Fifth Third Bancorp (FITB) 2014 Q3 法說會逐字稿

Good morning. My name is Suzanne, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fifth Third Bank third-quarter [2014] (corrected by company after the call) earnings conference call. (Operator Instructions).

Mr. Jim Eglseder, you may begin your conference.

Good morning. Today we will be talking with you about our third-quarter 2014 results. 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 certain risks and uncertainties. There are a number of factors that could cause results to differ materially from historical performance and these statements.

We have identified some of those 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 and would not expect to update any such forward-looking statements after the date of this call.

I am joined today by several people: our CEO, Kevin Kabat, and CFO, Tayfun Tuzun; Frank Forrest, Chief Risk and Credit Officer; and our Treasurer, Jamie Leonard. During the question-and-answer session, please provide your name and that of your firm to the operator.

With that, I will turn the call over to Kevin Kabat. Kevin?

Thanks, Jim. Morning, everyone. Today we reported third-quarter net income to common shareholders of $328 million and earnings per diluted share of $0.39. Results included the impact of a $53 million negative valuation on the Vantiv warrant, which was approximately $0.04.

During the quarter, we continued to execute on our strategies that we shared with you in recent months and maintained our focus on disciplined deployment of our shareholders' capital. In today's environment, I'm even more convinced that our focus on growing businesses that consume less capital, capture a wider array of revenues in every relationship, and that are closely aligned with our customers' changing preferences is the right way to build sustainable, long-term value for our shareholders.

Our intense focus on expense management was once again evident this quarter and represents another cornerstone of our strategy to achieve our return targets. Expenses were down 7% both sequentially and year over year. If you exclude the negative mark on the Vantiv warrant, we ran at an efficiency ratio just under 60% in the third quarter as we continue to find ways to right-size our expenses in line with revenue trends.

Certainly there are and will be continued investments in the risk management and compliance area as we take a balanced approach to expense management while continuing to invest in our infrastructure and our revenue-generating capabilities.

Our financials reflect some of the deliberate actions we have taken that we believe are the right decisions to make for the long term and will position us well as the economy and interest rate environment change. Part of this is taking a prudent approach to lending standards and scaling back in areas that we don't believe have a compelling risk/return profile.

Loan growth was more muted compared to other quarters, especially in C&I, as we maintain our cautious approach with respect to the industry's aggressive pricing and structure from both banks and nonbanks that we are seeing in certain segments of commercial lending today.

In addition, during the quarter, we have maintained our disciplined pricing methodology in indirect auto lending in line with our return targets. Average loans were up $250 million sequentially and up 4% compared with last year. Growth from the prior year was driven by 9% growth in C&I and 7% growth in bank card loans.

Despite the elevated industry competition, our loan production remains healthy and within our risk parameters. We are managing the Company for the long term, and we are committed to maintaining our discipline even in this challenging environment.

NII was stable sequentially and up 1% from the prior year despite the continued pressure on margins from tighter credit spreads. Similar to our disciplined lending actions, we maintained our focus on building balance sheet strength as we took advantage of low rates and tight spreads, and issued $850 million in fixed-rate long-term debt.

On the asset side, we reduced the reinvestment of cash flows in the investment portfolio as we are willing to wait for better entry points to grow our earnings assets. We continued to generate solid core deposit growth, which was up 7% compared with last year. We are confident that the strength of our deposit franchise will be very significant in the coming rate cycle.

The investments that we are making in our retail business are increasingly building a comparative advantage for us relative to competition. The strength in our deposit franchise was reflected in the FDIC's annual market share data, in which we grew deposits in each of our 15 affiliates and gained market share in 13 of the 15 affiliates.

We also had the third-largest increase in total deposits among peers across our footprint. Our deposit market share position is a testament to the investments we have made since 2012, including our deposit simplification strategy. These offerings were designed with a focus on building full and profitable customer relationships and to align value provided and value received, given changes in the profitability of retail products.

As of the third quarter, 33% of our consumer deposit transactions were through digital channels, up from 31% in the second quarter. As we continue to build our digital capabilities on the transaction side, we are also investing in growing the revenue generation strength in these channels.

Fee income results in the quarter were led by areas that typically exhibit less volatility. Deposit service charges increased 4% sequentially as we continued to see the benefits of our focus on building complete customer relationships that we have undertaken over the past couple of years.

Additionally, we reported a record quarter for investment advisory fees of $103 million. We believe we have many opportunities in our wealth management business and expect to see continued growth as we execute on our business strategies.

The credit environment in general remains positive. Net charge-offs ticked up slightly, but nonperforming asset levels continue to trend down and were 21% lower than the prior year. And our nonperforming asset ratio declined below 90 basis points.

Our capital generation and our overall capital position give us the ability to support balance sheet growth while continuing to return capital to shareholders in a prudent manner. Our tangible book value grew 7% year over year, and the average share count declined 6%, driven by $1.1 billion of share repurchases announced in the past 12 months.

I am excited about all that we are working on at Fifth Third. As you saw last month, we announced the launch of our payments and commerce solutions division, which combines existing businesses such as treasury management, commercial and consumer card, and currency processing solutions with resources specialized in developing innovative, commerce-enabled solutions.

Our goal is to provide solutions for complex high-transaction industries and segments such as those businesses in our retail and healthcare verticals and to provide a deeper, more holistic experience to our customers. We remain focused on the things we can control, leveraging the strength of our core business, and positioning Fifth Third for future success.

