Ladies and gentlemen, thank you for standing by. Welcome to the Fifth Third Bancorp 1Q '20 Earnings Call. [Operator Instructions]. Thank you. I would now like to hand the conference over to your host, Mr. Chris Doll. Sir, the floor is yours.

Thank you, Laura. Good morning, and thank you all for joining us. Today, we'll be discussing our financial results for the first quarter of 2020. 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 Risk Officer, Jamie Leonard; and Chief Credit Officer, Richard Stein. Following prepared remarks by Greg and Tayfun, we will open the call 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. Given the unprecedented nature of the environment, I will focus most of my commentary on the proactive steps we are taking to navigate this crisis due to the pandemic. And then Tayfun will provide more details related to the quarterly financial results in his remarks. As all of you are aware, the events over the past couple of months related to the COVID-19 health crisis and resulting economic fallout has led us to reprioritize our focus. We are taking significant and ongoing actions to serve our customers, protect our employees and assist our communities. We believe these proactive steps will ultimately deliver long-term sustainable value for all stakeholders, including our shareholders. Starting in early February, the executive team and the Board began actively planning and prioritizing the organization's response efforts. We quickly mobilized our workforce to accommodate remote access for a large number of employees. Currently, more than 50% of our workforce is working remotely across the company. And for many groups, that number is over 95%. For employees who are not able to do their job remotely, we have established social distancing and enhanced cleaning measures based on CDC guidelines. Throughout these uncertain times, we have been proactively communicating with our customers and employees. We have issued more than a dozen press releases, several fact sheets and numerous proactive outreaches to our customers in addition to ongoing updates on our website. We have also significantly increased the frequency of communications with our employees in order to keep them informed of the latest developments, recommendations and health precautions. From a customer perspective, we are leveraging the strength of our balance sheet to help address the economic challenges many of our customers are facing. We are prudently extending credit…

Thank you, Greg. Good morning, and thank you for joining us today. Our company is well positioned to deliver on our pledge to provide financial support to our customers, communities and employees during the current pandemic and the duration of the economic downturn. It is important to note that despite the unexpected timing and nature of the events that led to the sudden decline in economic activity, we are entering this downturn from a position of balance sheet strength that was built through the actions that we've taken during the past few years. Although it is impossible to predict the timing of inflection points in the economy with precision, since late 2018, we had been anticipating an eventual change in the economic cycle after a record expansion period. Our client selection, capital, interest rate and liquidity risk management decisions have all reflected that expectation. What makes this downturn more challenging than others is clearly the unexpected nature of the initial trigger and the ensuing low visibility surrounding the depth and duration of the downturn. All parts of the global economy are entering this cycle at the same time, but the unprecedented level of fiscal and monetary actions will undoubtedly provide a level of support to cushion a portion of the economic setback. The actions that we have taken so far and those that we will be taking in the coming months will focus on maintaining and leveraging our strength to support our clients and stand by them as we help them manage through this difficult period. As always, we incorporate all information that is available to us at the time when we provide commentary about our business and discuss our expectations. Our overall perspective on the next few quarters have been very negative at the end of the first quarter,…

Thanks, Tayfun. [Operator Instructions]. Laura, please open the call for questions.

[Operator Instructions]. Your first question comes from the line of Saul Martinez from UBS.

I wanted to ask about the outlook for credit and the interplay there with your reserving. And your reserve -- as you highlighted, Tayfun, your reserve levels are very high versus -- and they're especially high versus peers, so the 213 basis points. It's not only high versus other regionals, but I think even more striking is just within product category, C&I at 168 basis points, way above -- I think anybody who live -- on reserve ratios on resi and home equity despite seeming the high-risk -- high-quality portfolio, sorry. So I know there's a lot -- and you talked about your estimates in your process and your assumptions. But I guess, I just wanted your perspective a little bit on, to what extent your reserving as a function of taking maybe a more conservative stance than others within the confines of plausible scenarios? Or to what extent it actually reflects perhaps a riskier portfolio or at least a portfolio that might be more susceptible to a downturn in terms of the impact on lifetime losses?

