Fifth Third Bancorp (FITBP) 2016 Q4 法說會逐字稿

Good morning, my name is Larry and I will be the conference operator today. At this time I would like to welcome everyone to the Fifth Third Bank Q4 2016 earnings release. (Operator Instructions). Thank you. Sameer Gokhale, you may begin your conference.

Thank you, Larry. Good morning and thank you for joining us. Today we will be discussing our financial results for the fourth 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 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 reference 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 am joined on the call by our President and 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 will see in our results, we reported full-year 2016 net income of $1.6 billion and EPS of $1.93 per share. We believe that 2016 marked an inflection point for the Fifth Third. During the year we took a number of important steps to help position our Bank to deliver superior results through business cycles and better serve our customers.

In September we announced Project North Star with a specific financial goal of generating a return on tangible common equity of 12% to 14% by the end of 2019. Over the course of the year we invested heavily in risk management, compliance and information technology. We invested in FinTech companies such as GreenSky, ApplePie, Abbot Exchange, Zelle and Transactive.

We were also pleased to recently announce a partnership with QED investors, a leading FinTech venture-capital firm. In addition we announced the acquisition of that Retirement Corporation of America, a registered investment advisor. We continue to evaluate acquisitions that will help augment fee revenue.

Several of these investments, particularly on the digital side, are table stakes. Over time we believe that these partnerships and investments will help us: one, expand our delivery channels; two, enhance our digital capabilities; three, develop new products and services; and four, drive additional business volume.

During the year we took several actions to help improve the profitability of our Bank while enhancing our ability to serve our customers. We announced an agreement with Black Knight to consolidate our existing mortgage platforms. This investment will lower our cost of originating mortgages, increase our mortgage loan origination capacity and significantly improve our customer experience.

In our continued investment areas of automation to optimize operations, reflecting a rapid change in technology and customer behavior, we are on track to implement our omni-channel strategies. We believe this will allow us to better serve the needs of our customers.

Over the last 18 months we have closed or announced plans to close branches representing 12% of our branch network. This was done in response to both changing customer preferences and our desire to continue to focus on our core markets.

We initiated a program to redesign our commercial client experience which will streamline many of our processes from end to end and reduce our cost to deliver. We renegotiated several key vendor contracts driving significant run rate savings. We focused on relationships that meet our risk-adjusted return hurdles; we were unwilling to sacrifice spreads or credit quality for balance sheet growth.

As an outcome of our disciplined approach we exited $3.5 billion of commercial loans that did not meet our desired risk or return profile. Excluding these deliberate exits our period end commercial loans would have been up 7% year over year.

We launched two credit card products which should help drive higher returns and loan growth over time. Growth in credit cards and other consumer loans should also allow us to achieve a better balance between commercial and consumer loan growth.

During the year while we continued to make investments we kept a close eye on expenses. In 2016 our expenses only increased by 3.4% compared to our initial expectation of 4.5% to 5% at the start of the year. We intend to continue to generate positive operating leverage in 2017 and beyond.

Lastly, we remain prudent stewards of capital and returned nearly $1 billion to common shareholders in the form of dividends or share repurchases during 2016 even as our capital levels improved. There is more work to be done but we believe that the steps we took in 2016 will help us achieve our performance objectives.

Before discussing our fourth-quarter results, I want to take a moment to thank our employees for their hard work and dedication over the last year. I believe the foundation we have laid in 2016 will position the Bank to deliver higher and more resilient returns in 2017 and beyond.

Moving to the fourth-quarter results, we reported net income to common shareholders of $372 million and earnings per diluted share of $0.49. Some non-core items highlighted in the earnings release resulted in a positive $0.01 impact to reported earnings per share in the quarter. Tayfun will provide further details about these items in his opening comments.

Our adjusted net interest margin expanded 3 basis points sequentially. This improvement reflected our continued focus on higher quality customer relationships and the benefit of higher interest rates during the quarter. Expenses were down 1% this quarter compared to the third quarter of 2016 as we continue to tightly manage expenses in this environment.

Credit quality continued to improve with a significant decrease in criticized asset levels for the fourth consecutive quarter. A decrease in criticized assets provides further evidence of our focus on stability on maintained relationships with a better credit profile.

Net charge-offs also continued to improve this quarter. On a full year basis our commercial net charge-off ratio was the lowest it has been in the past 15 years. While we continue to expect the benign credit environment to continue for the foreseeable future, charge-offs can exhibit quarterly variability.

Fee income was up 2% sequentially. Adjusted for notable items in the earnings release, fee revenue was down 2% year over year driven by lower mortgage and retail brokerage banking revenue. We believe that we have an opportunity to accelerate fee growth in 2017 led by our capital markets business. We will also continue to evaluate strategic acquisitions that will help drive fee growth.

Production metrics remained strong, although mortgage originations were affected by seasonality and higher rates in Q4. Volume of $2.7 billion was down 5% sequentially but up 54% from last year. Our commercial loan production per relationship manager was up 18% with fees per relationship manager up 30% year over year.

Our investments in the digital channel are paying off; approximately 61% of all transactions are made through digital channels compared to 30% just a few years ago. Overall we have seen a 29% increase in mobile usage year for year; we have also seen a 178% increase year-over-year in checking and savings accounts opened online.

Our capital levels remain strong and improved from last quarter. Our common equity Tier 1 ratio increased to 10.4% from 10.17% last quarter. The strength of our balance sheet and earnings allowed us to increase our common dividend by approximately 8% to $0.14 per share in December.

At Fifth Third we strongly believe in supporting our communities. In the fourth quarter we publicly announced our 5-year $30 billion community commitment with the National Community Reinvestment Coalition. We were pleased to work with CEO John Taylor and 145 of their member organizations who signed on to a program that will improve lives in the communities we serve. It includes a broad-based lending, investment and services plan.

We also announced a new financial literacy alliance with EverFi, a leader in digital instructional technology. We believe this initiative will educate more than 150,000 high school students annually throughout our footprint.