With that, I will turn it over to Tayfun to discuss our operating results for the quarter and give some comments about our outlook for the remainder of the year. Tayfun?

Thank you, Kevin. Good morning and thank you for joining us. I will start with the financial summary on page 3 of the presentation and some highlights from the third quarter.

We reported net income to common shareholders of $328 million or $0.39 per diluted share, which included the negative valuation adjustment on the warrant we hold in Vantiv of $53 million pretax or $0.04 per share.

On an adjusted basis, earnings per share were $0.43, in line with our adjusted first- and second-quarter EPS. Operating results have been stable from quarter to quarter this year, consistent with what you would expect in the current environment.

Return on assets was 1.02%, and return on average TCE was 11.1%. Adjusted for the Vantiv warrant, these ratios increased to 1.13% and 12.3%, respectively. Although these are below our long-term targets in a more normal environment, for the most part we have been pleased with our core business trends and our ability to continue to execute on our strategic plans.

With that, let's turn to the average balance sheet and page 4 of the presentation. Average earning assets increased 1% sequentially, reflecting modestly higher investment and loan balances. We continue to expect total noninterest earning assets to grow in line with average loan growth over the next couple of quarters.

In the third quarter, average investment securities increased by $886 million or 4% from the second quarter, driven by the full-quarter impact of our second-quarter purchases rather than an increase in investment activity during the quarter. The size and composition of our investment activity so far this year has been related to the anticipated finalization of the LCR rules.

As of September 30, our liquidity coverage ratio of 92% would be compliant with the 90% requirement for 2016. However, we intend to improve our LCR buffer prior to the implementation date.

The lack of directional certainty in the current global economic environment, despite the widespread anticipation for higher short-term rates sometime next year, gives us a pause in deploying additional cash into investment securities over the next few quarters.

We have always been opportunistic in managing our investment portfolio and timed our investments well in these challenging times. But at this time, we are exercising good caution in managing our risk exposures appropriately. We are content to wait on the sidelines for the moment.

Shifting to loans, similar to our cautious approach within our investment portfolio, we are being prudent on pricing and terms, and we continue to originate loans to customers where their relationship profitability meets our return hurdles. We believe that the current market environment and pricing levels leave little room for error in extending loans on the riskier structures.

As a result, combined with typically soft third-quarter commercial volumes, we saw relatively stable average portfolio loan balances, up $250 million from the second quarter, driven by a $182 million or 1% increase in consumer loan balances. Modest growth, primarily in residential mortgage and bank card, offset runoff in home equity balances.

A positive aspect of our lending discipline is that we are seeing a slowdown in yield compression within our loan portfolios, especially C&I. Yield on the C&I portfolio was 3.25%, down 2 basis points from last quarter, as new yields approach portfolio yields. While we can't predict the bottom, the rate of change seems to be slowing down.

Residential mortgage originations increased to $2.1 billion, with 70% purchase volume. Periodically, when it makes sense, we retain certain conforming loan products with strong coupons and good credit to mitigate the risk to earnings in a static or declining rate environment. As such, following our decision to portfolio an additional $310 million of loans this quarter, our salable volume declined from about 77% to 64%, reducing gain on sale revenue, which I will touch on in a moment.

Commercial balances increased $68 million, with growth in commercial construction and C&I, but runoff, paydowns, and stable line utilization offset third-quarter production. About one-fourth of this quarter's new loan volume was through our middle-market segment, and nearly 20% related to commercial real estate.

As Kevin mentioned, we are seeing less-compelling risk/return trade-offs in loan markets, and as a result, we continue to be very disciplined about the relationships we are targeting. Our loan growth numbers reflect that and may continue to do so, as we are making prudent credit decisions in the current market environment, which continues to feel the impact of nonbank competition.

On the deposit side, average core deposits increased $319 million in the third quarter, primarily driven by growth in money market account balances. As Kevin noted, recent deposit market share data indicated market share gains across our footprint and reflected the benefits of our strategies during the past 18 months.

We are very focused on reinforcing our strong retail deposit base as we firmly believe that our retail deposit franchise will be the foundation for profitable balance sheet growth, recognizing clearly that loan profitability is as much a function of funding cost as loan pricing.

Moving to NII on page 5 of the presentation, taxable-equivalent net interest income increased $3 million sequentially to $908 million, largely driven by the balance sheet changes I already discussed, as well as the benefit from an additional day in the third quarter.

Overall, the interest income from higher interest-earning asset balances was offset by the negative effects of lower repricing and higher interest expense associated with opportunistic debt issuances in the past two quarters. We are making the right long-term decisions in managing our liabilities and taking advantage of opportunities both in building retail deposits as well as in growing our wholesale funding efficiently.

As we have been sharing with you for the past couple of years, our interest rate management approach has kept our rate sensitivity in a tight range without taking outsize positions on either side. Once again, the current environment proves that anticipating rate increases in this weak global environment and building positions based on that is risky, and we intend to maintain our discipline accordingly.

The net interest margin was 310 basis points, down 5 basis points from the second quarter, primarily driven by repricing in the loan portfolio, higher funding and deposit costs, and a 1-basis-point reduction from the effect of day count.

As a side note, with respect to our deposit advance product, where earlier this year we made the decision to limit the availability of that product to existing customers, we continued to make progress on designing our next-generation banking products and services to address the needs of the underbanked population. These products and services are mostly retail cash banking services.

