Fifth Third Bancorp (FITB) — Q4 2017 Earnings Call Transcript

Thank you, Adam, and good morning and thank you for joining us. Today, we'll be discussing our financial results for the fourth quarter of 2017. This discussion may contain certain forward-looking statements about Fifth Third pertaining to our financial condition, results of operations, plans, and objectives. These statements involve risks and uncertainties that could cause results to differ materially from historical performance and these statements. We've identified some of these factors in our forward-looking cautionary statement at the end of our earnings release and in other materials. And we encourage you to review them. Fifth Third undertakes no obligation to and would not expect to update any such forward-looking statements after the date of this call. Additionally, reconciliations of non-GAAP financial measures we reference during today's conference call are included in our earnings release along with other information regarding the use of non-GAAP financial measures. A copy of our most recent quarterly earnings release can be accessed by the public in the Investor Relations section of our corporate website, www.53.com. This morning, I'm joined on the call by our President and CEO, Greg Carmichael; CFO, Tayfun Tuzun; Chief Operating Officer, Lars Anderson; Chief Risk Officer, Frank Forrest; and our Treasurer, Jamie Leonard. Following prepared remarks by Greg and Tayfun, we will open the call up for questions. Let me turn the call over now to Greg for his comments.

Thanks, Sameer, and thank all of you for joining us this morning. As you'll see in our results, we reported full-year 2017 net income of $2.2 billion and EPS of $2.83. Our results reflect the hard work of our employees, the support of our North Star initiatives. In 2017, we again took a number of significant steps to improve profitability and better position us for success. We will discuss the economic environment in our fourth quarter results. I would like to take a few moments to review some of the key accomplishments during the year. First, we continued to optimize and strengthen the balance sheet. We exited approximately $1.5 million in C&I loans that did not meet our targeted risk or return profile and this helped drive a significant improvement in our credit metrics. This followed the exit of $3.5 billion in C&I loans in 2016. As I mentioned before, we have now completed this process. We also continue to reduce our indirect auto exposure. This reflects our decision over two years ago to curtail originations to improve returns while mitigating credit risk. We have succeeded in improving returns in this business and plan to gradually increase our production volumes in 2018. These decisions highlight our commitment to building a franchise that performs well with the various business cycles. During the year, we re-launched our brand campaign through print, television, radio, and digital advertising. As we share with you this number, the re-launch was very well received and continues to strengthen our brand in the marketplace. We continue to focus on improving the customer experience by advancing our digital-first, customer-centric agenda and have made significant progress through several of our North Star initiatives. We launched our innovation center and just recently introduced an app called Momentum that helps millennials tackle student debt. As you know, student debt is an issue for many millennials. Since we launched Momentum in September of last year, we have had over 40,000 customers download the app. We also replaced our branch teller software platform. The new platform helps to mitigate compliance and operational risk through automation and improves the efficiency and speed of transaction processing. Our new mortgage loan origination system was launched across all channels in 2017. Although there is more work to be done, this initial will generate both NII as well as fee income opportunities by reducing our cost of originating mortgages. This business remains very important to Fifth Third as an anchor product and a proven tool to acquire households. We are leveraging analytics to drive both an improved client experience and to enhance our own capabilities. We unveiled several innovative solutions this year, including the rollout of a digital real-time financial risk and equity management platform for our commercial customers. This platform significantly improves the information our customers have access to in a convenient digital format. We implemented advanced proprietary data analytics to help in further optimizing our branch network. And we significantly enhanced our use of data analytics and improved the way we market to our customers. Our continued focus on customer service and creating more durable relationships has been recognized with a number of third-party customer surveys. We are rated as one of the best brands in commercial middle-market banking, and number one among our peers in relationship manager, product knowledge for Greenwich Associates. Expenses continue to be well-managed. Excluding tax reform, full-year expenses were flat year-over-year. We achieved this while investing heavily in key initiatives in Project North Star. We expect to generate further efficiencies in 2018 as we continue to implement our North Star initiatives. In 2017, we increased the pace in which we delivered better price and services through our buy partner build philosophy. We completed several acquisitions and strategic partnerships this year, including the acquisition of Epic Insurance and Integrity HR and R.G. McGraw Insurance, which allowed us to continue to develop our insurance capabilities. Our strategic partnerships and equity investment in NRT and Sightline expand our product offerings within our entertainment, largely in the leisure vertical. We are the first bank to join Mastercard's B2B Hub. This Hub provides an end-to-end automated platform that converts payable processes traditionally done by paper into an electronic transaction. Our CRA rating was upgraded to outstanding, reflecting our commitment to improving the lives of our customers and the wellbeing of the communities we serve. We received top rankings in several employee satisfaction surveys, including the Gallup Great Workplace Award for the fourth year in a row. Our employees are responsible for recommending our strategies, and we believe that a highly engaged workforce will help us to achieve our strategic and financial objectives. We hosted our inaugural Investor Day in December. Our senior leadership team laid out a detailed roadmap of our strategic priorities, how our operations are designed to facilitate our one bank approach, and how we are leveraging technology in order to improve the customer experience. The strength of our balance sheet and earnings allowed us to raise our quarterly dividend by $0.02 to $0.16 per share in the third quarter of 2017 and we returned over $2 billion of capital to shareholders during the full year of 2017. As a reminder, we have Fed approval to increase our dividend by an additional $0.02 in the second quarter of 2018, pending approval. Before discussing our fourth quarter results, I want to take a moment to discuss the new tax legislation. There was uncertainty for much of the fourth quarter as borrowers awaited more clarity. We believe the new tax law will help energize the economy and further accelerate growth in our businesses. We are optimistic that we will retain most of the run rate benefits of lower taxes with a super plan on the competitive dynamics. At year-end, I was also excited to distribute a portion of the benefits from tax reform to our employees in our charitable foundation. Moving to the fourth quarter results, we reported net income of $509 million and earnings per diluted share of $0.67. Some non-core items, including additional benefits from the new tax legislation, resulted in a positive $0.15 impact to reported earnings per share in the quarter. Tayfun will provide further details about these items in his opening comments. Despite the impact of delivered commercial exits as well as a continued decline in indirect auto loan balances, our total average loan portfolio was flat sequentially. Our adjusted net interest margin expanded three basis points sequentially. This improvement primarily reflected higher yields on our investment portfolio as well as a good mix of consumer loans with higher yields. Excluding the impact of non-core items mentioned in our earnings release, expenses were flat compared to the third quarter 2017, as we continue to focus on managing our expenses diligently. Credit quality remains stable; criticized assets were at the lowest levels in nearly 12 years, while non-performing assets continue to decrease, marking the lowest our NPA ratio has been in over 11 years. Fee income was up 3% sequentially. Adjusted for renewable items mentioned in the earnings release as we had discussed at our Investor Day, we believe fee growth should accelerate as our North Star initiatives are fully implemented and as we pursue additional strategic acquisitions and partnerships. Our capital liquidity levels remain very strong with our common equity Tier 1 ratio at 10.6%, while our LCR exceeded regulatory requirements by nearly 30%. I would like to once again thank all of our employees for their hard work and dedication as evident in our financial results and our customer satisfaction scores, and our community outreach efforts. I was pleased that we were able to deliver strong financial results in our North Star initiatives, and remain on track. With that, I'll turn it over to Tayfun to discuss our fourth-quarter results and our current outlook.

