Ladies and gentlemen, thank you for standing by and welcome to the Fifth Third Bank's Fourth Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] I will now hand today's conference over to Mr. Doll. Please go ahead.

Thank you, [Dkitria]. Good morning and thank you all for joining us today. Today, we'll be discussing our financial results for the fourth quarter of 2019. Please review the cautionary statements on 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; Treasurer, Jamie Leonard. Following prepared remarks by Greg and Tayfun, we will open the call for questions. Let me turn over the call now to Greg for his comments.

Thanks, Chris, and thank all of you for joining us this morning. Earlier today, we reported record full year 2019 net income of $2.5 billion or $3.33 per share. Full year adjusted net income of $2.1 billion was also a record for the Bank. As I reflect on the past year, I'm very pleased with the significant progress we made positioning Fifth Third for long-term success. In addition to the record net income, we generated our best full year core return on tangible common equity, excluding AOCI in over a decade, up 120 basis points from last year. We produced our lowest efficiency ratio in over a decade, which decreased 160 basis points from last year. We generated peer-leading household and deposit growth, all while reducing deposit cost during the year. Also, during the year, we successfully integrated MB Financial. We added significant scale in the Chicago market and expect to generate even stronger deposit, household and revenue growth going forward. We successfully navigated the evolving interest rate environment as our full year 2019 core net interest margin expanded 5 basis points after expanding 18 basis points in the year before, which is at the higher end of our peer group. We generated record fee income, including corporate banking, as our capital markets business generated double-digit revenue growth for the second consecutive year. We also generated record revenue in wealth and asset management, while generating positive inflows every quarter during the year. Net charge-offs and other key credit metrics remained at or near historically low levels throughout the year. We generated nearly half a billion dollars of excess capital through Worldpay transactions in 2019, which is yet to be deployed. And we returned over 110% of adjusted earnings to shareholders in 2019 through a 27% increase in our dividend and…

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. We are pleased with our overall financial performance and strong finish to a strong year. Similar to the trends all year, during the fourth quarter, our net interest income, net interest margin, non-interest income and non-interest expenses, all performed in line or better than our October guidance. Reported results for this quarter were positively impacted by $0.28 per share from several notable items. The most significant was a $265 million after-tax gain from the Worldpay TRA transaction, which added approximately 20 basis points to our CET1 ratio. Similar to all of the strategic decisions related to our legacy processing business over the past 10 years, the TRA transaction creates significant value for our shareholders by monetizing gross cash flows that previously expected to occur, primarily from 2025 until 2035. Consequently, we are also no longer exposed to FIS' taxable income capacity in the future related to those cash flows, and we still have multiple years of annual benefits impacting our fee income in the future. We provide more information on the transaction in our presentation appendix. In addition to the TRA transaction, reported results were also affected by a $34 million after-tax negative mark related to the Visa total return swap, a $15 million after-tax contribution to the Fifth Third Foundation and a $7 million after-tax impact from MB merger-related charges. Additionally, our quarterly results were negatively impacted by a $7 million after-tax impact to provision for credit losses, resulting from our conversion to a national charter. Our earnings materials provide more information on the various credit metrics that are affected by this conversion. Adjusting for those items and the purchase accounting impact shown in…

Thanks Tayfun. Before we start Q&A, as a courtesy to others, we ask you to 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. [Dkitria], please open the call for questions.

Thank you. [Operator Instructions] And your first question comes from the line of Scott Siefers with Piper Sandler.

Good morning, guys. Thanks for taking my question.

Good morning, Scott.

Hi, Tayfun, I just wanted to ask about the fourth quarter provision and give some detail on the items impacting it, in addition to just the move to the national charter, but you had, it sounds like, a couple of commercial credits and then the impact from the credit card portfolio as well. Just as you think about things sort of on a go-forward basis, how much of that proves transitory and how much, if any, is sort of a new run rate? In other words, if it was higher than expected this quarter due to some of those, kind of revert back down, or what's the best way to think about it?

