth including a recovery of DDA balances from the normal seasonality that we see associated with tax seasons with DDA balances being up. So when we think about a mid-single-digit kind of growth rate, we think that's the trajectory that the company can be on for some time and we can accelerate faster than that depending on the speed that we want to deploy marketing dollars to grow more balances. A mid-single-digit growth that supports what we talk about in terms of mid-single-digit growth in the loan portfolio. That really is the foundation of how we think about it coming together. And we think we have a long runway in front of us. We've talked for a bit now about the four $10 billion deposit opportunities in front of us, the maturing of the Southeast network, the growth associated with now the Southwest network, the buildout of our small business product, getting it into the place where we should be from a market share perspective and then the tech and life sciences growth from an innovation banking perspective. That's a $40 billion opportunity that we think we can achieve over the next better part of five, six, seven years as the network matures out. So we think the tailwinds associated with the deposit franchise are there and as Tim mentioned...

what we're excited about is it's not just a single play. We have a very diversified franchise that gives us a lot of abilities to grow in different areas both geographically and from a business perspective. And we've delivered and hopefully you feel like you've seen it in our numbers good outcomes. The consumer franchise continues to deliver and the investments we've made from a branch perspective continue to pay off. When you look at our overall deposit cost, you know, it's the consumer core franchise 116 billion of deposits that are at a 1.25 total cost of deposits right now. We feel very good about the profitability that that franchise is kicking off. And what you see is the ability to attract new customers and rate is often part of that. But when you can provide a customer with leading product, great service, and convenient locations, we're able to maintain those customers as we price them down over time. And so they're getting a great experience at Fifth Third, and we think that business model could continue for some time.

Yeah, I feel pretty good about our ability to sustain the loan growth pace going forward, barring a material change in the macro. Like when you look at the commercial clients that we have, I think confidence is up on a pretty broad basis. It really is not sector focused. Now that was based through the quarter on the belief that the situation in the Middle East was deescalating and also I think the fact that the tariff confusion is settled out. So clearly we have some retrenchment on the Middle Eastern front. But the tariff confusion has settled. Like a simple example there, one of the metal stamping businesses that I had the opportunity to talk to in Michigan had stopped bidding at market rates just given input cost uncertainty and had resumed bidding during the quarter. And I think clients across the board indicate that demand's pretty stable, in some cases actually had been improving. The sectors linked to infrastructure, capital investment in data centers, places where there is real evidence of reshoring activity like automotive where you have foreign OEMs building plants here in the US, is where the business is moving I think most strongly. The folks that are focused on more value-oriented consumers are probably the places where you've seen more hesitancy, but at least as it relates to us, if you just disaggregate the CNI loan growth, legacy Fifth Third was up by more than 2%. The big driver there is the fact that new quality relationships are running about 20% ahead of where they were in the prior year, and that is informed by the fact that they're about 6% more middle market bankers on the street than we had a year ago. The legacy Comerica business lines and markets grew CNI loans by about 1% sequentially after having been basically stable or flat for the past three or four years. So there's a nice step forward there. And the verticals in particular, the specialty verticals were the standout. They grew 6%. And the energy and talent of the bankers there is really exciting. I think as we get through the conversion, there's no reason to believe that both teams won't converge around the same growth rate. So good underlying demand attached to secular things more than sort of specific points in the cycle. And just both the sort of added feet on the street on the Fifth Third side and then the continued reacceleration of the rate of growth that Comerica had demonstrated it was capable of prior to the last three or four years, and you have a pretty nice sustained loan growth outlook for the bank.

Yeah, thank you.

Yeah, no, great question. I think going into next year. I don't think we have to wait for next year. We're tracking all of this stuff in a pretty detailed way. Hence my point earlier about like I said I think I said roughly 10% of new production exactly 8% of new TM production from Comerica TMOs this Fifth Third products that Comerica didn't offer previously. It's down to the deal level that we're measuring all these things. What I would say is the focus will shift when we get past conversion from the sort of job one which is protect what we have and get the expense synergies out to job two which is energize the combined team around the opportunities to drive growth. The job one we talked about the expense synergies. I think the other thing maybe that is worth mentioning that I didn't is 99.4% of the customers that Comerica had in commercial at the beginning of this year are still clients today. So we're actually running ahead of normalized client attrition. We're doing better from an attrition perspective than you normally would in this sort of equation. So the teams have done an incredible job of ensuring that the existing relationships understand why they're better off with the combined company than they would have been with either company being independent. But we've done the product innovation rollouts. We have added specialists in several of the markets. We'll continue to do more of that. And I think as we get into the fourth quarter this year and we're looking forward to next year, we'll give you a view of what we think from a growth perspective is coming from sort of legacy Fifth Third strategies versus what's coming from the application of those strategies to new markets or leveraging Comerica capabilities across the broader Fifth Third platform, and we'll just transparently let you see it.

