Good day. My name is Ellie, and I will be your conference operator for today. At this time, I'd like to welcome everyone to the Fifth Third Bancorp First Quarter 2024 Earnings Conference Call. All lines will be placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I'd now like to hand over the call to Matt Curoe. You may now begin the conference.

Good morning, everyone. Welcome to Fifth Third's first quarter 2024 earnings call. This morning, our Chairman, CEO and President, Tim Spence, and CFO, Bryan Preston, will provide an overview of our first quarter results and outlook. Our Chief Credit Officer, Greg Schroeck, has also joined for the Q&A portion of the call. Please review the cautionary statements in our materials, which can be found in our earnings release and presentation. These materials contain information regarding the use of non-GAAP measures and reconciliations to the GAAP results, as well as forward-looking statements about Fifth Third's performance. These statements speak only as of April 19, 2024. And Fifth Third undertakes no obligation to update them. Following prepared remarks by Tim and Bryan, we will open up the call for questions. With that, let me turn it over to Tim.

Thanks, Matt, and good morning, everyone. At Fifth Third, we believe that great banks distinguish themselves not by how they perform in benign environments, but rather by how they navigate challenging ones. In that sense, the uncertainty we face in the current environment provides us with an opportunity to demonstrate that our focus on stability, profitability and growth in that order will produce consistently strong, some might even say boring, financial results. This morning, we reported earnings per share of $0.70, or $0.76 excluding the Visa, Mastercard settlement litigation charges and the additional FDIC special assessment. All major income statement captions were in line with or better than the guidance that we provided in our January earnings call. Our adjusted return on equity and return on assets are the highest of all peers who have reported thus far and the most stable when compared to results from the first quarter of 2023. We grew period-end deposits compared to the prior quarter and generated annualized consumer household growth of 3%, punctuated by 7% growth in our Southeast markets. Since 2018, we have built more than 100 de novo branches in the Southeast. As a portfolio, they are exceeding our expectations, having achieved 112% of their household growth goals and 132% of the deposit goals built into the business cases. Florida is our top performing de novo market, with deposit dollars at 195% in gold. J.D. Power also recently named Fifth Third number one for retail banking customer satisfaction in the Florida market. Importantly, net interest margins improved in the quarter, driven by stabilizing deposit costs with interest-bearing deposit costs increasing only 1 basis point sequentially. Consistent with our guidance last year, the fourth quarter of 2023 marked the low point for NIM and we believe the first quarter of 2024 will…

Thanks, Tim, and thank you to everyone joining us today. Our first quarter results were a strong start to the year, reflecting our balance sheet strength, disciplined expense and credit risk management and diversified fee revenue streams. We saw new household growth accelerate and new quality relationships in commercial post steady gains. For over a year, we have highlighted the importance of maintaining balance sheet strength and flexibility in an uncertain economic and interest rate environment. Our first quarter results evidence the strength of our current position, which should produce strong and stable returns across a wide range of economic outcomes. This approach has served us well as rate cut expectations are pushed out. As Tim mentioned, our profitability remains strong as we have the highest ROA and ROE, and among the best efficiency ratios of our peers that have reported to date in a quarter in which we have outsized seasonal compensation expenses. On a year-over-year basis, we were the most stable for both ROA and ROE, and among the most stable for NII and the efficiency ratio. Our consistent and strong earnings added 15 basis points to CET1 during the quarter inclusive of absorbing 8 basis points impact from the CECL phase in. Turning to the income statement. Net interest income for the quarter was $1.4 billion and consistent with our expectations. Interest-bearing deposit costs were well managed and increased only 1 basis point compared to the prior quarter. The balance sheet continues to be reflective of defensive positioning with optionality to navigate the changing economic and interest rate environments. Net interest margin improved 1 basis point for the quarter. Increased yields on new production of fixed rate consumer loans and day count benefits contribute to the growth and were partially offset by the deposit balance migration from…

Thanks, Bryan. Before we start Q&A, given the time we have this morning, we ask that you limit yourself to one question and one follow-up, and then return to the queue if you have additional questions. Operator, please open the call for Q&A.

