Fifth Third Bancorp (FITBI) 2017 Q3 法說會逐字稿

Good morning. My name is Melissa and I will be your conference operator today. At this time, I would like to welcome everyone to the Fifth Third Bank's 3Q 2017 Earnings Call. (Operator Instructions) Sameer Gokhale, Head of Investor Relations, you may begin your conference.

Thank you, Melissa. Good morning, and thank you, all, for joining us. Today, we'll be discussing our financial results for the third quarter of 2017. This discussion may contain certain forward-looking statements about Fifth Third, pertaining to our financial condition, results of operations, plans and objectives. These statements involve risks and uncertainties that could cause results to differ materially from historical performance and these statements.

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

Additionally, reconciliations of non-GAAP financial measures we referenced during today's conference call are included in our earnings release, along with other information regarding the use of non-GAAP financial measures. A copy of our most recent quarterly earnings release can be accessed by the public in the Investor Relations section of our corporate website, www.53.com.

This morning, I'm joined on the call by our President and CEO, Greg Carmichael; CFO, Tayfun Tuzun; Chief Operating Officer, Lars Anderson; Head of Commercial Bank, Richard Stein; 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'll see in our results, we reported third quarter 2017 net income available to common shareholders of $999 million and EPS of $1.35. Our reported EPS included a net benefit of $0.87 from a few significant items, including our August Vantiv share sale. Our results for the quarter were strong, reflect the progress we continue to make for our long-term financial targets by strengthening our balance sheet, building profitable relationships and returning excess capital to our shareholders.

Before discussing highlights for the quarter, I'd like to make a few observations about the broader macro economic environment. Our commercial clients remain cautiously optimistic about the business expansion opportunities. Consumer confidence, consumer spending and the overall labor markets continue to be strong. Our customers like to gain more clarity into the direction of the U.S. economy. Although U.S. GDP growth picked up in the second quarter, it is unclear whether this acceleration will continue.

The Fed currently forecasts U.S. GDP growth of approximately 2% for 2018, which is still relatively tepid. Many of our clients also continue to take a wait-and-see approach for tax reform and other administrations' other pro-growth policies. Additionally, this is one of the longest periods of economic expansion for the U.S. fiscal stimulus may help extend this expansion, but it's unclear how much faster the economy will grow from the current run rate, given the length of this cycle.

Lastly, the Fed's decision to reduce the size of its balance sheet could put some pressure on market liquidity and interest rates. While some of the economic indicators are positive, there is still uncertainty about how much faster the economy can grow, given the factors I just mentioned. Our results continue to demonstrate that we are making progress towards our financial targets that I laid out over a year ago with Project North Star.

In Q3, we benefited from revenue growth, effective expense management and improvement in our credit metrics. Our asset-sensitive balance sheet allowed us to continue to grow net interest income, resulting from increased short-term interest rates and higher growth -- and growth in higher-yielding loans. Although loan demand remained relatively weak, we grew period-end loans, inclusive of the impact of our strategic exits. Our commercial loan production per relationship manager is up 14% this year on top of an 18% improvement last year, with fees per relationship manager up 8% year-over-year.

Our net interest margin expanded 6 basis points sequentially, exceeding our previous guidance. This reflected the benefit of higher rates, and a shift into higher-yielding consumer loans. We also maintained our commercial loan pricing discipline, which helped our overall net interest margin. Our total average loan portfolio was relatively flat sequentially, has reflected the impact of deliberate commercial exits, as well as a continued decline in direct and home equity loan balances.

In our commercial business, we announced at the beginning of the year that we plan to exit about $1.5 billion of commercial loans this year, which will impact our net loan growth. For the first 3 quarters of 2017, we have exited $1.3 billion of loans. Excluding deliberate exits, our average commercial portfolio grew 1% sequentially, and 3% year-over-year. As we have stated previously, we continue to expect that the commercial loan optimization efforts will be completed by the end of this year. In the consumer portfolio, excluding auto loans, average consumer balances grew 3% year-over-year.

Going to third quarter, we continue to manage our expenses diligently, while investing in areas of strategic importance. For example, we've increased our direct marketing spend, reflecting improved analytical capabilities to grow households through more targeted mailings. The results of these campaigns have been very positive, with an internal rate of return 2x higher than previous campaigns. Our expenses also continue to reflect IT spending necessary to better serve our customers, invest in infrastructure upgrades, and enhance our cyber security measures. Despite these, as well as other strategic investments, Q3 noninterest expenses were flat year-over-year. We continue to expect full year 2017 expenses to be flat compared to 2016.

We continue to manage credit risk effectively, and nonperforming loans and nonperforming assets decreased substantially during the quarter. Our NPA ratio was at the lowest level since 2006. Our criticized asset ratio remained stable during the quarter at 5.5%, with our classified assets at the lowest level in over 10 years. Our net charge-off ratio continues to remain at historically low levels.

Although credit quality remained strong, we expect some upward pressure on provisioning to reflect loan growth. This again assumes that the economy remains relatively stable. Any weakness in the economy would clearly have an impact on credit losses. Our capital and liquidity levels remain very strong, with our Common Equity Tier 1 ratio at 10.6%, while our LCR exceeded regulatory requirements by over 20%.

Our strong capital position allowed us to both increase our dividend 14%, and to invest nearly $1 billion in share repurchases during the quarter. We have increased our dividend 23% since the third quarter of 2016. We are also making progress on our North Star initiatives. In December, during our Investor Day in New York, we plan to provide you a detailed update on our progress.

As I've stated before, we are accelerating the pace at which we are introducing new and better products, services and experiences. We are focused on implementing the best solutions to solve customer problems as quickly as possible. To that end, we are embracing select acquisitions and fintech partnerships to fuel growth. We're also leveraging in-house innovation.

