10-QPeriod: Q2 FY2020

FIFTH THIRD BANCORP Quarterly Report for Q2 Ended Jun 30, 2020

Filed August 7, 2020For Securities:FITBFITBOFITBPFITB-PIFITB-PMFITB-PAFITBIFITB-PK

Summary

Fifth Third Bancorp (FITB) reported its second quarter 2020 financial results, a period significantly impacted by the COVID-19 pandemic. The company's net income available to common shareholders decreased to $163 million ($0.23 per diluted share) from $427 million ($0.57 per diluted share) in the prior year's second quarter. This decline was primarily driven by a substantial increase in the provision for credit losses, which rose to $485 million from $85 million in the same period last year, reflecting a deteriorating macroeconomic environment and the adoption of the CECL methodology. Net interest income on an FTE basis also saw a decrease of $47 million, mainly due to lower asset yields impacted by Federal Reserve rate cuts, although this was partially offset by lower funding costs. Despite the challenging environment, FITB demonstrated resilience in its deposit base, with core deposits increasing by 24% year-over-year, driven by strong growth in transaction deposits. The company actively participated in the SBA's Paycheck Protection Program, originating approximately $5.5 billion in loans. While merger-related expenses have significantly decreased, the ongoing economic uncertainty related to the pandemic presents significant risks, including potential increases in credit losses and impacts on various fee-generating businesses. The Bancorp maintained strong capital ratios, with a CET1 capital ratio of 9.72% as of June 30, 2020.

Financial Highlights

40 data points
Beta

Revenue

$122.00M

Net Income

$195.00M

159.8% Net Margin

EPS (Diluted)

$0.23

Total Assets

$202.91B

Cash & Equivalents

$3.22B

Free Cash Flow

$1.46B

Financial Statements
Beta
Revenue$122.00M
Interest Expense$203.00M
Net Income$195.00M
EPS (Basic)$0.23
EPS (Diluted)$0.23
Shares Outstanding (Basic)714.77M
Shares Outstanding (Diluted)717.57M

Key Highlights

  • 1Net income available to common shareholders declined to $163 million ($0.23/share) from $427 million ($0.57/share) year-over-year, primarily due to increased credit loss provisions.
  • 2Provision for credit losses surged to $485 million from $85 million in the prior year, reflecting macroeconomic deterioration and the adoption of CECL.
  • 3Net interest income (FTE basis) decreased by $47 million year-over-year, driven by lower asset yields due to interest rate declines, partially offset by lower funding costs.
  • 4Core deposits increased by 24% year-over-year, highlighting strong deposit growth and stable funding.
  • 5FITB originated approximately $5.5 billion in Paycheck Protection Program (PPP) loans, participating actively in government relief efforts.
  • 6The CET1 capital ratio remained strong at 9.72% as of June 30, 2020, exceeding regulatory requirements.
  • 7Merger-related expenses related to MB Financial acquisition significantly decreased, reflecting the ongoing integration but still impacting the year-over-year comparison.

Frequently Asked Questions

The COVID-19 pandemic significantly impacted FITB's second quarter 2020 results. It led to a substantial increase in the provision for credit losses ($485 million vs. $85 million in Q2 2019) reflecting a deteriorating macroeconomic environment and the adoption of the CECL methodology. Net income available to common shareholders decreased to $163 million ($0.23/share) from $427 million ($0.57/share) year-over-year. Net interest income also declined due to lower asset yields, although this was partially offset by lower funding costs. The pandemic also affected fee income and increased operational risks.

The adoption of the CECL methodology on January 1, 2020, significantly impacted the provision for credit losses. For the second quarter of 2020, the provision for credit losses was $485 million, compared to $85 million in the second quarter of 2019. This increase reflects the forward-looking nature of CECL, incorporating expectations of future economic conditions, which deteriorated significantly due to the COVID-19 pandemic. The adoption also resulted in a Day 1 increase to the Allowance for Loan and Lease Losses (ALLL) of approximately $653 million.

Total loans and leases, including those held for sale, increased by 5% from December 31, 2019, driven by a 8% increase in commercial loans and leases, partly due to Paycheck Protection Program (PPP) loans. Consumer loans decreased slightly. Core deposits, a key funding source, saw robust growth, increasing by 24% year-over-year, largely driven by increases in demand deposits and interest checking deposits, reflecting increased liquidity in the economy and stimulus programs. The company also participated significantly in the SBA's PPP, originating approximately $5.5 billion in loans.

Fifth Third Bancorp maintained strong capital ratios. The Common Equity Tier 1 (CET1) capital ratio was 9.72%, the Tier I risk-based capital ratio was 10.96%, and the Total risk-based capital ratio was 14.24%. The Tier I leverage ratio was 8.16%. These ratios are calculated under the Basel III standardized approach and, as of June 30, 2020, reflect the five-year transition provision for the CECL adoption. The company exceeded the 'well-capitalized' and 'capital conservation buffer' requirements.

Net interest income on an FTE basis decreased by $47 million year-over-year for the quarter, primarily due to lower yields on interest-earning assets as market interest rates declined significantly. The Bancorp's net interest margin (FTE basis) was 2.75% for the quarter, down from 3.37% in the prior year. While deposit costs have also decreased, the significant increase in low-cost deposits and excess liquidity has put pressure on net interest income. Management expects net interest margin to remain suppressed due to elevated liquidity levels and a slower pace of asset repricing.