Sure. Scott, I will make a few comments and I'll turn it over to Frank for the credit piece. We believe that clearly these couple of credits that just happened in one quarter impacted the provision numbers, which we believe to be transitionary. If you look at our guidance for next year, we are clearly expecting continued stability in benign credit performance away from sort of the accounting-related changes in our credit metrics. This truly was just one of these quarters where a few credit loans came up, but, Frank, do you want to comment on that?

Tayfun, I will. And Scott, we've talked about before, the commercial business – and we've done this a long time – is lumpy. The nature of the business is lumpy. One quarter didn’t make us trend in either directions in the commercial business, and it's something that you manage over an extended period of time. These two credits are non-related to each other. They're both kind of core middle market companies. The company has actually banked for a long period of time. One is a retailer. One is in the hospitality sector. They're just – they're going through a workout and they happen to hit at the same time. But if you revert back to the year and if you look at our overall, again, results for the year, we're actually very pleased with the asset quality for the year. As we said before, our criticized assets came within our expectations for the year. Our outlook for 2020 has really not changed other than maybe a [2 or 3 basis points] increase, just given the economy. And overall, our nonperforming assets for the quarter were centered on these two items, the $50 million net flow at the end of the day. When we think back to the work, we've done in the company intentionally over the last four years, we've repositioned this company to be strong through operating cycles. So, we're highly confident – I'm highly confident we've done that. These are middle market credits. The increases we've actually seen for the year in our problem credits have been tied to kind of the lower-end middle market. A lot of that's reflective of repositioning the rating system from MB. Some of it's in our systems as well. Those credits tend to be very well secured and historically have a loan…

Okay. That's helpful. I appreciate that. And then separately, Tayfun, I was curious on the gain that you got from the change in the TRA agreement, do you guys have the same flexibility to repurchase shares with that gain as you do under kind of a more traditional – if you were to just sell shares and get an after-tax gain in that way?

Not with the gain that we book. We typically go to the Fed with a specific request, but clearly, the first quarter 2019 gain on share sales, we are able to buy back shares with that. But obviously, this gain that we booked in the fourth quarter goes into our overall capital ratios, which gives us a better starting point for the 2020 CCAR exercise.

Yes. Okay, perfect. Thank you.

Dkitria, are you there?

Yes. Next question comes from the line of Ken Usdin with Jefferies.

Thanks, good morning guys. Can I ask a question on the right side of the balance sheet, you talked about loans growing 4% this year? I'm wondering if you could put the deposits into context in terms of the mix of deposits and what type of growth you're expecting on the deposit side overall? Thanks.

I suspect that I'll turn it over to Jamie with details as well. We obviously have had a very good year both in consumer, as well as commercial deposits in 2019. We expect that our stable growth in consumer accompanied by good growth in household will continue. We do expect a stronger year in commercial deposit growth as well because we have a good amount of focus on the partnership in our treasury management group and our commercial deposit. Jamie, anything you want add?

Ken, this is Jamie. One of our goals this year is that we do match loan growth with deposit growth. And so, for us, we would expect core deposits to be growing similarly to the loan side at 4%. Tayfun mentioned our focus is really improving the share of wallet that we get on the commercial side of the aisle because historically, retail, as you know, has been a very strong provider of deposits and funding for the company over the years. So, our focus is getting commercial up to those levels. So, we would expect commercial to outperform those numbers, and then on the retail side, to be a little bit less than that 4% number, in part because we’re intentionally running down our CD portfolio and repricing a lot of those higher-cost CDs around 2% or so, right now, repricing them down in the 1.25% range. So, we are driving those deposits out the door, which results in a little bit lower retail deposit growth number. However, you see that benefit show up in our deposit costs, both in the fourth quarter, as well as a big support to what we expect in the first and the second quarter of the year.

