Fifth Third Bancorp (FITBI) 2016 Q2 法說會逐字稿

Good morning, my name is Johnna and I will be your conference operator today. At this time, I would like to welcome everyone to the Fifth Third Bank's Q2 2016 earnings call.

(Operator Instructions)

Thank you.

Sameer Gokhale, you may begin your conference.

Thank you, Johnna.

Good morning and thank you for joining us. Today we'll be discussing our financial results for the second quarter of 2016.

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

This morning I'm joined on our call by our CEO, Greg Carmichael; CFO, Tayfun Tuzun; Chief Operating Officer, Lars Anderson; Chief Risk Officer, Frank Forrest; and 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 can see on page 3 of the presentation, we reported second-quarter net income to common shareholders of $310 million, and earnings per diluted share of $0.40. Some offsetting non-core items resulted in a $0.01 negative impact to earnings per share in the quarter.

Since I became CEO in November of 2015, I have reaffirmed the Bank's key strategic priorities. These include growing fee revenue; streamlining processes to reduce expenses; improving our customer experience; and investing for the future in order to deliver strong resorts through business cycles. I believe we have the right strategies in place. Our second-quarter financial results reflect the progress we are making towards those goals.

Our Q2 results were solid, especially considering the market volatility we experienced during the quarter. In addition, we were very pleased with the credit results. Fee income levels, including corporate banking fees, were also strong.

As you know, we have been building out our capital markets capabilities for the last few years. We recently hired a team to further expand our M&A and strategic advisory services. Our investments are paying, off as we continue to gain market share with our expanded set of differentiated products and services.

Also, our mortgage volume of $2.7 billion was up 53% sequentially. This represented the highest level since the third quarter of 2013. Net interest income was relatively stable in Q2, which was in line with our expectations and guidance. NII results reflect growth in commercial loans of 2%, and 1% growth of security balances, along with disciplined loan pricing and targeted relationship management.

Origination yields in our auto loan business improved compared to Q1, reflecting our decision to originate loans more selectively in that business. Also, as we have mentioned previously, we have been managing deposit rates tightly; and we expect that to continue in this environment. We have planned on managing through an extended period of low interest rates. With the fall-off from Brexit, we are even more confident that was the right approach.

We have been very deliberate about growing fee revenue in order to mitigate the impact of lower interest rates. We have continued to maintain a steady and cautious strategy with respect to rate risk. Given our focus on outperformance through the cycle, we are better positioned to address market volatility and economic uncertainty than at any point in the Bank's recent history. We remain focused on executing our strategies and continue to make significant progress.

We recently closed on the sale of the branches in Pennsylvania, which resulted in the $11 million pretax gain. As the consumer landscape evolves, we will continue to look for more opportunities to optimize our branch network.

We are also making investments to enhance our digital and operational capabilities. For example we recently hired Melissa Stevens as our Chief Digital Officer and Head of Omnichannel Banking and Steve D'Amico as Head of Innovation.

Our investments in the digital channel are paying off. In the second quarter, approximately 20% of consumer deposits were made via our mobile app compared to 16% a year ago. In general, we have seen a 28% increase in mobile usage year over-year. We also saw a 135% increase year over year in checking and savings accounts opened online. We expect our investments to drive higher digital adoption and create a more integrated customer experience.

Also in the quarter, we sold a small, nonstrategic agented and credit card portfolio at a 12% premium. This allows us to continue to focus our energies on our core credit card business.

As you may have seen, we recently signed an agreement with a third party to help consolidate our residential mortgage loans systems onto one platform. This initiative will help streamline our mortgage processes and operations, improve customer closure times, and significantly improve the overall customer experience. As we previously disclosed, we expect this investment to generate a full run rate benefit of $12 million annually.

The strategic initiatives we shared with you in April are on track. We're actually implementing them in a more cost-effective manner than we had initially projected. As a result of our strong execution and focus on expense management, we now expect year-over-year expense growth of 4% in 2016, compared to our guidance of 4.5% to 5% at the start of this year.

Over time as we realize the benefits of implementing these initiatives, we would expect annual expense growth to be well below 4%. The continued execution of our key initiatives will also support our longer-range targets, including a 12% to 14% core ROTCE ratio and a 1.1% to 1.3% ROA ratio.

Finally, we recently entered into a couple of significant transactions with Vantiv. First, we extended our processing agreement with Vantiv through 2024. This agreement was previously set to expire in June 2019. We are pleased with our new agreement as it will generate a meaningful level of revenue benefits and cost savings from the second half of 2016 onward.

In addition, we entered into another agreement with Vantiv related to our roughly $800 million of existing TRA cash flows. We terminated and settled certain cash flows, totaling $331 million over 18 years, for an upfront payment of $116 million. We also have the option to terminate and settle another $394 million of future cash flows at pre-specified amounts through the end of 2018. I am pleased that we have reached this agreement. It reduces future risk, and enables us to monetize and redeploy that capital. Tayfun will provide further detail in his commentary.

