Good day. My name is Jay, and I’ll be your conference operator for today. At this time, I would like to welcome everyone to the Fifth Third Bancorp’s Second Quarter 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. It is now my pleasure to turn today’s program over to Mr. Chris Doll, Director of Investor Relations. Sir, the floor is yours.

Thank you, Jay. Good morning and thank you all for joining us. Today, we’ll be discussing our financial results for the second quarter of 2019. Please review the cautionary statements in our materials, which can be found in our earnings release and presentation. These materials contain reconciliations to non-GAAP measures along with information pertaining to the use of non-GAAP measures, as well as forward-looking statements about Fifth Third’s performance. We undertake no obligation to and would not expect to update any such forward-looking statements after the date of this call. This morning, I’m joined 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, Chris, and thank all of you for joining us this morning. Earlier today, we reported second quarter 2019 net income available to common shareholders of $427 million or $0.57 per share. Our reported EPS included a negative $0.14 impact from the items shown on Page 2 of our release. [Technical Difficulty] mostly due to merger-related expenses associated with MB Financial. Excluding these items, our adjusted second quarter earnings were $0.71 per share. Our financial results were very strong, exceeded our previous guidance, and reflect the progress we are making on our four strategic priorities: leverage technology to accelerate digital transformation, invest to drive organic growth and profitability, expand market share in key geographies, and maintain credit, expense, and capital discipline. The strong performance also reflects our continued focus on driving profitable revenue growth, prudently managing our expenses, and the improved profitability resulting from MB Financial. During the quarter, we completed the MB Financial customer conversion [ph], which represents a significant milestone. We remain very optimistic about our post acquisition growth prospects both in our retail and commercial franchises. Additionally, net interest income, fee income, and expenses all performed better than our April expectations. As a result, our adjusted efficiency ratio improved more than 250 basis points from a year-ago quarter to 58.5%. Our net interest margin, which include the expected positive impact from MB Financial, expanded 9 basis points and was in line with our previous guidance despite the challenging interest rate environment. Net charge offs of 29 basis points improved sequentially and year-over-year reflecting the ongoing benign credit environment in previous balance sheet actions. Our adjusted ROTCE, excluding the impact of AOCI, due to the significant unrealized investment portfolio in cash flow hedge gains was 15.8% in the second quarter. Before providing an update on the progress related…

Thank you, Greg. Good morning and thank you for joining us today. Let’s move to the financial highlights on Slide 4 of the earnings presentation. Reported results for the quarter were negatively impacted by two notable items, an $84 million after-tax impact from MB merger-related charges and a $17 million after-tax negative mark related to the Visa total returns swap. Excluding these items and other items from prior periods as shown in our reconciliation tables, including MB-related merger charges and prior period Worldpay gains, pre-provision net revenue increased 29% on a year-over-year basis, and increased 24% from the prior quarter. Our financial performance also reflected the full quarter benefits associated with the acquisition of MB. Our adjusted results for the second quarter were very strong with net interest income, non-interest income, and expenses all performing better than our April guidance. The area where we are significantly outpacing the peer group is our NII and NIM performance. We have been very deliberate and comprehensive in our actions over the past 12 months and longer in managing our interest rate risk, including our strategies in managing the investment portfolio, our preference not to grow our residential mortgage portfolio, and a timing of the hedge transactions that we have executed ahead of the rate downturn. These were well thought out and well executed decisions with a longer horizon view that put our performance ahead of others. Looking at the disclosed information prior to today, our net interest margin, excluding purchase accounting accretion is above the median of the peer group facts. Our adjusted return metrics were also strong during the second quarter with an adjusted ROA of 1.33%, an increase of 12 basis points from last quarter. Also, we achieved a return on tangible common equity of 15.1%. It is important to note…

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 allotted this morning. During the question-and-answer period, please provide your name and that of your firm to the operator. Jay, please open the call up for questions.

Thank you, Chris. [Operator Instructions] Our first question comes from the line of Scott Siefers of Sandler O’Neill. Sir, your line is open.

Good morning, guys. Thanks for taking my question.

Good morning, Scott.

Good morning, Scott.