We've recently opened an innovation and capability center at the company's headquarters to help foster this culture of innovation. One particular area of focus for us relates to our millennial research project. Although we aren't ignoring other generations, we recognize a tremendous long-term opportunity with what is already the largest generational segment in the U.S. today. The first millennial idea, activated out of our innovation incubator was our app called Momentum. Millennials see debt as one of the biggest drags on their financial well-being, and they want to pay down that debt as soon as possible. Through our app, customers are automatically rounding out their transactions to help pay off their student loan balances. In the first 30 days since we launched Momentum at the end of August, the app was downloaded 10,000 times, and the early results are very promising. We will continue to roll out additional millennial-focused solutions in the future.

We're also leveraging innovation, with new geographical science capabilities. We have developed specialized technology and analytics to more accurately assess our branch network and staffing allocation, and refine sales goals. We also recently announced additional strategic relationships, acquisitions and equity investments. This follows several other agreements we have discussed with you throughout the first part of the year.

Our recent acquisition of Epic Insurance Solutions & Integrity HR enables us to enhance our insurance capabilities and HR consulting services. We expect this acquisition to provide value-added products and services to help clients with their most pressing financial and risk management challenges. The acquisition complements our R.G. McGraw Insurance acquisition earlier in the year to further build on our modest, but expanding insurance capabilities. Our strategic relationship and equity investment in NRT Sightline, the largest pure play casino payment technology company in the world, enables us to provide a comprehensive suite of treasury management and payment solutions to our entertainment, lodging and leisure vertical.

We also recently announced a strategic relationship with AvidXchange and MasterCard to bring best-in-class automated accounts payable solutions to our customers. We are proud to be the first bank on the forefront of revolutionizing commercial payments by joining MasterCard's B2B hub. This hub provides an end-to-end automated platform that converts payable processes traditionally done by paper into an electronic transaction. We expect that, over time, these solutions will result in increased insurance, HR consulting and payment solutions fee revenue. We are very focused on improving the customer experience. Our objective is to provide appropriately tailored solutions and to be a trusted advisor to our customers in every aspect of their financial life. Our efforts are bearing fruit. In addition to being ranked in the top 3 across the industry by 2 independent surveys for overall customer satisfaction earlier this year, we were just named the 2017 Javelin Online Banking Leader in 2 categories, including recognition for our customer service and for customers' ability to move money easily and securely with confidence.

We are also aligning resources to further improve the client experience in our payments business. We've recently announced the addition of Jed Scala to head our payments and commercial solutions division. Jed has over 2 decades of experience in financial services. He joins us from American Express, where he most recently led the U.S. consumer lending business. We are fortunate to have Jed as part of the Fifth Third team.

Today's reality is that our competition is no longer the bank across the street, but the customers' last best experience. The bar is continuously rising to deliver a world-class customer experience in the branch, on the phone, on the web, and on our highly-rated mobile applications. While we are developing new client-facing solutions, we also know that data security is just as important, especially given the recent cyber attacks in the news. We continue to be proactive with ways to further enhance our cyber security controls. Although our systems and controls are critically necessary to prevent attacks, I firmly believe that each of our nearly 18,000 employees are the key to defending the bank and our customers' data from the ongoing risk we face.

I'd like to, once again, thank our employees for their hard work and dedication, which is evident in our financial results, our customer satisfaction scores and our community outreach efforts. I was pleased that we were again able to deliver strong financial results, and our North Star initiatives remain on track. We plan to share more information about Fifth Third at our Investor Day in December.

With that, I'll turn it over to Tayfun to discuss our third quarter results, our current outlook for the remainder of the year.

Thanks, Greg. Good morning, and thank you for joining us. Let's move to the financial summary on Slide 4 of the presentation. As Greg mentioned, during the quarter, our NIM expansion, continued focus on disciplined expense management, stable credit quality and efficient capital management, all reflected our commitments to driving improved financial performance and shareholder returns. Relative to last year's third quarter, our net interest margin was up 19 basis points. NII was up 7%. Noninterest expenses were flat and total net charge-offs were 36% lower.

Total core revenues were 3% higher. These positive results were accompanied by a 42 basis-point increase in our Common Equity Tier 1 ratio and a 7% reduction in shares outstanding. Although some of our balance sheet decisions had a negative impact on loan growth over the past year, the benefits of these strategic actions are apparent in our financial results, and will continue to have a positive impact on shareholder returns in coming years.

Reported results were materially impacted by our Vantiv share sale during the quarter, which boosted pretax income by over $1 billion. We also recognized a $47 million charge as a reduction to noninterest income associated with the Visa swap. The charge is attributable to litigation developments during the quarter and to the increase in Visa share price.

Pre-provision net revenue, adjusted for items disclosed in our presentation, increased 2% sequentially and 6% year-over-year. Our focus on prudent expense management enabled us to drive positive operating leverage on a year-over-year basis. We expect to achieve positive operating leverage again next quarter and for the full year of 2017.

The environment continues to be challenging in commercial lending. Whether it is the uncertainty related to tax policy and its impact on capital investments, or the ongoing back and forth related to healthcare legislation and its impact on the health care sector, these uncertainties are understandably keeping a lot of our clients on the sidelines. The lack of clarity on these important topics has also slowed M&A activity overall. Having said that, I think we actually did a very good job navigating through these challenges this quarter in our commercial business.

Average loans were flat sequentially. Growth in commercial real estate, residential mortgages and other consumer loans was mostly offset by the reduction in certain C&I exposures that did not meet risk return hurdles as well as the planned decline in our indirect auto loan portfolio.

Average commercial loan balances were flat sequentially and down 2% year-over-year, including the impact of our planned exits. Excluding the impact of these exits, average commercial loans were up 1% sequentially and 3% year-over-year. Approximately 60% of the exits were credit-based, and the remainder consisted of return-based exits. We have seen a strong pickup in our regional production, especially in our larger markets in Cincinnati, Chicago and Indiana. Production coupons were stable.