We have discussed our efforts to reduce our risk exposures as a necessary aspect of delivering consistent returns through the cycle. As of June 30, 2016, our exposure to companies in the UK and other European countries represents less than 2% of our total loans. It consisted mostly of exposure to large global businesses that are well-diversified.

Leading up to the Brexit vote, we engaged with our clients to assess any potential impact on our business. As a result, we reduced our direct exposure in advance of the vote. Therefore, we believe our exposure to any fall from Brexit should be limited.

In terms of our exposure to the energy sector, we continue to believe that our risk is well-contained. Oil prices in Q2 increased relative to Q1, and our energy NPLs remained essentially flat. We are comfortable with our credit loss exposure in this portfolio.

We also know there's been an increased concerned about growth in commercial real estate loans. As we have mentioned on prior calls, we have a lower mix of CRE relative to peers. Additionally, our growth in absolute dollars is lower compared to many of our peers. Our disciplined client selection and centralized loan underwriting process is designed to ensure that we have a consistent and conservative approach to making CRE loans.

Moving on to capital, I'm very pleased that the Federal Reserve did not object to our 2016 CCAR plan. The 2016 plan allows us to invest realized gains from Vantiv share sales and realized gains from the monetization of the Vantiv TRA into share repurchases. We believe the economics of doing so are favorable. We will continue to value the use of cash proceeds for share repurchases. The CCAR plan demonstrates our ability to generate and return a significant amount of capital to our shareholders.

Additionally, it demonstrates our ability to withstand severely stressful economic conditions while remaining well-capitalized. Our capital levels remain strong. Our common equity tier 1 ratio reached 9.94%, an improvement from 9.81% at the end of the first quarter.

With that, I'll turn it over to Tayfun to discuss our second-quarter operating results and our current outlook.

Thanks, Greg.

Good morning and thank you for joining us. Let's start with the financial summary on page 4 of the presentation.

Overall, we are pleased with our core results despite the challenging environment. Our corporate banking revenues were solid; and mortgage originations have outpaced peers, as well as the overall industry in the second quarter. We are deploying capital in businesses where our return targets meet our long-term goals and are making good progress in executing on our strategic plans.

As we shared with you previously, these projects were carefully vetted to minimize reliance on an improved economic environment. Operating leverage is the top priority, with a strong emphasis on sustainable expense control without weakening our business' strength and growing revenues.

For the second quarter, there was a net negative impact of $0.01 per share resulting from several items. The most significant item was a charge related to the valuation of the Visa total return swap, which was due to the rejection of the merchant litigation settlement.

So with that, let's move to page 5 for the balance sheet discussion. Average commercial loan balances increased 2% sequentially and about 4% year over year. We achieved this growth with stabilizing spreads, while repositioning the balance sheet for better risk-adjusted returns.

C&I loans contributed nearly 80% of the total sequential growth in average commercial balances. CRE growth of $199 million made up the majority of the remaining quarterly balance increase. Our CRE portfolio as a percentage of total commercial loans is one of the lowest among our regional peers.

In construction, as well as in perm lending, our teams are cognizant of valuations and supply/demand dynamics created by the lack of attractive investment alternatives. As Greg mentioned, our disciplined client selection and credit underwriting in CRE will continue to rely on stringent standards.

Average consumer loans were down 1% from last quarter and down 1% year over year. Residential mortgage loans grew by 2% sequentially and 9% year over year, as we kept jumbo mortgages and ARMs on our balance sheet during the quarter. Our residential mortgage originations were up 53% from last quarter and 7% year over year. During the quarter, 54% of our originations consisted of purchase volumes.

Indirect auto loans were down 4% from last quarter and 9% year over year, in line with our lower origination targets and focused on improving risk-adjusted returns in this business. The profile of our second-quarter production was consistent with the first quarter.

Our home equity loan portfolio decreased 2% sequentially and 7% year over year, as loan paydowns continued to exceed originations. Average investment securities increased by $390 million in the second quarter or 1% sequentially.

Average core deposits increased $258 million from the first quarter. This increase was driven by seasonally higher demand deposit and money market account balances, partially offset by lower-interest checking balances. Average core deposits balances were negatively impacted by approximately $201 million due to the previously-disclosed sale of branches in Pennsylvania, and $219 million due to the full quarter impact of the sale of branches in St. Louis last quarter.

Excluding these deposits sold in the branch transactions over the last two quarters, average core deposits were up 1% on a sequential basis. Our liquidity coverage ratio was very strong at 110% at the end of the quarter.

Moving to NII on page 6 of the presentation.

Taxable equivalent net interest income decreased by $1 million sequentially to $908 million. The decrease was primarily driven by the full-quarter impact of $1.5 billion of unsecured debt issued in the first quarter of 2016 and from lower auto and home equity loan balances. The decrease was partially offset by growth in commercial loans and securities.