Thank you, Greg. Good morning and thank you for joining us. Let's begin with the financial summary on slide 4 of the presentation. As Greg highlighted, during the quarter, we saw underlying net interest margin expansion, consistent focus on disciplined expense management, stable credit quality, and effective capital management, all of which underscore our commitment to enhancing financial performance and shareholder returns. Our reported results were significantly influenced by the items mentioned on page 1 of our release, predominantly due to the recently enacted Tax Cuts and Jobs Act. The most substantial item was a $220 million income tax benefit resulting from the re-evaluation of our deferred tax liabilities. This benefit was partially offset by a $68 million impairment related to affordable housing investments in the fourth quarter. Additionally, we recognized a $27 million dip in interest income tied to the re-evaluation of our leverage lease portfolio. Furthermore, we accounted for $30 million in one-time discretionary expenses associated with employee bonuses and charitable contributions in response to the new tax legislation. Apart from the effects of the new tax law, our reported results were also influenced by several other factors. As we discussed in the last quarter's earnings call, this quarter's taxes included an additional $20 million tax expense linked to our gain from the Vantiv sale in the third quarter. Our fourth-quarter results also included an $11 million decline in non-interest income related to the Visa swap. Adjusting for the non-core items disclosed today and in prior periods, on a sequential, year-over-year, and full-year basis, our return on assets and return on tangible common equity improved, our efficiency ratio strengthened, net interest margin grew, expenses remained relatively steady, and our credit metrics also got better. We achieved our goal of generating positive operating leverage while decreasing the risk profile of our company and enhancing regulatory capital levels compared to last year. Compared to last year's fourth quarter, our adjusted net interest margin increased by 19 basis points, adjusted net interest income rose by 7%, non-interest expenses were stable, total charge-offs held steady, and non-performing assets decreased by 34%, with the criticized asset ratio declining by 70 basis points. These favorable results were accompanied by a 22 basis point increase in our common equity tier I ratio and an 8% decrease in shares outstanding. Despite some of our balance sheet decisions negatively affecting loan growth in 2017, the advantages of our strategic actions are clear in our financial outcomes, and we anticipate that they will continue to positively impact shareholder returns moving forward. Transitioning to slide 5, the environment remains tough for commercial loan growth. Even though many clients adopted a wait-and-see attitude during the fourth quarter while the tax bill was debated, we achieved the highest commercial origination volume since the second quarter of 2015. Despite robust loan production, net loan growth was subdued due to elevated payoffs. With the tax legislation now finalized, companies have started to revise their capital investment plans. We are hopeful that increased expenditures will stimulate higher loan demand. Average total loans were flat sequentially. Growth in commercial and industrial loans, commercial real estate, residential mortgages, credit cards, and other consumer loans was largely countered by ongoing reductions in home equity and commercial lease balances, intentional commercial exits, and the expected decline in our indirect auto loan portfolio. Average commercial loan balances rose by approximately $150 million compared to the third quarter but were down 1% year-over-year, considering the effects of our planned exits. Excluding these exits, average commercial loans increased by 1% sequentially and 3% year-over-year. We're seeing strong middle market originations in our regions, especially in Florida, Indiana, North Carolina, Chicago, and Tennessee. The sequential increase in average commercial and industrial balances, along with a 1% rise in commercial real estate loans, was partially diminished by a 1% drop in commercial leases. As mentioned in December, due to our emphasis on profitable relationship-oriented growth, we have ceased originations in non-relationship-based equipment leasing, anticipating end-of-period commercial leases to decrease by $400 million to $500 million by the close of 2018. Average growth in commercial real estate loans in the fourth quarter was driven mainly by drawdowns at the end of the third quarter, although commercial construction balances fell 2% on an end-of-period basis. We continue to adopt a conservative risk profile in construction lending as we find ourselves in the later stages of the cycle. By year-end, we completed our balance sheet optimization initiatives, which have led to over $5 billion in deliberate loan exits since the first quarter of 2016, including around $200 million of commercial exits in the fourth quarter of 2017. Growth patterns in 2018 and beyond will reflect typical activity. Overall, commercial loan production has been solid. We remain competitive and focused on profitable relationships, notably in our middle market lending sector, which will be a priority in 2018 and beyond. We have recently broadened our middle market lending reach to California and are evaluating additional regions for future growth in loans and revenue. Moreover, we plan to launch two new verticals this year to enhance commercial and industrial loan growth within our corporate lending portfolio. We currently anticipate total commercial portfolio growth of around 1% from year-end in the first quarter and approximately 3% by the end of 2018, factoring in the expected run-off of our national leasing business. In the consumer