The sequential decline in average C&I balances was partially offset by 2% growth in commercial real estate loans this quarter, most of it in construction. The growth in construction loans was mainly driven by embedded funding from existing construction loans. We continue to maintain a conservative risk profile in construction lending, as we are in the later stages of the cycle. Certain segments, such as hospitality and urban luxury multifamily, are losing their attractiveness, while others like self storage and industrial segments are more appealing. Expanding new production spreads, combined with the move in LIBOR, resulted in a 22 basis-point yield improvement in that portfolio.

At this time, we have roughly another $200 million of commercial exits to go for the fourth quarter of 2017. We are expecting modest growth in the commercial portfolio during the fourth quarter, which will reflect the impact of these exits.

We remain competitive in all of our markets, and are maintaining our focus on growing profitable and durable relationships. Commercial loan production across the board has been steady. To further boost loan growth, we are expanding our commercial sales force. We are also -- we also continue to assess additional geographic expansion within middle market lending, which should provide future loan and revenue growth opportunities. Including the planned decline in the indirect auto loan portfolio, average consumer loans were flat sequentially, and down 1% year-over-year. Excluding auto, average consumer loans were up 3% year-over-year.

Auto loans were down 12% year-over-year, reflecting the ongoing impact of our decision to curtail indirect originations and redeploy capital. Returns on this business have improved to the high single digits from the mid-single digits earlier in the year. Our pace of origination activity will depend on how much returns continue to improve.

Residential Mortgage loans grew by 1% sequentially and 7% year-over-year as we continue to retain jumbo mortgages ARMs, as well as certain 10 and -- 15-year fixed rate mortgages on our balance sheet during the quarter. Our home equity loan originations were 2% lower sequentially and up 6% year-over-year. As loan pay-downs in our legacy book continue to exceed origination volumes, our portfolio decreased 2% sequentially and 9% year-over-year.

Our credit card portfolio increased 3% from the second quarter. Purchase active accounts were up both sequentially and year-over-year, reflecting stronger growth from new card rollouts at the end of last year. We expect our simplified and more competitive card offerings, along with our enhanced analytical capabilities to drive faster growth in the fourth quarter and into 2018. We are expecting portfolio growth rate to accelerate closer to 5% in coming quarters.

Other consumer loans increased 18% sequentially. Growth was driven by our personal lending portfolio, primarily through loans generated from our GreenSky partnership. We currently expect personal lending balances to grow to $2 billion by the fourth quarter of 2019 from approximately $600 million at the end of third quarter in 2017.

Loan originations will remain focused on high-quality prime customers, with GreenSky providing first-loss coverage, as we have discussed before. Growth in personal loans should allow us to generate a higher ROE revenue stream, and help us achieve a better balance between our commercial and consumer portfolios.

Excluding indirect auto loan balances, we continue to expect low- to mid-single-digit growth in consumer and mortgage loans in the fourth quarter. Our investment portfolio balances remained relatively stable in the third quarter as we had expected. We expect to continue to maintain our investment portfolio at roughly the same level in the fourth quarter. Average core deposits were down 1% sequentially. The sequential decline in commercial money market, consumer savings and consumer demand deposit accounts was partially offset by increases in commercial demand deposit accounts and consumer money market balances.

Deposit markets are competitive and international banks, in particular, are competing aggressively for deposits. We feel good about our deposit balances, as we continue to make rational decisions between pricing them appropriately for profitability and maintaining and growing relationship-based LCR-friendly deposits. Improved marketing analytics drove an increase in new DDA account openings, which were up 14% from last quarter and up 5% from last year. Our modified liquidity coverage ratio continued to be very strong at 124% at the end of the quarter. Taxable equivalent net interest income of $977 million was up $32 million or 3% from the previous quarter's NII, and is up $64 million or 7% from last year.

Our strong NII performance primarily reflects the positive impact of higher short-term rates. Growth in NII came from both the consumer and commercial portfolios. The increase in the NII reflected higher interest rates, a funding benefit from the temporary influx of cash related to the Vantiv sale and a modest benefit from interest payments on nonaccrual loans that paid off during the quarter.

The NIM increased 6 basis points from the second quarter to 3.07%, exceeding our guidance. On a sequential basis, our total loan yield was up 14 basis points, with commercial yield up 15 basis points. The NIM reflected a total benefit of 2 basis points from the temporary influx of cash and the interest payments on nonaccrual loans that I just mentioned. Due to the temporary nature of these 2 items in the third quarter, the NIM in the fourth quarter should be a couple of basis points lower compared to the third quarter. Excluding the impact of these items, we expect the NIM to be stable quarter-over-quarter in Q4.

Overall, deposit pricing so far has remained relatively muted with cumulative betas since the end of 2015 when the Fed triggered the first rate hike in the sub 20% range on a blended basis. Consumer has been in the mid-teen range, with commercial in the low-30s. The incremental blended beta for the last move in June is in the low-30s and we project beta in the mid-40s for the next potential move in December. For subsequent rate hikes, we continue to expect deposit betas to be in the 50% range. If we see betas at lower ranges, our margin could exceed our guidance.

We expect our fourth quarter net interest income to be similar to our third quarter NII. This includes the full quarter impact of an auto securitization executed near the end of the third quarter. The market remains competitive, and our margin and NII outlook reflects current market dynamics. Credit spreads continue to pressure margins across the banking sector, but the strategic actions we have taken during the last 2 years have led to a redeployment of capital away from low returning loans and is helping us achieve very stable NII and NIM performance. We would expect to maintain this relative stability even in the absence of further Fed rate increases in the coming quarters.

Excluding the impact of the Vantiv sale and Visa swap, noninterest income in the third quarter was $571 million compared to $573 million in the second quarter. Underlying noninterest income would have been up about 1%, had we not reduced our ownership stake in Vantiv during the quarter, as the sale reduced equity method earnings from our ownership stake.

The Vantiv transaction was clearly an important milestone in our very successful partnership with the company. Since the initial joint venture with our private equity partner in 2009, we recognized over $5 billion in pretax gains. After the sale, which generated an after-tax gain of $679 million, we own 8.6% of the company. This will decrease to 4.9% of the new company once their acquisition of Worldpay closes. The sale triggered roughly $650 million in future gross TRA cash flows under the current corporate tax regime. A 10% reduction in the marginal corporate tax rate would reduce this amount by about 1/3.