As we mentioned in July, we are working with all interested parties to explore the design of an extension plan for the credit product. We believe that the time and effort spent on this is worthwhile to ensure that we arrive at a long-term solution that meets our clients' needs and our goals in the current regulatory environment. We will provide detail on this and what it means for our 2015 results when we give our annual guidance in January.

Shifting to fees on page 6 of the presentation, third-quarter noninterest income was $520 million compared with $736 million last quarter. Excluding the significant items noted on this slide for both quarters, largely Vantiv, fee income of $573 million decreased $12 million sequentially.

Looking at other drivers within fee income, mortgage banking net revenue declined 21% sequentially, which was below our July expectations. Our decision to retain certain conforming production, specifically ARMs and shorter-term fixed-rate originations, impacted the sequential results and drove lower gain-on-sale revenue by approximately $7 million, while at the same time gain-on-sale margins were down 14 basis points to 224 basis points, which caused a $2 million decrease in sale revenues. In addition, we had a positive $5 million MSR hedge result in the second quarter relative to a $1 million loss this quarter.

Corporate banking revenue declined 7% sequentially on lower syndication and business lending fees, primarily reflecting the impact of lower loan production in the quarter. As I discussed earlier, this is an area where our prudent decisions have impacted activity and short-term growth, but we believe that we will be able to deploy this capacity at better terms for our shareholders by being disciplined. Markets are fluid, and we will be focused on taking advantage of those opportunities when we see them.

Long-term success of customer relationships depends on win-win solutions for our customers and for us, and we remain committed to our strategies, including our focus on cultivating lead-left relationships and targeting key industry verticals.

Card and processing revenue declined $1 million from a seasonally strong second-quarter result and was up $6 million from the third quarter last year as we continue to drive deeper into our existing customer base through greater card utilization and higher consumer purchase volume.

We had solid results in our deposit service charges and investment advisory revenue captions, up 4% and 1%, respectively, from the second quarter. Retail deposit service charges increased 9% sequentially, reflecting the additional day in the quarter, as well as higher overdraft occurrences.

Within investment advisors, our shift to recurring revenue streams and an increase in market values led to a record quarter of fee income of $103 million, up 6% over last year, with increases in personal asset management fees and securities and brokerage fees.

We also continue to manage expenses tightly to maintain our status as one of the more efficiency-focused banks while still investing in our Company.

We show noninterest expense on page 7 of the presentation. Expenses came in at $888 million this quarter compared with $954 million in the second quarter. This was our lowest level of reported expenses in five years.

Adjusted for the items listed on the slide, which include elevated litigation reserve charges in prior quarters, noninterest expense of $882 million was down $10 million sequentially, driven by lower compensation expense reflecting the second-quarter payout of long-term incentives, as well as another 1% reduction in headcount in the third quarter.

This was primarily due to additional reductions in retail staffing as branch transactions declined another 4% in the quarter and were down 10% from the prior year. In addition, although there were a few million dollars of seasonal benefits in our total expenses, our core performance still helped us achieve operating leverage during the quarter, including a sub-60% efficiency ratio.

PPNR on page 8 of the presentation was $535 million. When adjusted for the items noted on this slide, PPNR was $594 million, up $1 million from the second-quarter adjusted PPNR, primarily the result of our core expense discipline. The efficiency ratio adjusted on the same basis was 59.5% for the quarter.

Turning to credit results on page 9, total net charge-offs of $115 million increased $14 million sequentially, with the increase split evenly between commercial and consumer net charge-offs. Net charge-offs were 50 basis points of average loans. The increase in consumer net charge-offs was spread across the portfolio, while on the commercial side, a $19 million increase in C&I net charge-offs was partially offset by a $12 million decline in commercial real estate net charge-offs. Although there is some variability in results at these low levels, we do believe there is further room for improvement here, primarily in consumer.

Nonperforming assets, excluding loans held for sale, of $796 million at quarter end were down $36 million from the second quarter, bringing the NPA ratio to 88 basis points, its lowest level in seven years. Commercial NPAs and consumer NPAs decreased $25 million and $11 million, respectively, from the second quarter. Commercial delinquencies and consumer delinquencies over 90 days past due continue to trend lower.

Wrapping up on credit, the allowance for loan lease losses declined $44 million sequentially, and reserve coverage remains solid at 1.56% of loans and leases.

Looking at capital on slide 10, capital levels continue to be strong and well above regulatory requirements. The Tier 1 common equity ratio on a Basel I basis was 9.6%, up 3 basis points from last quarter. Pro forma for Basel III rules, our common equity Tier 1 ratio was 9.4% and increased 12 basis points from last quarter.

At the end of the third quarter, the average diluted share count was down another 1% sequentially and is the lowest we have seen since the end of 2010. During the quarter, we announced common stock repurchases of $225 million. That ASR was settled last week, and we received an additional 1.9 million shares, which makes the total for the entire transaction approximately 11.2 million shares.

Now turning to the outlook on page 11, we have updated parts of this slide to reflect any changes to our full-year expectations, but the remainder of my comments will focus more on our current outlook for the fourth quarter. As in the past, comparisons exclude the impact of any gains on Vantiv share sales and changes in the warrant value in 2014 and 2013, as indicated in the footnote of the slide.