sector, including the planned decline in the indirect auto loan portfolio, average loans were up 1% sequentially but down 1% year-over-year. Excluding auto, average consumer loans increased by 3% year-over-year. Auto loans dropped by 10% year-over-year due to our decision to limit indirect originations and redeploy capital. Our origination pace will remain aligned with risk-adjusted returns in this sector. Given current spreads and returns on capital, we expect total production to be closer to $4 billion with the overall auto portfolio declining around $500 million by the end of 2018. Residential mortgage loans remained flat sequentially and rose 5% year-over-year as we continued to retain jumbo mortgages and adjustable-rate mortgages as well as certain fixed-rate mortgages during the quarter. Our home equity loan origination volumes decreased by 2% sequentially but rose by 2% year-over-year. As paydowns in our legacy portfolio consistently exceeded origination volumes, our portfolio declined by 2% sequentially and 9% year-over-year. Our credit card portfolio grew by 3% from the third quarter, with purchase active accounts rising both sequentially and year-over-year due to the new card rollouts at the close of 2016. We expect our new card offerings and enhanced analytical capabilities to spur faster growth in 2018. While we anticipate balances to remain flat sequentially in the first quarter due to seasonally higher paydowns, we expect card balance expansion in the mid to high single digits by the end of 2018. Other consumer loans surged 28% sequentially, driven primarily by personal lending, largely through loans generated from our GreenSky partnership. We expect personal lending balances to rise to $2 billion by the fourth quarter of 2019 from about $900 million at the end of 2017, focusing on high-quality prime customers, with GreenSky providing first-loss coverage as discussed earlier. Growth in personal loans should enable us to generate a higher return on equity revenue stream and attain a better balance between our commercial and consumer portfolios. In the first quarter, we expect total end-of-period consumer loans to remain stable compared to the fourth quarter. For 2018, we project end-of-period loan growth of between 2% and 3%. Excluding indirect auto loan balances, we anticipate consumer growth exceeding 4% driven by initiatives we have previously outlined. Our investment portfolio balances remained relatively stable in the fourth quarter as expected, and we plan to maintain our investment portfolio at a similar level in the first quarter. We experienced strong deposit performance in the fourth quarter, with average core deposits growing by 2% sequentially. The sequential rise in commercial interest checking deposits and commercial demand deposit accounts was somewhat offset by declines in consumer savings and commercial remarket account balances. As is common in rising rate environments, the deposit market remains competitive. We continue to make careful decisions regarding pricing for profitability while also aiming to maintain and grow relationship-based deposits that are favorable for liquidity coverage ratio. Despite environmental pressures, we see an opportunity to steadily expand the consumer book while accelerating commercial deposit growth. Our modified liquidity coverage ratio remains very robust at 129% at the end of the quarter. Taxable equivalent net interest income of $963 million declined by $14 million from the prior quarter mainly due to the leverage lease re-evaluation prompted by changes in tax law. Excluding this item, adjusted net interest income rose by $13 million or 1% from last quarter and increased by 7% compared to the adjusted net interest income from the fourth quarter of 2016. Our robust net interest income performance chiefly reflects the favorable impact of higher yields on interest-earning assets as well as a continued shift towards higher-yielding consumer loans. The net interest margin, adjusted for the same lease item, increased by three basis points from the third quarter to 3.1%, surpassing our previous guidance by five basis points. The sequential improvement was driven by better investment portfolio and loan yields, primarily from consumer categories. We expect the net interest margin in the first quarter of 2018 to be approximately 3 to 5 basis points higher than in the fourth quarter. We foresee full-year 2018 net interest margin in the 3.15% range, exceeding our December guidance, including the effects of two expected rate hikes, one in March and another in September. Should there be no Federal Reserve rate changes in 2018, we predict full-year net interest margin to align with the fourth quarter of 2017 at around 3.1%, since the impact of these two partial-year rate increases approximates the full-year impact of a 25 basis point change in the federal funds rate for us. Supporting this outlook is the relative stability observed in overall deposit pricing, with cumulative betas since the first Fed move at the end of 2015 hovering in the low to mid-20% range on a blended basis. The consumer sector's beta has been in the mid-teens, while commercial has been in the low 40s. The data for the last December move indicates a beta in the high 20s, with expectations for subsequent hikes projecting a beta in the 45% to 50% range. If betas land on the lower end, our margin could surpass our guidance. We expect first-quarter net interest income to range between $975 million and $980 million, representing about a 1% decline from the adjusted net interest income of the fourth quarter, primarily due to day count factors. For 2018, we anticipate net interest income growth of approximately 5% from the adjusted 2017 net interest income of between $4 billion and $4.07 billion, exceeding our December guidance. Credit spreads continue to exert pressure on margins across the banking sector, but our