Fifth Third Bancorp (FITBP) 2002 Q1 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the first quarter, 2002 earnings conference call.

At this time, all participants have been placed in a listen-only mode and we will open the floor for your questions and comments, following the presentation. It is now my pleasure to send the floor over to your host, Ms. .

Ma'am, the floor is yours.

Thank you.

This presentation contains forward-looking statements relating to present or future trends for factors affecting the banking industry. And, specifically, the operations markets and products of Fifth Third. Actual results could differ materially from what is projected. Fifth Third undertakes no obligation to release revisions to these forward-looking statements, or to reflect events or circumstances after the date of this call.

At this time, I'd like to turn the call over to the Fifth Third Bank President and CEO George Schaefer. George?

Thank you, .

Good morning, and thank all of you for taking the time to listen in. Neal and I are going to keep things relatively brief this morning. We'll take just a couple of minutes to review what, we feel, are the highlights of the quarter and our prospects for the future, and then we'll quickly open it up for all of your questions.

By this time, I am sure that most of you have had a chance to take a look at our first quarter results that we released earlier this morning. I think everyone would agree that was a good first quarter for us. The bottom line was up 27 percent, revenue growth was strong across all of our business lines, checking account growth continues to be very good, and credit quality continues to be very manageable, and shows some signs of stabilizing.

From my perspective, the highlights of the quarter were:

Number one: continuation of strong deposit growth trends. Average interest checking balances increased 35 percent and average demand deposits are up 31 percent over last year. Sequentially, transaction deposits are up 36 percent, on an annualized basis.

Obviously, the magnitude of these numbers is somewhat affected by the increased cash position of the consumer, but these are really strong numbers, and show our success in attracting new customers in all of our markets, but particularly, in Michigan and Chicago.

Number two: strong revenue and service-income growth. You see that our was up 9 percent over last year, showing the benefits of our deposit focus. Our business, our payment processing business, was up 55 percent, deposit service income up 27 percent, investment advisory, our money management business, up 10 percent, and then our commercial banking treasury management business up 37 percent.

Number three: credit quality shows some signs of stabilizing, with charge-offs at 49 basis points, and remaining steady at 57 basis points. I'd also like to point out that our capital ratio exceeded 11 percent this quarter, and we now have 7.8 billion in equity.

Number four: loan growth. Overall, loan growth has remained steady with period-end loans and leases increasing just a bit from last quarter. A highlight here, is retail installment loans, which were up about 11 percent on record origination levels. These are primarily home equity loans.

Our focus for the remainder of the year continues to be the same, as I've talked about in the last couple of quarters. We want to sustain our solid revenue growth, our deposits and loan growth and our retail and commercial business. I'd like to point out that we still have considerable deposit market share upside in our footprint, because we have less than 10 percent deposit market share here in the five Midwestern states. And, we have significant momentum building in our large markets. And then, number two, we'd like to expand the contribution of our investment advisory and our payment processing services in all of our, in all of the markets we operate in.

Now, I'd like to turn it over to Neal for some additional review of our businesses and some trends to expect in the future quarters.

Neal?

: Thank you, George. As George said, very heartened by the trends we that we saw. Let me focus, first of all, on the lines of business and the trends, and what we see going forward.

First of all, as George said, up 55 percent, year-over-year. That includes $21 million in revenue from , that wasn't in prior years, period. If you'd exclude that, we're still up high 20s, something in excess of 25 percent. So, I would say feels very good. Transaction volumes have been strong.

For those of you who are familiar with us, first quarter versus fourth quarter, we usually see a modest decrease in overall total revenue on a , courtesy of the Christmas season drop-off. But, it was very similar in dollar amounts to last year, so I think still sees very strong transaction and momentum going forward.

On the commercial area, I'd say we're gaining momentum on the deposit growth strategies and the for-fee product sales. Average demand deposits' up 24 percent and deposit-related cash management revenue up 49 percent. I would say that's really taking hold in several of our markets -- a real product emphasis -- and, as we said in prior quarters, that we felt we have some commercial momentum building, and I'd say we're starting to see that in almost all our markets, so feel very good on the commercial fee revenue side.

On the retail side, as George said earlier, both deposit and loan growth trends remain very strong, and I'd say retail loan demand, in general, has been picking up modestly, so we feel pretty good on the asset-origination side. On retail, as George talked about, the deposit growth trends were very strong, I'd say, on that area. Most of us expected some reduction in some of the cash levels, and I'd say that hasn't happened.

