FITB

Fifth Third Bancorp (FITB)

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Fifth Third Bancorp (FITB)

Q2 2009 Earnings Call

July 23, 2009 9:00 am ET

Executives

Kevin Kabat – Chairman and Chief Executive Officer

Ross Kari – Chief Financial Officer

Mary Tuuk – Chief Risk Officer

Mahesh Sankaran – Treasurer

Jim Eglseder – Investor Relations

Jeff Richardson – Investor Relations and Corporate Analysis

Analysts

Brian Foran – Goldman Sachs

Matthew O'Connor – Deutsche Bank Securities

Christopher Mutascio – Stifel Nicolaus & Company

Mike Mayo – Calyon Securities

Betsy Graseck – Morgan Stanley

Robert Patten – Morgan, Keegan & Company

Presentation

Operator

Good morning, my name is Nakeesha, and I will be your conference operator. At this time I would like to welcome everyone to the Fifth Third Bancorp second quarter 2009 earnings conference call. (Operator instructions). Thank you. I will now turn the conference over to Mr. Jeff Richardson, Director of Investor Relations. Sir, you may begin the conference.

Jeff Richardson

Thanks. Hello and thanks for joining us this morning. We'll be talking to you today about our second quarter 2009 results. This call may contain certain forward-looking statements about Fifth Third Bancorp pertaining to our financial condition, results of operations, plans and objectives. These statements involve certain risks and uncertainties.

There are a number of factors that could cause results to differ materially from historical performance in these statements. We've identified a number of those factors in our forward-looking cautionary statement at the end of our earnings release and in other materials, and we encourage you to review those factors. Fifth Third undertakes no obligation and would not expect to update any such forward-looking statements after the date of this call.

I'm joined in the call by several people, Kevin Kabat our Chairman, President and CEO, Chief Financial Officer Ross Kari, Chief Risk Officer Mary Tuuk, our Treasurer Mahesh Sankaran, and Jim Eglseder of Investor Relations. During the question and answer period please provide your name and that of your firm to the operator.

With that I'll turn the call over to Kevin Kabat. Kevin?

Kevin Kabat

Thanks, Jeff. Morning everyone and thanks for joining us. A release went out a couple of hours ago so hopefully you've had a chance to review it and we can address your questions during this call.

Second quarter results were generally in line with the outlook we provided in April, and we've had a lot of announcements this quarter, the SCAP results, capital actions and the completion of the processing joint venture, so I expect that our comments this morning won't be surprising to you. With that being said I'd like to take the opportunity to provide some perspective on our actions and results before turning things over to Mary and Ross for a more detailed discussion of our credit and our financial performance.

For the first time in a while more questions were answered than raised during the quarter for industry with the publication of the SCAP results and the capital raises that followed. The completion of the SCAP marked a critical turning point for the industry. Uncertainty about the levels and required quality of capital for large banks was addressed and new standards established.

We've exceeded our tier one common equity commitment under the more adverse scenario by 60%, and we continue to attack credit and aggressively manage exposure to economic weakness and market volatility.

Total loan losses for the first half of 2009 came in at $1.1 billion and that compares to an assumption under our SCAP more adverse scenario submission of $1.6 billion for the same period. Net charge-offs increased to $626 million, in line with what we expected.

As for the third quarter, we're not expecting a significant increase but our current expectation is for loan losses in the third quarter to show a moderate increase from the second quarter with higher commercial real estate charge-offs partially offset by lower consumer real estate charge-offs.

At that point we'll be through three of the eight quarters of the SCAP assessment and would currently expect to have incurred something like 20% of the assumed losses. So we don't expect to incur anything like the losses incorporated into the SCAP assessment. Our pretax, pre-provision net revenue is also tracking well ahead of the SCAP assumptions.

Fifth Third's capital position is very strong. During the quarter we closed our processing joint venture with Advent International, generating a $1.1 billion after-tax gain and a $1.3 billion benefit to tangible common equity.

We raised $1 billion in new common equity with the offering oversubscribed by three to four times. We also generated $441 million of common equity through the induced conversion of about two-thirds of our Series G convertible preferreds.

Finally last week, we completed the sale of our Visa Class B common shares generating about $200 million of additional common equity.

The results of these actions is that we've generated common equity of $650 million in excess of the SCAP requirement, and we expect future capital levels to significantly exceed those assumed in the SCAP.

We're currently at 7% on the tier one common ratio including the completed Visa transaction. Our capital levels significantly exceed all well capitalized capital levels, as well as our own target levels. Our capital mix is rich with common equity and that mix feels about right relative to where we want to be going forward after repaying TARP. We also have one of the strongest reserve ratios in the industry at 4.28% of total loans and 135% of NPLs. The reserve covers current levels of annualized charge-offs by 1.4 times.

At the same time our earnings power remains very strong and our earnings generation relative to risk-weighted assets is higher than most of our peers which was a positive for us under the SCAP methodology. Results for the second quarter were in line with our expectations and continue to reflect healthy core trends offset by elevated credit costs.

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