strategic decisions over the past two years have led to a redeployment of capital away from lower-return loans, helping us maintain a strong net interest income and net interest margin profile. Excluding the effects of the Visa swap and Vantiv gains, non-interest income for the fourth quarter was $587 million, compared to $571 million in the third quarter, marking an approximately 3% sequential increase. This increase resulted mainly from a $44 million Vantiv TRA payment in the fourth quarter of 2017 and a rise in wealth and asset management revenue, partially countered by a dip in corporate banking revenue due to lease residual impairments and traditionally lower mortgage banking revenue. Mortgage banking net revenue amounted to $54 million, down $9 million sequentially. Origination fees fell by $8 million sequentially due to lower rate lock volumes and tighter spreads. Originations of $1.9 billion were 10% lower than in the third quarter, with a fourth-quarter gain on sale margin of 206 basis points compared to 228 basis points in the third quarter. Throughout the quarter, 57% of our origination mix comprised purchase volume. Approximately two-thirds of our originations continue to stem from retail and direct channels, with the remainder sourced from the correspondent channel. Corporate banking fees reached $77 million, down $24 million from the third quarter, primarily due to a lease remarketing impairment previously disclosed during our Investor Day. Excluding the $25 million impairment, corporate banking revenue showed a slight increase of $1 million. Despite ongoing market challenges, we recorded a 20% sequential growth in FICC revenue, showcasing broad-based advancement across derivatives, commodities, and institutional brokerage, all up from last quarter and last year. FX revenues also experienced a 16% sequential increase. This growth was tempered by lower other capital markets revenue from deals that were pushed into the first quarter from the fourth quarter. We currently predict corporate banking fees to climb between 5% and 10% sequentially, excluding the lease remarketing impairment, driven by a robust pipeline supplemented by delayed deals from the previous quarter. Deposit service charges remained stable compared to the third quarter. Card and processing revenue rose by 1% sequentially, reflecting a seasonal uptick in credit card spending and debit transactions, along with higher rewards. Total wealth and asset management revenue of $506 million was up 4% sequentially, reflecting improvements in the equity market during the quarter. Recurring revenue in this segment has increased to 83% of fees, up from the mid-70s last year. We plan to continue shifting our product and service offerings towards more recurring revenue streams to reflect our reliance on transactional activities. In the first quarter, we anticipate recording an approximately $415 million pre-tax step-up gain following Vantiv’s acquisition of Worldpay. This gain surpasses prior expectations and leaves us with an additional unrealized pre-tax gain of roughly $0.5 billion based on current market prices. Moving forward, we will refer to the company as Worldpay after the name change following the acquisition. With an ownership percentage of about 4.9% in the new company, we will continue to benefit from the equity method of accounting related to our stake in a larger, now global enterprise. For the first quarter of 2018, we expect fees to range between $560 million and $570 million, excluding the Worldpay step-up, which represents a decrease of about 4% from our fourth quarter adjusted non-interest income. This comparison takes into account the $44 million TRA payment from this quarter. Excluding the TRA impact, we project core fee income growth of 4% in the first quarter compared to the fourth quarter. For the entire year of 2018, we anticipate fees to grow between 5% and 6% from the adjusted levels of 2017, reaching around $2.4 billion. Implicit in this forecast is a $20 million TRA-related income expectation in the fourth quarter of 2018, rather than the $44 million recorded in 2017. While client activity remains subdued, we are optimistic about our fee growth trajectory given the investments we're making to enhance the scale and scope of our fee-generating products and services. We remain committed to disciplined expense management while also investing for revenue growth. Reported non-interest expense increased by 10% sequentially. Excluding one-time items from tax law changes, expenses remained flat compared to the third quarter of 2017, against our previous guidance of 1.5% growth. Overall, expenses were effectively managed in 2017, and our focus on operational efficiencies combined with revenue growth contributed to positive operating leverage for the year. Our adjusted efficiency ratio for 2017 stood under 62% in the fourth quarter and under 64% for the full year. Keep in mind that the amortization of our low-income housing investments is included in expenses, influencing our efficiency ratio comparably to our peers. We will continue to strive for positive operating leverage while making strategic investments to position ourselves for long-term outperformance. We anticipate that strategic technology investments will continue to set us apart from competitors while simultaneously supporting both revenue growth and cost-saving opportunities across our organization. As demonstrated throughout 2017, we will keep thoroughly evaluating other areas to lower run rate expenses and reach our long-term efficiency target of under 60%. For 2018, we currently estimate total expenses to range between $4 billion and $4.1 billion. This guidance closely aligns with what we provided in December, aside from the anticipated impact of minimum wage increases and higher low-income housing investment amortization resulting from tax law changes, amounting to about $30 million. Additionally, our