I will start with net interest income. We expect full-year 2014 NII to increase about 1% from full-year 2013 NII of $3.6 billion. The slight change in our full-year outlook reflects the decisions we made in the third quarter to issue debt ahead of our planned schedule and temporarily delay additional investment portfolio leverage. These actions cost us about $12 million.

Additionally, our revised guidance reflects a lower level of fourth-quarter commercial loan outstandings as we are starting the quarter at a lower level than we had anticipated due to the reasons we have already discussed. So for the fourth quarter, we expect NII to be down a few million dollars compared with the third quarter.

We anticipate a full-year NIM slightly less than 315 basis points, given our expectation for further margin compression in the fourth quarter. We expect NIM to be down about 6 basis points from the third quarter, which includes 2 basis points due to higher cash balances we expect to carry in the fourth quarter, as well as 1 basis point from the full-quarter impact of our $850 million debt issuance. Otherwise, we generally expect loan growth in the fourth quarter to offset continued repricing in the portfolio as we continue to take a disciplined approach.

Turning to loan growth, we still expect mid-single-digit growth for the full year, although toward the lower end of that range than we had anticipated coming into the year as a result of my earlier discussion on the environment. We expect sequential growth in the fourth quarter of (technical difficulty) [1%], driven by growth in C&I and commercial construction loans. We now expect a mid- to high-single-digit increase in deposits as we further prioritize the value of deposits on the balance sheet.

Moving on to overall fee income and expense expectations for the fourth quarter, we currently expect fee income to increase in the mid- to high single digits, from $573 million, excluding the impact of the Vantiv warrant reported in the third quarter. Otherwise, the increase is expected be driven by growth in corporate banking revenue in the 15% range due to seasonally stronger business lending and syndication fees relative to the third quarter.

In addition, excluding any hedge-related variability, we expect flat mortgage banking revenue in the fourth quarter. And last, fourth-quarter fee income should include the $23 million benefit from the annual tax receivable agreement payment that we expect to receive from Vantiv, which is an ongoing long-term benefit that we receive from them as part of the overall relationship, including our direct ownership and warrant position.

Turning to expenses, we currently expect fourth-quarter expenses to be up in the low- to mid-single-digit range due primarily to seasonally higher compensation-related expense based on our expectations for business activity levels during the quarter, and continued investments in risk management and compliance, including an uptick in CCAR-related expenses.

The sequential increase is also somewhat higher, given some of the seasonal benefits in the third quarter that I mentioned earlier. We remain committed to managing our expenses in line with revenue trends while maintaining appropriate investments in the Company to build future revenue streams. We don't typically highlight expense saving initiatives publicly as they are included in our ongoing numbers. As such, the efficiency ratio is part of the internal benchmarks that are used to evaluate management's performance.

Having said that, we also acknowledge that there is a focus in the industry on improving risk and compliance infrastructure in light of the changing business and regulatory environment, and we will increase our investments in that area as well. We don't necessarily view these as pure carry costs. Rather, we believe that such investments ultimately will build a competitive advantage for us going forward.

Overall, excluding the impact of the warrant, we expect PPNR to be up in the fourth quarter. And we still expect to achieve positive core operating leverage in 2014, excluding Vantiv, with the efficiency ratio improving about 80 basis points relative to 2013, and the impact of our expenses have been offsetting declines in revenue. As for taxes, we expect the full-year 2014 effective tax rate to be about 27%.

Turning to credit, our outlook for the full-year net charge-off ratio is now in the mid-50-basis-points range, given that we are at 57 basis points year to date. Fourth-quarter net charge-offs are expected to decline by about 10% from the third-quarter level. We still expect a significant decline in NPAs compared with 2013, down about 20%, further reducing the NPA ratio.

With respect to loan-loss reserves, we continue to expect the benefit of improvement in credit results to be partially offset by new reserves related to loan growth.

Overall, our outlook is reflective of what we see in the current environment, how we are reacting to that environment, and our focus on building long-term shareholder value by maintaining discipline in all areas that we control. The decisions that we are making are less reliant on the anticipation of a better environment, but more on maintaining stability in our results.

One housekeeping note: We added a slide in the appendix on page 15 that provides some more detail around the assumptions that drive our asset sensitivity. I wanted to make sure that you were aware of that and mention a few items.

First, our balance sheet is well positioned for rising rates while being mindful of the downside rate risks. Second, our sensitivity assumptions are more conservative than what we experienced in 2004 through 2006, with deposit data of 70% and no lag in raising rates. Finally, we show our asset sensitivity for our current balance sheet as well as our forecasted balance sheet, with the measures being fairly comparable.

To wrap up my remarks, I just add that the fourth quarter is underway. We look to continue with positive momentum in our results through year-end and beyond. We believe our strategies position the Company for success now and in the future, and we will continue to appropriately invest to strengthen our competitive edge and optimize shareholder value.

With that, let's open the line for questions. Suzanne?

(Operator Instructions). Scott Siefers, Sandler O'Neill.

Tayfun, I guess I was hoping you could expand upon some of the comments you made about maybe a more conservative posture toward the securities portfolio, and I guess or I gather maybe staying a little shorter. Can you talk a little bit about the ongoing ramifications of that? In other words, even though the yields aren't necessarily attractive, I guess they would be lower the shorter you stay on the yield curve. So can you talk about the cost versus longer-term earnings pickup dynamic that you guys had thought about? And then would that imply that there might be renewed margin pressure even beyond the fourth quarter if the tactics on managing the securities portfolio are a little different?