The NIM decreased 3 basis points to 2.88% quarter over quarter, driven by the full-quarter impact of the debt issuance in the first quarter. We had previously guided to a decrease of 3 to 4 basis points in the net interest margin in the second quarter, and guided to relative stability off those levels in the latter half of the year, assuming a June Fed rate increase which did not occur. With no Fed moves during the remainder of the year, we now expect a 2 to 4 basis point NIM contraction in the third quarter, which includes the full-quarter impact of our second-quarter debt issuance, as well as a 1-basis-point impact due to day counts.

We will continue to execute a balanced interest rate risk management strategy, as we have over the last three years. We will be able to mitigate some of the negative impact of the flatter yield curve with lockout cash flow and bullet securities that now constitute approximately 50% of our investment portfolio. Despite the NIM contraction, we are forecasting a stable NII for the second half of the year. For the full year, our balanced management approach will enable us to grow NII 2%, despite the ongoing challenges with the low-rate environment.

Shifting to fees on page 7 of the presentation.

Second quarter noninterest income was $599 million compared with $637 million in the first quarter. Our fee income, adjusted for items I previously mentioned, was $602 million, an increase of $24 million or 4% sequentially. Despite challenging market conditions, our results were strong.

Corporate banking fees of $117 million were up $15 million, or 15%, sequentially, reflecting increases in loan syndication revenue and institutional sales revenue. The growth in corporate revenues is indicative of the scope and scale of our product offering, and relationship-driven target operating model that we are executing.

Mortgage originations were $2.7 billion in the second quarter, with 54% of the mix consisting of purchase volume. About 75% of the originations came from the retail and direct channels, and the remainder from the correspondent channel. Gains on sale were up 29% quarter over quarter, with robust origination volume as the gain on sale margin was down 85 basis points.

Mortgage banking net revenue of $75 million was down $3 million sequentially, primarily due to servicing asset amortization as a result of higher refis in the servicing portfolio. The net servicing asset valuation adjustments were negative $29 million, compared to negative $16 million last quarter.

Deposit service charges increased 1% from the first quarter, reflecting seasonal trends in consumer deposit fees, and decreased 1% relative to the second quarter of 2015. Total wealth and asset management revenue of $101 million decreased 1% sequentially, reflecting seasonally lower trust tax preparation fees from the first quarter.

As you may recall, our prior guidance called for 4% to 5% annual fee growth over reported 2015 fees, excluding impacts from Vantiv share sales and warrant valuation adjustments, which was approximately $2.3 billion. Excluding Vantiv-related items, and the Visa total return swap adjustment this quarter, and any other potential Vantiv-related gains, we expect to grow our fees 5% as a result of a strong first half and the expectation of continued strength during the next two quarters.

Next, I'd like to discuss noninterest expense on page 8 of the presentation. Expenses of $983 million were $3 million lower than in the first quarter, reflecting a seasonal decrease in FICA and unemployment expense, partially offset by a $9 million expense due to retirement eligibility changes. First quarter's results were also impacted by a $14 million expense related to the voluntary early retirement program.

As Greg said earlier, we are making good progress in executing on key strategic initiatives and managing our expenses. We now expect expenses to grow at the 4% level, slightly below our April guidance. This guidance includes the impact of the higher FDIC assessment.

I also would like to remind you that our guidance includes the impact of the increased amortization of our low-income housing investments, which most of our peers reflect in their tax line; the increase in the provision for unfunded commitments; and the impact of one-time benefits related to the settlement of legal cases in 2015. These three items make up roughly 2% of the forecasted 4% increase in expenses.

As I mentioned earlier, operating leverage is our top priority going into 2017. Although we are taking a cautious approach to maintain our franchise's strength in growing revenues, there are a number of identified areas that we are focusing on that I would like to review with you.

We plan to engage third parties in some areas to optimize our savings. The first is the end-to-end commercial loan origination underwriting and servicing process. This is a natural area of attention given the size of our commercial business. In addition to cost efficiencies, we also believe that our work here will have significant positive impact on client service quality.

Similarly, we are looking at opportunities in central operations. With new senior management in place, we have identified consolidation opportunities in our facilities and believe that we will be able to extract more savings going forward.

This morning, we announced a 5 1/2 year extension to our operating agreement with Vantiv. The new agreement will reflect reduced expenses for Fifth Third and enhance revenue opportunities that both companies enjoy in this mutually-beneficial partnership.

We will continue to look for opportunities across the board in all of our vendor relationships. We also believe that our significant offshore presence will continue to be a source of savings in all of our business operations, including our risk and compliance areas. The long-term performance targets that Greg reviewed require a focused and disciplined approach to expense management, and we are confident we can execute.

Turning to credit results on slide 9, net charge-offs were $87 million or 37 basis points in the second quarter, compared to $96 million and 42 basis points in the first quarter of 2016, and $86 million and 37 basis points in the second quarter a year ago. The sequential decrease was primarily due to a $7 million decline in C&I net charge-offs. Of the total net charge-offs, less than $2 million were in energy. Nonperforming loans, excluding loans held for sale, were $693 million, down $8 million from the previous quarter, resulting in an NPL ratio of 74 basis points.