forecast includes around $20 million in expenses associated with an insurance acquisition finalized late in the fourth quarter. First-quarter expenses are expected to rise by about 9% from adjusted fourth-quarter expenses, largely due to annual seasonality associated with compensation awards and payroll taxes. Expenses for the subsequent quarters are expected to decrease significantly from the first-quarter levels as the year progresses. Examining credit results on slide nine, fourth quarter credit results continued the positive trend from the year, with charge-offs remaining at pre-crisis levels due to our strategic intention to minimize volatility and charge-offs. Net charge-offs were $76 million or 33 basis points, rising four basis points from the third quarter of 2017 and up two basis points from the previous year. Commercial charge-offs registered at 22 basis points, an increase of one basis point from the third quarter, and two basis points year-over-year. Consumer net charge-offs of 51 basis points saw a seasonal rise of eight basis points sequentially and increased by two basis points compared to the previous year. Total non-performing loans and leases amounted to $437 million, a reduction of $69 million or 14% from the prior quarter and a 34% decrease from last year. Our non-performing loan ratio of 48 basis points is at a ten-plus year low, with total commercial and industrial non-performing loans down 19% sequentially and 42% year-over-year. Nearly all loan categories exhibited a sequential improvement. At the close of the fourth quarter, our criticized asset ratio improved significantly to 4.6% of commercial loans, which will further enhance our balance sheet and performance in stressed conditions. Our loss provision remained stable compared to the third quarter, influenced by improvements in criticized assets and non-performing loans, counterbalanced by an uptick in net charge-offs and higher end-of-period loan portfolio balances. The reserve ratio decreased by one basis point to 1.3%, with our reserve coverage over non-performing loans now lifted for three consecutive quarters to 274%, among the highest within our peer group. While we continue to be in a stable credit environment and economic conditions support a benign credit outlook, we advise that some upward pressure could emerge in the future. Nonetheless, considering our robust balance sheet, we believe our provision expense will primarily reflect loan growth along with some normalization of credit losses. Our capital levels remained solid in the fourth quarter. Our common equity tier 1 ratio was 10.6%, essentially unchanged from the previous quarter and up 22 basis points year-over-year, notwithstanding the $273 million share buyback initiated during the quarter and the declaration of our $0.16 dividend. In 2017, we returned over $2 billion to common shareholders through dividends and repurchases, equivalent to 95% of earnings. Keep in mind we have another potential $0.02 dividend increase planned for June, pending board approval. Our tangible common equity ratio, excluding unrealized gains and losses, rose by five basis points sequentially and seven basis points year-over-year. At the conclusion of the fourth quarter, we had 12 million fewer common shares outstanding, a decrease of 2% compared to the third quarter of 2017, and down 57 million shares or 8% compared to last year's fourth quarter. Both book value and tangible book value are up 9% year-over-year. Effective capital management is a crucial element of our strategic approach. As mentioned in December, we believe that our enhanced credit profile allows us to operate at reduced capital levels. Our aim remains to be judicious with the amount of capital we retain on our balance sheet, maximizing long-term returns through various market conditions. Given the lessons learned from the financial crisis, we will persist in focusing on generating long-term shareholder value. Regarding taxes, our fourth quarter tax rate was influenced by the re-measurement of BTL and other items disclosed in our release, which increased the tax benefit for this quarter. Excluding the BTL and the tax recognition carryover from Vantiv in the third quarter, our tax rate was 25.5%. We anticipate our full-year 2018 tax rate under the new legislative framework to be in the 15.5% to 16% range, influenced by the step-up gain associated with the Vantiv Worldpay acquisition. After accounting for this one-time impact in 2018, we envision our normal run rate to fall between 14% and 14.5%. Our December guidance, based on a 20% marginal tax rate, suggested a range of 12.5% to 13.5%. With the corporate tax rate now at 21%, this outlook closely aligns with our previous guidance. Overall, tax credits continue to play a significant role in impacting our effective tax rates. As Greg noted, after accounting for the increased compensation announced at year-end in conjunction with tax reform and the trigger change in low-income housing acquisition, we expect most, if not all, tax benefits to positively influence the bottom line, thereby improving our long-term return targets. On a normalized run rate basis, a reduction of 12% to 12.5% in our effective tax rate is projected to have a positive effect of 1.5% to 2% on our North Star return on tangible common equity targets. This adjustment elevates the upper limit of the return on tangible common equity target to the 15.5% to 16% range for the fourth quarter of 2019 and onwards, while ROI targets increase by approximately 15 basis points to a range of 1.35% to 1.45%. Our revenue growth projections, combined with our ability to achieve positive operating leverage without altering our risk appetite, and our strong balance sheet and strategic positioning, all give us confidence in generating additional shareholder value. With that, I will now turn it over to Sameer to open the floor for questions.