Sure. Good question. Obviously this environment makes us think five times before we build strategies and tactics. I just have to point out that over the past three years, we have dealt very well with the volatility in the interest rates. When markets were anticipating rate increases, we were cautious. We maintained our rate sensitivity within a very tight range. And a lot of that actually had to do with the way we invested in the portfolio. We kept the size very small for that reason. And so, the experience that actually we've gained throughout the last two or three years in this environment is helping us now.

In terms of activity in this environment, we are just not adding leverage to the portfolio. We just don't believe that the risk/return profile of those investments at this point are attractive enough, and we are willing to sustain a little bit short-term pain for that, because I think in the long term, being able to invest -- although I have to say that we don't know yet when that environment will realize -- but at 2% 10-year and even the short end of the curve being where it is, I think we will remain on the sidelines, which, obviously, from a NIM perspective actually, it is not that hurtful. But from an NII perspective, we will have some short-term pain, as we actually discussed in the script.

I will turn it over to Jamie for further comments, as he and his team have been watching these markets very closely.

Thanks, Tayfun. And, Scott, as Tayfun was mentioning, we pushed out additional investments while also still achieving a 92% LCR. And we have done that by taking the pain on the funding side with the debt issuances. We pulled forward the $850 million fixed-rate. So we have had the NIM compression on the funding side. While not able to enjoy all the benefits on the asset side by holding the elevated cash levels, we would expect by at least mid-2015 to be able to put that money to work. But then our forecast is based on a several-quarter delay in additional timing.

And then the other part of your question related to just the rate environment and the outlook. Really, if you go through each of our quarters, the last three quarters, the loan yields have compressed 5 basis points in the -- of NIM impact in the first quarter, 4 in the second, 2 in the third. So you are really seeing that dissipating and stabilizing here.

So I wouldn't expect a whole lot more in terms of loan yield compression. But what you will see and what Tayfun mentioned in terms of the fourth quarter, just the remaining carryover effect of the funding actions in the fourth from the third quarter will cost us 2 to 3 basis points. And then holding those cash levels hold us -- costs us another 2 basis points in the fourth. So we are looking at a NIM in the 304 range, and then maybe a little bit of a bp or 2 maybe in the first quarter. But really, we have really taken the pain from the LCR in terms of the NIM compression. And really, we will just -- NII and NIM expansion beyond this will be reliant upon this market selling off here.

Okay, perfect. I appreciate that. And then, maybe either Jamie or Tayfun, just as a follow-on on rates, I guess who knows what is going to happen with either the short end or the curve more broadly. But if the Fed does indeed act next year, but the long end of the curve stays low, what is your attitude qualitatively toward that kind of environment? Because I guess you get relief on the capital side and then maybe there's some relief on the short-term end, but how would you think about that sort of situation?

Yes, I think you are right. Clearly 30 days ago, the likelihood of us being in this environment was as high as the Reds making the playoffs at the time. The Reds didn't make the playoffs, but here we are in this environment. And at the same time, this morning's economic data indicated that the jobless claims are at the lowest level since April of 2000.

So it is difficult to predict exactly how this is going to play out in the global context and what the Fed will do. But part of the discussion that we had today, not only with respect to interest rate risk, but with respect to the market and other risks that are being priced, is very related to the environment. And we are very cognizant of that. There's a lot of liquidity chasing, a lot of unattractive yields. And if this market environment continues to be exactly the way it is today, we will maintain our discipline.

But at the same time, we are looking at our financials a little bit more broadly than just net interest income. And we have been able to manage our performance in line with the environment. Whether it is related to our investments in fee income-producing businesses or managing expenses, we will react accordingly.

I think our tactics and strategies are dependent on the background and how that that background shapes, but we have been able to show that we are nimble and we make the right decisions, and we will do so without necessarily stretching for additional risks.

All right, perfect. Thanks a lot.

Ken Usdin.

Tayfun, I was wondering if you could just help us just get to the -- just true-up the pre-pre-comments about third to fourth. So, are we talking about off of a base of 590 for the third quarter when you talked about pre-pre- still being up in the fourth quarter?

Yes.

And then as you guys think about looking out to next year, just in general terms, again, taking all your points about how challenging it is, do you believe you'll still be able to build upon this base of pretax preprovision from here, given the dynamics that we are hearing you guys talk through about some of the revenue challenges, but the better expense performance? How do you think that is all is going to have to -- how do you think that's, as you start to think about next year's planning, what will be the key drivers there?

Sure. Ken, as you can imagine, we are working on our 2015 numbers as we speak. And events like this week and changes in volatility obviously changes our plans as we move forward. 2014, it was not necessarily a breezy year for us either, but in this environment we have done pretty well. And as we look forward to 2015, we still believe that, along with additional investments in areas that we mentioned during our introduction, we still have room to continue to manage this business efficiently.

We are very keen on managing sales force effectiveness in this environment as production fluctuates. We need to make sure that we are getting the highest efficiency from our salesforce. We are working on significant efforts to control third-party large-vendor expenses. We are looking at outsourcing opportunities.

So there's still tools in the closet that we have available to us in 2015. And we also clearly are investing in the business to drive revenues, so whether it is in commercial capital markets, in the payments business, in retail. We are not -- as Kevin mentioned and I mentioned during the introduction, we are spending money to increase revenues in the retail channel through digital channels.