Overall, credit metrics remain strong. While there may be volatility in credit metrics periodically, our portfolio is performing in line with our expectations. Our provision was $4 million higher than total charge-offs. And our reserve coverage as a percent of loans and leases was unchanged at 1.38%.

Relative to our peer group, our NPA net charge-off and reserve ratios compare favorably. Our previous guidance that net charge-offs would be range-bound with some quarterly variability is unchanged. Also, we continue to believe that our provision expense will be primarily reflective of loan growth.

On slide 10, given the recent events overseas, we have provided a breakdown of our UK and European exposure. As Greg already mentioned in his earlier remarks, our second-quarter UK exposure is minimal, at less than 2% of total loans. We do not anticipate any significant issues from our portfolio, which is diversified and consists primarily of loans to large corporate customers.

Moving on to capital on slide 11, our capital levels remain strong. Our common equity Tier 1 ratio was 9.9%, an increase of 52 basis points year over year.

At the end of the second quarter, common shares outstanding were down approximately 4,000,000. During the quarter we executed open market share repurchases of $26 million, which reduced the share count by 1,440,000 shares. This completed our previous CCAR repurchase activity.

On slide 12, as Greg mentioned earlier, we recently entered into another agreement with Vantiv related to our roughly $800 million of expected TRA cash flows. This transaction mitigates future risk related to these cash flows and enables us to reinvest the realized gains into share buybacks.

As we've discussed with you many times in the past, our ability to realize these cash flows over the next 15-plus years depends on factors, such as US corporate tax rates and Vantiv's taxable income levels. With that in mind, at the end of last year we terminated and settled a portion of these future cash flows. And this week, we executed another agreement for a termination and settlement of $331 million in cash flows for an upfront payment of $116 million.

In addition, under a quarterly put/call structure owned by Fifth Third and Vantiv, respectively, we will have the ability to terminate and settle another $394 million of future cash flows for a total of $171 million payable to Fifth Third in 2017 and in 2018 in eight separate quarterly optional executions.

We have essentially locked in the ability to receive a minimum of approximately $15 million per quarter in 2017 and $26 million per quarter in 2018. This transaction will require an upfront asset booked on our balance sheet this quarter, as it essentially removes the contingencies associated with these future cash flows.

I would like to remind you that we will also receive our annual normal payments this year and next year. These TRA flows are related to all share sales executed up to this point. There is roughly an additional $1 billion in future TRA flows related to future potential sales of our current ownership at the current Vantiv share price. We believe that our actions around the Vantiv relationship are in the best interest of our shareholders.

Relative to CCAR 2016, the Federal Reserve's review is complete. And we received a non-objection to our capital plan. Our capital plan includes the ability to increase the quarterly common stock dividends to $0.14 in the fourth quarter of 2016; the repurchase of common shares in an amount up to $660 million; and the ability to repurchase shares in the amount of any realized after-tax gains from the sale of Vantiv stock.

Additionally this year, our capital plan now also includes the ability to repurchase shares in the amount of any realized after-tax gains from the termination of any portion of the Vantiv tax receivable agreement we just discussed. We believe our results demonstrate the relative strength of both our capital position and our internal capital generation capacity. We have included the overall outlook on slide 13 for your reference.

And with that, let me turn it over to Sameer to open the call up for Q&A.

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'll do our best to answer as many questions as possible in the time we have this morning. During the question-and-answer period, please provide your name and that of your firm to the operator.

Johnna, please open the call up for questions.

(Operator Instructions)

Ken Zerbe, Morgan Stanley.

Great, thank you, good morning. Just to be really clear on the TRA, I get that you executed on the $116 million, that seems to be a locked in gain. Just the way the press release reads about the additional $394 million, you've got $171 million coming in, I just want to make sure, is that a locked in gain in third quarter such that if you go on slide 12, you get $279 million gain in third quarter? Is that --

Yes, Ken, so these are basically put and call structures, we own a put option and Vantiv owns a call option on a quarterly basis on predetermined cash flows. And both of these options basically remove the contingency associated with the TRA cash flows, and therefore we are required to book an upfront asset for the present value of these assets, which will basically result in $163 million pretax gain in Q3. So we will book an asset of $163 million on a pretax basis, and then we have basically the cash payment of $116 million that we will be receiving for the $331 million in gross cash flows. So that's the combination of the two.

And Ken, this is Jamie. One nuance to the CCAR approval and Tayfun's reference to realized after-tax gains. When it comes to capital deployment of these gains, the $116 million, because it is recognizing and realized would result in our ability to deploy that capital on an after-tax basis in the $76 million or so range this quarter, and the reason we broke out slide 12 the way we did was to show you that the capital deployment related to the recognition of the asset for the receivable, the $163 million, would be deployable as this puts and calls are exercised and in cash is exchanged in the quarterly installments you see in 2017 and 2018.