Thanks, Saul. Good question. Obviously, it is a broad question. And the difficulty here is the environment has changed so quickly it is difficult to compare one bank's ratios and coverage to another. But having said that, what we gave you on Page 12 of the slide presentation, is a similar set of coverage numbers for stress test runs that other banks have. And clearly, our coverage levels are exceeding those losses that we have predicted through our models compared to other banks. What we have done is we have incorporated the -- as the environment continued to deteriorate in March into the end of the quarter, and basically reflected a fairly drastic change in the economic environment, not only in the second or third quarter, but try to project a weaker recovery into the second year and third year because we are looking at a 3-year R&S period here. And I gave you some statistics around our assumptions. In our minds, the current fiscal and monetary policies are likely to cushion the second and third quarter impacts but are not going to be necessarily providing a significant support to the latter years. So our reserve levels, as conservative as they are at 2.35%, do reflect a slowly recovering economy rather than a V-shaped recovery. Underlying those numbers is also the quality of the portfolio that we have. We shared with you statistics on our consumer and mortgage portfolios, and we are also sharing some details on the commercial. The commercial book -- I think Jamie and Richard can comment on the commercial book, but the portions of the commercials that are exposed to COVID-19 also tend to be the book that has more large corporate exposures, more heavy sick exposures. So all of those combined, hard to compare our numbers to another, but we do believe that we've appropriately accounted for a weak outlook, slow recovery and the quality of the portfolio that we have in place. Jamie or Richard, I don't know if you guys want to add more.

Yes, Saul, so as I stepped into this chair and started looking at the portfolio, the 1 thing that stands out to me is just how intentional we have been about where we do business with the clients that we select, that should be resilient in times of stress. And frankly, the focus for us has been on companies with larger scale that should be able to persevere in this environment. And so our loan book, I would tell you, is comprised of high-quality liquid resilient names, and the best data we could use to prove that point is the shared national credit information that we included on the page. And as you can see, it's a very high percentage of 75%.

No, [indiscernible] suggests that this is like -- obviously, we continue to evaluate the data as it comes. We continue to evaluate these new programs. And we -- at the end of this quarter, we'll do that evaluation again just like every other bank will do. And then we'll share you with you the results of our analysis.

And I know this gets into the weeds but some elements of your modeling, 3-year reasonable supportable and why not maybe on the more conservative side than in some other peers. But 1 follow-up question. You did have the second consecutive quarter where you had a pretty elevated amount of nonperforming loan formation in your commercial book. If you can talk to that, and was any of that related to sort of piece of accounting noise with PCI moving to PCD and then getting reclassified into nonaccrual? Or was there actually something underlying that as suggesting some worsening credit trend in some parts of your book?

Yes. So on the first part of the question, there is very little impact on the PCI to PCD transition. So the NPA inflows that you see in the deck of about $175 million was driven by several factors. One -- about 1/3 of the inflow was a single real estate mall exposure. About 1/4 of the NPA formation is actually in smaller businesses, business banking, lower middle market. And then the remainder, when you look at what drove it, it's really spread across industries and geographies, but the 1 common thread is that they're all predominantly in the service industry. So professional, medical, education, financial advisory. So pretty widespread there.

Your next question comes from the line of Matt O'Connor from Deutsche Bank.

I was wondering if you could comment at all in terms of the PPP loans going to, I guess, those small businesses that need them the most. I mean, obviously, this is kind of a broader question than just Fifth Third, but it seems like a little bit of a free for all, and there's just been some articles out there about maybe some bigger companies getting the loans and not really kind of criteria for deciding who gets it and just wondering if you could comment on that, on your thoughts.

Yes, Matt, this is Greg. As I mentioned, we processed about 10,000 loans for our customers to the tune about $3.5 billion. The average loan size is about $350,000, $370,000. So that -- for our portfolio, I think it was pretty broad-based, but we did a good job, I think, at servicing both the LMI community businesses, small businesses in general, very few of our loans were up for that $9 million to $10 million range. So for our portfolio, I think we did a pretty good job of opportunities much through the system as we could in the short time that we had available -- the system was available to us. Hopefully, that gets refunded tomorrow at the latest. We've got more resources there because we definitely have a larger pent-up demand for the PPP program. But overall, with respect to Fifth Third, I think we did a nice job on -- the size of our loans indicate that we served a large portion of the smaller businesses that are out there versus the larger business. I've read the headlines. I've seen some of the challenges that other banks are faced with as far as prioritizing loans. We did not do that. We worked as hard as we could to get many loans through the system. A lot of that depends on the complexity of the request itself and the ownership structure of companies, kind of dictated how much we can get through at what pace if your loan got through or not. But once again, we've already input a significant additional number of applications, hopeful that the window will open here shortly, and we'll get those through.