Yeah, I mean you know that we worry about that. Given the time that I spend on technology, the one guaranteed rule is that we will misestimate the amount of capacity that's required here because you have a lot of different competitors. You have a nascent market which means you don't have a normal market structure, which means you have more people trying to gain share than there is share to be gained, which by definition means there will be some overbuilding. Now my own view on this is that there's a possibility that that capacity gets absorbed just over a much longer time frame than people anticipate, but it makes being on the construction financing side of that equation a little bit dicey. That said, given the composition of the client portfolios that Fifth Third and Comerica have, which tend to be real economy businesses disproportionately, we have lots of relationships with people who are engaged in constructing data centers. I had a chance on one market visit I did out west to meet an HVAC contractor who mentioned that they have a five-year backlog equating to like $300 million in incremental backlog due to hyperscaler demand. We have clients that we bank that are in the exotic businesses of quarrying aggregate or mining lime that goes into concrete that gets poured into the foundations and otherwise. I don't know that it would be possible for us to do a portfolio level look at the sort of second derivative exposure, but we do that work every time we reunderwrite an individual client. We look at the concentration risk that exists in their revenue composition. We look at the stress scenarios as it relates to sort of demand overall as well as idiosyncratic scenarios. And the benefit of banking the people constructing data centers as opposed to making the construction loans for data centers is, to the point you made earlier, there is an underlying business there. Given the length of the relationships we have with these clients, it was doing fine on a regular way basis prior to the data center boom.

Yeah, absolutely.

Hey Mike.

No. 850 million or more will drop to the bottom line. The or more question will be a function of our ability to whether we have the ability to drive better value for shareholders by reinvesting into revenue growth or whether we think the environment is such that we're better off just continuing to run a more efficient company.

The consumer franchise is up. It's net up. It's like 102% or something like that of what it was at the beginning of the year. It's essentially flat in Michigan and up 4% in the Southwest markets.

Yeah, sure. I mean I think that loan growth accelerated, right? And my own view is that there's no reason to believe barring a change in the environment that it will decelerate from here. On legacy Fifth Third CNI up more than 2%. I think that compares pretty favorably. Comerica from flat the last three years to up 1% sequentially during a period of time where appropriately what we are asking our teammates to do is to make sure that we take care of existing customers and get them through the migration process and that's all production. We didn't get a lift in utilization quarter to quarter. So there is a nice production trend there. Commercial real estate we were softer than I think I have seen at least thus far from others. We were up half a percent. I think many others are up a little bit more than that. Our general view there is to live in a slightly more conservative place in the ecosystem. We have not been providing back leverage to a lot of the private credit funds that are out there in this market. I think that is the place where we've seen structure and pricing and CNI it's actually remained pretty consistent. So we've elected not to chase some of the stuff that has either stretched recourse or on LTV or otherwise. And then the other, if you flip and look at the consumer side of the equation, which you didn't ask about, but I'll give it to you anyway. Home equity has been really strong for us. The indirect auto business has been a source of growth the last few years. The market there is, as you know, very efficient. Pre pricing has come in and we reflected that in origination levels, but to the extent that pricing or the balance sheet needs changed, there's no reason why we couldn't continue to run at the levels that we were running previously. So I don't disagree with you. I would like the whole company to be running at the 2% plus level that Fifth Third did, but we'll get there. We're going to get through the conversion, we'll get everybody on the same platform with all the same products. And I do think at that point you will continue to see an acceleration of the blended combined Fifth Third Comerica CNI growth rate.

There are just over 70 consolidations that will happen in Michigan. They've all been announced. There are no others that are contemplated at this point in time. Many of those locations literally share the same parking lot in the same strip center. So we're not moving people very far. The intent at this point in time is to execute those consolidations, get customers settled, and then we will look the way that we do across the rest of the Midwest on an ongoing basis at where growth pockets are, and we'll add next generation financial centers there. We'll move branches down the road to the extent that we can get a better pad or otherwise, but I would just for all intents and purposes say Comerica customers will have 60% more branches, Fifth Third customers will have 40% more branches, and that's sort of the plan of stasis. In California, we have a couple of other de novo branches that we will add there. They are in the central valley and in places where we have commercial operations where neither Comerica nor Fifth Third had any branches. Beyond that, there really isn't a plan to add or subtract at this point in time. We got 150 to build, I guess 149 now, to build in Texas along with finishing off the Southeast. And as we get into the end of 2027 or 2028, we're looking forward to what 2029 will bring. That's the point in time where we'll re-evaluate whether there's a different strategy for us on the ground out west.

