Did Fifth Third just open the door to more bank M&A?

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During Fifth Third Bancorp’s first-ever investor day, the company drove home the message that it is much more tech-savvy and less risky than it was before the financial crisis.

In presentation after presentation, executives highlighted Fifth Third’s digital focus, from investments in data analytics to a new open-office workplace. They also drew attention to the company’s expansion into businesses with relatively minimal volatility, such as middle-market loans and credit cards.

But while analysts have welcomed Fifth Third’s reinvention, many who attended the day-long event in New York on Thursday had a more pressing question on their minds: When will the Cincinnati bank jump back into the business of bank M&A?

In the two years since taking the helm, CEO Greg Carmichael has all but shut the
door on acquisitions, citing his top priority as making the company more profitable.

In speaking with analysts Thursday, he didn’t officially change his stance — but he certainly sounded more open to the idea than he has in the recent past.

“I think strategic bank M&A absolutely makes sense at the right price and the right value,” Carmichael said, emphasizing that Fifth Third will remain “mindful and thoughtful” about how it deploys capital.

Buying a bank could make sense if the company saw an attractive target in a region where it wanted to expand its franchise, Carmichael said. An acquisition could also help the company more efficiently pay for its large, albeit much-needed, investments in cybersecurity and digital banking.

Perhaps most importantly, a bank deal would end Fifth Third’s nearly decade-long drought . Its last acquisition was in 2008, when it bought the $4.8 billion-asset First Charter Bank in Charlotte, N.C. Fifth Third has, however, recently acquired a string of nonbank insurance and wealth advisory firms.

At one point during the question-and-answer session with analysts and investors, Chief Financial Officer Tayfun Tuzun interjected to clarify the company’s position on M&A, citing an “abundance” of inquiries on the topic.

“I don’t want you to walk out of here thinking Fifth Third’s perspective on M&A has changed,” Tuzun said. “It has not.”

Questions about Fifth Third’s acquisition strategy come as a number of once-prohibitive barriers to bank M&A appear to be lifting.

In a regulatory filing Thursday, Fifth Third disclosed that it expects to receive an “outstanding” rating on its most recent Community Reinvestment Act examination from the Federal Reserve. The company last year was downgraded to “needs to improve,” a rating that restricted it from buying banks.

Additionally, the $140 billion-asset Fifth Third would stand to benefit in a big way under a regulatory relief measure in the Senate. The bill would lift the asset threshold for being designated a systemically important financial institution to $250 billion from $50 billion. Passage of the measure could kick-start a long-dormant M&A market in banking, according to industry analysts.

There are other favorable winds at Fifth Third’s back. With Congress poised to pass legislation that would permanently slash corporate tax rates to around 20%, the company could get a significant boost to profits.

“A significant portion of that we expect to fall to the bottom line,” Carmichael said.

During the event, Fifth Third executives discussed the company’s progress on its three-year profitability plan, which was introduced just over a year ago and dubbed “Project NorthStar.”

Under the plan, the company is projected to earn a return on tangible common equity of nearly 14% by the end of 2019. That figure has recently hovered around 10%.

Additionally, Fifth Third wants to drive its efficiency ratio below 60%, but the metric has recently hovered in the mid-60s.

Reaching the goals set under the NorthStar plan would require a complex mix of technology upgrades, nonbank deals and additions to its sales force, among other things. So far, the company is progressing according to schedule, executives said.

As part of its goal reduce volatility in its earnings, Fifth Third has sought to build up its consumer lending business — most notably in personal loans and credit cards. As of Sept. 30, consumer loans made up 38% of total loans and leases, and also accounted for 49% of the company’s total revenue.

Over the past year, Fifth Third has hired consultants to assist in designing an analytics program that will more accurately target customers with credit card offers.

The consultants are former employees of the credit card giant Capital One Financial, according to Jed Scala, head of payments.

Since the company began using more targeted analytics, total spending among credit card customers has increased by over 6% from the prior year, Scala said. The technology is expected to drive portfolio growth in the years ahead.

“This is a space where I’m extremely confident that it is going to have an impact,” Scala said.

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