Fifth Third Bancorp (FITB) Q1 2012 Earnings Call April 19, 2012 9:30 am ET Executives Jeff Richardson - Director of Investor Relations and Corporate Analysis Kevin T. Kabat - Chief Executive Officer, President, Executive Director, Member of Trust Committee and Member of Finance Committee Daniel T. Poston - Chief Financial officer and Executive Vice President Bruce K. Lee - Chief Credit Officer and Executive Vice President Tayfun Tuzun - Senior Vice President and Treasurer Analysts Ken A. Zerbe - Morgan Stanley, Research Division Kenneth M. Usdin - Jefferies & Company, Inc., Research Division Leanne Erika Penala - BofA Merrill Lynch, Research Division Kevin J. St. Pierre - Sanford C. Bernstein & Co., LLC., Research Division Brian Foran - Nomura Securities Co. Ltd., Research Division Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division Paul J. Miller - FBR Capital Markets & Co., Research Division Craig Siegenthaler - Crédit Suisse AG, Research Division Presentation Operator
I'm joined on the call by several people: Kevin Kabat, our President and CEO; Chief Financial Officer, Dan Poston; Chief Credit Officer, Bruce Lee; Treasurer, Tayfun Tuzun; 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 T. Kabat Thanks, Jeff. First quarter was a very strong start to the year for Fifth Third. We reported first-quarter net income to common shareholders of $421 million and earnings per diluted common share of $0.45. Excluding net gains related to Vantiv, which were itemized in the release, earnings would have been $0.36. That would be a 9% sequential increase from the $0.33 we reported in the fourth quarter of 2011. Revenue results were better than we expected back in January driven by continued strong mortgage revenue, corporate banking revenue and in investment advisory fees. Mortgage business has been a great business for us over the last couple of years. We've picked up significant market share and that provided significant cross sell value to us as well. We expect that to continue in the second quarter. Corporate banking also came in strong with an 18% sequential increase and investment advisory revenue was up 7% from the fourth quarter. We again posted very solid loan growth for the quarter, particularly in C&I loans, which were up 5% sequentially on an average basis. Credit trends also continued to improve. Net charge-offs declined for the fourth consecutive quarter to $220 million or 1.08% of loans while nonperforming assets declined $143 million down 8% on a sequential basis. Delinquencies dropped 11% and our criticized asset levels continue to decline as well. So we're seeing ongoing conversions towards historical levels across the board.
Deposit generation continues to be a strength for us with average transaction deposit growth of 2% sequentially and $7.7 billion or 10% from last year. We're adding new customers and growing balances with current customers with our value based approach to products and services. Capital levels also continue to be very strong, including under the rules proposed by Basel III. Our Tier 1 common ratio was 9.6% and we estimate our pro forma Tier 1 common ratio would be about 10% on a fully phased-in Basel III basis. We believe that would place us among the highest Basel III capital positions of the top 20 U.S. banks. As you know, we submitted our annual capital plan last quarter to the Federal Reserve, which included, among other plans, increasing our quarterly dividend in initiating common share repurchases including using any after-tax gains related to share offerings and Vantiv. And as announcement of CCAR results, the Fed's independent analysis with the 19 banks results, indicated that our expected capital levels and profitability levels under stress were among the strongest of the banks tested. The Fed did not object to our continuation of the current common dividend or repurchasing shares with any Vantiv gains. They did, however, object to the planned dividend increase and other share repurchases. As you know, we're not permitted by Fed rules to comment on the reasons for their objections. The resubmission will be based on March 31, 2012 results, using new macroeconomic scenarios. We believe we'll be able to address their concerns in our resubmission, which we expect in late May or early June. Capital plans rules provide that the Federal respond no later than 75 days after a resubmission, so most likely sometime in August. We would currently expect to include similar plans for the dividend and share repurchases as originally submitted, subject to our evaluation of the scenarios and results and board consideration in approval of the plan. We have substantial capital and earnings capacity, including under stressed assumptions to distribute a significantly higher percentage of our earnings to shareholders while maintaining capital above targeted and required levels.
Now turning to the economy. The overall economic picture remains about where it's been for more than a year. We're seeing slow improvement in a number of areas but the pace of the recovery is noticeably weaker than any postrecession period in memory. Companies we call on, remain to a large extent in a wait-and-see mode, not on defense but not yet fully committed to offense either. As the year progresses, we expect to see continued improvement in the economy and in the business environment but the pace of the recovery is very likely to remain slower than what we would like.Before I turn it over to Dan, I want to mention the strategic transactions that were announced in late March and early April. This is Vantiv's -- the first is Vantiv's initial public offering. This was part of a several year process that we started back in 2008 when we made the decision to sell an interest in Fifth Third processing solution, we believe that the growth of the business would be accelerated by enabling it to operate independently and that's exactly what's happened. Vantiv nearly doubled its revenue between 2008 and '11, which also included the benefit of several acquisitions. Those acquisitions would have been difficult to accomplish and had -- had the processing business remained a fully consolidated subsidiary of the bank. We continue to own a 39% interest in the company, whose stock was valued at $4.2 billion at the end of the first quarter. That represents about $1.6 billion of pretax value to Fifth Third, which is carried on our books at only $600 million. That's after recognizing about $2 billion pretax through gains to date. We feel very good about the way we've executed on our strategy and think we and Vantiv are in a good position as we move forward. Read the rest of this transcript for free on seekingalpha.com