Thanks, Tayfun. Before we start Q&A, as a courtesy to others, we ask that you limit yourself to one question and a follow-up and then return to the queue if you have additional questions. We will do our best to answer as many questions as possible in our time we have this morning. During the question-and-answer period, please provide your name and that of your firm to the operator. Adam, please open the call up for questions.

Thank you. Good morning, guys.

Good morning.

Tayfun, can you explain the step-up process regarding the $415 million in the first quarter of 2018? In the past, the gains from this investment have been used for stock repurchases. Are you considering going back to the Fed during the intra CCAR period to do that again, or will you wait until the next CCAR and possibly use it then for stock buybacks?

Gerard, since we are past the halfway mark and approaching the end of this CCAR period, we plan to do that in the next CCAR period.

Okay, very good. And then second, on the commercial loans. I think you said you had elevated payoffs in the quarter. Can you give us some color on what you're seeing where your customers are paying off the loans vis-à-vis what you saw maybe earlier in the year?

Yes, Gerard, that’s a good question. We did observe, similar to many of our industry peers, a notable increase in pay-downs and payoffs. I would attribute more than half of that to our commercial real estate portfolio line of business. Most of these involved asset sales, characterized by very low cap rates and high-quality assets. Additionally, several properties transitioned to the permanent market while the yield curve remained flat. The remainder can be linked to end-of-year movements that are common in the industry, where companies were reducing leverage and possibly adjusting in light of the new tax policy. Honestly, we are still assessing the situation to understand its implications. Overall, this trend was evident across different regions and our various business segments, but there was nothing unusual beyond that.