Hi. Tayfun, I just want to make sure I understand the guidance correctly, and I appreciate all the granularity. Just as I look specifically at the fee guidance for the full year, just given that we have half a year in the bag, and then, we’ve got the third-quarter guide, it looks like the fourth quarter ramp would be just very, very strong. I want to make sure I understand what all the puts and takes are as you see them, and I guess, both for the third quarter you know it sounds like corporate banking is going to be, you know, pretty strong, but then into the fourth quarter what would drive that really big ramp?

Yes. So, Scott, the underlying third quarter to fourth quarter growth is truly in corporate banking and a combination of overall capital markets as well as treasury management. As we look at our corporate treasury management pipelines and the expected on-boarding of some of those client revenues, as well as in general our expectations with respect to just corporate banking fee activity, you know, that builds the basis for our outlook.

Okay. So, it should indeed be, you know, well above the $700 million I guess in fees in the fourth quarter if I’m reading it correctly.

Yes. Mathematically that should be over $700 million. That’s correct.

Yes. So, okay, good. Alright, thank you. I appreciate that.

Sure.

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

Great, thanks. Just a question in terms of the margin, I know the MB does, say, helps you guys out a fair amount, is there any way to separate out the benefit that you got on a core NIM basis? So ex-the PAA from MB versus what Fifth Third would have done this quarter ex-MB?

Yes. Ken, it’s Jamie. I would look at it, you know, as we left the first quarter, our guide was we were going to grow from a 3.28 core NIM to a 3.32 core NIM, which is exactly what we posted. When you decompose the NIM benefits, I think we said on the last call, you know, we would expect the MB loan and deposit portfolios to be additive to NIM and the challenge with unmixing the paint this quarter on the benefit is that we made a lot of investment portfolio and funding actions in advance of the MB acquisition. But in total, I would decompose the NIM that a combination of the balance sheet positioning, funding actions, investment portfolio, plus MB’s loan and deposit portfolio benefit was 8 basis points, and then our core deposit growth on a core basis at Fifth Third was up 2% and that added a basis point. So, we had 9 basis points of benefit, and then that benefit was partially offset by a basis point headwind from day count, a basis point impact from the $1.3 billion on balance sheet auto securitization we did in April, and then 3 basis point erosion from market rates, which as we’ve talked about in the past, is primarily related to the one-month LIBOR to Fed funds spread, which cost us a little over $1 million per quarter per basis point, and that contracted to 6 basis points during the quarter. So, when you take all of that together, that posted the core NIM of 4 bps, but it is getting harder and harder to break out, you know, what MB did exclusive of the other actions we took on the balance sheet.

Yes, this may be one last time that we’re doing this, but it’s going to be very difficult going forward from here on.

Got it, understood. Now that actually – the answer was actually very helpful. And then, just a really quick follow-up, are you guys – in terms of the hedging strategy, I know you’d been adding more hedges this quarter, are you guys now fully done, comfortable where you’re at with the hedging – your hedging portfolio?

So, we’re definitely pleased with what we were able to execute. I would tell you, in the fourth quarter of 2018, we did the $11 billion of total hedges, $3 billion in floors, $8 billion in receive-fixed swaps, as Tayfun mentioned. $3 billion of those received-fixed swaps were forward starting. $1 billion began in June, and another $1 billion will begin in the third quarter and the final $1 billion leg of that is in January. I would love to do more, but not at these entry points. So, what we did this quarter and actually over the last six months as opposed to adding more hedges because we didn't like the entry points, we effectively repositioned the investment portfolio to the equivalent interest rate protection of about $10 billion in notional swap. So, we included an extra page in the slide deck, it’s page 20. It’s just to highlight the additional positioning we've done with the investment portfolio to highlight the protection that it will provide. And so, that obviously helped during the second quarter and helps protect the outlook as we go forward. So, a long answer to a simple question, but at the end of the day, there are a lot of tools we have at our disposal, and we've been I think very effective at utilizing them whether it’s swaps, investment portfolio, the fact that our CD portfolio is -- 76% of it matures in under 12 months, so that should reprice fairly fast, the fact that we put on additional fixed rate auto, so the auto production was $1.4 billion for the quarter and should be about $5.8 billion for the year. So, we've done a lot behind the scenes to help protect to the low rates and that’s starting to shine through in the results.

Alright, perfect. Thank you.

Thank you. Our next question comes from the line of Matt O'Connor of Deutsche Bank. Your line is open.

Good morning.

Hi, Matt.

Hi, Matt.