So those still will help us to maintain stable and healthy revenues going forward, and we still have tools. But we will share more of this with you in January, when we update our 2015 numbers.

And last clarification, just coming back to the pre-pre-, so the growth off of the third quarter includes the $23 million Vantiv?

Yes, it does.

It includes it. Okay, got it. All right, thank you.

Now, I have to say, Ken, that number is now built into our income because, as we have discussed with many of you over the past year or so, we are looking at 15-plus years of cash flows coming from the TRA agreement. It is part of how we planned the spinoff, and it is part of how we retain the value from Vantiv. So it is very much part of our core earnings.

Understood. Okay, thanks, guys.

Erika Najarian, Bank of America.

My first question, we appreciate the guidance on mortgage revenues for next year, but we heard another bank earlier this morning say that just over the past few days they have gotten quite a significant bump-up in refi. And I was wondering, given the fluidity of the rate situation, if we could see a better-than-expected volume, refi volume quarter for you guys.

Yes, Erika, it is Jamie. Say the same is true here; our volume has picked up from about a $20 million a day up to $38 million application day yesterday. So, yes, refi volumes are picking up. But we'll see how long that holds.

If I were truly prophetic and had put in the interest-rate sensitivity slide on page 15 that had a flat-and-fall scenario, what you would see for us is about a 1% NII decline, but more than made up for by that mortgage banking revenue in refi.

So we think we are well positioned and have a nice diversified balance sheet and business to really battle through this type of environment if it were to stay this way for a while.

Yes, Erika, it is a little difficult to give you a different picture this morning after an intraday volatility that we saw yesterday between [187] and wherever that the day started, [220]. So as we sort of continue to observe the markets and see wherever this ends, we will clearly update our internal discussions. And then if we have a chance, we will update our outlook as well.

Great. And in terms of your comments about scaling back in certain lending products, could you tell us specifically where in commercial you feel like the industry risk tolerance is above yours? And is it the credit structures that give you pause, or is it pricing, or both?

It is both. And when you look at production levels for this quarter, the largest portion of our commercial production came through our middle-market segment. That segment clearly is a little bit more isolated and it's healthier. We have good existing relationships that drive better outcomes.

But broadly, what we are seeing is, both from some larger banks, larger than us, and nonbanks, there is stretch in structures. For example, we have -- I was looking at specific deals. We have certain amortization targets and typically our amortization targets are no less than 50%, no less than 40% for certain structures. We are seeing now lenders extending credit with no amortization. We are seeing multiples of leverage above us in offers. We are seeing, on a combined basis with structural elements, leverage elements, significantly lower coupons. And we don't view that as healthy.

There are reasons why, I guess, banks and nonbanks are doing this, but we are seeing that in different industries, in different segments. And that is what gave us a pause. So, it is a combination of both rates and risk parameters.

In some instances, even with higher rates, we would not compromise from structural elements or covenant requirements. In others, though, we are willing to look at risk offers, priced appropriately. But even there, we are seeing stretched parameters. Frank, I don't know if you have additional comments on that.

No. The only -- you asked about where we are pulling back. We have certainly, like most banks, taken a hard look at our leverage book. We did that proactively at the end of the first quarter prior to the Shared National Credit exam, and as a result of that, made some adjustments in our underwriting criteria and also our caps on overall risk appetite that we believe were prudent. We shared those proactively with our examiners, and they agreed with our assessment. So we feel very good that we are positioning that book appropriately, given the overall concerns that the regulators have.

Back to Tayfun's point, though, however, on the leverage book, one of the major concerns that has been expressed has been on covenant-lite deals. And that is not an issue with Fifth Third. Less than 1% of our leverage book is covenant-lite. So we are sticking with good structure, ensuring we are getting paid for the risk, and doing credits today with companies that we know very well, that we underwrite very carefully and prudently and do good due diligence.

So that is one area I think we have acted prudently to pull back, although we are still bullish on doing good business, good leverage business with the right customers.

Yes. The good thing is that on the leverage side, that portfolio for us has stayed at the same dollar number for the last two years. We have been fairly focused on making sure that we are doing the right deals. So, again, we are happy with where we are, where our portfolio is, but we are not willing to necessarily stretch to add growth.

Got it. And if I could just sneak one more in here, with your loan-to-deposit ratio on a core basis over 100%, do you have targets in terms of where you would like to lower that to in potential anticipation of a rising short end? And is there something that you are seeing that would cause deposit betas to be 20 percentage points higher, or is that just model conservatism?

Erika, this is Kevin. Here is what I would tell you. We still believe very strongly in core deposit growth as one of the fundamental pieces of relationship in the business. So our focus there has never waned. We continued be strong in terms of growing that, as I have indicated in my scripting and some of the FDIC data. So we still see very strong growth opportunity from that perspective. And we think that will help position us well on a go-forward basis in terms of the franchise as well.

So I think the one thing that we as a bank and the industry as a whole are in debate in terms of how conservative the betas are in anticipation of a change in rates and what both companies and individuals do with all the liquidity at that point. I think our point would be that we are conservatively looking at it and trying not to be in a position where we get surprised, if and when that situation occurs. So that is really the way we are positioned and why we -- why Tayfun detailed that additional page we put in the appendix.