On the investment advisor area, I would say , we feel better, and I think we're starting to see some trends that are starting to follow through. We're working very hard with our retail and commercial lines of business, to better sell our product. I would say the highlights in the quarter brokerage was very strong. We actually had our first call night on the brokerage side, feel very good there.

Private banking revenue, and I'd say investment levels, are picking up. So, we're pretty optimistic I'd say, going forward in the next couple of quarters, on the side.

Let me spend a moment on balancing net interest income trends. Net interest margin was up 16 basis points, sequentially, and 29 basis points over a year ago, really as a result of funding costs decreasing by 214 basis points. And, I'd say the bulk of that's already here, so I would say I don't expect margin to expand, going forward, on anything other than balance sheet growth. I do think that we can hold margin at current levels, certainly above four percent. And these are levels that are high watermarks for us in recent memory. So, that obviously feels good. But, clearly asset re-pricing is still with us. So, loan volume and balance sheet trends will be the drivers, I think, of , over the next couple of quarters.

On the deposit side, as George highlighted, retail saw a dramatic success I think, on the deposit side. As we've seen growth rates on the deposit side that are very strong. And I'd say, it's not just the percentage increase. These are off some pretty larges checking and savings. So, those growth rates are real and we feel very good about that.

On the commercial side, as George said, I think we're seeing continued positive momentum there. Reductions in our wholesale funding sides, the short end of the curve feels some pressure. Hopefully, as we recover, I think we feel good about where we're positioned on that side.

Maybe highlighting a moment on credit quality. As George said, I think stable is the way we'd describe it. steady at 57 basis points. That's certainly on the low side and ranks us pretty favorably, versus the industry. We have non-accrual loans of $219 million, versus total loans of $42 billion, so again, I think we feel very good. pretty flat, quarter to quarter, so I think we sense that there could be some improvement on that side of the house.

Net charge-offs, at 49 basis points, a little better than last quarter, at 52 basis points. And, again, I think we feel good about those trends. So, all in all, I think probably the highlight for us is we continue to see very strong trends that you've seen the last several quarters. I think the other thing that we're seeing is that the momentum that we have in our affiliates, and the fundamentals coming out of each of affiliates -- we probably have more affiliates earning in excess of 2 percent on assets, and so I think we're seeing good participation across all areas on the side.

With that, I'd open it up to questions. , we'll turn it back to you, and if you want to have questions, George and I'll answer those.

OK.

Thank you, ladies and gentlemen.

The floor is now open for questions. If you have any questions or comments, please press the numbers one, then four, on your touch-tone phone at this time. Pressing one, four a second time, will remove you from the queue, should your question be answered.

Lastly, we do ask, while posing your question, that you please pick up your handset, if listening on speaker-phone, for optimum sound quality. Please hold, while we poll for questions.

Take them in the order you get them

Our first question comes from . Please ...

: Morning guys.

Morning, Chip.

If you would, first talk about your view of the economy, right now, and where you think we are? Secondly, Neal?, if you would talk about some of changes that have been made in the investment advisory business that caused the pickup in performance, and then finally, just kind of a specific question, what caused the pickup in consumer recoveries?

, your first question -- this is George -- on the economy here. As you know, my barometer has always been our hiring attempts out here. We're trying to hire about 900 people in our Midwestern markets out here. Now, we're still paying a $500 bounty, if any of our employees get someone to come in here and work at the bank. And so, generally from that level, that is very good.

You know what's going on with Midwestern housing, and you know what auto, what's going on out there. Those are pretty good. We are starting to see some loan demand pickup. Our outstandings on our home equity lines have been picking up pretty well here. Particularly in the first couple weeks, here in April. And then, I think generally you're seeing little pickup in commercial balances out here. So, we feel a little bit better about the economy, now.

Yeah, and I'd say, , on the -- we're always cautious early in the year. But, I think this economy feels like it's coming out of it. But, I would say a couple things on the investment advisory side. On a basis, we're up just a little in excess of $10 million, on a $73 million quarter sort of base. So, we feel very good about the momentum. Probably, nominally focused on our partnerships with commercial and retail. On the commercial side, we've been doing joint calls, and really trying to drive the product sales in each of the markets.

And, on the retail side, I mentioned the call night. I think we had participants from all over our company, on a call night, where we called 4,700 customers, and had something like a 15 percent hit rate in every one of our markets from all the various lines of business. George said he didn't think we knew how to do a call night. ...