Our remaining ownership is worth roughly $1 billion. We expect to record an approximately $350 million pretax step-up gain upon the close of the World Pay acquisition, which will leave us with an unrealized pretax gain of roughly $0.5 billion at current market prices. We believe that this was a very good transaction for our shareholders. We will continue to benefit from utilizing the equity method of accounting going forward, related to our ownership in a larger and now global company.

Moving on to other fee income categories. Mortgage banking net revenue of $63 million was up $8 million sequentially, originations of $2.1 billion were 6% lower than the second quarter, but our gain on sale margin improved to 228 basis points from 209 basis points in the third quarter. Volumes in our direct and retail channels dropped in September, largely tied to the hurricane in Florida. Origination fees were up 8% sequentially.

During the quarter, 2/3 of our origination mix consisted of purchase volume. Approximately 2/3 of our originations continue to be sourced from the retail and direct channels, and the remainder through the correspondent channel. In servicing, so far, this year, we have acquired MSR's tie to $10 billion of residential mortgage loans, and we'll continue to assess opportunities in the future.

Corporate banking fees of $101 million were flat compared to the second quarter. Most of our individual line items were above the second quarter levels, but were offset by lower lease residual gains, which somewhat masked the underlying strength in our capital markets business. Although the market environment and low levels of client activity continue to challenge revenue growth in the FICC business, we saw double-digit growth in capital markets fees for the quarter. Financial risk management, loan syndications, equity capital markets and M&A all showed growth sequentially and versus last year's third quarter. We've also seen good quarter-over-quarter growth in corporate bond revenues.

Capital markets fees will continue to exhibit some quarterly variability given the nature of the business. We currently expect corporate banking fees to increase 10% to 15% sequentially, driven by deals in our pipeline that we expect to close by the end of the year.

Deposit service charges were relatively stable, down $1 million from the second quarter. Card and processing revenue was flat sequentially, reflecting an increase in credit card spend volume, offset by higher rewards costs. Total wealth and asset management revenue of $102 million (corrected by company after the call) was down 1% sequentially due to lower brokerage fees and specialty service fees, partially offset by higher personal asset management revenue.

Revenues increased 1% relative to the third quarter of 2016, mainly due to higher personal asset management revenues. Recurring revenues in this business have increased to 82% of fees from 78% in the third quarter of 2016, and 73% in the third quarter of 2015. We will continue to shift our product and service offerings toward more recurring revenues to limit our reliance on transactional activity.

For the fourth quarter, excluding mortgage banking, we expect adjusted fee income growth of approximately 10%, with a potential to reach low teens, from the third quarter. This outlook also includes Vantiv JV earnings, adjusted for our reduced ownership. Recall that our fourth quarter noninterest income guidance incorporates the impact of our recurring annual TRA payment, which is expected to be approximately $40 million.

Our fourth quarter fee guidance is strong with this recurring payment, but the underlying trend is very healthy, close to mid-digits in operating fees. Despite some current environmental volatility and subdued low client activity, we are still optimistic about our fee growth trends in light of the investments that we are making to grow the scale and scope of our fee-producing products and services.

We remain focused on disciplined expense management, while continuing to invest for future revenue growth.

Non-interest expense was flat compared to the third quarter of 2016 and up 2% sequentially. We will focus on continuing to drive positive operating leverage, while still making strategic investments that position us for long-term outperformance. A good example of this is our investment in our direct marketing analytical capabilities over the last year. These enhanced capabilities will help us generate future retail household growth to support both loan and deposit production.

Our investments in technology continue to support many revenue growth and cost saving opportunities across the company. We continue to target new opportunities to create value for our customers, while investing to compete effectively with larger banks and nonbank competitors.

Similarly, as Greg mentioned, fraud protection and cyber security are on the top of our priority list. Bad actors are still very active, and there is an ongoing need to upgrade our defenses, both to protect our clients' information and to prevent fraud losses from increasing. We continue to expect total expenses in 2017 to be flat relative to 2016 as we guided last quarter. Fourth quarter expenses are expected to be up about 1.5% of reported expenses in the third quarter.

Turning to credit results on Slide 9. We are very pleased with our third quarter credit results, as gross charge-offs remain at a 17-year low. Our charge-off in nonperforming loan results fully reflect the impact of our recent Shared National Credit review completed in the third quarter. Net charge-offs were $68 million or 29 basis points, up 1 basis point from the second quarter of 2017, but down 16 basis points from last year. Commercial charge-offs of 21 basis points continue to be positively impacted by our decision to deliberately exit certain loans which no longer meet our desired risk parameters.

Commercial charge-offs are up 4 basis points from last quarter, but down 20 -- 22 basis points from last year. Consumer charge-offs of 43 basis points were down 3 basis points sequentially, and down 6 basis points year-over-year, led by lower charge-offs of Residential Mortgage and home equity loans.

Total portfolio nonperforming loans and leases were $506 million, down $108 million or 18% from the previous quarter, and down 16% from last year, resulting in an NPL ratio of 55 basis points.

C&I NPLs were down 36% from last quarter. The largest concentration of nonperforming loans continues to be in energy, which comprises roughly 30% of the balances. Total NPAs were down 14% from last quarter, and down 28% from last year. Nearly all loan categories showed a sequential improvement. At the end of the third quarter, the criticized assets ratio remained stable with the previous quarter at 5.5% of commercial loans, and remains near a 10-plus year low.

Our loss provision was up $15 million compared to the second quarter, largely due to a $12 million release in the prior quarter. The reserve ratio declined 3 basis points to 1.31%. This decline was primarily driven by a $20 million reserve reduction due to the deconsolidation of a variable interest entity. Our reserve coverage over NPLs increased to 238% from 200% last quarter. Our coverage of NPLs has had a multiyear high, with a broader reserve coverage over NPAs at the highest point since the end of (company corrected) 2004.