Overall, I am pleased that our strong results for the year enabled us to return a significant amount of capital to shareholders, make strategic investments to support the communities we serve. With that I will turn it over to Tayfun to discuss our fourth-quarter results and our current outlook with some additional color on Project North Star. Tayfun?

Thanks, Greg. Good morning and thank you for joining us. I will start with the financial summary on slide 4 of the presentation.

As Greg mentioned earlier, we are very pleased with our results for the quarter. During the quarter the expansion of our underlying net interest margin, the sequential decline in our expenses and excellent credit quality reflect our continued commitment to driving improved financial performance.

For the fourth quarter there was a net positive impact of $0.01 per share resulting from several items. The most significant item was a $16 million pretax charge to provide refunds to certain credit card customers offset by the previously disclosed Vantiv gain, a positive mark from our Visa swap and a tax benefit from the early adoption of an accounting standard.

Our adjusted net interest margin, which excludes the credit card charge, expanded 3 basis points sequentially. We maintained pricing discipline during the quarter and our asset sensitive position allowed us to benefit from the rising interest rate environment. Our reported NIM contracted by 2 basis points.

Expenses remain tightly controlled as we continue to look for efficiencies throughout the organization. Credit quality was excellent as evidenced by our ongoing improvement in criticized assets and a decline in net charge-offs during the quarter.

Our focus on improving our returns led us to deliberately exit certain commercial relationships and reduce indirect auto loan originations. This led to a sequential decline in our total loan portfolio. In aggregate we exited approximately $3.5 billion of commercial loans in 2016 and we expect to exit roughly another $1.5 billion in 2017.

So with that let's move to slide 5 for the balance sheet discussion. Average commercial loan balances were down 1% sequentially and flat year over year. As I mentioned earlier, throughout the year we made deliberate decisions to exit lending relationships that do not meet our desired risk and return profile. This had a negative impact on C&I balances which decreased by 1% both sequentially and year over year.

During the quarter we maintained our origination spread levels as LIBOR increased driving a 5 basis point increase in our C&I yield. We will continue to optimize the portfolio to achieve better returns while improving the stability of our credit performance.

The sequential decline in average C&I balances was partially offset by 1% growth in commercial real estate this quarter. As we have discussed on prior calls, in construction as well as in perm lending, our teams are cognizant of valuations and supply/demand dynamics. Our disciplined client selection and credit underwriting in commercial real estate will continue to rely on stringent standards.

Average construction loans grew by 1% sequentially in the fourth quarter. As a sign of a healthy construction portfolio, loan run-off increased this quarter as underlying projects were completed and sold or refinanced. Our pipelines are diversifying away from multi-family and we are becoming more selective as the sector gets deeper into the later phase of the cycle.

Average consumer loans were flat from last quarter and were down 2% year over year. Auto loans were down 3% from last quarter and 13% year over year, in line with our reduced originations. Throughout 2016 we maintained a consistent focus on improving the profitability of this business. We are continuing to work on additional tactical changes to further improve the returns in 2017.

Residential mortgage loans grew by 3% sequentially and 10% year over year as we kept 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 portfolio decreased 2% sequentially and 7% year over year as loan paydowns exceeded origination volume. Our originations this quarter were seasonally down 14% compared to last quarter and flat year-over-year.

Our credit card portfolio grew by 1% sequentially but was down 2% compared to the fourth quarter of 2015, including the impact of the sale of the agent portfolio in June. Excluding this sale of the agent-bank portfolio in the second quarter of 2015, our credit card portfolio would have grown by 3% year over year in the fourth quarter.

The introduction of two new credit card products last October and investments we are making to significantly upgrade our analytical capabilities should lead to faster growth in credit card outstanding.

In addition to our new initiatives in credit card lending, our GreenSky partnership should support faster consumer load growth as well. We started funding loans in October and are confident that our partnership will help us achieve a better balance between commercial and consumer loan growth.

Average investment securities increased 3% sequentially in the fourth quarter partially due to underinvestment during the previous quarter. Our investment portfolio yield was stable with only a 1 basis point decline sequentially.

We had three top priorities for 2016 in terms of managing our balance sheet. First, we wanted to make material progress in positioning our loan portfolio for improved and stable returns through the cycle. Second, we sought to balance our interest rate risk exposure. Third, we wanted to maintain a healthy level of liquidity on our balance sheet.

We achieved all three goals by focusing on originating loans that met our targeted return requirements, exiting relationships with subpar risk return profiles and optimizing our mix of liabilities. These objectives will also remain our top priorities for 2017.

At this time we have exited approximately two-thirds of the commercial lending relationships that did not meet our desired profile and have roughly another $1.5 billion to go. Excluding these deliberate exits we expect to grow total commercial loans by 4% to 5% in 2017. Including these exits we expect our commercial loan portfolio to grow by closer to 2% at year end.

We plan to maintain indirect auto loan originations at $3.4 billion in 2017, which will likely result in a roughly $1.5 billion decline in that portfolio. Including the impact of the auto runoff, we expect our overall consumer loan portfolio to grow modestly in 2017 on a period end basis. We also expect to maintain our investment portfolio at roughly the same level we are at today.

Average core deposits increased 2% sequentially driven by increased commercial interest checking account balances and consumer money market account balances. Excluding the impact of the two market exits, Pittsburgh and St. Louis, average core deposits were up 2% on a year-over-year basis.

Inclusive of the impact of the market exits core deposit growth was approximately 1% year over year. Our modified liquidity coverage ratio of 128% at the end of the year was very strong and exceeded the new 100% minimum.

Moving to NII on slide 6 of the presentation. Excluding the impact of the credit card charge, taxable equivalent net interest income increased $12 million or 1% sequentially. Including the charge NII was down $4 million to $909 million. The impact of the credit card item was partially offset by improved short-term market rates in the fourth quarter and higher investment securities balances.

Excluding the credit card charge the NIM on an FTE basis increased 3 basis points from the third quarter to 2.91%. The impact of the charge was 5 basis points resulting in a 2 basis point contraction in our reported NIM. Fourth-quarter margin performance was largely driven by an increase in short-term market rates during the quarter and continued pricing discipline in our loan portfolio.