Got it, so the right-hand chart basically, so the left-hand charts say you book an asset of $163 million, the right-hand chart says as the cash comes in, you don't recognize the gain, you simply, it's an offsetting asset. So capital goes up, asset goes down.

Correct.

Okay, thank you very much.

David Eads, UBS.

Good morning. I wanted to talk about the NII outlook, looked like there was on a ending (inaudible) period basis there's a pretty big ramp up of securities. Was there anything unusual with that strategy there? Should that benefit the NII outlook in the next quarter, was there anything unusual [positioning] on the securities there?

Good question. One item related to the end of period balance sheet versus the average is that the end of period includes the unrealized gain, and the average balances do not. So good news is we had $1.355 billion unrealized gain in the portfolio that makes it look like on an end of point basis we had added some leverage.

But to your question in terms of the outlook on the portfolio, the one assumption in our NII outlook is that given the low rate environment, the flatter curve, and the tight spreads, we don't expect to reinvest portfolio cash flows in the third quarter of roughly $1 billion or so during the quarter, so that you should expect on the securities portfolio that average balances would be stable to down slightly from second quarter to third quarter.

All right, that's very helpful, thanks a lot. You talked about the 2 to 4 basis points NIM pressure in 3Q. If we assume no rate hikes just for simplicity, should we expect more pressure on NIM going forward? Or what's the headwinds -- the loan, the debt issuance come through -- can NIM be a little bit more stable from there?

David, I think the NIM contraction looking forward, we gave you some guidance for Q3, and there may be a little bit more left in contraction if rates do not go up. And obviously these comments depend on the shape of the yield curve. But over the long term, if we all see an environment like today's in the next year or two, our expectation is that our NIM will be fairly stable. There may be some contraction from here, but it's not going to be a continuous bleed out of the NIM. We expect that given our risk exposures and interest rate management approach, we will be able to stabilize the NIM.

Great, thanks so much.

Ken Usdin, Jefferies.

Good morning. Guys, just wanted ask you a question on the fee outlook. So this quarter two you had the servicing hedge was a bit of a delta, and you mentioned the good pipelines you have on mortgage. Just wondering if you could help us to understand this, the drivers of core income, if in fact it's just mostly related to getting that back on the mortgage side, or do you also continue to expect good growth in some of the core (inaudible) line items?

Yes, so let me make a couple of comments on fees (inaudible). Obviously given the rate movements, we do expect a good quarter in mortgage. I think our pipeline looked strong at the end of the second quarter, which should play well for the third quarter. And also we had a very strong corporate fee performance in Q2. Typically we would see some weakness, just general seasonal weakness in the summer in corporate fees, but we expect a healthy environment in Q4, and so good corporate growth in Q4. And we would expect the other fee lines in general to be stable.

So our expectation of a second half strength in fee income relates to continued strength in mortgage here in the near term, and then good corporate strength as we approach the end of the year.

Okay, great. And if I could follow up on the TRA comments, so the $163 million that is an asset, when you get the cash flows back next year, are you able to buy back the amount of the cash flows that are laid out on the right side of page 12?

Yes, but on an after-tax basis, so the TRA payments from Vantiv to Fifth Third will need to be tax effective for capital deployment.

Right, but I think there's some confusion. So the $116 million you're very clear on, that you can do right away, the $163 million --

In the tune of $76 million --

--right, on an after-tax basis, and then the $163 million comes through in the cash flows we see on the right side, but on an after-tax basis, you could them by those back, but only as they're recognized along that schedule of 2017 and 2018?

That's exactly right.

Okay. And you didn't sell any shares this quarter, so that still is an open-ended question too about what's the thought process behind when and your decision trees behind incremental actual share sales?

Ken, this is Greg. This discussion comes up quite a bit. We've been very, very disciplined on how we monetize our equity position in Vantiv. I would say we continue to look at what's the right thing for our shareholders, and we're going to continue to do that as we move forward in the remainder of this year. We've been disciplined, that's rewarded our shareholders very well. It's something we always consider and will continue to consider and evaluate as we move forward.

Understood, thanks, guys.

Paul Miller, FBR & Company.

Good morning. This is Tim for Paul. Touching on the average loan growth outlook, that 2%, how does that stack up with your expectations from last quarter? I believe you guys had mentioned 3% growth on the commercial side on the last call. And so should commercial loans still grow at a faster pace than the rest of the portfolio?

Yes, so I think what we shared in the past is that we would expect to outpace GDP and that's exactly what we delivered, for this quarter, particularly in commercial loans. You saw good growth, very diversified across our markets, across a number of businesses that we continue to emphasize, invest in. And we would expect that we would have that same type of performance throughout the balance of the year, as Tayfun has previously guided.