[Operator Instructions] Our first question comes from Mike Mayo from Wells Fargo. Your line is now open.

Hi. Can you hear me?

We can. Good morning, Mike.

Hey. I'm just trying to figure out how you get away with interest-bearing deposit cost going up only 1 basis point quarter-over-quarter when the group is like around up 10 basis points? And I mean, is this sustainable? Is it due to your tech? Is it because of your Southeast expansion? What's your secret here, or maybe it's just ways to bite you in future quarters? Thanks.

Thank, Mike. It's Bryan. Great question. I think one of the things on this front, we very early last year made the decision to grow deposits very aggressively. We viewed it as a very consistent theme with being focused on the long-term, focused on stability, and quite honestly, focused on returns. We viewed it as worst case. We're going to generate some low cost wholesale funding with no prepayment penalties. Best case, it gave us an opportunity to have 12 million interactions with prospects and customers. And we have a lot of confidence in our ability to win relationships, when we can get our team in front of our customers. And so with that, as we've moved into this more stable environment, there clearly was some costs as we brought those promo balances in, but it gives us an ability to actually manage and recycle interest expense where we're able to pulse offers through different markets, where we can basically harvest some savings and reintroduce that back into interest expense on new offers and ultimately have a lower net overall cost. We just feel like it's being very efficient with every dollar we're utilizing. As I mentioned in the guidance, there's certainly some risk that the competition can reaccelerate, but it does feel like overall deposit competition did soften at the end of last year and that continued to [indiscernible].

And just to follow up, I mean, you are expanding share in the Southeast. You said you went from, what, 8% to 6% year-over-year. I mean, don't you need to price competitively and offer higher rates to gain that share?

We definitely took advantage of the fact that we have I think at this point with the investments that have been made down there, Mike, a higher natural share than we did existing market share rights. So, we were able to use the Southeast as a mechanism to raise deposits without repricing existing relationships to the same degree that we would have if we were using those rate offers in markets where we had high existing shares. I think though, what's important is that what's driving the growth in the Southeast is the household growth. And those relationships are that vast majority momentum banking relationships, which means the core deposit product is a non-interest-bearing deposit product. So, the 7% growth in the Southeast when you break it apart, the research triangle is like 25% year-over-year. Most of the major markets in Florida were in the mid to high teens, Tampa 11% or 12%, Broward County and north in Southeast Florida 17%, 18% year-over-year household growth rates. So, we're gaining share in a way that then allows us to make decisions about whether we want to move more of the deposit wallet where obviously rate is part of it, or where then we have the opportunity to introduce the fee-based businesses on the consumer side of the equation, and in commercial third of the relationships that we added in treasury managers, we mentioned this last quarter, were payments led. So, they're not driven by deposit rates or credit as the entry point.

All right. Thank you.

Yeah.

Our next question comes from Scott Siefers from Piper Sandler. Your line is now open.

Good morning, everyone. Thanks for taking the question. Was hoping you could spend a moment discussing on demand trends in more detail. Kind of soft for the group, though, you noted some specific states that have generated stronger middle market growth. And then maybe within the response, if you could also please discuss the outlooks for the specialty businesses such as dividend and provide?