You mentioned the 4Q19 targets assuming CET1 migrating down to about 9%, compared to the 9.6% that you are at right now. Is that implying some front ending of the buybacks of the $2 billion that you’re targeting for the next four quarters?

No, we should be – I mean we will be. We’re not necessarily providing how we’re going to execute those, but more or less, you know, I think it's going to be even – we also, as you know, have a portion of the Worldpay gains still waiting to be converted to buybacks potentially.

Okay, alright. And then, just separately, on the early stage delinquencies, they were up both Q2, and then especially, year-over-year. Is that being distorted at all from MB deal?

There’s a little bit of noise there. Some of those are matured facilities that we’re in the process of getting through the pipe. They’re small facilities overall. We expect that to subside in the next quarter or so. There’s nothing there that portends deterioration that in credit leading to losses or anything like that. It’s just working through some of backlog we need with the adjustment, primarily on MB, and again, not delinquent, but also maturated facilities that we’ve had a plan in place to work through and we’ve made a lot of progress. So, you’ll see that come down in the next couple of quarters.

Okay. That’s helpful. Thank you.

Okay.

Thank you. Our next question comes from the line of Ken Usdin of Jefferies.

Hi, thanks. Good morning. One question on just the loan growth commentary, Greg, you made in your intro. So, that caution I guess on the commercial side, is that just talking points or is that something that you're seeing? You mentioned still the strong pipelines in the back half, so can you talk about whether that's anecdotal or actually coming through in terms of a change in the amount of pipeline that you guys are seeing?

You know, Ken, we haven’t seen that show up in our pipelines yet, and actually we feel very confident about our ability to deliver on our commitments we just made on asset growth for the second half of the year. But the conversations are less optimistic, you know, obviously with the noise that’s out there right now, you know, the slowing economy, the rate environment, what’s happening with the tariffs and so forth. It’s just a cautionary discussion. We’re ticking that up, but once you get that kind of ebbs and flows, but right now, we have [nothing to show up] in our pipelines. Actually, production was held up very well in the second quarter, and as we talked about, and we expect that to materialize again and continue forward into the third and the fourth quarter this year.

Okay, got it. And my second question just on the deposit cost side, it’s tough to see kind of the underlying core, Jamie you mentioned a little bit in terms of the MBFI effect. But you had 4 basis points interest-bearing costs increase below peers probably because in part of the averaging, just how do you think about the trajectory of that deposit – interest-bearing deposit costs from here in terms of ability to start, you know, controlling that if not showing a rate of decline at some point?

So, the deposit cost in the quarter, MB’s book at the end of the year and you can look at their fourth quarter release, their deposit costs were roughly in line with our deposit costs, not far off at all. So, our [up 4] was as we got it to the last quarter, we thought it would be [up 4] and we were [up 4] and that’s like, you know, really the Fifth Third books. So, we think it's been – rate costs have been well maintained on the deposit side. For our forecast, if we were to not have a Fed cut at the end of July, I think a normal amount of deposit rate increase for us would be up 1 basis points or 2 basis points just given mix and promotional rates and new acquisitions because we continue to have good deposit growth. But given that we have a July cut and a September cut in the forecast, those numbers, I think, will be down a bip or 2 from the levels that you see in the second quarter.

Got it. Thanks, Jamie.

Next question comes from the line of Mike Mayo of Wells Fargo Securities.

Hi, this question might go in the category of no good deed goes unpunished, right. Why not guide for lower expenses in the third quarter versus the second? I mean, it’s not like you're done with the merger savings and also at what point would you increase the expected savings from the merger?

Well, Mike, we still continue to invest in our company. We are very much interested in maintaining a healthy revenue growth. We are interested in making all the necessary technology investments that we need to make. So, as much as we like the way we manage expenses, we also want to make sure that we continue to support the franchise. In terms of, you know, the overall expense savings, I mean we will share those with you, but I think we’ve proven over the past two, three years that we are, you know, good stewards of expense and we will continue to execute on those terms.

And just a separate question. In terms of the hedges that you put on last October and November, I mean, that was ahead of the industry, what are you doing now and what caused you to put on those hedges before so many others?