Yeah, . Those call numbers -- maybe you ought to mention that. We got 1,400 of our employees together one night, three Monday nights ago from five o'clock at night to eight o'clock, in our call center. We had 1,400 employees made a total of 34,000 phone calls, in that three-hour period, and it was all automated. We had this all set up with our programming people. And we got 4,700 appointments to come out and talk about investment products, where people -- and these were our own customers, large deposit customers who had interest in having somebody from Fifth Third, their brokerage person, or their trust person, come out and talk to them about additional investment services. Four thousand seven hundred and something appointments in a three-hour period is really pretty amazing. But I think that shows you the kind of sales culture and what we can do, when we really set our minds to selling some of these products.

Where are you, in terms of just getting the process? Are you still very much in the early stages?

Oh, yeah. I would say, , our focus is product and distribution. And, we think that's something that Fifth Third quite naturally does well. We've focused on that for a number of years, I think, both on the commercial and the retail side. We've located some of our investment people, right next to some of the retail and commercial people in the same departments. And, I think we've seen pipelines double every time we do that. So, we'll probably keep doing that.

Yeah, . For example, if we make 100 residential mortgages, right now, we only have about six or seven of those people have their brokerage account with us. We are now actively cross-marketing there.

On the commercial side. If we make a $5 million or $10 million loan to a company, only six or seven of those companies have their 401(k) or company benefit plans with us. Just by asking for the business now, we're starting to double our penetration there. And, those are just two quick examples.

And consumer recoveries?

Yeah. I'd say consumer recoveries, if you look at them, fairly flat sequential quarters. If you look at the supplemental data, I think what you see happening on the consumer side is the, that a lot of credit quality trends have, are pretty stable. If you look at the direct/indirect, each of the individual categories, we feel pretty good at this point, as to where the consumer has been, I think, used car prices have firmed, and I think that's helped slightly on the consumer lease side.

OK. Thanks.

Good.

Our next question comes from . Please state your affiliation, then question.

, with .

Yes.

Your equity is now above 11 percent of assets. Can you discuss what your plans would be, with respect to that? Would you see that continuing to trail up, or do you have something else in mind?

I think, , as you know, we've always maintained extremely high capital levels. And, we do receive pretty good ratings from the rating agencies out there. And, in our industry, the capital levels almost, in periods like we've experienced with the loan issues that are going on right now, almost, from a lender side, never seem to have enough of that stuff called capital out there. So, we've got them high out there. But, it does give us tremendous flexibility going forward, you know, to use that. But, in terms of specifics for how we're going to address that capital, I don't know that, I might ask Neal to comment there.

Yeah. We don't have a firm policy on too much capital. You know, and I would tell you, given the uncertainty that we see in the market out there, we're always very happy to have it, and you can never plan for when you need it. So, I would tell you we think the loan growth probably picks up from here. So, at this point, I think we're quite comfortable.

I wouldn't like to see it go to 12 or 13. We'll obviously try to hold the balance sheets size at this level. But, we're happy to have it in during times of uncertainty, and people are focusing on our industry and the quality of the balance sheet. We didn't plan on that, but we feel good.

It really gives us tremendous flexibility for whatever opportunity arises, and we don't know what the opportunities are going to be out there, but we do want to be ready for anything that's, you know, that's going to be advantageous to our shareholders.

Neal, you also hinted that a good bit of the great deposit growth that you've seen in this quarter just finished, came out of Michigan and Chicago.

Yeah.

Could you just proportionalize that, relative to the rest of your branch network?

Yeah. I would say across the board, we've been running at 20 percent kind of deposit growth. If you'll look at each of the individual categories, in each of our affiliates, I would tell you we have very good deposit growth in Michigan and Chicago on linked-month basis. We're seeing in excess of $300 sort of million kind of growth. So, we feel very good that those trends have been that positive.

Obviously, all the conversions are behind us. You know, we feel very good on the sales force. I would say in Detroit, Chicago and Grand Rapids, have all been doing a fabulous job. I think all of us had our fingers crossed. The hard part to put a finger on, is how much liquidity in people's transaction accounts. We certainly recognize there's some. You know, when we see 30, and 40, and 50 percent growth rates, you know, we didn't think we were that good.

Well, I thank you very much.

All right, thanks.

OK.

All right, good day.

Our next question comes from . Please state your affiliation, then question.

Good morning. , from J.P. Morgan.

Hi.