Yeah, sure. Happy to. I'll start that one, and if need be, Bryan can fill in here, Scott. So, I mean, listen, I think in general, the commentary we've provided about what we hear from clients is more or less the same. They are not pessimistic at that current point, but they're also not leaning forward in the saddle here, whether it's capital investments or pushing forward on M&A opportunities or building inventories or otherwise. The prospect we now face with rates being higher for longer definitely will weigh on plans. And so, I do expect that in general that if we're going to get growth, we have to get it principally through taking market share. I mean, the byproduct of that is that the places where we are expecting to see growth in the second half of the year are the places where we made investments to be able to do it. So, middle market C&I was strong in the first quarter. I gave a little bit of a breakout on the markets. A driver there in the Midwest and the Southeast both is the benefit that we get, the early benefit that you see from the federal stimulus programs on manufacturing, energy transition, infrastructure and otherwise, because our regions have gotten a disproportionate share of those dollars. I think in addition to that, we have a much larger sales force in the Southeast today than we did three years ago, and again the byproduct of that is we will continue to see an accretion of market share attached to those investments as those RMs become fully productive. Texas has been a really nice story for us. We've been in Texas for a little more than a decade now. We have I think it's 175 employees there roughly and it's a really nice complement to the strong commercial banking team that we built out in California a few years back in terms of expanding the middle market footprint. So, we expect to see growth in that area. And then lastly, on the industry vertical side, aerospace, defense, transportation and TMT are the places where the pipelines have -- we're seeing some pickup in the pipelines.

Okay. Perfect. Thank you very much. And then, Bryan, I was hoping you could discuss -- I know that the numbers aren't huge here, but maybe you could discuss sort of the fluctuations in kind of reserve building versus reserve releasing outlook. I know it sounded like from your comments it'll be a little reserve build in connection with loan growth, but I think you were among the fewer sort of mid quarter when you said maybe a little release. So, just curious sort of the puts and takes as you see now.

Yeah. Thanks, Scott. I think the main thing there is two items. For the guidance for the rest of the year, that is under the assumption that there is no change to the economic outlooks as provided by Moody's. A big driver of the release this quarter was the economic outlook from Moody's did get better. So that was a factor. We also had end-to-period decrease in loans sequentially. So that was an item that drove the release as well. Next quarter, we did guide to stability on loans. So that's what we're saying kind of zero to $25 million. Mix could cause a little bit of build, but we do expect end-of-period loan growth in the second half of the year and that's where you get the larger numbers.

Perfect. Okay. Wonderful. Thank you very much.

Next question comes from Gerard Cassidy from RBC Capital. Your line is now open.

Hello. Can you hear me?

We can. There we are. Good morning, Gerard. We couldn't for a minute there.

Good morning, Tim. Yeah, thank you. Bryan, just to pick up on your comments about Moody's and the outlook, can you share with us how it's kind of evolved over the last two or three quarters? And what is their current outlook for the US economy in '24? Are they still calling for a slowdown or a recession, or are they actually in the camp now that we're going to have positive real GDP growth for 2024?

Their baseline scenario has had a bit of stability. It's certainly -- I don't think it is a significant -- there's no slowdown in 2024. They continue to push out their baseline expectations. They've also improved their downside scenario. That's had a little bit of a bigger impact on our reserve calculation. But overall, they're now in the camp of the economy continues to be moving well, and I don't think that they're expecting a significant slowdown at this point in 2024.

Got it. Thank you. And then, Tim, coming back to the growth, particularly in the commercial side, you gave us some very strong numbers, of course, particularly in your Southeast franchise. Can you take it a little deeper or give us a little more color? Once you bring on these clients like you mentioned about the customers that came in this quarter based on payments, how long does it take to get them to a return that you find -- passes your hurdle rate and you guys are happy with it? Is it a 12-month, 24-month period? Can you walk us through that kind of waterfall on how you get there? How many more products do they need in addition to payments or in addition to a loan to get them to your return levels?