Mike, Jamie gave a good discussion on the way we are managing the investment portfolio. I think lately, since sort of the end of last year into this year, we've executed a few actions to position the investment portfolio. We thought that it was a better choice between executing through the transactions and moving the portfolio. And, we look at the environment and market expectations every day, and as there are certain windows open, we may choose to add more direct hedge protection. But at this point, we have been favoring moves on the investment portfolio to protect the downside. But that may change, it's a very fluid process and we are very careful. And I think over the years, we had we have a great team. They've provided a great perspective on economic growth, as well as central bank actions. And it's that same team will continue to monitor the situation as closely as they happen over the years.

Alright, thank you.

Next question comes from the line of Gerard Cassidy of RBC.

Good morning, guys.

Good morning, Gerard.

Hi, Gerard.

Can you share with us, maybe, Greg, the outlook when you look out over the next 12 months; certainly, the MB Financial transaction from the numbers that we're hearing today seems to have started out very well. I know at the time of the announcement, your stock suffered because of the deal, some of the metrics that were included in the deal, but what is your view going forward on consolidation and acquisitions?

Yes, first all, we're extremely pleased with the MB acquisition and partnership, and I do want to thank all the MB employees for their great leadership for this transition. So, we're very pleased with that. We're very pleased also with the quality of that business and our forgoing expectations to achieve our expense synergies and our revenue synergies. We feel very, very confident and as Tayfun mentioned in his comments, we're slightly ahead of the expense side house and we're very bullish on the revenue side of the house as we start to look at some of those pipelines starting to come together. It all starts with the people and we've got great people at MB and partnership with Fifth Third team in Chicago to serve that market. With that said, job one is to get this done right and deliver on the commitments that we made, whether it be the 400 basis points in improving our efficiency ratio, which we're on the way to do that, the 200-basis points improvement in ROTCE, the 12-basis points of ROA improvement. We want to deliver on those commitments as we said we would to our investors, and that's going to be job one. We want to get that done right and demonstrate that going forward. So, our focus is on that. Our focus is on continuing to build and expand our businesses organically where we'd be growing in new markets like California, Texas or investments in the Southeast, products, services and people and we're going to continue to do that. And that's really the focus is, MB and then organic growth. There's nothing out there on horizon right now that we're focused on beyond that.

Very good. And then Tayfun, maybe can you give us an update on CECL, what you think the day one impact might be from first quarter of next year?

Gerard, we're not quite ready yet to share. Obviously, there's a lot of work that's still going on. There's still a lot of work ahead of us between now and year end. We are in the middle of these parallel runs. My expectation is the earliest we will probably potentially give an update will be our third quarter earnings. But we're working very diligently to finish all the work.

Okay. Thank you.

Sure.

Next question comes from the line of Saul Martinez of UBS. Your line is open.

Hi, good morning, guys.

Good morning, Saul.

So, I'm sorry, if this is a really simple question. I just want to make sure I understand the fourth quarter financial targets and how to read that. So, you know that the 75 basis points of cuts have a 70-basis point impact on ROTCE and 5 basis points ROA, yet you basically maintained your full-year guidance for all of the items, including net interest income. So, I mean, should we basically assume that your expected run rate for NII, maybe a little bit lower than what you had previously, but the full-year number doesn't really change in part because you basically outperformed in the second quarter. So, I just want to make sure I understand what the fourth quarter targets imply for run rate?

Yes, I think, in general, Saul, if you remember the guidance that we provided back in April, these numbers do line up very well, including the impact of lower interest rates. Now, on ROTCE, the additional impact is coming through the AOCI and that's why we wanted to exclude that and gave you the 16.5% excluding the AOCI. Overall, if you take our NII guidance up about 1% from the adjusted Q2, you will see that we're not necessarily expecting a growth into the Q4 based on that third rate cut assumption. And, I mean, it's not like a big fall or anything like that, but you're not going to expect another 1% growth over that. In terms of fee income, I answered one of the earlier questions, we are expecting a good amount of growth from the third quarter into the fourth quarter in terms of fee income. And in terms of the expense outlook, it's not different. These numbers are large percentages because of the MB comparisons and therefore you're not seeing the underlying movements. But our expectation is that we had great performance in the second quarter with respect to NII, we still expect very good performance in light of a lower rate environment. And we just kept our overall return targets pretty much intact despite the weaker rate environment and because we just outperformed quite a bit in the second quarter. I mean, that's really – that has also a lot to do with our ability to maintain our overall return targets.