We expect the NIM to widen by approximately 8 to 9 basis points from the fourth-quarter reported number to about 2.95% in the first quarter. On a full-year basis we expect the NIM to range between 2.95% and 3%. The low end of the range is based on a rate scenario with no additional Fed moves while the upper end of the range assumes two additional Fed moves in June and September.

We will continue to execute a balanced interest-rate risk management strategy as we have done over the last 3 years. Our risk management approach aims to limit the downside impact of low interest rates while maintaining an asset sensitive position.

The cumulative increase in LIBOR over the last two quarters and our ability to maintain pricing discipline have had a sizable positive impact on our NIM. If the expectations for higher interest rate actually materialize NIM expansion will be a function of deposit pricing lags and betas. Our disclosures on this topic are very transparent in terms of the impact of various interest-rate and deposit balance scenarios.

Including the impact of day count we expect our first-quarter net interest income to be up by 1.5% to 2% from the reported fourth-quarter net interest income. With the background of our earning asset growth expectations that I detailed earlier, we are projecting full-year net interest income growth of 3.5% to 5% bracketed by the two rate scenarios that I just outlined.

Shifting to fees on slide 7 of the presentation, fourth-quarter non-interest income was $620 million compared with $840 million in the third quarter. Our fee income adjusted for items disclosed in our earnings release was $608 million, up 2% from the adjusted third-quarter level.

Mortgage Banking net revenue of $65 million was flat sequentially as lower production gains were offset by positive net MSR valuation adjustments during the quarter. Originations were seasonally down 5% from last quarter and up 54% year over year.

During the quarter 41% of our origination mix consisted of purchase volumes and 59% consisted of refinance volumes. Approximately 70% of the originations continue to be sourced from the retail and direct channels and the remainder were originated through the corresponding channel. Gains on sale were down 51% sequentially reflecting the lower origination volume and 132 basis points tighter gain on sale margin. Net MSR valuation adjustments were positive $23 million compared to a negative $9 million last quarter.

Corporate banking fees of $101 million were down $10 million or 9% sequentially reflecting the impact of election-related volatility and the timing of capital market activity. Decreases in institutional sales revenue and lease marketing -- remarketing fees were partially offset by an increase in foreign exchange fees.

In 2016 we grew our capital markets fees by 14%, reflecting strong performance in all of our investment banking products including M&A advisory, equity capital markets and corporate bank underwriting revenue.

Additionally, adjusted for a lease residual impairment recorded in 2015 our corporate banking fees were up 4% for the full year in 2016. These results suggest that our relationship driven model and our efforts to increase the scale and scope of our product offerings are bearing fruit. We expect corporate banking fees in the first quarter to be stable relative to the fourth quarter.

Deposit service charges decreased 1% from the third quarter and 2% relative to the fourth quarter of 2015. This primarily reflected reduced monthly service charges as part of our new consumer checking account lineup.

Total wealth and asset management revenue of $100 million was down 1% sequentially. Our focus on reducing reliance on transactional revenue has resulted in nearly 80% of fourth-quarter fees now being driven by recurring resources versus 73% in the fourth quarter of 2015. Revenues declined 2% relative to the fourth quarter of 2015 mainly due to lower retail brokerage fees.

Results in the fourth quarter included a $9 million pretax gain from the Vantiv warrant exit that we announced during the quarter. With this transaction we have exited our remaining warrant position and the final tally on our Vantiv warrant is $812 million in pretax gains for our shareholders.

Our recurring TRA payment of $33 million is also included in our total non-interest income. Third-quarter results were affected by the TRA termination and settlement transactions. The Vantiv-related transactions during the last two quarters were very beneficial in terms of managing the risk parameters around our financial interest in Vantiv and reducing volatility in our reported results.

Excluding mortgage banking revenue and non-core items shown on slide 14 of the presentation, we expect non-interest income to grow by 3.5% to 4% in 2017. In the first quarter of 2017, on the same basis and excluding the annual $33 million TRA payment in the fourth quarter, we expect non-interest income to be roughly flat sequentially. In addition, we expect mortgage origination fees to decline by 10% to 15% in the first quarter.

Next I like to discuss non-interest expense on slide 8 of the presentation. Expenses were well managed this quarter, down $13 million or 1% compared to the third quarter to $960 million.

As Greg stated earlier, we are making good progress in executing on key strategic initiatives while controlling expense growth. For the full year our expense growth was under 3.5% year-over-year compared to our initial guidance of 4.5% to 5% at the start of the year. We expect expenses in 2017 to be up 1% compared to 2016.

Our guidance includes incremental expenses associated with new initiatives under North Star. In the absence of North Star-related expenses we would have expected our total expenses to decline by about 0.5% in 2017.

Over the past few months we have stated that we intend to achieve positive operating leverage in 2017 and today's guidance reflects that expectation. More importantly, we believe that we will achieve positive operating leverage even if the Fed decides not to raise interest rates further.

Once again I would like to remind you that our total expenses include the amortization of our low income housing investments, which most of our peers reflect in their tax line. In 2016 this line item added 3% to our efficiency ratio.

Our first-quarter expenses will be more elevated this year relative to other years due to timing of certain expenses. We have changed the grant date for our long-term compensation award this year for all of our recipients, which will pull forward about $15 million of expense from the second quarter to the first quarter.

In the first quarter, including a merit increase that will become effective during the quarter, we expect our total expenses to be approximately 2% higher year over year.

Slide 9 has a list of the initiatives which we shared with the investment community last month. As you can see, we are not and we were not expecting a significant revenue impact from these initiatives in 2017. They are in the execution phase and will be providing support for revenue growth in 2018 and beyond. The important note related to these initiatives is that we are paying for these investments by cutting costs elsewhere.