Yeah, sure. So, I'm going to do payments first and then we'll start with the loan, because payments is easy. So, the payments clients meet their return thresholds essentially out of the gate, Gerard, because you don't have credit attached, which means the capital you're holding is op risk capital. And it can take as long as 30 to 45 days to board a client, but because of some investments we made fortuitously for us prior to the deposit crisis last spring, we can board a client provided that the client is ready to do it in six days now on average. And that then allows for a very quick ramp and that's what's supporting the -- I think it's 11% growth in commercial payments fees year-over-year, that current pace. A high single-digit pace has been the goal there for a while and it requires us to get ramped quickly every time we add a new client. On the credit side of the equation, I think the beauty of the focus that we have on granularity right now is when we move a middle market relationship, it's generally a single bank relationship. And that means the credit comes on. It will take a month or two to move payables and receivables and otherwise and to get the payments flowing, but you hit the return threshold very quickly I would say generally well within a year on what we do in middle market. Where we are playing either at the upper end of middle market or in corporate banking, the return profile can develop over a longer period because quite often then the ancillary that we're focused on is not payments. It's the capital markets revenues. Where we lead, we get the returns quickly. Where we are a participant, we're a participant because we believe we can grow the relationship over time. And then, there is a strong discipline here to go back through the book every year. We do an operating review in every region with every corporate vertical and we have them show us the 25 lowest returning relationships in their portfolio, and there's either a relationship plan that we believe, or we exit.

And real quick, Tim, just to follow-up on that payments, the new customers that you've referenced.

Yeah.

Are you -- are those customers that don't have a payments product already or are you taking them from a fintech company or a competitor?

The disproportionate share of the clients that we are moving with conventional payments products and managed services are moving from another bank. So, it would be either they are a business that doesn't run with any leverage and that relationship moves, or they make a decision to move their payables or receivables business to Fifth Third because we can provide a superior service. So, that is a share shift. In the case of the embedded payments businesses, we are quite often helping people to build products into their software applications that didn't necessarily exist previously or where they had a smaller bank who had agreed to provide simple services and they're looking for somebody who's more robust controls the ability to support higher volumes. And then, in the case of the work we're doing on the technology side now, a simpler process to do integration and future product development.

Appreciate all the color. Thank you, Tim.

Absolutely.

Question comes from Ebrahim Poonawala from Bank of America. Your line is now open.

Good morning.

Good morning.

I guess just one question for you, Tim. You've been fairly cautious on the macro outlook the last 12, 18 months. Has that changed today? And the reason I'm asking is I'm trying to sync that up with your messaging around buybacks both in terms of the back half and third quarter seem quite front-footed. So, just give us a sense of, do you feel better about economic outlook in your markets today than you did six or 12 months ago? And just broadly as a result of that, how are you thinking about capital allocation where should we expect some -- this level of sort of second half buybacks continuing absent growth reaccelerating next year? Thanks.

Yeah. Ebrahim, thank you. And as you know, we're big believers in accountability here. So, I actually asked Matt to go back and look through the Q&A in the scripts from prior quarters to see when we got the first question on higher for longer rates, and you were the one that asked it, so -- in the fourth quarter of '22 earnings call. What we said was we thought the market was overly optimistic on how quickly inflation would come down, and I don't remember what event it was last December. But the comment that I made then was that we thought either the bond market or the equity market were wrong. The question was just which one. And then, if we had to guess, it was bonds. So, I think for certain we know now that the bond market was the side of the trade that was wrong at the beginning of the year. The factors that have influenced our more cautious outlook are pretty much exactly the same today as they were the last time we talked about it. We just view the current fiscal and monetary policies to be at odds and that the fiscal side in particular is unsustainable and inflationary over time. And the longer it goes on, right, the more that the Fed will need to remain higher for longer, which puts pressure on the long end of the curve. And then, I think as a knock on to that, we know that longer rates stay elevated, the more likely it is that you see adverse consequences either in asset prices or in credit performance. The big question is just how long does that take, right? When does that play out? And that is an area where we have low conviction. So, what…

Got it. That was helpful. And to be clear, it wasn't a planted question. But the other thing that caught my attention, you mentioned Texas and obviously you mentioned so we think about that Fifth Third Southeast. Just talk to us, remind us in terms of the strategy in Texas. Are we opening a lot of de novo branches there? And I'm assuming there's no near term M&A, but that does open up potential opportunities I guess down the road? Thanks.