Got it, Okay. And maybe as a follow-up, on the first quarter outlook, you talk about down 2%, but you did indicate that you expect the core NIM to be up and loan stable. So, can you help us flush out what the other deltas would be in terms of – you mentioned the seasonality of securities and some of the deposits. Like what else – it seems like that there wouldn't be so much of a drag on fourth to first.

Yes. From an NII dollars perspective, the fourth to the first is really driven by day count of $10 million, then higher wholesale funding costs and the impact of seasonal runoff in DDAs. That's about $5 million. And then the investment portfolio, we expect to be down about $10 million from the elevated fourth quarter levels. The fourth quarter levels include a lot of the year-end one-time mutual fund dividend amounts, and that was $6 million. And so, the other portion of the investment portfolio reduction is that we did not reinvest cash flows in the fourth quarter. And as Tayfun mentioned, given where rates are right now, we don't expect to reinvest all of our portfolio cash flows in the first quarter. So, we'll be opportunistic. If things change, we certainly have the capacity to reinvest, but right now, we're running the portfolio at about 21% of total assets. And that's – will probably be in that 21% to 22% range over the course of the year.

Yes. And maybe this is a good point for us also to add that for the year, our NII guidance for the year basically assumes a fairly flat, even maybe a slightly down average portfolio balance. So, for those of you who are modeling investment portfolio numbers for 2020, our decisions on the investment portfolio tend to be very opportunistic, but for now, as we sit here at the beginning of the year, we're not anticipating an increase to investment portfolio balances. If we do see opportunities, if the environment changes, that clearly will have an impact on the actual performance when we get to the end of the year.

Okay. Thanks guys.

Your next question comes from John Pancari with Evercore ISI.

Good morning. On the CECL front, if you could help us think about how provision on a day-two basis could shape up in terms of either on a quarterly basis as we go into 2020 or how we could think about it on a full year basis on how it's impacted by the adoption? Thanks.

Sure. Yes, I think the progress in our reserves and the impact on the provision number is probably very similar to others, except for when you look at what's driving the higher reserve rates, it really is the longer dated loans and some of the consumer credit outstandings. We, as you know, have been very clear on our expectations with respect to the residential mortgage portfolio. We do not intend to grow that portfolio, not necessarily because of CECL, but just because in the current interest rate environment, I don't think that we're getting paid to grow that. And home equities have been declining. That's another portfolio that has a relatively large increase in – under CECL compared to the incurred methodology. So, those two portfolios should not contribute much in terms of increases in reserve coverage. The one portfolio that we continue to grow is auto. Now, auto CECL is also higher than auto incurred loss. So, that should have a slight sort of increase, but if we continue to grow our commercial book, as we have done so in the past, that's our biggest book, and we will continue to grow that. I suspect that our coverage ratio ultimately will not change much from where we are standing, but we're all going to have to wait and see how this plays out. It is without having not even a quarter under our belt, it is very difficult to establish good, reliable trends, given the impact of these various macroeconomic scenarios that we will be applying.

Got it. Okay. Thanks Tayfun. And then, separately on the MB side, just wanted to see if you can give us an update on banker retention. I know there was some concerns about that a few months back on some headlines that everything you had indicated that you're retaining a majority of your targeted employees as part of the deal. You mentioned that last quarter. Just want to get an update on that front and how that's been progressing? Thanks.