Turning to credit results on slide 10. Net charge-offs were $73 million or 31 basis points in the fourth quarter, an improvement from $107 million and 45 basis points in the third quarter of 2016 and $80 million or 34 basis points in the fourth quarter a year ago. The sequential decrease was primarily due to a $36 million decrease in C&I charge-offs. Recoveries during the quarter were down $6 million from last quarter and $1 million from the fourth quarter of 2015.

Total portfolio nonperforming loans were $660 million, up $59 million from the previous quarter resulting in an NPL ratio of 72 basis points. The sequential increase was driven almost exclusively by a single RBL credit in our energy portfolio that is well collateralized and current on all interest.

Our criticized assets were down $364 million quarter over quarter. Our criticized asset ratio has steadily declined over the last five quarters and continues to be at the lowest level since before the financial crisis. The decline in criticized assets and low net charge-offs suggest that the credit quality should remain relatively stable. However, credit losses, especially on the commercial side, can be volatile on a quarterly basis.

Our loss provision was $26 million lower than last quarter. Our resulting reserve coverage as a percent of loans and leases of 1.36% was 1 basis point lower than both last quarter and last year. At the end of 2016 our reserve coverage was among the highest in our peer group and well above the median.

Our total net charge-offs in 2016 were $363 million or 39 basis points. Our previous guidance that net charge-offs will 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.

Moving on to capital and liquidity on slide 11, our capital levels remained strong. Our common equity Tier 1 ratio was 10.4%, an increase of 23 basis points quarter over quarter and 58 basis points year over year. At the end of the fourth quarter common shares outstanding were down approximately $5 million or 1% compared to the third quarter of 2016 and down 35 million shares or 4% compared to last year's fourth quarter.

During the quarter we executed an accelerated share repurchase of $155 million which reduced the share count by 4.8 million shares. Primarily reflecting the decline in unrealized securities gains given the rising rate environment, our book value and tangible book value per down at 3% and 4% respectively from last quarter. Book value and tangible book value were up 7% and 8% respectively compared to last year.

As I mentioned previously, our common equity Tier 1 ratio increased by 58 basis points from 9.82% at the end of 2015 to 10.4% at the end of 2016. This result, when combined with the $1 billion capital distribution to our shareholders during the year, demonstrates our ability to generate capital at Fifth Third.

As we are now going through this year's CCAR exercise it is too early to give you meaningful color on our expectations, but suffice it to say that we will remain good stewards of our shareholders' capital. During the past 4 to 5 years we targeted stable capital ratios entering the new CCAR cycle and in near-term we would expect to maintain the same approach. The composition of our capital distribution between dividends and share buybacks will be reviewed and approved by our Board.

With respect to our taxes, the early adoption of an accounting change had a positive impact on our taxes in the fourth quarter of approximately $6 million. We expect our first-quarter and full-year 2017 tax rate to be in the mid-25% range.

Given the anticipation for meaningful changes in the corporate tax regime there is a lot of interest in how potential changes may impact our effective rates. It is clearly very early to confidently predict the nature of these potential changes. Our tax positions are similar to other financial institutions in the form of tax credits associated with low income housing, a small BOLI portfolio and a very small muni portfolio and some leasing activities.

All else being equal we believe that we should be able to allow a large percentage of any reduction in corporate tax rates to drop to our bottom line, but it is too early to opine on the dynamics of the competitive environment and how that may ultimately impact Banks' ability to retain any potential benefits associated with the anticipated changes.

Our 2017 financial plan reflects the benefits from our recent actions and provides support for the initiatives under North Star. These initiatives will leverage our strength in middle market lending, industry verticals and specialty lending areas in our commercial business. In the consumer business growth initiatives in mortgage banking, credit card and personal lending will provide support for more balanced growth in our overall loan portfolio.

We continue to expand our capabilities in businesses such as capital markets, insurance and wealth management, which generate attractive returns. Our revenue growth outlook, our ability to achieve positive operating leverage, without changing our risk appetite, our ongoing discipline of maintaining a strong balance sheet and the longer-term strategic positioning of our business lines together provide a positive backdrop for our shareholders.

We have included the updated outlook on slide 12 for your reference and with that let me turn it over to Sameer to open the call for the 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 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. Larry, please open the call up for questions.

(Operator Instructions). Ken Usdin, Jefferies.

First question, if you could talk about just the overall balance sheet. Tayfun referenced still some C&I relationships that you are still exiting and you are also exiting auto. So just in the context of your loan growth and keeping securities balances fairly flat, would you expect to see much change in the overall size of the balance sheet? How would you just imagine the moving parts across that?

Ken, I think with the flat investment portfolio and the 2% year-over-year growth, earning assets will grow. It is probably going to be closer to sort of a 1% type number as you average the two dollar balances -- dollar items.

And as far as loan growth then and your commentary on credit, just wondering if you can help us understand -- I think reserving for growth makes reasonable sense. But any context you can give us around recency of your loss expectations? You guys have had a pretty decent swing in your quarterly losses. And understanding we are at the lumpy part, but just a way to understand how to think about your progression on just underlying credit for the year would be helpful. Thanks.

Hey, this is Frank. Good question. We have had very consistent asset quality results in this year and really back into 2015. And again, our focus has been on deliberately changing the risk profile of the balance sheet. We've, as you know, had a significant number of de-risking activities both on the consumer and the commercial side of the portfolio.

We don't have a significant energy book, very small, so we have not really had any losses of any size there. Our commercial real estate book is performing really well and it's limited, it's capped at 15% from a concentration limit of our total book which is lower than our peers. We have a larger mid-cap book into large-cap that is primarily investment-grade and it has performed exceptionally well.

The other thing to consider relative to NPLs, we reported $660 million in NPLs for the year, 72 basis points, 31% of that number are tied to energy and they are tied to reserve base loans which are very well secured. And the loss profile on that portfolio is roughly 2% max in our opinion.

That is far different, far lower than what you would typically see in an NPL portfolio with substandard loans that generally has a portfolio of anywhere from 10% to 15%, 20% loss.

So again, the profile of the portfolio, both the NPL piece, the balance sheet management composition of our assets we believe is well diversified and that bodes very well and we expect in 2017 that our credit losses, as Tayfun said, should be range bound but should be down from what we reported this year which was 39 basis points at an enterprise level.