And any sense on, call it, what the pipeline is for when there's additional funding?

Yes. Well, obviously, I think most bankers would agree, and most people would agree that the additional $300 billion is not going to be adequate to serve the total demand that's out there right now. We expect that $300 billion to $350 billion to be absorbed pretty quickly, even faster than the last 350 were absorbed. So we think it's going to be very fast, and we don't think it's going to be adequate. We think the demand is going to continue to outpace the available funds.

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

So just to piggyback off of Saul's question. You took a significant reserve build and still earned $0.04, with the stock at $16.75 and tangible book value per share of $22, so clearly, the market is fearful of tangible book erosion. And I guess my question here is, in the realistic scenarios for economic stress that you see, and it seems like your band of expectations are reasonable, do you see yourself continuing to earn positive earnings during the duration of this downturn?

Good question. I will not comment on this [indiscernible] Look, I mean, I think our -- away from reserve builds and loss expectations, I think the underlying PPNR activity is going to continue to look good. We intend to manage our expenses at an appropriate level relative to the environment. We have a strong protection against a lower rate environment, and we have diversified revenue streams. So the company has strong ability to generate capital on earnings in this environment. As I mentioned earlier, it is a little difficult to predict exactly what will happen to the provision and the charge-offs. But clearly, our intent is to continue to outpace the impact of the credit here. And this is one of those environments where, unfortunately, looking longer than beyond 1 or 2 quarters is extremely difficult. So we will give you a better update as we get a better read on the environment. But obviously, we believe strongly in our ability to manage this company at profitable levels.

And just my follow-up question is, you noted that there would be a total impact of 4 to 5 basis points on the net interest margin. If we consider each 25 basis point of decline in the short end plus what's happened to the long end. And I'm wondering, does that include the PPP impact? And does that include the reduction in deposit cost that you anticipate? And how do you plan to fund the PPP loans that are coming on balance sheet?

Yes. So we did not give any NIM guidance this quarter, and that was on purpose. I think the general dynamics around NIM and the impact of lower short-term rates and a flatter curve at lower rates is pretty set for us. As I mentioned, it's 4 to 5 basis points per move. The reason why we chose not to give guidance this quarter is because there are 3 -- I view the second quarter as a transitionary quarter. There are 3 main impacts. One of them is the very high levels of liquidity that we are carrying on our books. I mentioned that March carried a significantly more liquidity on our balance sheet. Here in early April, we're carrying even more because some of the government programs are starting to throw cash. The second 1 is PPP, as you mentioned. And the third 1 is the LIBOR/Fed fund spread. We expect LIBOR/Fed fund spread to tighten throughout the quarter from the current levels. And what we also believe is the high level of liquidity that we're carrying in our balance sheet is going to give us a better ability to manage the deposit rates down during the quarter. So all those together, the second quarter is going to be 1 of those quarters that's going to be very busy. But beyond the second quarter, that relationship between rate moves and the curve shape and our NIM impact holds pretty tightly. 4 to 5 basis points is a pretty good number that you can use.

Your next question comes from the line of John Pancari from Evercore ISI.

For the detail on Slide 12, I think it's very helpful. And I acknowledge that similar to the prior comments that your reserves are booked to a level that's higher than peers. Can you discuss your confidence in your reserve relative to the DFAST numbers that you cited? I guess there approximating around 50% of DFAST, severe. Given that you are factoring in a U shape essentially versus a V, why wouldn't you think that those numbers should be higher? Not that I've got a problem with it or anything. I'm just saying if it is factoring in a U, should that warrant possibly a level that's higher than about 50% of the severe DFAST?

In order to achieve a better level of precision, we need to know more about this environment. This -- we are giving you these reference points as a comparison. I think the scenarios that underlie the DFAST are known, and they are quite severe. But no stress scenario is like the other one. And this one, in particular, is going to be very different in the sense that these support programs are yet to be evaluated with respect to how they impact the recovery path and where we are going to end up. That's a big difference because in most classic stress tests, usually the economy comes back at 1 point to where it starts. What we don't know today is where this economy is going to end up and the recovery period flattens out to a -- So I'm very hesitant to answer your question because we just don't know enough about the nature of this downturn. But at least showing you the DFAST results gives you the ability to compare us with others. And then as this economy develops, then we have the ability to reshape our expectations.