Hi, John. Thanks for the question. This is Greg. First of all, we feel really good about the talent that we have in the Chicago market, as evidenced by the strong production numbers that we're seeing from Chicago. As you would expect, we have a target of $255 million of expense reduction. So, a lot of that reduction shows up in the form of individuals to late expenses and so forth that did not have jobs offered to them. So, a lot of attrition, you would expect to see that. I would tell you in general, 80 plus percent individuals we offer positions to or with the company remain. We feel really good about that. And our ability to hit our expense targets that we modeled in this attrition is exactly where we'd expect it to be. So, there's no surprises here. We've also taken a best-of-breed approach. So, when you think about leadership in that market, alright, and as far as a CEO, we've retained the best of breed we thought to run that company. There's redundancy. There's optimization that's going to occur. You would expect certain individuals to look for other opportunities as we modeled in. So, it's very much in line with what we expected. There was no surprises here. And we'll achieve the objectives we've mentioned, but more importantly, the outcomes in Chicago, when you look at our retail franchise, our wealth business and our strong, strong core middle market production, we're really excited about what we're seeing there, and also the revenue synergies as they start to come together as we integrate that business into the rest of our business, whether it be asset-based lending, leasing, capital markets, into the old MB book, we feel really good about what we're seeing there. And we're very bullish on the ability to accomplish our objectives that we set forth in that market, but there’s no surprises here.

Got it. Thanks Greg. Appreciate it.

Your next question comes from the line of Ken Zerbe with Morgan Stanley.

Great, thanks. And just in terms of corporate banking, obviously, you've had really good success over the last couple of years with that business. And I know your fee growth is obviously higher for 2020 in general, but could you just talk specifically about corporate banking in terms of what you're expecting from that line? Is that – like how far forward can we continue to expect sort of those double-digit gains? I'm just trying to understand what's sort of transitory versus more of a sustainable growth rate.?

Ken, I'll add to this and then I'll turn it over to Lars for a little more color on this. First off, when you go back and think about our North Star commitments, a lot of those investments were in corporate banking, capital markets area. And those investments we said will start to materialize from a revenue perspective in 2019, you're seeing that. Strength in 2018, continued strength in 2019. We continue to invest in that area because once again, it provides the products and services we need to better support our clients. And we’ve a great team assembled and we continue to make great progress in that area. So, we would expect that performance to continue on as we look into 2020 and beyond. So, Lars, let me give you the [that].

Yes, Ken, we're really pleased with how the North Star investments foundation have really played out. We shared with you in particular the re-platforming of our FRM business. We're already seeing the benefits of that. You can actually see that in our foreign exchange performance this quarter. FRM business is really coming back. It's strong, but in addition to that, a real focus on our advisory model, our relationship banking model and aligning our businesses to both our middle market focus as a company, as well as our industry verticals to be an advisor, a consultant, which that meant that we really needed to go after the investment banking piece of capital markets, and that is paying big, big dividends for us today. So, an example of that would be Coker Capital that we acquired, and that perfectly aligns with our advisory approach to the healthcare industry. Most recently, you saw the fact that we recruited 12 investment bankers in San Francisco. It aligns with our renewables and solar business. So that's the theme here is to continue to build out a broad platform to serve the industries, geographies, and segments that we plan to win in. Now look, we may not be able to control the ultimate loan growth quarter-to-quarter or year-to-year because there are macroeconomic impacts on that, but one thing we can do is, bring them advice, solutions, and those are often tied toward our fee products and services. And you're seeing that come through in our corporate banking success. I'm really proud of the talent that we have.

Alright. That's great. And then, just maybe one follow-up question for Tayfun. You mentioned that you have higher regulatory expenses related to the charter change in 2020 as part of that 1% extra expense growth next year. Is there any seasonality related to that? I'm trying to figure out what's – again, what sort of unusual first half kind of driven expenses versus this just permanently increases your expense base. Thanks.

Yes, there is no – Ken, there is about $11 million, $12 million just the direct fee that we pay to the OCC. It's just – that's the marginal increase in direct costs, but there is no seasonality.

And it's just an ongoing expense going forward?

That's correct. The change is a unique change year-over-year, but it will be in our expense rate going forward.

Perfect. Alright, thank you.

Your next question comes from the line of Erika Najarian with Bank of America.

Hi, good morning. I just wanted to reiterate maybe the point that you made earlier. If the NII or the non-interest income revenue outlook fell short, there is room to pull the expense lever and potentially we do better than the 2% to 3% range to achieve positive operating leverage for 2020?