Yeah, absolutely. So, we got into Texas in 2012 when we formed our energy vertical. We have deeply experienced folks there who have done a really excellent job. And then, over the course of the past several years added middle market offices in Houston and Dallas, where we were able to attract very strong talents from trillionaire banks, who understand the focus we have on whole relationships and we're able to do what I think for us is a little bit unique, which is a heavy focus on C&I and then the delivery of the value-added services, whether they're capital markets or payments as opposed to a focus on either loan-only relationships or buying participations or investor real estate or otherwise. That business now also has specialty products, so ABL equipment leasing coverage. It has coverage dedicated treasury management. It has wealth and asset management support and then a non-public branch office, which allows us to do things on the pub fund side. What it does not have today is any retail banking presence. I wouldn't rule that out, but those are very large markets that we're talking about here. They're not markets of between 0.5 million and 3 million people, which has been the expansion strategy in the Southeast. So, any effort that we elect to make with branches in those markets will be a thing that we communicate to you in advance, because we'll be talking about committing 50 to 100 branches in a single city in many cases as opposed to what we're doing in the Southeast right now, which is really building 10 to 25 at an individual market level and getting to that top five presence that we know we need to be able to support the primary banking model.

That's helpful color. Thank you.

Question comes from John Pancari from Evercore. Your line is now open.

Good morning.

Good morning.

On the NII outlook of down 2% to 4%, I know previously your -- last quarter your forecast was forward curve as well and you had five or six cuts in that assumption and now you're sticking to the forward curve, so much less of three cuts I'd say is in the forward curve now. However, your NII guide has remained intact despite that. Can you maybe just talk a little bit around it -- around the ability to keep that outlook without changing it? And then, what does that mean in terms of your margin forecast? I know you indicated that it's bottomed as well as NII now, but as you look through the year, what type of trajectory do you see in the margin? Thanks.

Yeah, John, thanks for the question. It's one where the main thing that I would highlight for you is that we continue to have very strong benefits from the fixed rate asset repricing at this point. And you can see this -- for us, you can see that in our actual numbers. Year-over-year our indirect secured consumer business, which is primarily our indirect auto business, that's up 100 basis points year-over-year on a $15 billion portfolio. So, $150 million of annualized benefit in a year where we were actually constraining production in auto because of the RWA diet. So, those businesses we have, those medium-term fixed rate lending assets, whether it's the auto business, RV Marine, whether it's solar provide, generate a lot of power for us in terms of earnings capacity. Over the next 12 months, we'll have enough fixed rate assets reprice that will generate $350 million, $400 million plus of annualized NII benefit. So, even in a higher rate environment and with the curve selling off some, that benefit is increasing for us. So that is a good outcome for us that helps support and offset some continued migration from a DDA perspective, as well as some continued forecasted increases in deposit costs overall. We're not making any assumptions that the deposit environment and the competition and the increasing cost is over, but it is definitely moderating. From a NIM perspective, we do expect positive NIM from here as well. We're only talking about a couple of few basis points a quarter trajectory. A big wild card on the magnitude of the NIM increases just ultimately is where the cash position ends up. If we continue to have really strong performance out of our deposit franchise above the 2% to 3% that we're guiding to, NIM will be a little bit lower, but NII will be better as a result of that. But overall, we feel really good about the absolute positioning.

Got it. Thanks, Bryan. Very helpful. And then separately on the credit side, NPA is up a bit this quarter. If you could just give us a little bit of color on what you're seeing in terms of credit migration and maybe by sector. We're hearing a bit of stress on the transportation sector. We have aviation credit impacted some of the names as well as some banks flagging healthcare. So, if you could just give us a little bit of color there and maybe also your confidence in your 35 basis point to 45 basis point charge-off guidance? Thanks.

