FITB

Fifth Third Bancorp (FITB)

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Fifth Third Bancorp (FITB)

Q4 2011 Earnings Call

January 20, 2012 9:00 am ET

Executives

Jeff Richardson - Director of Investor Relations and Corporate Analysis

Bruce K. Lee - Chief Credit Officer

Daniel T. Poston - Chief Financial officer and Executive Vice President

Kevin T. Kabat - Chief Executive Officer, President, Executive Director, Chairman of Finance Committee and Member of Trust Committee

Analysts

Craig Siegenthaler - Crédit Suisse AG, Research Division

David J. Long - Raymond James & Associates, Inc., Research Division

Ken A. Zerbe - Morgan Stanley, Research Division

Stephen Scinicariello - UBS Investment Bank, Research Division

Leanne Erika Penala - BofA Merrill Lynch, Research Division

Andrew Marquardt - Evercore Partners Inc., Research Division

Matthew H. Burnell - Wells Fargo Securities, LLC, Research Division

Paul J. Miller - FBR Capital Markets & Co., Research Division

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

Michael Mayo - CLSA Asia-Pacific Markets, Research Division

Presentation

Operator

Good morning. My name is Jamal, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fifth Third Earnings Conference Call. [Operator Instructions] Thank you. I would now like to turn the call over to Mr. Jeff Richardson, Director of Investor Relations. Mr. Richardson, you may begin.

Jeff Richardson

Thanks, Jamal. Good morning. Today, we'll be talking with you about our full year and fourth quarter 2011 results. This call may contain certain forward-looking statements about Fifth Third 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 some of these factors in our forward-looking cautionary statement at the end of our earnings release and in other materials, and we encourage you to review them. Fifth Third undertakes no obligation and would not expect to update any such forward-looking statements after the date of this call.

We're joined on the call by several people: Kevin Kabat, our President and CEO; Chief Financial Officer, Dan Poston; Chief Credit Officer, Bruce Lee; Treasurer, Tayfun Tuzun; and Jim Eglseder of Investor Relations.

During the question-and-answer period, please provide the name -- your name and that of your firm to the operator. With that, I'll turn the call over to Kevin Kabat. Kevin?

Kevin T. Kabat

Thanks, Jeff. Before going through the quarter, I want to make some comments regarding 2011. Although it was a fairly tough year environmentally, I believe our results demonstrate the many core strengths of Fifth Third, as well as the many steps we've taken to make it a better company. Net income to common shareholders of $1.1 billion is the highest since 2006 and more than doubled from last year. Pre-provision net revenue exceeded $2 billion for the third consecutive year, as we've managed the regulatory headwinds and a slow growth environment. We've posted a return on assets of about 1% for 5 consecutive quarters with the full year ROA of 1.2%, up about 50 basis points from our 2010 full year ROA. I'm pleased with our ability to produce these returns in the midst of a relatively weak economic recovery and significant regulatory changes.

We remain committed to serving our markets, which is being demonstrated through our strong deposit and loan growth results. For the year, average transaction deposits increased 10%, and we grew portfolio loans 5%, with average balances increasing each quarter throughout the year. Credit quality metrics showed continued and significant improvement, with charge-offs approximately half of 2010's levels, and we continue to build equity capital despite our already strong capital position. Those trends are encouraging and provide a solid foundation to build on as we enter a new year.

Now moving onto some highlights for the fourth quarter. Fifth Third reported fourth quarter net income to common shareholders of $305 million and earnings per diluted common share of $0.33. Earnings results included the impact of charges related to the Visa total return swap and our bankcard association membership, which Dan will discuss in more detail. Those charges were $68 million pretax or about $0.045 per share. Returns remain solid despite the impact of these charges and the initial impact of new debit interchange rules.

Return on assets for the quarter was 1.1%, and return on tangible common equity was 12%. Additionally, tangible book value per share of $11.25 increased 2% sequentially and 13% from a year ago. We posted very strong loan growth for the quarter, with end-of-period portfolio loans and leases up 2% sequentially and up 9% on an annualized basis. We're seeing continued growth in our C&I, mortgage and auto portfolios. Additionally, the rate of attrition in other portfolios continues to slow as the economy slowly improves and more stability begins to return to real estate markets and values. Looking to next quarter, we expect these trends to continue.

Credit trends continue to show improvement, with net charge-offs falling to the lowest level since 2007 and nonperforming assets declining $128 million on a sequential basis to the lowest level since early 2008. Total NPAs, including held for sale, were down $187 million or 9%. Delinquencies continue to decline as well, falling $95 million sequentially to the lowest levels in recent memory. Capital levels continue to be very strong and well in excess of targeted levels and regulatory requirements, including those proposed under Basel III. Tier 1 common is 9.3% under current capital rules, and we would estimate a fully phased-in Basel III Tier 1 common ratio of approximately 9.7%. We believe that will place us among the highest Basel III capital positions of the top 20 U.S. banks.

As you know, we recently submitted our capital plan under the Comprehensive Capital Analysis and Review or CCAR process. We believe that our strong capital levels and earnings make it possible and appropriate for us to increase our distributions to shareholders in coming quarters, including through share repurchases, while at the same time the plan will retain some of our common equity generation to support asset growth. Dan will discuss this more in his remarks.

Looking at the broader economic picture, we continue to see slow improvement with recent trends favorable. While recent unemployment figures are encouraging, it's important to note that labor force participation rates remain 2% to 3% below levels seen in precrisis years. Put another way, while seeing the economy adds jobs can very positive -- is very positive, right now, we've got $3 million to $4 million less people out there looking for them. So the declines we've seen in the unemployment rate are likely to slow as more people attempt to re-enter the labor force. However, this is still a positive development.

GDP continues to expand as does consumer sentiment, but overall improvement remains somewhat sluggish. Customers continue to view the macroeconomic and political environment as uncertain in making their investment decisions, and that may not improve a lot in an election year. That being said, the U.S. economy is resilient, and we think slow and steady growth throughout 2012 is the most likely scenario. That kind of growth is now likely to lead to higher rates where a steeper yield curve, which we'd like to see and which is critical to allow us to a more fully -- to more fully generate the higher returns we expect for Fifth Third.

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