While we remain in a relatively stable credit environment, we continue to caution you that charge-offs are at near historic lows and that we could potentially experience some upward pressure in the future. Nevertheless, we continue to believe that our provision expense will be primarily reflective of loan growth and some normalizing of credit losses. Despite the highly competitive market, with some banks relaxing underwriting standards, our top priority continues to be focusing on maintaining our disciplined client selection.

Our capital levels remained very strong during the quarter. Our Common Equity Tier 1 ratio was 10.6%, reflecting a decrease of 4 basis points quarter-over-quarter, but an increase of 42 basis points year-over-year. The sequential decline reflects the $990 million share buyback initiated during the quarter, which included the after-tax gains from the Vantiv sale, and the declaration of our $0.16 dividend, which was a 14% increase from the prior quarter. Our tangible common equity ratio, excluding unrealized gains and losses, decreased 13 basis points sequentially, but increased 11 basis points year-over-year.

At the end of the third quarter, common shares outstanding were down 33 million shares or 5% compared to the second quarter of 2017, and down 50 million shares or 7% compared to last year's third quarter. Book value and tangible book value were both up 4% from last quarter.

Effective capital management is a very important component of our overall strategic approach. We will always be very prudent with the amount of capital that we keep on our balance sheet to support the current and future risk profile of our company, and aim to maximize the long-term return on that capital and alternative environments. With the lessons learned from the financial crisis, we will remain focused on long-term shareholder value. At the same time, we do not intend to keep more capital than we need, and we'll look to return it back to our shareholders prudently.

With respect to taxes, our third quarter rate was impacted by the partial sale of our Vantiv stake and a specific Vantiv tax item noted on Page 1 of the release. Our tax rate for the third quarter was 31.9%, but excluding the Vantiv sale, our tax rate would have been 25.8%. The large gain recorded in the third quarter also impacts our tax rate for the last quarter of the year.

We expect our fourth quarter tax rate to be slightly elevated from the normal levels to around roughly 29% to 30%. Excluding this impact, we would have projected the fourth quarter tax rate to be in the 25% to 26% range. This would result in a full year 2017 tax rate in the 28.5% to 29.5% range. Our revenue growth outlook, our ability to achieve positive operating leverage without changing our risk appetite, our strong balance sheet and our strategic positioning give us confidence in our ability to create additional shareholder value. As Greg mentioned in his remarks, we will be hosting our first-ever Investor Day on December 7 in New York. Our executive team will share additional details about their businesses and the progress we are making towards our strategic objectives.

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

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

(Operator Instructions) Your first question comes from the line of Ken Usbin from Jefferies.

Yes. I actually wanted to ask on the -- your comments about the NII trajectory. You said that -- Tayfun, that the fourth quarter should be kind of flattish, and then you'd expect to be able to keep that flattish ex rates, is that what you said? So can you just walk us through kind of how you're expecting to grow NII, what are the drivers of future NII ex rates? And then the follow-on would just be, what do incremental rates do from here?

Yes. I think the reason why I provided that color, Ken, is there's a lot of interest, obviously, from the investor community to understand NII dynamics in the absence of rates. So what we are projecting is even if the Fed does not have any rate increases left, we do believe that we will be able to maintain a stable NIM and NII. And obviously, loan growth -- with a stable NIM, loan growth will be the factor that influences NII. We clearly still expect widening NIM and growth in NII, resulting solely from Fed's rate increases, but even in the absence, we're not seeing an erosion in our expected numbers.

Okay. And then just a follow-up on the loan point then. At what point do you expect to be kind of clear of incremental, either C&I exits, or get to a comfort point with some of the portfolios that you've been slowing the growth? So I guess, at what point do we get kind of a better base to kind of -- start to grow back up off of volumes?

Ken, this is Greg. What we've communicated is, by the end of this year, this optimization program is over, and then it's more business as usual. So we've talked about $5 billion for the last couple of years, $1.5 billion of that this year. We're pretty much through that, a little bit left in the fourth quarter, and then we're done with the optimization efforts. So you can expect us, going forward, up more a stable base.

The one color that I would add to that is Greg's comments relate to the commercial loans, but we will see continued reduction in auto loans because our originations will still continue to be under our long-term trends. But we expect, obviously, with added consumer loans in other line items to make up for that reduction in auto loans outstanding.

Your next question comes from Geoffrey Elliott from Autonomous Research.

On the noninterest income, I mean, I know there are a couple of details you called out around lease residual gains and so on. But if you look at the year-on-year comparison, service charges are down 3% year-on-year, corporate banking, revenues down 9% year-on-year. Wealth is up 1%. It doesn't feel like there's a lot of growth there. Can you maybe give us a kind of update on the initiatives you've been running to grow fees, where you feel like things are working, where you feel like there's more to do, and then some thoughts on how we should look at noninterest income, going forward, what you can do to get growth back into positive territory again?

Great. Thanks, Geoffrey. I'm going to make some general comments, and I'm going to turn it over to Lars for his perspective as well. So in general, clearly, a number of our initiatives, going forward, are focused on fee income generation. That includes payment processing. It includes mortgage banking. It includes capital markets. When you look at the year-over-year comparisons, you also need to keep in mind that especially in commercial-related line items, such as treasury management and such as capital markets, we are seeing some impact of the exits that Greg detailed over the last 24 months. So I think Lars is going to give you some color on the underlying strength on the commercial side. We are also, as you know, focusing on growth in wealth management through either acquisitions or expanded sales force. There's insurance acquisitions going on. So as we look forward, there are a number of line items that we would hope to discuss with you in December to support stronger fee growth. Lars, any sort of specific color?