Thanks very much.

Geoffrey Elliott, Autonomous Research.

You helpfully gave us some numbers around expense growth, what that would be without the incremental North Star investments. Can you help us think about the same sort of math on fees and on net interest income? What would that look like without North Star this year?

So on fees, Geoffrey, as we indicated before, we were not expecting much of a lift in 2017. These initiatives are underway; some of them will come to their final phases this year. For example, the mortgage system will go online in the fourth quarter of this year. There are others on the capital markets side we are gradually executing, that includes potential insurance adds, etc.

So our expectations with respect to fee income were more focused on growth in 2018 and beyond. We have significant investments in our credit card and personal lending areas that would be very encouraging both from a fee side as well as the balance sheet side in 2018 and 2019.

So, my overall comment is whether it is NII or fee income, in 2017 you are seeing the results of what we have done so far through the end of 2016. On the expense side we clearly have started executing some of the expense initiatives earlier in 2016.

Now if you include some of the exit strategies in commercial in 2017, those are more negative than positive for NII, as you can imagine from just a pure 2017 calendar year perspective. So that is why some of the 2017 guidance appears to be a bit more muted. But we are pretty optimistic as we look forward into 2018 and 2019.

Thanks. And then just to follow up on fees. I think you said something on mortgage income sequentially. I wonder if you could just repeat that for us.

Yes, the mortgage income, we expect the origination income to be 10% to 15% below -- I think we said last year's levels. And that is purely obviously just an impact of interest rates. Actually in mortgage a number of our efforts as we get closer to year end will boost our ability to support a higher origination level. We just need to manage that transition period between higher interest rates and our new system coming online in an efficient manner.

Thank you.

Erika Najarian, Bank of America.

I just wanted a little bit of clarification on your loan growth guide for the year. And thank you very much for giving us the details underneath. So if I am taking 2% of $92.1 billion that assumes $1.8 billion of net growth. And I am wondering, given your guide for C&I of up 2%, so that is about $830 million. And then you have the $1.5 billion of decline in auto. I am wondering where the rest of the growth is coming from?

So you have the numbers roughly -- on the C&I side we will see growth -- on the commercial side we will see growth in -- continued growth in construction. So that will be one source of growth just on a year-over-year basis. We clearly will see some moderate growth in leasing.

And we expect to see growth in credit card outstandings on a Q4 over Q4 level. And relative stability, maybe a little bit of a growth in mortgage as well. And then you will also have the positive impact of our GreenSky partnership, which we've said would produce about $90 million to $100 million growth on a quarterly basis.

It should be about $300 million for the full year.

Yes.

2016 and 2017.

Got it. And just to clarify on the fee guide for the first quarter. So obviously taking out Vantiv and mortgage, we are looking for stable fees from a $510 million base from 4Q?

On a core basis, no, on that base we will have growth. I mean we clearly are not taking our guidance down to $510 million for the first quarter. I think we need to get you a little bit more detail. We are expecting sort of stable to moderate growth in sort of our processing income, deposit fees should be stable.

We guided for stability I think in corporate banking overall. And wealth and asset management should be stable to moderate growth because there are some seasonal factors there that support Q1 growth. The bigger change clearly will be in our sort of other non-interest income -- other fees which includes the $33 million impact of the TRA payment.

Got it. Thank you.

Scott Siefers, Sandler O'Neil.

I guess first question, can you just clarify the dollar base off which you are guiding for 1% growth in expenses? I think you guys reported $3.9 billion in 2016, there was some noise so you get $35 million, $40 million lower if you were to use an adjusted base, so what is the base?

Yes, I mean that is what we are using, basically the same -- that the $3.9 billion number that you are looking at.

$3.9 billion, okay.

Yes.

Okay, perfect. All right, and then I think I am getting a little confused on fee guidance now. When you say -- so I want to follow up on Erika's question on that. When you say adjusted flat excluding mortgage in the first quarter, excluding mortgage in the TRA payment, I think that does come to about $510 million. So is that adjusted flat with year-over-year or maybe if you can just clarify that please.

That is flat sequentially -- adjusted for the TRA payment and mortgages it is flat sequentially, Scott.

Okay, all right, perfect. Let's see I think that does it for me. Actually one final question. So the provision was about as low as it has been in the last three years or so. I imagine a portion of that was you released some reserves in the energy portfolio.

Is it realistic to think that you could repeat and have provisions this low again or would we revert to something along the lines of what has been the last few quarters anywhere in that kind of $90 million to $100 million per quarter range. Do you have any sense or can you provide any clarity there?

So without necessarily giving a precise guidance on total provision dollars I would point out that this quarter's provision was lower due to: one, a significantly lower commercial total charge off dollar number; and two, the EOP over EOP decline in loan balances.

So as loan balances grow you clearly are going to have reduced releases or growth in that line item and then Frank just talked about overall in terms of charge-off expectations. So I wouldn't necessarily take the $28 million commercial charge-off and project that over the entire year on a quarterly basis, which will guide your provision expectations a little bit.

Yes, okay. All right, good, I appreciate the color. Thanks, guys.

Ken Zerbe, Morgan Stanley.

Sorry to keep asking about this, but just on the Mortgage Banking side, I just want to make sure I am really, really clear. Because I heard the 10% to 15% -- is that first quarter versus fourth quarter or is that full-year 2017 verse -- down 10% to 15% versus full-year 2016?

No, I am not guiding full-year mortgage guidance; I am basically guiding 10% to 15% and I am talking only about sort of the -- as we give guidance we are only giving guidance over -- just for the origination fees. And we are saying that the origination fees should be 10% to 15% lower than what we saw in the fourth quarter of this year.

Versus -- of the $65 million, got it.

No, $65 million includes the MSR gain. So I am not giving guidance on MSR; I am only giving guidance on just the pass-through fees which is about $30 million or so.

Okay, so $30 million down 10% to 15% and then all the MSR --.