Okay, understood. And to that end, the drop-down in provisions, was that solely due to an improvement in credit and outlook for credit, or [does] it reflect a change in loan growth assumptions? That $91 million that you guys did this quarter, is that a good base for provisions to grow off, or should we see further improvement?

Yes, first of all I just want to make sure that everybody understands our coverage ratio remained at 1.38%. So we did not drop the coverage ratio. It's just reflective of the loan growth. And it's a quarterly analysis, and we went through our analysis, the credit trends looked good, and we just provided $4 million. Going forward as I commented, I think provision will reflect loan growth.

Great, thanks, guys.

Matt O'Connor, Deutsche Bank.

Good morning. A couple of follow-ups on topics that have already been covered a little bit, but just on the commercial loan growth, why haven't we see more growth there? I know there have been some derisking going on, and you've been very focused on pricing. But when did those factors run its course, and you get back to maybe more industry commercial loan growth levels?

Well first of all I'd tell you we feel good about our commercial loan growth for this quarter. It was largely in line with our peers. We've had some headwinds as we have repositioned our portfolio, as we've decreased exposures to nonstrategic relationships in industries such as commodity sector. But this is really about not overreaching and focusing on client selection. We're going to focus on what we can control. And frankly we are doing that.

If you look across all of our business, all of our verticals, we're seeing some excellent growth. We're continuing to expand those, we're seeing growth across our core middle market franchise. That's very promising for us. So when we would expect to see any significant change, and that's relative to say HA data, very difficult to tell, we're going to focus on what we can control, and that is building deep client relationships with attractive returns for our clients, very deliberately, so that we prudently use our capital and our liquidity, and frankly we build long term relationships with our clients.

Matt, this is Greg. The only thing I would to Lars' comment, this has been one of our core strategies, building our balance sheet to be good through the cycle, but we've been very selective on the relationships, the geography, asset diversification is extremely important. We're very pleased with the commercial loan growth that we saw in this quarter. It's consistent with our strategies as we move forward.

Okay, and then maybe a follow-up on NIM for Tayfun or Jamie. I think the comment was beyond the third quarter, do you think you can keep the NIM relatively stable in this rate environment? Was just hoping to get a little more color on that, that's obviously better than peers, and would be an accomplishment in such a difficult rate environment. So you mentioned some hedges and swaps and [protection], but just elaborate a little bit on how you keep NIM stable beyond 3Q?

Yes, Matt, on NIM and what you've seen from us the past couple quarters is that most if not all of our contraction are from things we've intentionally done, whether that's debt issuance or the sale of some of the nonstrategic assets that we've completed.

And going forward, the NIM compression, whether it's the third quarter or perhaps even after the third quarter, again if we were to have compression it would be based on things we're intentionally doing, if we were to have more debt issuances that could be a factor to drive a little bit more compression.

But overall we're pleased with how we've positioned the securities portfolio, as Tayfun mentioned the bullet and locked out cash flows. We're not as susceptible to this low rate environment over the next few quarters. But if this environment were to continue for an extended period of time, then it would be more challenging to have stable NIM. But at least over the foreseeable future we feel like we've positioned the book as well as we could for this lower-for-longer environment. We've talked to guys about that over the past two years as we built the securities portfolio.

And then the one factor you haven't heard from us over the past couple quarters is the fact that loan yield compression just really hasn't been a factor in our NIM, and given the pricing strategies and the success that we've had executing on the loan side, we think we can continue to deliver a stable NIM as the loans come on the sheet at the yields we're comfortable with.

Yes, Jamie, just maybe tag on to that, we are being very deliberate in terms of our disciplined credit pricing, and as Greg had mentioned our client selection. We're very focused on businesses and markets in which we believe that we can outperform, and frankly that has really helped us to stabilize those loan spreads. In a couple areas we've seen slight improvement. We're going to continue that strategy. I would tell you post-Brexit we have seen a little bit more competitive environment. But we're going to continue to stay focused on this strategy. It's producing the right kinds of outcomes, specifically consistent with what Greg has shared previously.

And I also want to clarify I did say that we may see just a few more basis points in Q4 based upon what Jamie just mentioned about some capital market activities, but beyond that, I think, looking out another two or three quarters, I think we expect that there will be (inaudible).

Okay, thank you very much.

Matt Burnell, Wells Fargo Securities.

Good morning, thanks for taking my question. Just wanted to follow up on the comment you just made in terms of how deliberate you've been in terms of client selection and pricing. I'm curious either in terms of, are there markets where there is greater pricing pressure, and therefore more pressure to try to get clients to drive fee income within your footprint? Or are those more in the lending offices that may not be in the middle of your branch footprint?

Yes, so we do see variation geographically from quarter to quarter, year to year, and clearly we have some markets that are more competitive than others. But I'll tell you our value proposition, what we're delivering, is being very well received. I'll give you an example. Chicago, this is a very competitive marketplace, we've seen, in fact that's been our fastest growing regional market that we have in our footprint. Every day we're having to earn it client by client.