Yes. So maybe speaking to corporate banking fees, in particular, Geoffrey, a couple of things, as Tayfun had pointed out, that prior period comparison with those -- prudent leasing gains, as we actively manage that leasing portfolio, is really an important part of that strategy. So you really do have to kind of look a little deeper into it. And I would tell you, our business lending fees on a year-over-year basis were up about 2%, and that's why we executed on our balance sheet optimization. So we continue to feel good about those business lending fees and the opportunity to accelerate those, as we see the overall lending market grow. But in particular, corporate banking fees are -- over 60% of that is capital markets. You know what is going on in the FICC kind of segment this year and the pressure there, but we've continued to make investments in our FICC business in re-platforming that business to enhance the client experience. That's going to be rolling out in the coming quarters. But despite that, we stayed very close to our clients because we knew, as Fed tightening became closer, then we would see clients begin to take action. On a linked-quarter basis, actually, our FICC business was up 13%. Investment banking was up 22% on a linked quarter basis. Again, I've shared with you that we continue to invest -- in our loan syndication, capital, our equity and corporate bond, underwriting capabilities, our M&A advisory, very strong. That 22% gives us an 18% linked quarter growth overall in capital markets. So we're going to position ourselves with our clients to capture that. I think we've got the right products for the right lines of business and in both our industry verticals and core middle-market to continue to accelerate that in the future, albeit, that this is a variable kind of area of our noninterest income and the overall economic environment will influence it.

Your next question comes from Scott Siefers from Sandler O'Neill and Partners.

I was just curious on the expense base. Just trying to figure out the sort of the puts and takes in that. If you look at sort of year-over-year, the expense growth has certainly been pretty well controlled, but it looks like they're going to be up in the fourth quarter, and we will be up a couple of percent from when you first announced the North Star initiative. So I guess I'm just wondering, given how large North Star is just in terms of dollars, will there be a point where would see absolute declines in the cost base? Or should we be thinking about it despite the sizeable dollar values involved as sort of offsetting natural growth in the expense base?

Yes. I think -- so far, obviously, I don't know how many quarters in a row now, but we have done better than we guided. We continue to focus both on headcount expenses, as well as expenses in other line items. There is some increase into the fourth quarter, somewhat seasonal in some of the operations areas, given the pickup towards the end of the year; some increase in IT expenses related to the timing of the projects coming online. Our goal is to clearly, first and foremost, is to achieve operating -- positive operating leverage. The ability to keep -- to lower expenses will depend upon the investments that are needed to boost our revenue growth opportunities. And we're not necessarily looking at expense management solely by itself, but how it relates to future growth opportunities. Having said that, it is clearly our goal to maintain a low level of expense growth in order to also achieve, make sure that we achieve operating leverage in this environment, which continues to be challenging with respect to revenue growth opportunities. So the company is very focused. We will share more obviously about 2018 with you in December and in our upcoming fourth quarter earnings release in January.

Okay. And then Tayfun, just want to make sure I understand the tax guidance correctly, the 29 to 30 in the fourth quarter. I think in your prepared comments, you've kind of implied that's simply a fourth quarter event. That's not the new run rate we should be thinking about in 2018. Is that indeed correct?

That is correct. It's simply a fourth quarter impact. And let me give you maybe a little bit more of a color there. As you can see on the first page of our earnings release, the after-tax impact -- after-tax gain on Vantiv share is $679 million this quarter. If you include the fourth quarter impact on our tax rate, that ultimate resulting after-tax gain is going to be around $657 million, $658 million, which is the marginal increase -- which leads to the marginal increase in our tax rate, and that year-ending after-tax of $657 million, $658 million in Vantiv is very close to what we disclosed in September at Barclays Conference. So that's a one-time only tax rate increase that will not show up again in 2018.

Your next question comes from Saul Martinez from UBS.

A couple of questions. First, you mentioned that the exiting of commercial relationships has kind of run its course, and presumably, the runoff from the auto books starts to lessen a bit, albeit it's still going to be there for a little bit. As we think about loan growth going forward beyond 2017, how do you think about how quickly you can grow? And are there opportunities to gain share? And what -- how do you think about what could be a sort of a more normalized level for loan growth in your different portfolios?

Yes. So good question. As we look forward to 2018, Tayfun has made some prior comments, and we'll be sharing more a little bit about that in December at the Investor Conference. But we're looking obviously to grow our commercial portfolio at a rate that would be around nominal GDP-plus. We obviously are very focused on moving market share. We're positioning our businesses to have the capabilities and the talent to frankly execute on that. We continue to build out our industry verticals, which has been a very successful strategy for us. We're also, as Greg mentioned earlier, we're focused on also expanding some of our middle markets banking operations and markets in which we've been operating in the past through verticals in corporate banking around the country. So I believe that with the things that we've been investing in, in our payments, treasury management, capital markets, we really do have an advantage as we head into the coming quarters. Obviously, the overall economic environment is going to have an impact on it. Our clients, we continue to hear from them. They are more optimistic today, I would tell you, than they were 6 months ago. However, there are still a lot of commerce that's on the sidelines. It's very ready to go, but they need clarity, and at that point, I think that we can really accelerate the growth.

The other thing I would add to Lars' comments on the consumer side, credit card has been an area of focus for the organization. We've seen a slight increase this quarter. We expect that to continue on next year with the investments we've made, both in people and products in that space. Additionally, unsecured lending is also another bright spot, our partnership with GreenSky, more originated there, and the quality of that relationship, we're very pleased with. Additionally, we expect to continue to grow consumer mortgages as we roll out our new platform -- it's rolling in at course already, but we'll roll in to our retail and direct channels later this year. So we feel confident that we can continue to grow roughly, as Lars said, at nominal GDP levels.

That's helpful. And if you can't kickstart loan growth and start to grow closer to nominal GDP-plus, what does that mean for deposit cost pressure? Does it -- your LDR moved up a little bit. You're at 90%-plus. Obviously, rates are moving up. How do you think about deposit betas in an environment where we do start to see a little bit more growth?

