Shortly after Greg Carmichael took over as CEO of Fifth Third Bancorp in late 2015, he set a goal of better preparing the Cincinnati company for the digital age in banking.
In his first months at the helm, Carmichael, a former tech executive, announced plans to invest aggressively in digital platforms to speed up back-office procedures and improve client-facing products. The thinking was that big technology investments would better position Fifth Third to compete in the industry and drive revenue over time.
But if there’s a drawback to playing the long game, it is that it often requires some short-term pain. Such is the case at the $142 billion-asset Fifth Third, which said Tuesday that it is hiring a consultant to help it find new ways to rein in other costs so it can afford those investments.
No specific targets were announced, nor were any other concrete details about the efficiency plan provided, though the company said that layoffs and cuts in back-office operations are possible. During a conference call with analysts — who raised questions about the third-party review — Chief Financial Officer Tayfun Tuzun said Fifth Third is simply taking a second look at its spending patterns given recent setbacks in generating revenue.
“We are taking a closer look at our expense base in light of the ongoing lack of strength in loan growth and a muted fee environment,” Tuzun said.
During the first quarter, total noninterest expenses rose 6% from a year earlier to just under $1 billion. Tech-related costs, meanwhile, jumped 17%.
Like all regional banks, Fifth Third faces a tricky balancing act when it comes to investing in technology in a way that is forward-thinking but that also does not harm other parts of the business. Asked during a follow-up interview if he has been too aggressive with technology investments, Carmichael defended his approach.
“If you look at the quality of our earnings, if you look at the quality of our balance sheet, if you look at the commercial customer experience, if you look at us from a regulatory compliance perspective, we’re in extremely good shape, and that would not have happened without these investments,” Carmichael said.
He added that looking for new ways to “optimize” expenses — including by bringing on an outside consultant — was “always part of the plan.”
“I think we’ve done exactly what we said we were going to do, and I feel confident with the pace at which we’re delivering,” Carmichael said.
In some ways, the new round of cost cuts illustrates the challenges of managing a bank that is going through a number of big, simultaneous changes.
In addition to its ongoing improvements in technology, Fifth Third is coming to the end of a long-term project to reduce the credit risk in its loan book. In recent quarters, planned pullbacks in areas such as leveraged lending and home equity have been a drag on overall loan growth, as has the industrywide slowdown in commercial lending.
During the first quarter, total loans and leases were flat from a year earlier, at $92.3 billion, despite a 17% increase in construction loans.
Noninterest income, meanwhile rose 3% from a year earlier, excluding several one-time items. During the quarterly call, the company said fee-based revenue for 2018 will likely come in lower than previously expected, due in part to an industrywide decline in mortgage banking revenue.
For Carmichael, the pressure to cut costs is nothing new. It is something he has faced since the day he stepped in as CEO.
Asked what has changed in recent months, however, to make Fifth Third concerned enough to bring in a third party, Carmichael said the company, like many of its peers, is simply looking for ways to be more efficient in the how it generates revenue.
“There’s no concern here,” he said. “We just want to be smart about how we do it.”
By the end of the year, notably, Fifth Third expects to report an efficiency ratio of below 60%; that figure stood at 66.9% at the end of the first quarter.
Fifth Third has not yet signed a contract with a consulting firm, Carmichael said. He added that his company has also begun looking at its own “early-stage models” to figure out the best way forward to trim expenses.
During the call, Tuzun said Fifth Third will likely share details about the “scale and timing” of its new efficiency initiative during the company’s next quarterly call, in July. The initiative is expected to get the company closer to earning a 17% return on tangible common equity; it was at 13.4% as of March 31.
“We’re not going to leave revenue on the table,” Carmichael said. “We want to grow revenue in the most efficient manner.”