Why did reported earnings fall so sharply in the fourth quarter?

The main driver was a $224 million pre-tax FDIC special assessment, roughly $172 million after tax. Smaller notable items included a $22 million Visa total return swap valuation charge, a $15 million Fifth Third Foundation contribution, and $5 million of restructuring severance, partly offset by a $17 million tax benefit. Together these reduced EPS by $0.27, so reported EPS of $0.72 compares with adjusted EPS of $0.99.

Is the net interest margin decline a concern for investors?

NIM fell to 2.85% from 2.98% in the prior quarter and 3.35% a year earlier, reflecting higher deposit costs and a deliberate decision to hold large cash balances. Management expects continued pressure from the liquidity posture. Investors should weigh this against the company's full-year 2024 guidance for net interest income to grow 1-2% and its stated intent to keep balance sheet flexibility.

What does the transfer of securities to held-to-maturity mean?

On January 3, 2024, Fifth Third moved $12.6 billion of available-for-sale securities, about 23% of the AFS portfolio, into held-to-maturity, with a $994 million unrealized loss. Under HTM accounting these securities are not marked to market through AOCI, which reduces potential capital volatility from interest rate moves. The trade-off is that the company is committing to hold these securities, limiting flexibility to sell them.

How is credit quality trending?

Credit metrics present a mixed picture. The NCO ratio fell to 0.32% from 0.41% sequentially, but it is up from 0.22% a year ago, and consumer NCOs rose to 0.64%. Nonperforming assets increased to 0.59% of loans and OREO from 0.44% a year earlier. The allowance for credit losses stood at 2.12% of portfolio loans, and management guides to a 2024 NCO ratio of 35-45 bps.

Did the company return capital to shareholders in the quarter?

Fifth Third paid a quarterly common dividend of $0.35 per share and did not execute any share repurchases in the fourth quarter of 2023. Full-year 2023 repurchases totaled $201 million, and the company's CET1 ratio of 10.29% gives it room to consider future capital returns, subject to regulatory requirements and the outlook for earnings.

FITB 8-K: Earnings & Results & Regulation FD

01—Abstract

Summary

Summary of the 8-K filed January 19, 2024. Cited figures are marked; the original filing is the authoritative source.

Fifth Third Bancorp (FITB) reported fourth quarter 2023 diluted EPS of $0.72^a, down 21% sequentially and 29% year over year, as GAAP net income available to common shareholders fell to $492 million.

The decline was driven largely by a one-time $224 million^b pre-tax FDIC special assessment, which together with other notable items (Visa total return swap valuation, a Foundation contribution, and restructuring severance) reduced EPS by $0.27. Excluding these items, adjusted EPS was $0.99, and the adjusted efficiency ratio was 55.3%, with adjusted ROTCE excluding AOCI of 16.8%, up 90 basis points sequentially. Full-year 2023 diluted EPS was $3.22 versus $3.35 in 2022.

Balance sheet and capital trends were mixed but generally constructive. CET1 rose 49 basis points sequentially to 10.29%, aided by completing a risk-weighted asset reduction initiative, and average deposits grew 2% sequentially and 5% year over year while the industry declined about 3%. Net interest margin compressed to 2.85% from 2.98% as the bank carried more than $25 billion^c in cash and short-term liquidity and deposit costs rose.

Management also transferred $12.6 billion^d of AFS securities (about 23% of the AFS portfolio) to held-to-maturity on January 3, 2024, to limit capital volatility from the roughly $994 million unrealized loss on those securities. Credit quality weakened modestly. The net charge-off ratio was 0.32%, down from 0.41% in the prior quarter but up from 0.22% a year earlier, with consumer NCOs rising to 0.64%.

The nonperforming asset ratio increased to 0.59%. Management's 2024 outlook calls for net interest income up 1-2%, noninterest income down 2-4%, noninterest expense up about 1%, and a 2024 NCO ratio of 35-45 basis points. The bank did not repurchase shares in the fourth quarter.

02—Key points

Key Highlights

Diluted EPS of $0.72 reported, or $0.99 adjusted, versus $0.91 in 3Q23 and $1.01 in 4Q22; the reported figure absorbed a $0.27 hit from notable items, primarily the $224 million pre-tax FDIC special assessment.
CET1 ratio rose 49 bps sequentially to 10.29%, with management citing completion of its risk-weighted asset reduction initiative and balance sheet optimization.
Average deposits increased 5% year over year to $169.4 billion, while the industry declined about 3%; loan-to-core deposit ratio improved to 72%.
Net interest margin fell 13 bps sequentially to 2.85% as the company held elevated liquidity (over $25 billion in cash and short-term investments) and deposit costs rose.
Net charge-off ratio improved to 0.32% from 0.41% sequentially but rose from 0.22% year over year; consumer NCOs reached 0.64%.
Transferred $12.6 billion of AFS securities to held-to-maturity on January 3, 2024, to reduce capital volatility from a $994 million unrealized loss.
FY2024 guidance: NII up 1-2%, noninterest income down 2-4%, noninterest expense up about 1%, NCO ratio 35-45 bps, and a 1Q24 NCO ratio of 35-40 bps.

03—Questions

Frequently Asked Questions

Why did reported earnings fall so sharply in the fourth quarter?
The main driver was a $224 million pre-tax FDIC special assessment, roughly $172 million after tax. Smaller notable items included a $22 million Visa total return swap valuation charge, a $15 million Fifth Third Foundation contribution, and $5 million of restructuring severance, partly offset by a $17 million tax benefit. Together these reduced EPS by $0.27, so reported EPS of $0.72 compares with adjusted EPS of $0.99.
Is the net interest margin decline a concern for investors?
NIM fell to 2.85% from 2.98% in the prior quarter and 3.35% a year earlier, reflecting higher deposit costs and a deliberate decision to hold large cash balances. Management expects continued pressure from the liquidity posture. Investors should weigh this against the company's full-year 2024 guidance for net interest income to grow 1-2% and its stated intent to keep balance sheet flexibility.
What does the transfer of securities to held-to-maturity mean?
On January 3, 2024, Fifth Third moved $12.6 billion of available-for-sale securities, about 23% of the AFS portfolio, into held-to-maturity, with a $994 million unrealized loss. Under HTM accounting these securities are not marked to market through AOCI, which reduces potential capital volatility from interest rate moves. The trade-off is that the company is committing to hold these securities, limiting flexibility to sell them.
How is credit quality trending?
Credit metrics present a mixed picture. The NCO ratio fell to 0.32% from 0.41% sequentially, but it is up from 0.22% a year ago, and consumer NCOs rose to 0.64%. Nonperforming assets increased to 0.59% of loans and OREO from 0.44% a year earlier. The allowance for credit losses stood at 2.12% of portfolio loans, and management guides to a 2024 NCO ratio of 35-45 bps.
Did the company return capital to shareholders in the quarter?
Fifth Third paid a quarterly common dividend of $0.35 per share and did not execute any share repurchases in the fourth quarter of 2023. Full-year 2023 repurchases totaled $201 million, and the company's CET1 ratio of 10.29% gives it room to consider future capital returns, subject to regulatory requirements and the outlook for earnings.

04—Continue

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