Yes, this is Jamie. As Tayfun mentioned in his prepared remarks, betas have been pretty benign. We're in about 18% cycle to date, but we're certainly expecting betas to increase the June move -- during the quarter was a 20 beta, but we think it will be a 30 beta by the end of the year. And a December move, we're modeling in the mid-40 range. So we certainly expect competition to pick up, as the Fed continues to hike rates. In terms of deposits, we were down sequentially about $900 million. There was some consumer seasonality softness, combined with an ongoing trend on the commercial side that we saw in the second quarter that continued into the third quarter, and that's really driven by a few factors. One, there are certain segments where liquidity is being deployed for working capital or other seasonal needs, such as in CRE and pub funds. Also, we've seen the large corporate customer base that currently has excess liquidity begin to seek alternative investment options or seek higher deposit rates, and that's a phenomenon where we're keeping the customer, but we lose those excess deposits because we're unwilling to match those overly aggressive rates. I think one good data point back to your LCR comment, within our LCR calculation, our nonoperational deposit categories are where we have had the runoff. That's down about $1.6 billion, whereas our operational deposits continue to increase. And that's really, as we look forward, where we expect to be funding this loan growth in 2018 as continued improvement in the commercial deposit gathering space, driven by strong TM client acquisition.

Yes. I mean, Having said all of that, just keep in mind, we're not giving 2018 guidance. We're not giving guidance on loan growth in 2018 at those levels. So I just want to caution you with respect to that.

Your next question comes from Peter Winter from Wedbush.

I was wondering -- can you just talk about some of the factors, puts and takes that keeps the margins stable without a rate hike?

The biggest impact, Peter, is the decision that we made 2 years ago to reallocate capital away from lower returning assets into higher returning assets, whether it's in autos or whether it's in C&I. The churn of that capital into higher-returning assets is clearly a defense mechanism that has worked well for us. At the same time, we are also seeing a very healthy and stable origination coupon. Now that doesn't mean necessarily that spreads are not under pressure, and also the betas on deposits so far have fared below our expected levels. But in general, overall, as we guide for stable NII and stable NIM, this continued churn away from lower-returning assets into higher-returning assets, whether it's from auto to unsecured lending or within commercial to better relationships is helping us.

Great. And just one quick follow-up. I don't know if you said it, but how much was the auto securitization at the end of the quarter, and was there any gain from it in the third quarter?

The auto securitization was on-balance sheet. It was a $1 billion transaction, where we held one of the tranches, so it provided $750 million of proceeds, but simply was a funding mechanism, no gain or loss on that transaction.

Your next question comes from the line of Ken Zerbe from Morgan Stanley.

Just had another follow-up question on the deposit side. I hear what you're saying, but we still see core deposits coming down. Like, what's the launch from strategy there, right? Should your deposit beta be higher, right? Should you be paying up more to retain some of those deposits to even grow your operational deposits to fund balance sheet growth. I'm just kind of trying to get a sense of how you -- where you want deposit growth to be over the next, say, few quarters?

We -- Ken, it's Jamie. We definitely want deposit growth, but we want it in the right categories. And if you look year-over-year, in the commercial space we were down $2 billion in deposits and we were up $2 billion in the consumer side. And so we're definitely focused on growing our households, and we've been very successful in doing that on the consumer side. On the commercial side, we've allowed deposit balances to run down to simply -- from the economics where we have the flexibility when faced with aggressive deposit pricing levels to let the deposits run off and funded through the FHLB. So over time, in '16 and '17, that's allowed us to experience a lower beta. We still have significant amount of flexibility and contingent liquidity to do so. However, we are focused on growing a good commercial operational deposits, going forward.

So I guess that kind of leads into the second part though, if -- does there come a point where deposit betas don't price gradually, where you say, okay, we're done with the commercial runoff. We actually need to do commercial deposits, and therefore, we see a much more meaningful step-up in your deposit betas, or you try to stabilize that portfolio?

I think it's possible that, that would happen, but not at the type of Fed increases we're expecting, which are pretty low step-ups from the Fed. We're just not at that point yet.

Your next question comes from John Pancari from Evercore ISI.

On the -- back to loan growth, I heard you think your -- the exiting of the commercial relationships has pretty much run its course at the end of next quarter. Could you just remind us -- the Shared National Credit portfolio, what is the size of that as of today, and was that part of any of the intentional run off?

Yes. So this is Lars. Let me just take that question, give you a little bit of background on that. We had, a number of years ago, an increase in the Shared National Credit portfolio, in particular, consistent with the build-out of some of our industry verticals, which frankly really benefited us in a large way. However, shared national credits, it's not a line of business. It is just an outcome of our business strategy. If you look at our SNC portfolio, it's been fairly stable in that 50%, 51% type range over a number of quarters now. It's stabilized, as we continue to focus even more on our middle market portfolio. And I would remind you of this too, our Shared National Credit portfolio is underwritten with the same risk team, to the same standards, held at the same pricing discipline, same expectations in terms of risk profile. In fact, if you look at the asset quality of that portfolio today, you would see that it largely matches our overall commercial portfolio, the same thing in terms of the overall returns. And we're really pleased with what we've been able to drive there, as we have executed on our balance sheet optimization. There has been a churn in that Shared National Credit portfolio. Today, about 80% of those Shared National Credit relationships have multiple products with us -- which is very high. The other 20%, frankly, are newer relationships, ones that we are actively building out and deepening client relationships, as we bring to them strategic options and treasury management, more sophisticated products that we're investing in, so we feel good about our strategy there. But I wouldn't expect that, that would grow significantly in the future, in particular, as we invest in our core middle-market franchise even more on a go-forward basis.

And the only thing I'm going to add to Lars' comments is our SNC criticized assets are lower than our overall commercial in general. So they performed extremely well and have, even through this cycle, performed well for us.

Okay. And I know you mentioned that it shouldn't grow. But -- so would you think that at the current level, that 50% to 51% range, I guess what's that, 25% to 30% of total loans, that that's pretty much where it's going to stay?

Yes. It's hard to say quarter-to-quarter where things will go, depending upon the overall economic environment. But our longer-term goal would be -- for that to be a smaller portion of our overall balance sheet. As I said before, we're putting a lot into our core middle-market business banking focus, and we would expect to be accelerating the growth of that in the future.