Yes, so we clearly – we have always intended to – in the past number of years to achieve it. We achieved it every year. And we continue to keep the same target. And when you look at the contents of the remaining expenses beyond that 1% sort of unique change, Erika, clearly our largest expense is in compensation. And there is an underlying inflation built into that, and that consumes over 0.5 point of that expense increase. And in addition, there is also another 0.5 point or so in expense increase related directly to revenue growth. So, if the revenues sort of tend to come in slower than we expect, we believe that it will be reflected on expense growth as well. And then, we're going to have to make some choices as to where to invest and where not to invest to wait out a slower revenue growth environment.

Great, thank you.

Your next question comes from the line of Matt O'Connor with Deutsche Bank. Matt O’Connor: Good morning. I was wondering if you could talk a bit about just commercial borrower sentiment. You did mention that the payoffs were quite high in 4Q and had a somewhat muted outlook for commercial lending. I think it was the first quarter, but it seems like maybe commercial and corporate sentiment is improving. Maybe it's just literally the last few weeks here, but that's one of the themes that we've been hearing from some other banks and maybe some of the things in the credit markets point to that as well. So, are you seeing some early signs of that? Or is it a little bit of a different customer base for you guys than maybe we're seeing elsewhere?

Yes, Matt. So, first of all, just to address the first quarter, there's seasonality issues in that. So, I would really be looking to Tayfun's guidance for the year. That's what we're focused on is executing in 2020. There has been a heightened sense of caution as we have moved through the second half of 2019 with some of the global tensions, tariffs, those kinds of things, but some of the resolution of that, we're beginning to hear some positive things. We're seeing some activity levels that are reflected in the pipelines, not just from a lending, but also from a fee solutions perspective. That is giving me a little bit more confidence as we look at 2020 and a potential pickup in activity levels there. So, frankly, I'm not looking at 2020 with a lot of concern. I feel like that we can go out there and execute, given where we have positioned our resources in the Southeast in middle market banking, in industry verticals, but in summary, there is still a sense of caution, but I would describe it as positively migrating. As you see, a number of things start to play out in the global marketplace and with some of the trade tariff activities recently completed. Matt O’Connor: Okay, that's helpful. And then, just separately, you reiterated sort of your interest in additional fee deals. You've talked about this in the past. Just remind us kind of which areas you’re mostly looking to complement, and are they sizable enough that you kind of pull back a little bit of your capital versus your target? Or they're just not going to be meaningful enough to really impact the kind of capital and buyback story? Thank you.

Yes. The capital decisions are independent from that, Matt, because they – the timing of these availabilities are random. We have in the past – we're very clear. Lars mentioned the confidence that we have in our advisory businesses, in commercial. We clearly, if we come across opportunities to even grow our advisory M&A services etc., we will be looking for those. Long time ago, we started talking about potentially adding more capital markets capabilities in commercial real estate. As they may become available, we will be focusing on those. We have invested in our asset management business. There are opportunities that are financially feasible and rewarding. We will be looking at those. So, it is going to be more business commercial-oriented fee-oriented opportunities, but at this point, what we do with the capital that we have is somewhat independent of the opportunities. If we see the opportunities, we will execute them regardless of whether we're sitting on $0.5 billion of capital or not. Matt O’Connor: Got it. Thank you.

Your next question comes from the line of Saul Martinez with UBS.

Hi, good morning, guys. First, I wanted to clarify a couple of points on credit. First, you obviously – on the commercial side, you obviously mentioned the specific allowances for two commercial credits. You also had a big increase in NPL formation in commercial, I think $165 million, on Page 21. I think, Frank, you mentioned that was also related to the – those two specific credits. I just wanted to confirm that was the case. And also, on CECL, Tayfun, just again a clarification. And I have to sharpen my pencil on this, but I think your allowance takes your ACL ratio to like 160 bps, 170 bps. I guess what you're saying is that obviously, there is volatility, there's more things driving quarterly provision, but your best guess at this point would be that it sort of stays in that range and we should be modeling provisions with charge-offs and growth. Is that sort of the right way to think about it? So, a couple of questions with more a clarification question on...

