Fifth Third Bancorp (FITB)

Q2 2010 Earnings Call

July 22, 2010 9:00 a.m. ET


Jeff Richardson - IR

Kevin Kabat - President & CEO

Dan Poston - EVP & CFO

Mary Tuuk - EVP & CRO


Kenn Usdin - BofA Merrill Lynch

Todd Hagerman - Collins Stewart

Paul Miller - FBR Capital

Nancy Bush - NAB Research LLC

Brian Foran - Goldman Sachs

Betsy Graseck - Morgan Stanley



Good morning. My name is Ginger, and I'll be you conference operator today. At this time, I would like to welcome everyone to the Fifth Third Bancorp Second Quarter 2010 Earnings Call. (Operator Instructions) Mr. Jeff Richardson, Director of Investor Relations, you may begin your conference.

Jeff Richardson

Thanks Ginger, and thanks everyone for joining us this morning. We'll be talking with you today about our second quarter 2010 results. This call may contain certain forward-looking statements about Fifth Third Bancorp pertaining to our financial condition, results of operations, plans and objectives. These statements involve certain risks and uncertainties. There are certain number of factors; sorry there are a number of factors that could cause results to differ materially from historical performance in these statements.

We've identified a number of these factors in our forward-looking cautionary statement at the end of our earnings release and other materials, and we encourage you to review those factors. Fifth Third undertakes no obligation, and would not expect to update any such forward-looking statements after the date of this call.

I'm joined on the call by several people. Kevin Kabat, our President and CEO; Chief Financial Officer, Dan Poston, Chief Risk Officer, Mary Tuuk, Treasurer, Mahesh Sankaran, and Jim Eglseder of Investor Relations.

During the question-and-answer period, please provide your name and that of your firm to the operator. With that, I'll turn the call over to Kevin Kabat. Kevin?

Kevin Kabat

Thanks, Jeff. Good morning and thanks for joining us. I'll make some opening comments, and then hand the call over to Dan and Mary for more detailed discussion of our financial and credit performance.

We've also developed a presentation this quarter to facilitate that discussion, which we hope you find helpful. Obviously, this quarter marks an important turning point for us. Although the first quarter's loss was very small, it's still a loss. For the second quarter, we reported significantly stronger results particularly from the credit standpoint that resulted in a profit of 192 million. It was 130 million or $0.16 per common shareholder.

Environment remains challenging, but I'm pleased with the progress we've demonstrated in both credit trends and continued strong operating metrics. We've seen fairly sharp improvements in credit results, which I believe is the result of our aggressive actions earlier in the cycle, and while the phase of that improvement is obviously not sustainable, we do believe that credit should trend favorably as we move forward.

Taking a look at the few trends in credit, we saw a very significantly move in charge offs this quarter down 25% or 148 million from last quarter to 434 million. It was better than expected and it is the lowest level of charge offs we have seen since the second quarter of 2008.

Charge offs peaked in the third quarter of last year at 756 million, we have seen a reduction of over 40% just three quarters. NPAs were down a 160 million or 5% sequentially and NPLs were down 7%.

Delinquent loans 90 days past due were down another 39 million or 9%, so problem loan levels and loss content as both grew solidly in the right direction and this contributed to a reduction in loan loss reserves.

Still our reserve position remains very strong at 4.85% of loans, and with coverage actually improving to a 146% of NPLs in over two times annualized charge offs. Looking forward to the third quarter given the size of the decline in charge offs we just saw and have seen in the past several quarters, it probably will be difficult to beat the second quarter charge off level. Right now our expectation would be for charge offs to be stable to a bit higher in the third quarter.

We are probably looking a net charge off of something like 450 million plus or minus 10 or 15 million. Commercial probably be up modestly and consumer losses should be flat or down a little.

We continue to expect net charge offs to be significantly lower in the second half of the year than the first half of 2010 and for them generally follow a stable to declining trend line.

NPAs and delinquencies have declined recently and we expect those to slowly improve over time. We don't currently expect a significant move one way or the other in the third quarter and finally we would expect the reserve to continue to come down based up on our current views for credit trends and the economic environment.

Let me give some high level operating results, pre-provision net revenue of 567 million was consistent with that reported last quarter and was in line with expectations reflecting better than expected fee income results and lower expenses.

That was partially offset by lower net interest income resulting from weaker than expected loan demand and a decline in market interest rates. Fee income results were strong partially offset by lower mortgage banking revenue as expected. Total non-interest income was down 1% sequentially. Corporate banking revenue and card and processing revenue both showed mid-teens growth.

Average core deposits were up 1% sequentially and 12% over 2009 levels that include 1.8 billion in runoff of public funds deposits without significant other relationship aspects as expected.

We will continue to focus on gathering households and long term core funding and we will continue to manage our balance sheet and funding by minimizing our high cost non-relationship deposits.

Average loans were down 2% from last quarter, we came into the quarter expecting better results from that but commercial borrowers became more cautious as the European crisis developed and the U.S. equity markets declined in the middle part of the quarter.

Loan production was up from last quarter and we continue to gain market share. However, it was more than offset by higher than expected prepayment levels as companies continue to deleverage and defer investments. Line utilization hasn't increased but it did remain stable. The economy seemed to take a pause during the quarter still growing perhaps less the expected a quarter ago and borrowers have reacted to that.

Expenses were down 21 million from last quarter as expected driven by lower credit related cost and lower FICA. We continue to invest in the business for the long term which you can see in our FTE growth. Our strategic plan is focused on approving our core franchise and strengthening our financial performance as we look to the end of the cycle. Our strategic initiatives are focused on continuing to improve the customer experience at Fifth Third which will result in deeper customer relationships and improved retention.

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