And then you have basically the servicing fees, the servicing asset amortization, etc., that would make up the rest of the mortgage revenue line item.

Got it, okay. All right, perfect. Thank you very much.

Mike Mayo, CLSA.

I want to make sure I understand what you are guiding to. So for 2017 you are guiding for at least 250 basis points of positive operating leverage assuming no rate hikes, is that correct? In other words, you take the 3.5% for net interest income and at least 3.5% for fees, that is the 3.5%; you guided for expenses of 1%. That would be 250 basis points of positive operating leverage; is that correct or no?

So the only thing that I would point out, Mike, is that we are not providing -- there is a mortgage line item that we are not providing there. So you need to include that in your numbers.

And just to make sure that we are all on the same page, the basis that we are using for that is $3.64 billion of net interest income in 2016, about a $2.4 billion number for fees in 2016 and about a $3.9 billion non-interest expense in 2016. So, yes, we are giving you a very clear guidance on the percentages.

Okay, so when we plug this in our model later, if you include mortgage how much positive operating leverage would you expect? Or would you still expect it assuming no rate hike?

Well, I am not giving you mortgage guidance, so therefore I don't think I can answer your question. But just to suffice it to say that we are expecting positive operating leverage. And whatever -- wherever our efficiency ratio ends up you need to subtract 3% from that to make it comparable to our peer group statistics.

Okay. And then one follow-up. North Star you are targeting a 12% to 14% ROTCE by the end of 2019. In 2016, the way you look at it, reported it was 11.6% in 2016, but you had a lot of noise. What would you consider a core ROTCE in 2016? And if you were just to give us a very simple waterfall on how you get from your core ROTCE in 2016 to the 12% to 14% that would be helpful.

So I think we gave some indication as to how we go from the current level. I think the number that we are looking for 2016 in terms of core ROTCE is probably about 10%. So, and we will take you -- and I think we have given you some example -- as to how that 10% gets to 12% to 14% in the combination of expense saves, balance sheet optimization and fee income growth. And, Mike, we will continue to clarify that path as we execute these initiatives.

So -- but obviously the current environment -- it materializes whether it is with respect to interest rates or the tax rates. Our expectation is that we will clearly be closer to the upper range of that guidance because we clearly stated that we would reach the lower range of our guidance with no rate increases and a meaningful change in the environment.

And that has not changed.

Yes.

All right, thank you.

John Pancari, Evercore.

Just a couple areas of clarification again; I am sorry if there is any repeating going on here. But in terms of how to think about the end-of-period loan balance for the fourth quarter here, that was a good amount below the average loan balance. And I am assuming it is because some of the loan exits came in late in the quarter. So therefore is it still a fair base to grow off of as we think of growth in loans going into next quarter?

John, the only comment I will make, and I'll let Lars give some color is this, is roughly $1.2 billion of the $3.5 billion that we talked about exits we expected in either our credit hurdles or our return totals, $1.2 billion of that was in the fourth quarter. If you exclude the $3.5 billion we would have been up 7% year over year on an end-of-period basis on commercial loans. And I will let Lars handle the color.

Yes, John, keep in mind, as you know, the end-of-period number, that is a balance sheet item, it is a point in time. We have already seen, frankly a rebound in utilization rates for example in corporate banking; it was off about 200 basis points on a linked quarter basis end of period.

We did see encouragingly in the core middle-market in the regions about a 100 basis point pick up, which we do think may be a reflection of the some improved optimism that we are hearing across our footprint from our clients. So I think it is too early to -- say it is a trend. But clearly that was a portion of that end-of-period, but I think we are really well positioned on a go-forward basis.

You have heard Tayfun talk this morning about the way that we repositioned the balance sheet, asset quality has improved. We have had five consecutive quarters of yield increases, loan spreads have stabilized in spite of running out higher risk, higher coupon assets from the Company, capital markets has benefited from our strategic strategy that we are taking to the market. So frankly we feel really good about the way that we are positioned for 2017.

Okay, that is helpful. And then the guidance that you provided on the EOP basis of up 2%, that -- just to confirm, that implies that the average balance year over year in loans is going to be down 1%, is that fair?

No. No the average balance will be up, but it will be up modestly. I mean it will be up, I don't know, between maybe 0.5% and 1%.

Okay, all right. And then on your expense clarification that you gave that you expect expenses for full-year 2017 would have been down or the expectation would be for them to decline only about 0.5 percentage point ex the North Star cost. Does that include cost savings that would be coming from North Star as well? Are you excluding that as well or is that in that 0.5% down number?

It is in that number that we are guiding to, the 1% includes some of the savings associated with the North Star initiatives or the number would have been higher than that from an expense growth perspective. So they are taking those savings and we'll reapply those savings into the investments and also taking some of that to the bottom line.

Okay, so it does include the saves but does not include the investment that down 0.5% (multiple speakers)?

That is correct.

Okay, all right. And then lastly the efficiency ratio, is it -- I'm just trying to think of a fair way to assume where it could end up for the full year 2017 given the guidance you gave. Is it fair to assume that that could end up around 63% coming off the 64% level for 2016? Just trying to weigh in where we think the operating leverage could play out.

Yes, I think that is right. I think that you are pretty close. Again, obviously interest rates will play a role because there is a 1.5% difference in NII growth based upon what you are assuming. For the full year yes. I just -- we gave you some guidance on Q1 numbers because of some timing changes, Q1 will be a high point, and then we would expect to go down from that level. But your full-year assumption is pretty close.

Okay, all right, thank you.

Matt O'Connor, Deutsche Bank.

I was hoping to follow up on the North Star comments about 2017, about it being a modest net drag to profitability. And then just kind of what is the walk from this modest drag in 2017 to the positive $800 million contribution in 2019? Maybe give us some concrete numbers or percentages of when that $800 million comes in.

Matt, you're going to have to be a bit patient with us. We will give you guidance but today we are giving 2017 guidance. We will provide more color on 2018 and 2019 as the year progresses.