No. Great. Okay. And then the -- another question on the reserve. Do you have the allocation of the reserve to the high-impact areas that you flagged?

So we did not provide that, John. So relative to the 2.1%, one would assume it's north of that number, but we did not disclose that percentage.

Okay. All right. That's fine. And then 1 last question, if I could. Just on the loan modifications. How much of your loan modifications have been done on the commercial side of the portfolio? And do you have any industry concentrations really where you're starting to see those deferrals?

Yes. So within the commercial segment, we've actually had a fairly limited number of requests in the commercial side to the consumer side. We've only had about 400 or so, and it's predominantly covenant waivers for terms in 2020, and that's roughly $2 billion of outstandings, and that's led by car dealers, hotels and restaurants. When it comes to restructured or modified actual dollars, that's very small to date, with only $200 million in loan balances. And probably the 1 sector with the most activity would be restaurants. You see that on Slide 9, our $1.9 billion in outstandings. The good news is we're favorably weighted with only 35% is in dining and 65% fast food quick service. So about 80% of the book continues to remain open. Those that are closed are predominantly in the in-dining category. So overall, some activity here in the modifications, but it's still a little early. We'll see how it plays out over the course of the year.

Your next question comes from the line of Gerard Cassidy from RBC.

You gave us very good detail on a number of your different risks that you have on the portfolios today. And in the opening comments, Greg, you mentioned that I think about 96,000 fee waivers have been executed, also deferrals on loans up to $1.5 billion. That, I think, represents just under 5% of the consumer loan portfolio. Do you guys have any expectations of where those deferrals may peak out at as a percentage of your portfolio?

Yes. Let me start and I'll throw it over to Jamie here. First off, it's 96,000 [indiscernible] requests, not fee waivers. So it's 96,000 requests in total, which a lot of that included, obviously, both forbearances and deferrals in our loan book also, but the fee waiver is actually much smaller now because -- Jamie, number is at 400? Give me that number. Waivers?

About $0.5 million in fee waivers.

Yes.

And so Gerard, in terms of the hardship relief to date by product, and this is through the end of last week, so a little bit updated for April activity. What we're seeing is a lot of the fixed rate or fixed payment products have the higher request levels. So autos at 5%. Mortgages in our owned portfolio are at 4% of the portfolio. And then as you see the minimum monthly payments lower in home equity and credit card, they're at 2% and 3%. So as we model, obviously, we expect this to rise as unemployment rises, but the ultimate amount of hardship relief that we give will ultimately depend on where unemployment picks out. And for us, right now on most products, we're offering 90-day loan payment deferrals. And then in mortgage, we offer the 6-month forbearance. So we'll continue to update you as the quarter transpires.

And then obviously, the focus this quarter for you and others has always been on credit quality, the provisions. Equally as important, Tayfun, as you pointed out, is PPNR, can you share with us your outlook for PPNR from the standpoint that, obviously, the second quarter end-of-period first quarter loans from the industry was extremely high due to the drawdowns and revenues, obviously, will benefit from that in the second quarter. But as we get into the third and fourth quarters and the unemployment rate goes up, underwriting standards tighten, should we anticipate that PPNR revenues start to shrink for you guys just because of the environment we're in?

I think, Gerard, here's my take on the year. I do believe that, assuming these drawdowns will stay with us for a while, the higher loan balances will provide a decent amount of support against the lower rate environment, and assuming that we manage the deposit rates down and our liquidity positions optimally, the year, despite the fact that it is a -- the worst-case scenario beyond just negative interest rates for banks, the balance sheet should support a decent healthy level of NII. In terms of the sequence of quarters from second into third into fourth, I think we will probably see a changing fee picture here because clearly, the economy stopped, and that will have a near-term negative impact on fees in the second quarter from spend levels to asset management based on equity levels and to some capital markets activity. Our expectation is, assuming that things start somehow normalizing either into the second half of the second quarter or the third quarter, we should see a little healthier fee picture in the second half of the year. And then the expense side of it, we clearly are going to benefit from lower expenses that are tied to activity. And then we will start making some decisions on our end based on this environment. So in general, you are going -- the second quarter definitely is going to be a transition quarter. But I do believe that as we look into the third and fourth quarter, we are going to start seeing some normalizing PPNR activity -- PPNR levels.

