When Kevin T. Kabat became Fifth Third Bancorp's chief executive a year ago, his experience as its president and retail banking head meant he was already familiar with many of the issues the Cincinnati company faced.
But as he prepares to address the company's shareholders at its annual meeting today, even he would admit his first 12 months on the job were tougher than expected.
"It started off with no honeymoon, that's for sure," Mr. Kabat said.
On April 17, 2007, when Mr. Kabat added the CEO title to his president's title, the Midwest's economy was already in recession, and credit quality was deteriorating. But early in his tenure those issues quickly mushroomed as a broad-based credit crisis took hold.
A pair of deals announced under his watch have been anything but easy to close, though neither that fact nor a declining share price has quashed recent speculation that it may bid on National City Corp., a Cleveland company that has wilted in the credit storm.
Mr. Kabat would not discuss Nat City, but in a telephone interview last week, he said he is ready to face shareholder questions about credit quality, his $111 billion-asset company's stock (which has dropped 50% over the last 12 months), and his strategy.
"In 2008, it's really a matter of managing your capital position and keeping focused on your operating performance," he said. "We feel that we are well positioned from a capital perspective."
His words might provide some comfort to shareholders in an environment where major capital infusions in the banking sector have become a common occurrence. (In February, Fifth Third raised $1 billion through bonds.)
And given his retail experience, it is not surprising that Mr. Kabat continues to look to that side of the company for growth and tout some of the improvements there under his stewardship.
"We do think that the work that's been done on customer experience needs to continue to be a very big focus for us," he said. "That's a pretty full plate." He would not provide any specific updates on those efforts, except to say, "Our focus will continue to be on cross-selling, as well as taking more market share from weaker competitors."
As the retail head, Mr. Kabat was instrumental in demanding that Fifth Third stay away from subprime lending — in what he describes as "a very challenged decision" within the management team. And as the president, early last year he formed a committee of executives to review the company's loan books, procedures, and standards. The committee's work led to "a much more solid and stronger approach to evaluating the risks associated with the asset generating," he said.
In April of last year, Fifth Third shuttered its national wholesale home equity originator, Home Equity of America, and later it discontinued all brokered home equity lending. It also has discontinued lending to home builders.
Still, its credit quality has deteriorated more sharply than expected.
"I don't know how we would have avoided some of those issues" Fifth Third is facing, Mr. Kabat said, though in hindsight, "obviously we would have tightened faster, closed down on certain businesses quicker."
Fourth-quarter net loan losses climbed almost 80% from a year earlier, to $174 million, and the chargeoff ratio increased 37 basis points, to 0.89%. Earnings fell 42%, to $38 million. However, Mr. Kabat said that he is "cautiously optimistic" about credit quality, particularly as it relates to loans in its commercial portfolio, and that he believes Fifth Third is halfway through credit cycle.
He also takes issue with a March 17 report from Moody's Investors Service that said, "A significant proportion of the deterioration in Fifth Third's core profitability over the past several years is likely to be permanent." Moody's put the company's Aa3 credit rating on a "negative" outlook. Mr. Kabat is adamant that Fifth Third has not lost its ability to grow. "I think just the opposite," he said. He said the company has performed well in "an incredibly challenging environment." He cited a 5% increase in net interest income last year, along with a 9% increase in noninterest income. "Our loan growth was up 7%. … Core deposit growth [was] double that of our peers. On a variety of core measures, this company is performing extremely well." In addition, "we don't feel that this crisis … has permanently damaged" Fifth Third, Mr. Kabat said. For example, it "had a strong first quarter" in mortgages. "There's been good refi business because of the rate environment. We've also been proactive" in approaching "our best customers" to review their financing options. (Fifth Third is scheduled to report first-quarter earnings April 22.)
"Obviously, no one is happy with the stock price and the stock performance," he said. Fifth Third's shares have dropped roughly 22% so far this year, compared with the 19% decline in the index of banking companies in the Standard & Poor's 500. "Ultimately, stock price is a reflection of your core earnings and how are those earnings doing in this environment, and we hope to address" those issues at the annual meeting.
Even though he would not discuss the rumors surrounding Nat City, Mr. Kabat said his company still prides itself at being good at dealmaking. "We continue to be good at M&A and the integration process," he said.
That's despite the difficulty surrounding a pair of recent deals. An agreement to purchase of nine branches in Georgia from First Horizon National Corp. almost fell apart in February, only a day before it was scheduled to close, and had to be renegotiated. After initially pursuing litigation, both companies announced an amended deal March 26. The transaction is scheduled to close by mid-May. A deal announced in August to acquire First Charter Bancorp. of Charlotte is taking longer than expected to gain approval from the Federal Reserve Board. Initially expected to close in the first quarter, the transaction is now expected to close this quarter. Mr. Kabat would not describe the delay as a setback. He said the First Charter deal is on track, despite the lack of regulatory approval, and he denied that Fifth Third's dealmaking ability has suffered.
Though Mr. Kabat would not discuss rumors Fifth Third is interested in Nat City, he may be more open to a transformational deal than his predecessor, George A. Schaefer Jr., now Fifth Third's chairman. "We believe that the diversification of our geography would be helpful," Mr. Kabat said during the interview. "Strategic in-market transactions could be highly economic, but short of that, there is really no change" in strategy.