I guess to push a little bit like as we exit 2017 will we start seeing some of the net benefits (multiple speakers)?

Yes.

If you look at a lot of the initiatives, Matt, that we are implementing, whether it be the mortgage loan origination system or end-to-end commercial restructuring or small business platform, and then the investments we are making, some of the strategic initiatives with respect to the FinTech space in businesses like GreenSky. A lot of the revenue components of that really start to show up at the end of 2017 into 2018.

In the expense opportunities associated with North Star we are seeing some of that benefit in this year to help pay for some of those investments. But more the revenue side of the house, the fee side of the house really starts to show up in 2018 and 2019.

But as we exit this year you will start seeing signs of those lifts.

Yes.

Okay. And you still expect the full impact, I think it is year=end 2019, if that is correct, the full $800 million benefit?

Yes. That is given a like-macro environment in a -- no additional rate increases. We'd be at the lower end of our 12% to 14% ROTCE range. If we get a better economic environment, we get an improved rate environment, we would hope to be at the higher end of that range.

Okay. Okay, thank you.

Kevin Barker, Piper Jaffray.

Just a follow-up on some of the comments you made about North Star. And it appears like one of your slides it shows about -- most of your projects being complete, just under 50% or some projects over 50% completed by year end 2017. Is it fair to say that at least 30% of North Star is embedded by the end of 2017?

To kick off you mean for 2018 guidance?

Yes.

Yes, I mean I think -- I don't have the exact sort of necessarily split in terms of the revenue pickups in front of me right now. But you will start seeing those lifts as we get near the end of this year. There are a few areas where I think it will be more visible, clearly personal lending will be one. I think as we sort of finalize the analytical investments in credit card lending you will start seeing that in 2018. I think you will start seeing capital markets.

You will also, in addition to that, see the impact of sort of -- the exits this year of $1.5 billion left will be coming to an end. So that will provide a built in improvement in loan growth into 2018. So those are all pointing to a pretty good 2018. But we will continue to provide more details as this year goes on.

So what percentage of North Star would you say is completed by the end of 2017?

I don't have that number right in front of me, Kevin. But we well -- again, just give us some time and we will clarify that.

Okay. And then regards to the gain on sale margin within mortgage, it declined quite a bit this quarter. Were there any particular fall outs from like a very high level of closings that may have caused some hedging mismatches within the gain on some (multiple speakers).

Yes, it is not hedging mismatches, but the timing between rate lock and loan funding is always from quarter to quarter may create some volatility. In general, in this environment we should not expect the 3% plus type margins. And we will probably come inside that as a sector. There is nothing unique in terms of our business but more reflective of what is going on in the sector.

Thank you.

Saul Martinez, UBS.

I guess my first question is more of a strategic type of question. And I appreciate the discipline when it comes to credit risk and commercial relationships. But how do you balance that strategic philosophy or strategic vent with the potential for better economic environment do feel like you are able to get incremental upside in 2018 if the economy starts to pick up and get that upside, especially from your more profitable relationships? And I'll ask my second question now on capital, I guess you guys gave a little bit of your views on your capital strategy and position but with 2% loan growth, 1% asset growth, you built capital this year, ROTCE is moving up, is it fair to say there is room for pretty notable increase in terms of your payout ask in future CCAR cycles?

I'll take the first one. First off, you know, you think about 2017, you look at our strategic portfolio, we did a nice job in 2016 of growing the strategic portfolio. We anticipate and expect to grow that portfolio, 4-5% in 2017. If the economy improves we get some of the expectations that are out there right now start to materialize. Right now, I'd categorize our customer base as guarded optimism. Right now, there is a lot of opportunity I think it is believed to be out there until we start to see some of these investments being made and some of the changes taking place. But we hopefully will capitalize that. We are well-positioned with our regional model to take advantage of that, especially in the middle market space. In addition to that, with our investments in our vertical strategies, we are well-positioned to take advantage of any upside in the economic environment.

As we mentioned before, from a nonstrategic perspective there is still roughly $1.5 billion we will push out this year. But even with that expectation we expect to grow the balance sheet modestly, but with some upside in the economy we would hope to be even more robust in that area.

This is Jamie. On your second question regarding capital deployment, I think as you know we do have some capital poised to be (technical difficulty) deployed in the form of the TRA quarterly options. That is about $170 million over 2017 and 2018 on a pretax proceeds basis that will most likely be deployed each quarter going forward that would obviously increase our payout ratio.

And then in terms of how we are managing capital, clearly we have had a nice capital build that we are pleased with and it certainly provides us flexibility. But as we sit here today we still don't have the instructions, the economic environment for this year's CCAR.

So until we see that we think it is a little premature to dictate what the payout ratios will be. However it is nice to have a little dry powder there if the regulatory environment provides us that opportunity.

And I think the number most folks would like to hear would be if we are running at that 10.4% level what would payout ratios be if we were to maintain a 10% common equity Tier 1. And for us that puts you in the 80% to 90% type of payout ratio before the TRAs. So there is certainly some upside there, but again it is a little premature.

Okay, no, that is helpful. And if I could just ask a quick clarification on the loan growth guidance. The 2% loan growth you gave, but excluding the $1.3 billion exiting of nonstrategic relationships, commercial loans grow 4% to 5%? And you also said you are seeing modest growth in consumer loans obviously with the decline in indirect auto. Did I get that correct?

The push out is actually $1.5 billion, not $1.2 billion, but I will let Lars (multiple speakers).

Okay, sorry. Right.

Overall I think you are around the right numbers.

Yes, especially if you focus on the commercial component of it. We have got a lot of traction. As Greg referenced, our strategic portfolios were up 7% this past year. So we feel like we are very well-positioned for that and can accomplish that.

We have done some other things internally in terms of realigning some of our credit specialties such as asset based lending, how we go to market with our leverage lending strategies. And frankly as we continue to build out our strategic solutions, fee solutions, these are all opportunities not only for us to grow just the balance sheet but also our fee income. So I think that we are well-positioned to deliver.

Okay, great. Thanks, that is very helpful.