Your next question comes from the line of Vivek Juneja from JPMorgan.

Couple of questions. Firstly, on your oil and gas exposure, can you talk a little bit about where you are in your reserve-based redetermination and what that could mean for the loans?

Yes, it's Richard. We're about 1/3 of the way through the redeterminations. And at this point, we've seen about a 16% drop in oil-based borrowing basis and about a 12% drop-through those that are gas-based producers.

Okay. And then I think, you said you've got a breakeven, Tayfun, you said of $18 production price?

Yes. What Tayfun was describing was we went through the portfolio and looked at the average breakeven lifting cost for our portfolio. So think about what it takes to get it out of the ground, and what it costs and what it would take to service interest for that portfolio. That's about $18 when you benchmark it to NYMEX. What Tayfun didn't give you, and I think this is important for the portfolio, we also say on Slide 10, the portfolio is 80% hedged for 2020. Those hedges give our producers about $14.5 of benefit, net benefit. So if you think about -- you had the hedges to it, it's $4 or $5 breakeven.

Okay. And those hedges, it sounds like a lot of them mature by the end of 2020.

What we've described on Slide 10 is the percentage of production that is hedged is 80% in '20, and then it rolls down to 30% in '21.

Okay, okay. And then what happens to those loans as those hedges roll off? Do you get to be done and the borrower has to figure out how to handle the funding? Or how does it work? Can you walk us through that?

For those under reserve-based structure, the borrowing base is redetermined every 6 months. So there will be a fall redetermination that will be based on current production, current reserves and the outlook from prices at that time. So the borrowing base and the loan amount that we're willing to lend gets reset every 6 months. So to the extent prices improve, that will change the borrowing base. To the extent they don't, the borrowing base would come down.

Okay. Great. And, Jamie, any color on the casino exposure of $2 billion?

The casino exposure on Slide 9, the top part of the page of Slide 9 refers to lending to the operating companies within the casino and then the CRE portion would be, obviously, building the hotel and going along with it. We -- really, the names are large companies, high-quality, resilient. So again, we feel like we're well positioned. And while there may be losses in this portfolio, we feel like the lost content is very manageable.

It's Richard again. The only thing I'd add is, in addition to high-quality names, we're diversified by operator types, so global operators. Some native American and some regional. And in each case, high quality operators, usually where they -- to the extent they are regional, they have got a great franchise area that is either given to them by regulation or demographics that give them a ton of resiliency and less competition.

Your next question comes from the line of Scott Siefers from Piper Sandler.

I guess, first of all, I just want to echo some of the prior comments, really good detail and appreciate the disclosure. And I think at this point, just 1 small question, sort of a follow-up on the deferrals. I guess I'm just curious on the commercial side. And even though it's early, I was hoping you might be able to give a little insight as to how you would expect sort of the, I guess, the re-due diligence process to go as we come up on the end of the deferral time period and how will that go? Sort of willingness to defer again? Or how does that entire process work through?

Yes. So on the mortgage, are you talking on the consumer side, Scott?

No. Actually, even though it's relatively small, I'm actually more curious about the commercial side.

Yes. So the commercial side will just continue on a case-by-case basis with each client. The covenant relief period expire. As we're executing on these covenant waivers, we have been adding some additional liquidity capital retention requirements as well. So we feel like the process has been productive. It's been a good dialogue with clients. And so that will just continue over the course of the year.

Okay. Perfect. And then at what point do you sort of -- I mean, I guess it's all case by case, but at what point do you sort of make the decision as to, okay, we could continue to sort of forbear on this or maybe it needs to be a downgraded charge-off, et cetera?

Yes. Hey, it's Richard. So we review the portfolio actively and for the names that are going to be more impacted at least quarterly. But there is active management, active dialogue. And so as new information comes in, we adjust our internal risk ratings. And then as we have financial reporting, that would be the other driver that would change our view on our risk. To the extent that borrowers continue to perform in line with expectations, we would expect to continue the deferrals and the forbearance that we've agreed to.

There are no question at this time. You may now continue, Chris.

Thank you, Kyle, and thank you all for your interest in Fifth Third. If you have any follow-up questions, please contact the Investor Relations department, and we'll be happy to assist you.

That concludes today's conference call. You may now disconnect. Thank you for your participation.