Great. Thank you, guys.

Yes, good morning. Bank of America.

Good morning, Erika.

Thank you so much for the detailed outlook. And I'm wondering, you were very specific in terms of reiterating a dollar expense range for 2018. And as we think about the NII outlook and the NIM outlook, it appears as though there's some conservatism baked into either the number of hikes or the deposit repricing assumptions. And the question here is, if the revenue results in 2018 are better than what's outlined on slide 11, does the $4 billion to $4.1 billion range hold regardless?

With respect to the expenses, I would say, yes. I think more movement on the expense base related to variable revenues comes more from the fee line items. But in general, the impact of a higher-than-guided NII performance should still keep that expense range intact.

Got it. So just to be clear, if you outperform on NII, that expense range is intact, but if you outperform on fees then that's when you may be at the high end or out of the range but still keeping with the positive operating leverage target?

Absolutely.

And Erika, this is Greg. We continue to focus on expenses as evident from our 2017 performance of flat year-over-year growth. This is an area of heightened focus in the organization. We will continue to focus on that as we move into 2018, and do a better job of managing expenses as we move into the year.

And just so you know, in general, if during the year we outperform NII, everything else being equal, only, and only due to rate changes, our variable compensation typically does not move.

Thank you. That was clear, appreciate it.

Evercore ISI. Wanted to get your thoughts on the payout target, longer-term post-tax reform, any change to your targeted 120 million to 140 payout.

I believe that generally, as our earnings increase, we would anticipate a higher payout in terms of dollars. We are still waiting for the Fed's CCAR assumptions and background, which we will incorporate into our figures. However, we continue to aim for a CET1 position in the mid 9 range for 2019, and our payouts will align with that goal.

Okay, thanks. And then my follow-up is around North Star. I know initially, when you laid out the program and in several of your updates posted, you were commenting on the 800 million in pretax income that you were targeting under North Star, but you didn't focus on that 800 million at the Investor Day. So is that still a target, that dollar amount? And does it change at all with tax reform, and if so what is the new number?

It does. And I don't necessarily have an updated number for you as to the impact of the tax reform. But as you recall, in December, during our Investor Day, we discussed that there were some adjustments to revenue expectations, especially related to loan growth assumptions. And we did say that, both in 2016, and '17, and also in '18, our loan growth assumption is somewhat lower than the initial estimate that we had when we laid out our expectations. But in return, we also mentioned the lower asset growth enabled us to purchase a higher amount of capital, which continues to support the same ROTCE targets that we laid out. And as the tax reform also is moving these targets out, we are actually ahead of our initial expectations with respect to that.

Okay, thank you.

Good morning.

Hi, Matt.

Sorry if I missed it. The expected TRA in the fourth quarter going forward, should we assume it stays at the $44 million, which I think came in higher than expected or what's the expectation on that at this point?

Yes, Matt, this is Jamie. The fourth quarter of '17 number was $44 million. That is what we guided to all throughout 2017, because it's based off of the Vantiv tax return from a year prior. So that number is locked in a year in advance. So the 4Q '18 number is also fairly close to being locked in, and that's about $20 million. And then going beyond 2018, given the change in the tax rate from 35% down to 21%, the go-forward number on those TRA cash flows would be in the $24 million range. And then those numbers shouldn't change appreciably as long as Worldpay has sufficiency of income to utilize and tax rates don't further change. And the only then variable to all of this would be whenever we would sell our remaining Worldpay interest, it would generate another $340 million or so of cash flows over the next 16 years. So, really look at $20 million for 4Q '18, $24 million beyond and until another disposition occurs.

Okay, that's helpful. And then just separately, if we look at your seeing at some peers, as we think about reserves to loans. And I'm just wondering if you feel like that gives you a little more flexibility to essentially grow into the reserves levels or how you're thinking about those. You've obviously been de-risking, the loans have not been growing, and most of the credit metrics have been improving, and you've had very good release. So just wondering how your thought of those levels going forward. Thank you.

And I'll ask Frank to comment on the credit profile of that, but in general, we believe that the reserve levels are at the right level. So in that sense, I wouldn't characterize a future flexibility associated with the ratio. But, Frank, do you want to comment on credit?