And as Kevin mentioned, we truly view our retail deposit franchise as the cornerstone of this franchise for balance sheet growth going forward. We spend a lot of time, because whether it is related to the LCR rules or just the state of the regulatory -- other regulatory rules, retail deposits in any environment, in any rate environment, are going to be extremely important across the board for all of our businesses. So we are spending quite a bit of time and maintaining that perspective.

Okay. Great. Thank you so much.

Ken Zerbe, Morgan Stanley.

Two questions for you. The first, in terms of the deposit advance product, it sounds like you are still working on that. But from a conceptual standpoint, when you do eventually figure out what new products you want to introduce, is there a ramp-up period such that you start it in 2015, it takes a long time to really get a customer adoption? Or is it a product potentially that gets a fairly fast ramp that you get more of the benefit sooner? Thanks.

Ken, you do have to look at that question in terms of strategically how we are viewing it. We think for the most part the core banking bundles that we've been talking about, which really exclude our orientation around what credit offerings we include there, we think will build over time. And we think there's a real need, and we think there's something from our product offering that makes a lot of sense for us to do that. So we are moving forward with that.

Whether or not, as we have discussed in the past, it includes a small dollar credit, we are still strategically in discussion about. We are still evaluating. And we are watching what both the marketplace needs would be as well as the regulatory environment. So we will balance that. That could be a much faster adoption rate, simply because of what we see as the need in terms of the environment and that customer base. So we will have more for you, as Tayfun mentioned, as we look at 2015. But we really see those as kind of two pieces.

Got it. Okay. And then the other question I had, just in terms of mortgage banking, if I heard right, it sounded like your gain-on-sale margin was lower because of your decision to retain I guess more adjustable-rate mortgages. Is that decision something that you anticipate to hold steady? Because it sounded like you expect the revenues for mortgage banking to stay constant, which implies no change to what you are doing. Or was there other drivers in there?

So, Ken, actually, margin was not necessarily -- the shrinking margin during the quarter was not necessarily related to the retention decision. But as days like yesterday would require, we will take a look at our thoughts on that retention. For now, we are still and our guidance basically assumes that we will continue that through the end of the year. I think it was a good decision. But over the next days and weeks, we are going to reevaluate it again once we see a level of stability in rates.

Got it. So the drop in margin was mostly just due to I guess industry factors, not your portfolio?

Exactly. It was not related to retention.

Understood. All right, thank you.

Bill Carcache, Nomura.

To date, there hasn't really been much of an earnings drag from the sale of your interest in Vantiv, given that it has continued to grow its earnings base even as your ownership stake has decreased. Can you talk about how going forward you guys are thinking about the eventual pressure from the lost earnings stream as you continue to sell down your stake? I know that that is still a ways off, but perhaps just conceptually if you could speak to that.

Sure. With respect to Vantiv, our strategy has not changed; our long-stated strategy of reducing our ownership in the Company has not changed. We are very well aware, obviously, just purely with respect to the earnings stream, but at the same time we have been obviously buying back our shares when we do sell Vantiv. That sort of has been mildly accretive so far. So we have to take that into account. And our assumption is that, unless a better opportunity comes along, we will continue to execute our exit in a similar fashion.

But in terms of just the focus on dollar earnings, the reason why we have been investing in fee-income-producing businesses, obviously, is going to contribute to a capture of that line item. But we are not specifically focusing on that line item, as, again, we have been able to reduce our share count in a similar fashion.

Okay. So the reduction in the share count, you get the benefit at the time that it is done, but then going forward as that earnings stream, as you lose that earnings stream, you have to replace that with some other fee income. And so the investments that you have been making in other fee-income businesses is where you expect you will be able to make up the lost Vantiv earnings stream over time? Is that the right way to think about it?

That's correct.

Okay. And then, separately, I had a couple of questions on auto. First, can you update us on your outlook for the auto lending environment from where you stand?

And then, separately, the average FICO scores of the auto loans that you guys have originated over the last decade-plus have been north of 750, so very high credit quality. Can you discuss whether you have ever considered going a bit further down the credit spectrum, particularly since this is an area where I guess you would be able to limit any losses by repossessing and selling the collateral at auction, so long as used vehicle prices are okay? Can you just maybe share what the thought process has been there?

Yes. Clearly, some banks are viewing the subprime auto sector as an attractive sector. We have not viewed it the same way. We have maintained our discipline in a very long period of time, and we will continue to maintain that discipline.

As you said, our FICO scores, our advance rates has remained very stable. We are not interested in the subprime auto business because we don't view our indirect lending business as a collateral-based capture of higher-than-anticipated collateral. It is a credit decision that we make. And so, therefore, we've stepped back from chasing yield through credit, and we are not participating there.

And we also, obviously, are conservative in terms of using our existing capacity. We are originating $400 million to $450 million a month, whereas our capacity there is significantly north of that. But, again, as the broad picture that we described earlier, whether it is in auto lending, in C&I lending, in the way we manage investments, it is part of our risk management strategy, and hitting the right risk/return trade-offs for our shareholders. And we will not compromise there.

Thank you.

Paul Miller, FBR.

Most of my questions have already been asked and answered, but I do have one follow-up. On slide 9, on the credit slide, there obviously was a modest uptick in 30-to-89 past-due that it looks like you attribute to seasonality. Can you just expand a little bit on what causes that?

