Fifth Third eyes loan growth following strong 3Q credit performance

The strong credit performance at Fifth Third Bancorp has positioned the regional bank to expand lending in growth markets at a time when many banks are tightening their loan standards, its leaders said when announcing third-quarter earnings.

The $213 billion-asset company's credit quality has "remained strong" throughout a year of economic uncertainty and volatility in the banking sector, according to Fifth Third CEO Tim Spence.

"Favorable credit outcomes" alongside deposit growth provide Cincinnati-based Fifth Third with an opportunity to continue applying "conservative underwriting policies" as the company moves forward with expansion efforts in the Southeast, Spence told analysts during a quarterly earnings call on Thursday.

"We can return to growing loans next year," Spence said.

Between July and September, Fifth Third reported $316 million in early-stage loan delinquencies, a 7% decline from the second quarter and 6% lower than in last year's third quarter.

Nonperforming loans more than 90 days past due totaled $29 million and decreased by 43% since the second quarter and by 51% compared with a year earlier.

And although net charge-offs of $124 million doubled compared with the year-ago period and climbed by 38% since the second quarter, the increase was "in line" with Fifth Third's expectations earlier this year, according to Spence.

"From an overall credit management perspective, we have continually improved the granularity and diversification of our loan portfolios through a focus on generating and maintaining high-quality relationships," added James Leonard, Fifth Third's chief financial officer.

During the third quarter, Fifth Third focused on lending to homeowners as a "segment less impacted by inflationary pressures," Leonard said. The strategy resulted in net charge-offs of $60 million in the consumer banking business, an increase of only three basis points from the second quarter, he said.

Meanwhile, Fifth Third's commercial real estate exposure remains "very well behaved," with higher-risk and delinquent loans in the portfolio improving during the third quarter, he said.

Office-related CRE loans, which have become a primary concern this year among investors, are "significantly better" than industry averages, according to Leonard. Fifth Third reported no new office-related delinquencies or charge-offs and decreased its loan balances by 8% "without any loan sales," he said.

"Credit quality in the office portfolio has remained very strong, and we continue to believe the overall impact on Fifth Third will be limited," Leonard said. "We nevertheless continue to watch it closely given the environment."

Lending at Fifth Third was flat compared with last year's third quarter and declined by 1% since the second quarter to a total portfolio of $122.3 billion. It reported total deposits of $167.7 billion, 2% higher than in the third quarter and 4% greater than in the same period last year.

The company reported a 74% loan-to-deposit ratio during the third quarter "as a result of our balance-sheet positioning and success adding new deposits," Leonard said.

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Total revenue fell nearly 1% year over year to $2.2 billion, while net income of $660 million was up 1% during the same period. Net interest income fell 4% to $1.4 billion, and noninterest income increased 6% to $715 million, since last year's third quarter.

Fifth Third's quarterly earnings received positive responses from analysts.

The bank's "healthy" credit metrics and lower-than expected loan-loss reserves of $119 million — down 25% from a year earlier — led to an increase in Fifth Third's earnings-per-share expectations, David Chiaverini, an analyst at Wedbush, wrote in a research note on the company's results.