Yeah, great. Thanks. Great question. So, of the $59 million increase that we saw in NPAs this quarter, $49 million of it was in commercial, two names, not in the industries that you had indicated. We had a retail trade name and a senior living trade name. So, we are continuing to see stress on the healthcare side, specifically in the senior living. That's not a huge portfolio for us and we think we have our hands around it, continue to review that portfolio on a consistent basis. So, not overly concerned. The thing that we have been consistently saying and we continue to see is we just -- we are not seeing trends by geography, by product, by industry. Our issues that have bubbled up have been more episodic and we've been able to deal with those episodic events on a quarter-by-quarter basis. So, I am not expecting to see a linear increase in our NPAs. To your last question, I still feel very good about the guidance. Bryan talked about earlier, 35 basis point to 45 basis point for the year based on -- again, Tim mentioned our commercial real estate portfolio continues to perform very, very well. The rest of our C&I borrowers continue to perform well. They've done a nice job with expense cutting. They've done a nice job passing along pricing. They're operating about as efficiently as we've seen them. We're taking a cautious view as well, not sure where rates are going to go. So, we're not seeing a lot of CapEx. But overall, we like the behaviors of our C&I portfolio, and I think the results of our commercial real estate portfolio speak for themselves.

Great. Thank you for taking my questions.

Absolutely.

Our next question comes from Ken Usdin from Jefferies. Your line is now open.

Thank you. Good morning. Just want to follow-up with Bryan. Bryan, you mentioned the annualized dollar impact from those fixed rate securities and loans. I think you said previously that was $12 billion. I'm just wondering if you have an understanding of what you know will be also repricing in '25, and is that -- I would assume that would also then be incremental to that annualized benefit you referred to earlier?

That's right. We do have a similar amount that will happen in '25. And actually, we've been in the range of $4 billion to $5 billion a quarter repricing overall on the portfolio between loans and investment portfolio. The investment portfolio has actually been, say, $600 million to $800 million a quarter range. That number is actually going to start accelerating later this year as we start to get some maturities on the bullet/locked-out structures. We're expecting over $1 billion in the fourth quarter and a pace similar to that in 2025. So, this benefit and the repricing is going to continue and actually pick up a little bit and that's where the higher for longer environment, as long as the frontend stays relatively stable, because that will help keep deposit costs stable, the higher long end will actually help and contribute to higher income over time.

Okay. And then also you mentioned keeping the cash and securities at around the same level. Can you talk about just how you're preparing for liquidity rules and what that will mean in terms of that -- how you think about the mix of -- across portfolios and the amount of cash you want to keep?

Yeah. We are there today for whatever comes out from a liquidity rule perspective. So, we will not have to make any material changes to the balance sheet compared to what we have today. What will happen over time as the loss position on the investment portfolio burns off, that will actually increase the liquidity contribution from the investment portfolio, so we can take the cash -- start to take the cash position down. Also we will start to remix the composition of our investment portfolio to continue to shift more into level one securities which will also help us take the cash position down over time. So, it will be just a natural transition where the balance sheet will get a little bit lighter from a cash and securities perspective as time passes. But we're very well positioned for any pending liquidity rules.

Okay. Thank you, Bryan.

Next question comes from Vivek Juneja from JPMorgan. Your line is now open.

Thanks. Tim and Bryan, a question for you on the Southeast. How much do you have in deposits there now? And what are you doing in terms of consumer side loans? Where do those stand relative to deposits?

Sure. Let me start on the consumer loan side and then Bryan will fill in on the detail on deposits. So, the balance sheet in the Southeast on the consumer side for the core banking relationships is a net funding provider for us. Vivek, the sort of general development of a customer relationship is acquire the primary DDA via direct marketing and the work that we do around the new branches as we build them. The payments products are an important part of primacy. So, credit card would come after that. And then, from there, you have the episodic opportunities whether that's home equity, because there is some improvement going on or mortgage, although there obviously hasn't been a lot of that in the environment over the course of the past few years. The auto business, the dividend solar finance business in particular do have strong production in Florida, just because of the size of the population relative to the other states where we do business. But they're really unconnected to deposits. Bryan, you want to talk about the individual markets and deposit balances?