Our 30 and 90 are still very low relative to expectations and standards. So we feel very comfortable with where we are. We do experience some seasonality in the quarter, but we are very comfortable with the level of past-dues, both at the 30 and 90 mark. No concerns going forward.

Okay.

Paul, in terms of credit, obviously we have not spent a lot of time because we think that the trend is positive. When you look at nonaccruals going down, nonperforming assets going down, 90 days past due going down quarter over quarter, nonperforming loans hitting 68 basis points, these are all good trends.

No, I understand the trends are good. I just was wondering what the seasonality was. I am not too familiar with third-quarter to second-quarter seasonality, but that cleared it up. Thank you very much.

Jeffrey Elliott.

You touched on the increased regulatory scrutiny on the leveraged loan market. Clearly there's been quite a few headlines in the press around that over the last few weeks. Are you detecting any further changes there? Do you think your competitors are getting the same messages maybe you'd picked up on earlier, and how does that affect the competitive dynamic as you go into the fourth quarter?

Some have gotten the message, it appears; some have not. So I don't think that it has been uniformly received. But we should not diminish the role of nonbank competitors in the space who are clearly not subject to the same type of regulations.

Great. Thank you.

Sameer Gokhale, Janney Capital Markets.

I just had a few questions. If I heard you correctly, Tayfun, you said that middle-market loan originations comprised about one-fourth of your total commercial loan production. So, first, I just wanted to check if that is right.

And then, related to that, what I was curious about is what that share has been in the past, say 12 months ago. And should we attribute, if the shares increase, say if it is in fact a quarter of your commercial production, is that increased share a function of the launch of your middle-market advisory business in April of this year, tying that in with more lending? So if you could just talk about that, that would be helpful.

Yes, Sameer, the middle-market lending percentage, when I look at the last four or five quarters, it has been high, but this quarter it ticked up. But just to clarify one issue, we have a mid-corporate group and then we have a middle-market group. So in the middle-market group is the more traditional C&I bread-and-butter business that we have had for a long period of time.

What you are referring to in terms of the efforts that we have discussed earlier in the year is the mid-corporate space. That is a separate space. That sort of has been growing as well, but just on a quarter-to-quarter change, the increase in true middle market has been a bit more pronounced than what we are seeing in the rest.

We also are seeing the benefit of some of the additional verticals that we have put in place. Our energy vertical is picking up and gaining momentum, as we had expected when we put that in place. So it is starting to mature across its development, as we had hoped when we put the strategy together. So I think that is contributing. And we are seeing some nice pickup also in some of the equipment leasing activity, which has been not something that we have seen as historically strong as we are seeing now.

Okay, thank you for that. And then, Kevin, you had talked about the payments and commerce solutions, I guess, business that you have launched. And I was wondering what you could lay out for us in terms of specific targets or what your growth aspirations are. Clearly, when you look at the results, currently card and processing revenue is not that big a line item relative to some of the others. in your noninterest income line, and then if you look at the size of the card portfolio, it is also relatively small. So

how big do you anticipate that this business getting? It seems like you and maybe many of your peers are increasingly focused on cards and credit card products as a way of offering another product, putting that in the hands of their customers. So can you share with us how much you expect both of those businesses, the fee income part and the loan portfolio, to grow over the next, say, two or three years?

Yes, I think the way that we are viewing it is a little bit differently than what you stated. I do -- while we do believe card is an opportunity for us, it comes on a very small piece of the whole. It is really predominant -- that whole payments and commerce division is really predominated with our treasury management business. That's large.

And if you look at our treasury management performance over the last three, four years, RTM growth in total has been significantly higher than the industry, largely because some of the product offerings that we have done, enabling of technology to enhance solutioning for our customers. I've talked to you about our RevLink product, which was specifically designed around our healthcare vertical. Those are the types of strategies that we think we have more room to explore. Our CPS solutions with our retail vertical we think is an opportunity for us to really help accelerate the growth from that standpoint.

So, while we haven't shared yet kind of specifics by product offering or by area as a whole, we do expect to continue to grow our entire payments and commerce solutions area at a multiple of what the industry has been performing at. So we expect that momentum to continue.

And again, it is through these innovative areas of solutioning that apply our knowledge of what their needs are, along with technology, to get them better insight into what they are doing. So that's really kind of the approach. It is not really -- I wouldn't define it as a card-based overly based solutioning that we are looking at in that space.

And is there a reason for not wanting to be more traditional credit card oriented in that space? Seems like that is another product offering that you could add and emphasize more. So is there a specific reason to not want to emphasize it as much?

No. We agree with you. We think that the card offering within our customers and utilization within their wallet is an important opportunity for us. But it isn't something from our standpoint that we look to really drive the growth out of the payment space. So it will contribute, but may not be the key driver of growth in that area for us.

And my last question, really more one out of curiosity, because I know you started up a UK office recently to service UK clients that have operations in the US, and I was curious from a timing standpoint, why now? There's some talk of weakness in Europe, the UK. Was there anything driving that in terms of timing specifically, or you just felt that this is something that just made sense?

Yes, there's nothing from a timing table. We have been in Brussels for 22 years, so we moved that office really to London, which is, quite frankly, much heavier concentration of the clients that we serve from that standpoint. So it made a lot of sense to us. And it really wasn't driven by timing. It was more driven by where our customer aggregation and business relationships are today.

I see. Okay, thank you very much.

There are no further questions in the queue. And with that, we will conclude today's conference call. You may now disconnect.