Hi there. A couple of quick questions, here. On a year-over-year basis, as we look at operating expenses, what should we back out to adjust for ?

I think it is high-teens kind of expenses in the numbers, . I think it's $17, $18 million.

OK. All right, that's great. And then, ...

And they are in the process of getting converted, or in the process of making sure that the expense platform is where we want it. So, I would say it's probably going to take us a couple quarters to get all the way through, where we're at there. Obviously, the product platform there is really the opportunity for us, as we take that small merchant product into the rest of our footprint.

Right. And, so far, so good, on that front?

Yes.

OK, good. And, I jumped on the call just a little bit late. I don't' know if you commented on the inflows to the watch list?

Yeah. I would tell you, in the quarter, the only inflows that we saw -- there was one $4 million credit in Indiana that was a part of a recreation, park or golf course piece, that was $4 million, or somewhere thereabouts. That was the only thing of significance that rolls on to the watch list in the quarter, .

All right, that's great. And then, just finally, you talked about all the investment spending you're doing on a variety of fronts, which I would basically characterize as blocking-and-tackling to grow the business. Given how well things seem to be going this year, with the good strong earnings, any thoughts for increasing beyond the blocking-and-tackling, any strategic initiative? Or, initiating any strategic initiatives to beyond the blocking-and-tackling?

I think, , this is our 29th year of record earnings, and we've been focused on our four businesses, and we're up 27 percent, and so as long as we can produce this kind of numbers, I don't see any need for trying some of that fancy stuff out there. We're not all that smart.

Well, George, I think you're doing pretty well at what you're doing there, so, ...

We're afraid of that question. , I would tell you, and just as recently as yesterday, we spend a lot of time looking at new branch locations, clearly with the kind of deposit growth, with new markets. You know, getting through a conversion. So, we're probably looking at building more branches.

Certainly been hiring people on both the commercial side, up in Chicago, and Detroit, and building some of those management teams. And, certainly we've talked about it on and investment advisor. I'd say largely, it's ...

We have seven percent of the market, you know, deposit market, out here in Ohio, Kentucky, Indiana, Illinois and Michigan. So, there's just tremendous upside, just in daily execution, in checking accounts and loan accounts and selling mutual funds out here -- out here, in the rust belt.

Yeah, now I think we have as many branches on the build it queue as we've ever had. You know, we've kind of gone market by market to say, you know, where would we put something.

OK. Great. Well, congratulations; it's a really great quarter.

Thanks.

Thanks, .

Our next question comes from . Please state your affiliation, then question.

Yeah, hi. , at Merrill Lynch. Just a two quick questions. Could you talk, give a little more color on what's driving the underlying revenue momentum at the , above and beyond the acquisition? Just, sort of maybe quantify which of the two main sides of the business most of the revenue is coming from? And, secondarily, I know this is a difficult question to answer, but could you give any sense that the recent deposit growth is, you know, quote-unquote hot money, and any magnitude of your feeling of the amount of sum that could flow back into non-bank investments over time?

Thanks.

OK. On the side, I think we've had a pretty good balance in growth between the merchant business and the business, you know, the ATM transaction business. But clearly, the automation of the back office, for large merchants, has really helped us with this product.

Also, there's been an, some change of ownership in some of the competitors out there, that are switching portfolios around, that has helped us also, in that. But, I think overall, that growth in -- you know, the high 20's percentage in our vanilla , without USB. -- has come from, really from both sides. And, we continue to improve, you know, our sales force. We continue to add more sales people in both lines of the business.

And, then the addition of USB. has also, we've learned quite a bit from USB. and how to market to the small merchants, and some of that's got applicability over in the large merchant side. So, that acquisition has really helped us also, in the marketing.

Yeah. And, I'd say strength has been, has continued to be very good. And that's probably a continuation of the theme that we've seen for the last several years. And, I'd say as far as, you know, deposits, how much of it's liquidity that's sitting on the shelf -- as long as it doesn't flow back to Merrill Lynch account, we're OK. But, I would say, you know, obviously the underlying trends that we were seeing, were high 20s. Anything north of that, we certainly would say is either coming from better opportunities -- and I think Chicago and Detroit certainly feel that way.