Yeah. Here I thought you were going to say that questions were myopic because your eyes are blurry after this many bank earnings releases in a single week. [laughter] I think there's a sort of simpler explanation here which is I am sympathetic to all of you who need to try to model the cadence of expense synergies in an environment where deals close mid-quarter and where conversions happen in the first week of the last month of a quarter. I honestly when we looked at it just in anticipation of the question on the call, I think it's a pacing of the expense synergies coming out because while the conversion is happening in the third quarter, for all intents and purposes you're not going to get any real benefit to it because it's not like we're going to send people home the day after Labor Day weekend. We're going to make sure that things are stable, but it's not like we're going to decommission legacy platforms until we have a couple of weeks of water flowing through the pipes. And so that as much as anything changes the trajectory. I think the other element of it just purely on the revenue front is we want people focused on helping clients get through conversion this quarter and in the fourth quarter you're going to see a real pick up in regular way production right across the entire company as opposed to it just being regular way production and unaffected markets. I am very happy with how far out ahead we are on customer communications. We are pretty data-driven here. So the TM conversion, the payments conversion is always among the most complicated in any of these businesses and that's an important part of the Comerica franchise. So we've 290 of the 300 most complex commercial payments clients of Comerica already working through a pre-conversion concierge conversion process, and two-thirds of the others already engaged and moving toward that date. That stuff takes work, but it's the way that you stick the landing and preserve the value of what you got. So I don't think it's the sort of conventional hockey stick of the third quarter is seasonally soft because people go away on vacation in August and then you get to pick up activity in the fourth quarter. Although there is always a little bit of that. So much as it just is, it's hard for people to model a deal closing in the middle of the first quarter and then converting in the first week of the last month of the third quarter.

I think my own view is it'll carry forward. But it's mix driven. The Comerica portfolio was more heavily weighted to commercial and to CNI in particular than the Fifth Third portfolio where you had a lot of consumer assets. And even though we're a super prime lender, your loss rates on consumer assets are almost structurally higher than they are in your commercial business lines. So we lowered the range for the second half of the year, which obviously reflects a continuation in the immediate term. And my own view is that barring a more fundamental shift in the mix of the portfolio, you should expect that to carry forward. There's nothing going on there like no outsized recoveries or things like that. There's no meaningful impact to purchase accounting or otherwise that's driving the outlook. Hence the reason you see it carrying forward from there.

Morning Ben.

Sure. So I think we look at these things on a branch-to-branch basis, right? So that's the easiest way to say, can you get paid? Jamie Dimon gave a talk that several of us watched not too many months ago where he talked about the fact the reason he loves branches is because you scale them and they make $2 million a year to infinity. And that obviously is the goal. You make a capital investment to build a building. You create operating expense and marketing and people to operate that building on an ongoing basis and you build up the book and you get an annuity out of it. So take the Southeast. In 2018 when we started the Southeast expansion, at pace I think we had like 278 branches and a rounding error to $10 billion in deposits. Today we have 420 plus branches. So plus 150, right up to 422 or 423 and a little over $20 billion, like maybe $21.5 billion in deposits. So the branch count has gone up by 60%. Deposits have more than doubled, meaning average deposits per branch have obviously also increased, even though you have a bunch of new branches there. So you both have higher market share because you've got more branch count, more deposits across branches, but also better profitability per branch. The profitability in the Southeast today is just under half what it is in the Midwest branches because of the dynamic on average deposits per branch and the fact that the Southeast is continuing to grow. So you've got a tailwind that we are happy to provide detail on from just the continued maturation of what we've built in the Southeast already plus then the incremental 150 that are coming in the Southeast and the incremental 150 that are coming in the Southwest. Comerica's Southwest network looks stunningly like Fifth Third's Southeast network in 2018. There are about 200 branches there. It's about $6.1 billion in deposits, or at least it was at the time that we closed. So the average deposits per branch in Comerica's Southwest markets if you just run the math are sort of in line with where they were in the Southeast for Fifth Third in 2018. Now we learned a lot of lessons along the way. I don't think it's a seven-year journey to get Comerica's to look like Fifth Third's Southeast markets. We intend to do that much faster, but then you have the same dynamic of the branches that will layer on on top. So we'll continue to give you data on de novo performance. But average deposits per branch are at today certainly the single best proxy for are we hitting break even and then achieving that ideal Jamie Dimon $2 million to infinity and beyond sort of run rate.

Hey, Ken.

The preponderance of the sort of investment into the business right now is focused on the consumer deposits. So it's the continued expansion of the branch network plus the direct marketing programs digital and mail that will support that sort of growth. The addition of sales force and I think that has included in the past two, three, four years specialists who are sector experts to support the build out of the M&A advisory practice as an example in the capital markets business, but also payments and otherwise, and then into the technology. We're big believers in the value of product differentiation in digital world in particular what we're going to be able to do on the AI front. So we are pleased with having the $2 billion fee income platforms. We were pleased to have capital markets crest above $600 million. The investment in the capital market side is really going to be in real estate capital markets next. Right. I think it's appropriately so with as much focus as there's been on Comerica. People are looking past the fact that we closed on the acquisition of a HomeStreet Mechanics DUS lender. And we're very excited about what we're going to be able to do in turning that into a multi-agency platform and in generating real estate capital markets fees on a go forward basis. So there will be some investment there too.