But also I would tell you across the industry verticals we continue to focus on stacking our resources against those opportunities where we can get the best returns. But it's not just about the balance sheet, I'd remind you, it's about the total client relationship. And it's one of the reasons that, as Greg shared earlier, we continue to invest in other fee sources and solutions to build out an advisory-based relationship with our clients, and frankly that's helping to drive the P&L also for us. So I think that this is all coming together nicely for us.

Okay, and for my follow-up with Tayfun, if I could follow up in terms of the 5% fee growth guidance. I just want to make sure that we understand the basis of that. That excludes any Vantiv related gains, but it includes other sale gains? Or are all of those excluded the way you would exclude them for core fee income?

Yes, so first of all, the base compares in 2015 is to about a $2.3 billion number. So our report number was -- I'm sorry, $3 billion, so you exclude all the Vantiv related gains in 2015, you get to $2.3 billion. The 5% is relative to that number, excludes any Vantiv gains. The only gain really that -- it also excludes obviously the branch gains as well, so it would be from our perspective our core performance this year.

Okay. That implies a relatively greater growth in the second half in fees, roughly about 9% by my calculation, in the second half versus the second half of last year. I appreciate that you expect a rebound in the fourth quarter in corporate fees, but that seems a bit stronger than you've had previously.

I think our numbers may not necessarily compare well. I wouldn't get to a 9%-type number. I think you already know our first quarter and second quarter numbers, if you exclude the gains that were booked against the branch sales, so I would basically advise you to follow that 5% growth off of $2.3 billion [take out] the first half, and then look at the remaining two quarters, again with some weakness in corporate in the summer, but they pick up in the fourth quarter, and strength in mortgage in the third quarter. Those are how we are getting to our 5% number.

Okay, I'll circle back with Sameer to get my numbers straight. Thank you.

John Pancari, Evercore.

Good morning, it's Steve Moss for John Pancari. Wanted to touch base on the European exposure you have. Do you plan to grow it further, or reduce it further?

Yes, so I think as we've underscored previously, and it's in the earnings deck, that we have relatively light exposure in Europe. Let me just reinforce what our strategy is. Our focus is on developing relationships with European, and in some cases Asian-based, very typically large strong corporate parents that are focused on expanding into the US where we can deliver domestic services to them. That's our key strategy. So do we plan to grow that in the future? I would say yes.

However consistent with our Brexit and EU plans and processes and market risk review, we're going to continue to be very cautious about that. But I would see this as an opportunity for us to continue to grow our domestic franchise, and build some attractive relationships while we do see some disruption in the marketplace.

Steve, this is Greg. It's important once again that we stick to the strategy that we put forth in support of our international relationships. You've watched us also over the last couple quarters simply reduce our exposure to any relationship that doesn't meet that strategic objective.

Okay. And then also on the CRA downgrade that you guys disclosed earlier in the month. Just wondering if there's any incremental work related to that, and/or if there's any restriction on M&A activity.

Yes, this is Greg. First off, we're very disappointed in that downgrade. Let me remind everybody, that was for a period of 2011 to 2013. It was not reflective of CRA activity, respective lending, investing, and our service commitments. Actually we scored Satisfactory to Outstanding and all those areas. It really is reflective of other agencies' issues with respect to some lending activities that were all closed out recently. So that was disappointing. (Inaudible) later this year to perform the next exam, they'll go up to mid-2016, and we're very confident that rating will be changed very shortly. So that's the state of the environment.

With respect to M&A, there are still opportunities. If you go into bank M&A, it's been very, very low on our priority. Bank M&A is at the lowest level of our priorities for how we deploy our capital. We still think in this environment that we trade the buying back our equities the best use of deploying capital. So we don't see this impeding our ability to deliver on our strategies. And once again they'll be back in later this year to perform the next exam.

Great, thank you very much.

Christopher Marinac, FIG Partners.

Thanks, good morning. I just wanted to reinforce the NII conversation of earlier. How do you feel about growing NII in 2017?

It's going to be a function of earning asset growth. Again, depending upon obviously rate moves, but assuming that there are no more rate moves over the next 18 months, then NII growth will be a function of earning asset growth. Beyond that I think it's tough to necessarily predict what happens to credit spreads, etcetera. But assuming some stability reflective of the current market conditions will depend upon our ability to grow earning assets.

Okay great, thank you for that, and just a follow-up on the energy book. Is there any way to handicap how the SNIC exam will go this fall for the next round? Should that be less onerous than it would have been earlier this year?

Good question, this is Frank, thanks for the question. And as you know the first quarter SNIC exam was focused very heavily on energy. Based on what we know they'll follow back up, they'll go back and they'll look at the same portfolio, the same credits that they evaluated in the first quarter. What's changed is obviously the price of oil per barrel has stabilized, down a little bit in the last week or two, or higher than where it was before. We are, when you look at our [priced X] and when you look at all of our scenarios that we run from [ace] to stress, the price of oil is well above that.