Yeah, absolutely. We've got about overall about $31 billion in deposits in the Southeast now. About -- over half of that relates to the consumer franchise. So, we're doing very strong in consumer on that front. And as Tim mentioned, we are -- it is a net provider of funding. We only have about $18 billion worth of loans in the Southeast.

And I would imagine most of those are on the commercial side, as Tim said, at this point?

Yes.

Yeah, absolutely.

Separate question. Solar, I noticed your growth has slowed as you've been indicating. Any update on what you're thinking in terms of originations, loan growth as well as credit?

Yeah. Well, I'll start and we'll get Greg to answer on credit. We are still number two, right? We are the number two largest financer in the residential solar market. And the byproduct of that is our growth opportunity has as much to do with the market size as it does anything else at this stage. And right now with rates being high and with net metering having been rolled back in a couple of places, you just have an affordability issue where the cost of purchasing energy off the grid is cheaper than it would be to finance solar installations. I think the other dynamic is that as rates rise, and this is I think ironically it's the same phenomenon in auto is as rates rise, the mix of leased financed installation shifts toward leases, which means as a lender, the solar is going to be down. I think the estimate from the industry is like 13%, 14% this year, Vivek, in terms of total installations. You're going to see a more significant decline in the financing volumes. So, we built our plan around being down 30% year-over-year. And I think in a higher for longer environment, that's probably right. If it's any softer than that, it's just going to be a byproduct of this continued dynamic on the lease versus finance, and does it make sense to -- can you offset energy costs on a zero basis with the cost of the equipment that's being installed. Greg?

And on the credit side, the solar dividend credit losses are performing right as we model right around 1.3%. We actually think we'll run a little bit better for the remainder of this year. Early volume within the portfolio is seasoning. So, we saw a little bit of seasonality this quarter, but we feel good about what we're seeing. And we certainly have more optimistic view for the rest of this year.

And then just on the volume front for originations for solar, I know this question came up earlier as well, we're probably talking closer to $1.7 billion to $2 billion of originations this year, just given the dynamics that Tim mentioned earlier.

Thanks.

Next question comes from Manan Gosalia from Morgan Stanley. Your line is now open.

Hey, good morning. I wanted to touch on deposit competition. You compete with several of the money center banks in several markets. How are you thinking about deposit competition as QT continues, as RRP balances continue to decline and the focus shifts back to bank deposits? How do you think deposit competition will trend in that environment?

We think that is certainly a big question for us and for the industry, and it's one of the items why we highlighted that our NII guidance at this point is less rate environment dependent and more dependent on just the overall level of deposit competition. As you mentioned, we do compete against the money center banks as well as a lot of regionals across our different markets. In the Midwest, we compete against JPMorgan primarily. They're the number one bank in most of our markets. We're the number two bank in those markets. So, we see them and face off against them. And obviously, in the Southeast, we deal with Bank of America, Wells and Truist, so very significant competition. In general, it does feel like the broader liquidity environment has stabilized versus what we saw midyear last year. So, even with a little bit of weakness from an overall industry deposit perspective at this point unless something really breaks in the liquidity system, we're not expecting the significant food fight for cash that happened last year as people were just scrambling to show that they had a stable balance sheet. But it does mean that over time that you're likely to see just a potential increase in competition. The big counter for this is really going to be whether or not loan growth shows up or not. If there's no loan growth for the industry, there's not going to be a need for significant competition for deposits. And so, broadly speaking, we think competition probably stays lighter than what we saw last year, especially in a stable environment, also at a time where we think the whole industry is going to be focused on maintaining profitability. So, we do think that will moderate some of the pressures, but the bottoming of the RRP and potential decreases in bank reserves as QT continues, certainly could create some pressure in the medium term.