Okay. And then one more follow-up on that. What is the average yield of that -- of your Shared National Credit for -- credits? And then separately, what percentage of them are you a lead arranger?

We are not disclosing the specific yields in sub portfolios. And clearly, where we are the lead arranger, that's a smaller percentage of the total.

Yes. Again, I would just -- I'd reinforce that 80% of that Shared National Credit portfolio though, we have multiple products. These are relationships, and that's what we continue to focus on building out, moving from just a provider of our balance sheet to true relationships. Yes, supporting our verticals and some of our larger core middle-market clients. That what it's about.

Your next question comes from Gerard Cassidy from RBC Capital Markets.

This is actually Steve Duong on for Gerard. A question on your CET1 ratio. You're at 10.5% today, consistent with the prior quarter even after a pretty large buyback. Is there a target CET1 level that you're looking to get to? And if so, what is the payout level do you think you need to get to reach that target?

So yes, obviously, in the very near term, our CCAR results and guidance dictates where that capital is. In general, we've been targeting a 10% type level, and we still have 3 quarters ahead of us in terms of adding more to our buybacks. Over the long term, that target potentially may change. Our peer's clearly are talking more about a 9 handle with respect to their capital ratios. And I think roughly a 50% -- 50-basis-point type of reduction in capital would equate about a, if I'm not mistaken, $500 million, $600 million type of additional buyback if we do choose to go there immediately. We clearly believe that the risk profile of our balance sheet and the business composition would dictate a lower capital ratio than what we are carrying today, whether it's 9%, 9.5%. Time will show.

Great. And just a follow-up question on the technology side. You guys mentioned that your innovation center -- as far as, I guess, philosophically, where are you most focused in on the technology development more on the client-facing side? Or are you more in the back-end or what's your philosophy on it?

We see the digital transformation, really, impacting both ends of the back-office or for continued optimization, which I think we've done a nice job of. But there's opportunities around artificial intelligence, we're biased, that we're looking at right now to more streamline our processes and reduce our overall costs, which we expect to achieve. So that's the focus. In addition, our client facing side of the house would be our advancements in our mobile application, our web platform, the investments we're making in payments to help our commercial customers automate their back-office. We'll continue to see that, and also around the distribution channels, how we touch our customers, the partnership with GreenSky; as we mentioned before, ApplePie, and the new partnership we just established with -- NRT Sightline is another example of that. So we'll continue to make those investments on both sides. Once again, it gets back to the return and the value we create for our commercial customers and consumer customers and our shareholders.

Your next question comes from Terry McEvoy from Stephens.

Earlier in the call, you mentioned international banks being more competitive as it relates to deposits. Is that something new that has emerged over the last quarter? And would you say it's in market retail consumer competition? Or more on the national, if not, international businesses that you operate?

Yes, it's not a new phenomenon. It's been going on definitely over the past year since the Fed really began increasing rates, and it's definitely on the commercial side, and you're seeing Fed Funds plus types of pricing from some FBOs.

And then just a follow-up to John's question. Could you substitute leverage lending for the SNC portfolio? Was the planned reduction in commercial centered at all on those loans? And I'm not sure if you disclosed the size of that portfolio today.

The -- you're asking about the size of the leverage loan portfolio?

That's correct.

Yes. It's been -- for a number of quarters now, it's been going down. It is currently -- I mean, we don't typically disclose it, but we've seen now for the last 2 years, a fairly significant drop in our leverage lending outstanding.

Terry, your question, that was part of our optimization efforts for the last couple of years, leverage loans.

Which interestingly enough, actually, was a headwind with respect to spreads and margins, so our ability to stabilize NII and NIM in light of the reduction, and our leveraging lending portfolio also points to a pretty decent strength from the way we manage it.

Your next question comes from Vivek Juneja from JPMorgan.

Tayfun, Greg, a couple of questions for you guys. One is the CET1, I want to go back to that. So why not -- why 10%, if I heard that correctly? I know you said each 50 basis point would do this, but why not lower, given what you've done? Is there something that's holding you back? Are there other plans for which you're trying to hold up -- hold on to the capital?

Vivek, we need to clearly make sure that we watch where the industry is going. There's a pure regulatory aspect of this. In the last CCAR, they enabled us to be a bit more flexible with respect to our capital return to our shareholders, but we still are cognizant over that additional dimension of where the peer group is. We are currently right in the middle, maybe a little bit above the middle range of the distribution of our peers. There is nothing on our balance sheet that suggests that we need to keep a 10-plus percent capital, but we would like to make sure that the progression to a lower range is in line with the way our peer group moves their capital as well. So that's really the factor that dictates, because, ultimately, when you think about CCAR, it's a group exercise. Yes, there is idiosyncratic impact of one balance sheet and income statement. But when the Fed looks at it, they look at it as a group, and we cannot ignore where the peers are. And also, the other piece is, in terms of our preferred bucket, we still have room, about $400 million to $500 million in additional preferred issuance. So as we think about the composition of capital, that is also a factor.

Okay. One more small question. And maybe this goes to Lars. On leasing residual gains, did I hear you right? You said they are -- you've taken some gains. Are they to run at this lower run rate, so -- or is that -- or was this just a blip this quarter because it's something that can be episodic?

It -- no, it's quite -- it really is episodic, and we don't necessarily have a plan for that line item. It depends on where the portfolio is, where asset values are. We don't necessarily drive to maximize residual gains. And last quarter, a pure -- seem to be a strong quarter, so the comparisons for last quarter looks a bit weaker.

Yes. We just have a very robust process where we're reviewing and actively managing that portfolio, and we're taking those gains where we think is appropriate.

There are no further questions at this time. Mr. Gokhale, I'll turn the call back over to you.

Thank you, Melissa, and thank you, all, for your interest in Fifth Third Bank. If you have any follow-up questions, please contact the Investor Relations Department, and we will be happy to assist you.

Thank you, and this does conclude today's conference call. You may now disconnect.