I'll take the CECL one and then I'll turn it over to Frank. I think your numbers are right in the ballpark, Saul. And yes, sitting here looking at the balance sheet progress, without necessarily having a perfect knowledge of macro scenarios, I can only assume that it's probably going to stay around those levels, but obviously, after a couple of quarters under our belt, we will be able to give you a more precise answer on this one. Frank, on the credit side?

Yes, on the $165 million, your question was is it inclusive of the $50 million. And the answer is, yes, it was. And just as a reminder, in the workout business, things are lumpy. It's – you don't package things up in any package and you have even inflows and outflows. We want to – we analyze inflows every quarter in detail and look to see if there's any particular trends that are bothersome to us. So, we didn't see anything there in particular that's spread out. I will say the flip side of that is, we had a really strong quarter on collections. So, our net at the end of the day was $50 million, which I think about as sort of those two credits that were there before. So, that's the story there. And again, it doesn't – I don't think portend anything different in our outlook for 2020. We feel very good about 2020 based on where we sit today.

Great. That's really helpful. Thanks a lot, guys.

And your next question comes from the line of Christopher Marinac with Janney Montgomery.

Hi, good morning. I just wanted to follow up on Tayfun's comment early in the call about the accelerated paydowns of leveraged loans in other commercial. Is that attrition going to continue do you think? Or would you look to replace those loans this year?

Yes. Our intent is not necessarily to grow the leveraged portfolio to make up for the faster payoffs. We will make loan decisions independent of the payouts, but Lars, any comments on that?

Yes. No, so actually going back to a previous question, just so that you understand, the build that you see, and we have seen both in middle market and corporate banking, increasing volumes of loan production throughout the year, and that is really encouraging, which I had mentioned about 2020, some of my optimism. On the flip side, and part of the muted impact in the ultimate balance sheet, a softness in the industry that we're seeing has been in paydowns, elevated paydowns. However, the complexion of that changed in the fourth quarter. In the fourth quarter, rather than just deleveraging of some of our portfolio, what we saw with the two biggest drivers was number one, higher risk assets in the leveraged lending portfolio where we actually saw a decline there. And that's a positive thing. It's strengthening our balance sheet. And it's not that we will not extend credit into the leveraged lending market, but we're being very disciplined and selective in that market. The second piece of it goes back to what Frank said earlier. We saw pretty significant paydowns in our construction lending line of business, which I shared previously in prior calls that we expected that that would begin to occur. This was a sign of a healthy commercial real estate portfolio late in the cycle. So, maybe a little bit more than you asked, but to kind of frame it, we do not see that leverage lending will be a growth area for us for a period of time this late in the cycle.

Great Lars. That's really helpful background. Thank you both for the comments.

Thank you. Your final question comes from the line of Scott Siefers with Piper Sandler.

Hi, guys, Thanks for taking the follow-up. I just wanted to ask on your GreenSky relationship. I know you guys had renewed that relationship. Just at a top level, any changes to how you're thinking about appetites for those types of credits? And then, I guess more specifically, were there any changes in the terms as a result of that renewal?

I can't necessary – yes, we renewed the relationship, and we renewed the relationship of having had the experience with GreenSky over the past couple of years and having seen a fairly stable credit performance. Having said that, we believe that the renewal actually benefits us the way it was done, the way it was structured from a credit support perspective, as well as pricing perspective. That's all I'm going to comment, given the fact that they're the counterparty to the agreement, but we feel pretty good as to where we ended during the renewal discussion.

Alright. That sounds great. Thank you.

Okay.

Well, there is no further questions. Thank you all for your interest in Fifth Third Bank. If you have any follow-up questions, please contact the IR Department and we'll be happy to assist you.

Thank you for your participation. This concludes today’s conference call. You may now disconnect.