Got it. And then maybe a bigger picture question. Tim, in your annual letter, you talked about rationalizing the business model in response to the tougher regulatory environment. You used the RWA data as an example. Bigger picture, what do you think the evolution of the model for Fifth Third and other banks of your size will look like going forward? Maybe there's more partnerships with private credit or there's a pivot to more fee-based businesses. But in what ways will Fifth Third look different in five or seven years from now versus today?

Yeah. So, a few things just on the industry in general and Fifth Third on that front. One, we've got to find a way to reignite growth in labor productivity, right? I think that's true of the economy in total, but you'd see the same thing if you look at the banking sector is despite all the investments that have been made in technology over the course of the past 10, 15 years. Aside from branch rationalizations, you can't really point to a lot of examples where there were big productivity lifts. So, whether it's the cloud platforms we're putting in, where we should be able to drive more straight-through processing, or the use of AI or otherwise, overheads have to come down. That is going to be an important point of focus for us through the value streams and through the tech modernization work that we're doing. I think secondarily, there are going to be businesses that regional banks or community banks just don't compete in, in the future, if there isn't a rationalization of the way that the non-credit wallet is shared. And large public companies would be a good example of that space, right? We did our diet last year. We walked away from companies where we were an important lender, but we weren't getting a fair share of the ancillaries because they were being consumed by the money center banks. That's either going to require the money centers to make larger individual commitments in order to justify the ancillary or it's going to require that the treasurers that those companies reallocate the wallet proportionally. So, I and -- my own view is at least initially you're going to see a shift there. I think private credit is going to be an interesting one to watch. Like…

Very helpful. Thank you.

Next question comes from Christopher Marinac from Janney. Your line is now open.

Hey, thanks. Good morning. Just wanted to ask about possible changes on risk grades in criticized and classifieds. I know it might be premature to see anything upgraded, but just curious on the path of those that you saw and how that may evolve this year.

Yeah, it's a great question. So again, probably not going to be linear, it's going to be lumpy. It has been for us in the past given current previous comments I made about episodic, more episodic events and the fact that we're just not seeing trending by industry, by geography. And so, I would expect it to continue to be lumpy. But as I said earlier, we're still liking the way our C&I portfolio is behaving. We like our commercial real estate track record an awful lot. But with higher for longer, maybe higher forever interest rates, we're going to continue to see stress and we're going to continue to proactively manage the portfolio as we have. We're not doing deep dives because on an ongoing basis, we are stressing the C&I portfolio by 200 basis points. We're getting out ahead of any potential issues, but that could lead to some criticized assets, a special mention. We're doing the same thing, do something on the commercial real estate side, exit stress testing. So, we're taking a look at maturities and we're stressing by 100 basis points a forward curve on what that loan looks like at maturity. And so, if we see weakness there, we could see an elevation in criticized assets, but 99% of our accruing criticized assets are current, right? And if you include our non-accrual, we're still 93%, 94% current within that portfolio. So, we'll see episodic kind of lumpiness for the remainder of the year.

Great. Thank you for that. And just a quick follow-up. I mean, the loss content ultimately is reflected in the reserve. So that would have to change a lot for you to kind of change your guide on reserve overall?

Exactly.

Thanks for that, Chris. I think we don't have any other questions in the queue, but we'd be remiss if we didn't say congratulations to [Erica] (ph) and her family since she wasn't able to join us today before we wrap up our call.

Thanks, Tim. And thanks, Ellie, and thanks everyone for joining -- for your interest in Fifth Third. Please contact the Investor Relations department if you have any other follow-up questions. Ellie, you may now disconnect the call.

Thank you for everyone attending the call today. We all hope you have a wonderful day. Stay safe.