Marty Mosby, Vining Sparks.

Tayfun, we have been having this ongoing kind of debate about deposit betas. And you have kind of forecasted eventually deposit betas are really going to tick up. And in your base case you are using about a 70% deposit beta.

When you look at the guidance you've given, you have given so much explicit guidance on everything, the real delta in what you are going to earn next year is really what happens to the interest rate scenario and how much you benefit from that.

On the first rate hike you are kind of forecasting a 4 to 5 basis point improvement for the December hike. But for the next two you are only generating about 5 basis points of improvement. I was wondering what kind of deposit beta you are assuming in the first and then in the next two rate hikes?

Yes, Marty, it is Jamie. I will take that one. On the deposit betas, what we experienced on the move in December of 2015 was a beta that started off high-single-digits, but by June over that six-month period we experienced about a 15% beta.

So in the move that just occurred on December of 2016 we are assuming a 20% beta and we believe each successive rate hike you will see slightly higher betas along with shorter lags in the re-pricing so that if we were to get a June move we model a 25% beta. And if we were to get a move after that, whether it is September or December, we model a 50% beta.

And we do expect lower betas in the consumer space and higher betas in the commercial space as you just have a higher percentage of indexed accounts in that line of business. And as you said, as a reminder, our interest rate disclosures do model a linear 70% deposit beta.

And then a bigger question, Greg, the North Star initiative and everything you are doing there feels like you are taking a bank and really amping it up and making it a well-run bank. But strategically Fifth Third used to be low-cost, high currency to be able to go out and really use that as a weapon in acquisitions.

So we knew what Fifth Third was. What strategically are you going to be that is going to make you different that is going to give you that competitive advantage once you complete all these initiatives of just becoming a better bank?

The first thing is when you look at -- when you think about how we want to run this business, it is really about being good through the various business cycles. We want consistency of earnings, quality of earnings and the right return on our balance sheet. And that is the way we put the expectations out with respect to the range of ROTCE, ROA or efficiency.

We are going to be a very well-run bank, consistently managing our balance sheet for profitability and quality as we go through the cycle and we believe that gets rewarded over time consistently. And we believe we achieve those objectives that we put in place from a financial perspective that will make us a top performing bank and give us the currency we need to continue to do strategic opportunities in the future.

This is Frank. Let me just add to that. If you look historically on the credit side, as Greg said, we had more volatility that our peers probably if you go back over the last 15 years. We have been very deliberate, very intentional and very disciplined in changing that. And you have seen the results of that already over the last 24 months. And that will continue.

We are going to do an outstanding job of balancing risk and reward. We are not in the business just of moving off assets off the balance sheet. We are in the business of evaluating credit, getting paid for the risk, picking the right clients and managing the book in an appropriate manner.

Our goal is to be not only good through the cycle, our goal is to outperform our peers through the cycle so that we do have a competitive advantage when you get to the other side of the cycle. Historically that is not where we played; we played with a much higher elevated level of criticized assets, that you know.

That is no longer the case at all. And we are now well-positioned and confident that we can perform not only exceptionally well through the cycle, but we can do it at a competitive advantage which will benefit the Company for the long run.

I get the -- I mean both answers reflect that you are going to be a better run bank. But competitively what is going to make you different than just being a good bank? I mean what is it -- is it a consumer strategy, is it a commercial strategy? At the end of the day what makes Fifth Third be able to go out and take business away from another bank that is well-run?

No, I think if you talk -- first off it is our -- we have a great business model. We have the right businesses that we are in, right, and we do a fantastic job of going to the market and our people do a fantastic job of going to the market really as one bank - Fifth Third.

And it is really about harvesting the full relationships of the customer relationships on the consumer side, on the commercial side. It is about providing the right products and services to our customers and really being the one bank our customers most value and trust. We have worked hard to put that model in place across our franchise. So we feel very good about that.

And really our strong brand and our footprint is extremely important to us and we are going to continue to focus on our brand equity in the marketplace. But when you look at it across the board we have strong earnings capacity, we have a great team in place, we have invested heavily in the right products. We made some strategic moves recently that position us well for the future. And I think we will have the products, the services and the team to deliver on that in the market.

Thanks.

Matt Burnell, Wells Fargo Securities.

Jamie, let me follow up on the capital discussion if I can. Your dividend payout specifically was a little bit below 30% last couple of years. I understand why that is. I am just curious, given your capital position and the fact that more of the regional -- lower risk regional banks appear to be able to get over a 30% payout ratio, some more so than others.

How are you thinking specifically about dividend payout ratios over the next couple of years at Fifth Third rising above the 30% level? Or are you going to keep it there and just do the capital management via buybacks?

Yes, I think you saw our recent dividend increase, which is one sign of our confidence in our earnings trajectory as well as our ability to increase that dividend. I think the one point of clarification when you look at our payout ratios for 2016 is that we have the TRA transactions that are included in those -- that net income denominator, so it makes the payout ratios look a little muted.

That TRA gain came in two parts. One was a gain that we did deploy in the buyback of $75 million in the third quarter, but the other gain that we had was a $170 million pretax gain in 2016 that is deployed or able to be deployed in 2017 and 2018 as the proceeds are received from Vantiv in the quarterly options.

So if you factor in or take that out at the denominator for 2016 our payout ratios are actually higher in the 70% range in total as well as the dividend payout ratio, I think it was around 31% or so. And I think given our earnings capacity, as Greg referred to, along with our desire to maintain the dividend payout ratio in that 30%, maybe a little bit north of 30% level, I think we have some capacity in the future to deploy that if the Board were so inclined.

And Tayfun, for my follow-up, just looking at the adjusted non-interest income excluding Mortgage Banking net revenue on slide 23, that totals $2.1 billion for 2016. But if I adjust for the Vantiv TRA-related transaction, that gets me to the $2.4 billion number that you referenced as the starting point for fee revenue growth in 2017, correct?

Correct.

Okay. Thank you very much.

Speakers you may continue with your presentations.

Okay. Thank you, Larry, 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.