Okay. Got it. That makes sense. Just a follow up then on the deposit cost and the deposit beta assumptions. I think you mentioned that we could expect with your rate assumptions a couple basis points decline in the third quarter. You also mentioned that deposit betas you're assuming are high-30s, I think high-30s or low-40s. If I recall, how does that high-30s, low-40s, over what time period does that play out? So, you're assuming 50 basis points of cuts, for example, in the third quarter, should we assume that deposit cost then in the fourth quarter will reflect that beta assumption or does that deposit beta play out over a multi-quarter type of time horizon?

Yes, it's a very good question. And unfortunately, the answer is somewhat complicated because you have about 12% of our deposit book is indexed to Fed funds. So, when the Fed moves, 12% is going to reprice immediately at a 100% beta. But then we have various offers that are out there that those deposit rates will come down over time. So, it's really a blend that will deliver it and as Tayfun mentioned, over the three rate movements, we're modeling a 38% beta, which is exactly what our cycle to date beta was on the 225 basis points of Fed funds increases.

And if I could ask maybe one final one on that, those index deposits, where they baked in? Are those in the other time deposits?

It's across the board. Yes, I'd say it's fairly evenly distributed.

It's probably less in other deposits and actually...

It's in more savings and IBT.

Sorry, what was that?

It's more in savings and IBT, as opposed to other.

Got it. And are they mainly commercial deposits or…?

Yes.

Got it. Alright. Thank you so much.

Yes.

Next question comes from the line of Marty Mosby of Vining Sparks. Your line is open.

Thanks. First, let me – maybe give you a little more credence than you give yourself, because I listen to a lot of the different calls every quarter and your approach to net interest income of being neutral when everybody else was still enamored with being asset sensitive gives you the flexibility to take advantage of those events when you solve them, because your goal at the end is trying to be as neutral as you can what you see on the interest rate sensitivity numbers. So, I think that perspective gives you a lot of flexibility versus trying to play what's happening even if it seems like the momentum is going to continue in the right direction. So, always like listen to your calls, Tayfun and Jamie, you've done a great job of getting ahead by keeping that perspective. In that vein, one of the things that you've done, I think is being able to keep these cash flow securities out in the sense of as you are kind of moving from mortgage back into these locked-out types of securities your premium amortization this quarter was pretty minimal. So, I just wanted to – when you mentioned your margin, you didn't mention any premium amortization or mortgage-backed securities. So, is it true that this quarter underneath all these numbers that would be a pretty minimum impact as you have been shifting the portfolio?

Yes. And I didn't give that data point, but that's exactly what the repositioning accomplished. I think we ran last year net premium amortization of $6 million a quarter, I think this quarter we were around $2 million, so that benefit definitely showed up in the quarter.

And when you compare that to other banks that went from like 6 last year to probably 4 times that this this quarter with all the prepayment speeds, accelerating, that was a big kicker in the sense of how you outperformed so dramatically on your NII because it took that risk out of the equation. The other thing that I wanted, which is, Tayfun a very easy question [Technical Difficulty] in the income statement and expenses, can you give us a little feel for what it was this quarter and what it's been in prior quarters?

So, the approximate – I'll give you the number on the revenue side, increase is probably about $20 million-ish quarter-over-quarter Q1 to Q2.

And what's the base this quarter, how much was it in total?

About $40 million, $45 million, Marty.

Okay, thank you.

Our last question comes from the line of Kevin St. Pierre of KSP Research. Sir, your line is open.

Good morning. Thanks for taking the question. Tayfun, you mentioned that, one thing that has benefited the NIM and your NII performance was the decision not to grow the first mortgage portfolio. You did guide to third quarter increase in consumer loans of about 2%. As you're thinking with the prospect of lower rates as you're thinking change there or are you expecting growth in other loan categories?

Yes, we're not – our outlook, at least for the second half of this year, sort of matches the production patterns with respect to the refi environment. I don't think that by the time we get to year-end, our residential portfolio outstandings will be much different from where we are today.

Got you. And maybe one final, noticed pretty stable demand deposits period end quarter-to-quarter on the linked quarter. Can you speak to deposit attrition at MB and how things are going there?

Yes. The deposit attrition at MB is going fine. It's slightly less than the attrition they experienced for the 28 months leading up to the acquisition. So, it's right in line to slightly better.

Great. Thanks very much.

Thank you.

There are no further questions at this time. Chris, you may continue.

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

This concludes today’s conference call. You may now disconnect. Have a great day.