So I don't think there's going to be near as much noise depending on where price moves between now and then. We moved 8 credits over in the first quarter, that were all but one reserve [base] credits to non-accrual. And we had very little if any loss forecast from those credits. Our portfolio is stable at this point, and as you know our portfolio is only 2% of our total book. It's small, it's fairly nominal. We manage it very well, we manage it through our vertical. And our outlook for the rest of the year is really going unchanged based on what we know today.

Sounds good, Frank. Thanks so much.

Mike Mayo, CLSA.

What inning are you in for the ramp up in investment spending, and what inning are you in for the savings from all of your initiatives? I can elaborate a little more, the investment spending mentioned: digital, regulatory back office on the investment side, and on the savings side you've mentioned vendors, facilities offshore, mortgage loan system, commercial loan system, and the branch closings.

Right. So first off, where are we. As I mentioned before, Mike, this will be the high water mark, we believe, for our investments in technology and from a regulatory perspective, investments we have to make. We've been very focused on is how to implement those opportunities and strategic investments in the most frugal way, and you've seen us accomplish that. That's why we brought our guidance down on our expenses for the remainder of this year, and the total for the year. So we feel pretty good about where we're at from an expense position on our investments, this will be the high water mark so we're in the latter innings of that.

We're also starting to realize some of the value created by the focus we've put on reducing our infrastructure, areas of the branch reengineering, personnel reengineering, the investments we've made to renegotiate our contracts, such as Vantiv, MasterCard, and I can go down the list. We're starting to see those benefits hit us actually in the second half of this year, you'll see more of that as we move into 2017. So once again we're very focused on positive operating leverage, and we fully expect that our plans and our actions will get us there in 2017.

Maybe just a follow-up on the savings, where do you stand with the closing of the 100 branches?

We've completed closing of the 100 branches, with the sale of Pennsylvania for $11 million gain last quarter. So we'll have full year run rate established by the end of this year, so that $60 million will be fully in the run rate going into 2017. And once again we'll remind you, Mike, that's an annual exercise. As our consumer preferences evolve, we'll continue to assess our opportunities, and there may be more opportunities we think about 2017.

And last follow-up, if you add in all the savings from the other initiatives too, you haven't really given a number on that, but your goal for positive (inaudible) starting in 2017, and do have a number for all of those?

Mike, we're not giving 2017 guidance, but clearly going into the planning period that's our target for all of our businesses and [staff] functions.

Mike, everything we do we put to through the lens [if it doesn't] meet those objectives that I set forth for ROTCE and ROA and our ability to execute. But thank you for your question.

Thanks.

Geoffrey Elliott, Autonomous.

Thank you for taking the question. On the Vantiv transaction, I think I understand the economics, but what was the rationale for the second stage of the transaction being this put/call option structure?

So clearly the goal of the TRA transactions, both from last year as well this year, was to ensure that from a risk management perspective, and this is risk related to corporate tax rates, that taxable income, etcetera, to make sure that we have visibility to the value of those cash flows. And clearly this is an agreement between us and Vantiv. It's a function of their ability to engage in cash transactions up front, versus using cash availability in future periods.

Thanks. And then one more quick one, there was this news earlier in the week about the chief legal officer's leaving because of the conflict. I wondered if you could elaborate on that at all?

First of all that's always a difficult situation. So the comment I've made and we've made as a bank is there was a personal matter that's been brought to our attention that (inaudible) represents a conflict of interest. So the result is we determined the best course of action was a separation. And it was a very qualified lawyer, and this matter has nothing to do with any of the legal done by Heather during her tenure and her time at Fifth Third. That's really all I can say.

Okay, thank you.

Kevin Barker, Piper Jaffray.

Thank you. During this quarter you obviously positioned that mortgage banking may be better in the third quarter, but you also experienced quite a bit of decline in gain on sale margins versus the previous quarter. And the first quarter was obviously higher than what we saw from a run rate. Was there any particular hedging the losses or something that caused the severe decline? And --

No, there isn't. I think the gain on sale margins are a function of channel production, also the realization of the revenues during the quarter and inter-quarter, so it's not necessarily reflective of anything specific. Going into the third quarter we would expect more of a stability if margins are looking good for now.

Okay, and then in reference to the MSR evaluation adjustments of a positive $6 million, the rate movement in the second quarter was less severe than we saw on the first quarter. Was there less hedging gains this quarter as well and in regards --

In which part are you talking about, MSR hedging or are you talking about on the production side pipeline hedging?

The MSR assets.

On the MSR side our net valuation last quarter was $11 million, and $6 million this quarter. And it really ultimately, and we've been fairly tight in terms of our hedge coverage, so it really comes down to the last day of the quarter, where we stand and the valuation of those.

Okay, that's all I had, thank you.

There are no further questions in the queue at this time. We'll turn the call back over to the presenters.

Thank you, Johnna, 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'll be happy to assist you.

This concludes today's conference call. You may now disconnect.