Yes, I mean, our charge-offs are a crazy number. Our commercial losses over the last five quarters have ranged from roughly 20 to 30 basis points. Our consumer losses have been in the 40 to 55 basis points range. Those have been slightly higher actually than our peers. Again, it's a trailing number. Our NPAs have been coming down nicely, and in fact, we talked about criticized assets. That will come down, but now the other remainder is from our perspective, we’re nine years into a recovery, and I think we will continue to see some early signs that we will continue forever. And so, there certainly is conservatism. I view this realism, that's nine years is far beyond where we typically would see a pressure. So overall, we feel we are not where we are, but 130 coverage we are comfortable with that that covers 275% we feel that that's prudent based on where we sit today.

Hey, good morning, guys. This is actually Brendon on the line for Scott. Just I wanted to start with the commercial loan outlook, I believe just compared to the outlook you gave in December, if you look, you've improved the outlook for commercial growth a little bit, can you just talk about what's underlying that improvement in the commercial outlook?

Looking back at the fourth quarter, I noticed that our activity levels were significantly higher. It was a remarkably strong production quarter across all our corporate banking sectors and nearly all our regions. If tax policy changes take effect, I've had numerous discussions recently with several CEOs and CFOs from middle market corporate relationships, and there's undoubtedly growing optimism, which could provide us with a beneficial boost as we head into 2018. However, I want to remind you that we've been reallocating our resources. In line with our North Star strategy, we've developed new verticals, with our TMT vertical continuing to gain momentum and establishing a strong reputation. Our healthcare vertical also had an excellent quarter and is well-situated for 2018, especially as the ACA Act fades a bit, bringing more clarity to that sector. We're actively engaged there, and I anticipate we'll see more developments in that area shortly. Regarding energy, rising prices are clearly providing a positive support. I'm also pleased with our recruitment of additional middle market bankers across our various regions. We've had strong performance in states like Florida and North Carolina, and Tennessee is progressing well while Indiana remains our top region for the year. At the same time, markets where we've added new bankers and leadership, such as Georgia, Cleveland, Northeast Ohio, and Chicago, also had a solid fourth quarter, and we believe they are positioned well for 2018. Tayfun mentioned growth in nominal GDP, which I think could be a positive factor for us. I'm optimistic about our business model, confident in our talented team, and I look forward to what lies ahead.

I appreciate all the detail and color over there. And then, just turning to corporate bank fee just want to make sure I have the guidance for the 1Q, correct. Is it fair to say you take the 77 million from this question, add back the $25 million impairment and then the growth of 5% to 10% off of that higher level, is that correct?

Yes, it is correct.

Hi, this is actually Anthony on for Peter. My first question on deposit costs. They seem to tick up across most categories again similar pace we saw last quarter. Any of that promotional or what are you seeing there in terms of deposit pricing competition.

Yes, this is Jamie. The betas that Tayfun referenced, cumulative beta, roughly 22% does include some increases in promotional offers, both in the retail segment as well as with some exceptional pricing in commercial. In terms of the acceleration of the beta, the June hike, we experienced about a 35% beta relative to that 22% that we've had cycled to date and when you break that down by product, commercial accounts experienced above-average beta at about 41% cumulatively whereas the consumer accounts have experienced a below-average beta of about 15%. And then add a little more color, when you break it down by the line of business, that 22% cumulative data translates to 6% in retail, 46% in our wealth and asset management line of business and then 52% in commercial. So I think that highlights where we’ve come and as Tayfun I mentioned, we are in that 45% to 50% modeling for the next couple of rate hikes.

Okay. And my follow-up is on the auto charge-off rates, it seems like it ticked up again a little bit this quarter about 10 basis points. I know you're looking to shrink the auto portfolio, but can you give any color on what's driving the continued increase in the charge-off in auto? Thanks.

Yeah. You have to realize that there is a denominator impact of that as well because the portfolio is shrinking and beyond just some seasonality, there is really no, but we’re pretty pleased with what's going out on the auto.

Hi, good morning. Just wanted to ask about the LCR and as it pertains to not being part of your guidance and to what extent that could help if that plays into your hand later this year?

Our LCR target is to operate north of 110 level, so clearly the 129 is a bit elevated driven to some extent by just seasonal inflows and some cash positions, but it certainly gives us some flexibility as the year progresses. But also keep in mind, that’s just a point in time on the last day of the quarter. So it does move around intra quarter. But it would certainly give us some flexibility as 2018 progresses.

Do you think that will drive both margins and NII if that changes in your favor?

Yes.

Alright. Okay, I think we will end the call there. Thank you Adam, and thank you all for your interest in Fifth Third Bank. If you have any follow-up questions, please contact the Investor Relations department and we will be happy to assist you.