, I think also, sometimes we underestimate the safety and soundness, with some of the -- Superior Bank, up in Chicago -- that rogue broker, up in Cleveland -- , that confiscated $280 million, or whatever -- we've had a number of small problems down here in Cincinnati. Every time one of those occurs, we see an influx in deposits. People want to keep their money in the safe, sound place. And that 11 percent capital, and our AA2 rating really help in that side. So, you're seeing a flight to quality here, in uncertain times. We're seeing good deposit growths, coming both from the commercial side and the consumer side. But, you can bet these corporate treasurers and people with a lot of money know a quality institution and want their money there, in a period of war and uncertainty.

Right, OK.

Thanks.

Our next question comes from . Please state your affiliation, then question.

Yes, , Investments. Good morning. Couple questions, George. First, follow-up on the business. How have the margins been holding up in that business. You know, you got tremendous top-volume revenue growth, but ...

Yeah, I would tell you that the margins have been quite stable for the last several years. Really, since the IPO craze of a couple-three years ago. We've really had very stable margins. I would also point out that, with the acquisition of , they have better margins, obviously, on smaller merchants, so we're quite optimistic that margins are hanging in there very well.

The problem with USB. was, their chair, and they would sign up a lot of accounts, but they had some pretty good turnover there, in the small side, and we're working now to reduce that account charge pretty significantly by some of the processes that we're working on here, so the margins hopefully will stay the same, or get a little bit better out there.

People are also willing to pay for quality. They're willing to pay for this tremendous up-time, and reliability that we've been able to deliver.

OK.

Then secondly, in times past, George, you guys have sized the type of deal you do, or type of deal you do on the bank side. In looking at the asset-management business, what, how large an institution would you be comfortable in buying, on the asset-management side. And, are you looking for certain product niche that you don't have to round out your current offering?

I think, Fred, in the asset-management business there, rather than the sides, we would want to make sure we had a good cultural fit with our organization. We've got to make sure anything we do on that asset-management acquisition side fits our corporate culture here. And you know how difficult, probably speaking from your own experience, at your own institution, how tough that is to get those cultures to mesh. And so, we're very cautious of that cultural fit here. And I think that would be the first hurdle that we would really have to get through.

I think, Fred, we've learned a lot from the deals we've done over the years. I think even on the asset-management side. And, as George said, you know, we aren't trying to win the lead tables on assets under management overnight, by doing some deal. I think what you'll see us do is continue to work on our execution in each of the markets, between retail and commercial.

You know, we have almost 5.5 million customers, just within our institution, that already know Fifth Third. What we're trying to do is, do a good job of selling that. We'd love to have more value-management. We'd love to, you know, continue to complement what we have. But, I don't think we're, we've sort of watched what has gone on in this industry. And, as George said, the first box you got to check is the fit. Plus, you've got to have confidence in us as managers.

We're not talking to those guys in Boston, Fred.

All right, OK. Thanks.

Our next question comes from . Please state your affiliation, then question.

Hi. , from . First of all, George and Neal, great quarter. A couple of my questions have been asked already, but I'll go ahead and give you one or two. First is, your margin came out better than I expected. And, I think from our last conversation, maybe even better than you guys expected. Can you just elaborate on that, a little bit?

And, second, can you talk about the Agreement regarding some of the trust services with National Commerce, at their doing, that they announced yesterday on their conference call -- that they were sort of doing a joint-venture with you guys?

, I think on that margin side, the inflow of, you know, checking accounts, demand deposits, free money -- you know, those huge increases we're seeing in checking accounts -- they are a little bit better than we anticipated. And, if you get money for free, that margin does really move. And, so I think that's the majority of the increase in the margin. Plus, we've also been pretty disciplined on the pricing side. You know us, we don't have to reach for that next loan. Or, we're not out there looking for just the volume. So, we've been very disciplined, and we've used our AA rating very cautiously, you know, on the credit side out there. Neal, talk about that.

Yeah. I would say the other thing, , we're trying to get used to having a margin above 4 percent, so, OK. We actually enjoy it. It's been below for most of my professional life. I would say, on deal, what we are doing, is on the small plan 401(k) side, trying to build a platform to deliver to our smaller mid-size customers a retirement plan solution. And, I would say the backbone of most of our shops works pretty well for larger merchants. But, I think small merchants, you need to be able to do it the right way. And, we went out and looked at a couple providers and felt very good about the platform they had to acquire there and we'll see. We certainly want to build our asset-management on the 401(k) side.

Thanks guys -- great quarter.

Thanks, .

Thanks very much for participating in our conference call. Have a great day.

Thank you, ladies and gentlemen. T

his does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day.

Thank you for your participation.

END