One more time, with feeling.
That was the reaction among some observers to Fifth Third Bancorp CEO Greg Carmichael’s update this week on the Cincinnati regional bank’s ambitious profit-improvement plan.
It is reining in expenses, and the bank made progress in purging risk from its loan portfolio — all things Carmichael explained in meticulous detail. But the unanswered questions for some were: What kind of bank does Fifth Third want to become when the dust settles? What is Carmichael’s grand vision?
The three-year Project North Star, announced in September, is essentially the $140 billion-asset Fifth Third’s road map to optimizing its operations. Carmichael was less than a year on the job when he announced the plan, partly to communicate where he wanted to take the bank. Carmichael was also facing pressure to cut costs after he made investors nervous with talk of increasing investments in technology and compliance.
North Star almost seems like an attempt at compromise. It includes an array of initiatives from investing in technology for its online mortgage origination platform to cleaning up its balance sheet. In the first quarter, for instance, Fifth Third unloaded about $600 million in commercial and industrial loans that either no longer fit its risk appetite or did not produce the kind of returns Fifth Third wanted, Carmichael said Tuesday.
With North Star, Fifth Third intends to accomplish a return on tangible common equity between 12% and 14%; a return on assets of 1.1 to 1.3%; and an efficiency ratio below 60%. Some of the results show a step back as the process gets underway before the anticipated steps forward.
In the first quarter its return on tangible common equity was 9.3%, versus 9.9% a year earlier; its ROA fell to 0.88% from 0.93%; and its efficiency ratio worsened to 67.4% from 63.8%. However, the company did keep noninterest expenses flat.
But, strategically speaking, does North Star say enough about the kind of bank that Fifth Third aims to be in the future? When asked about that in a quarterly conference call with analysts, Carmichael and other executives confined their comments to their balance sheet efforts.
“We talked about being good through the cycle, so everything we do, we put through that lens, and that's why you've seen us optimize the balance sheet the way we have and do some heavy lifting,” Carmichael said.
He talked about the $3.5 billion in loans that Fifth Third pushed off its balance sheet last year, its $6 million saved through staffing reductions and some $40 million saved in vendor negotiations.
“So we're focused on the efficiencies, but we're also looking at how we drive revenue and improve our fee businesses,” he said. “So that's why you're seeing additional investments in areas like M&A advisory services [and] expansion of all the capital markets capabilities. But what we're looking to create is a balanced infrastructure and business that would be good through the cycle with a higher rate of fee contribution onto our revenue.”
In a later conversation with American Banker, Carmichael said, “Project North Star was really my opportunity or chance to articulate a strategy for our business to shareholders, analysts, board members and employees.”
Marty Mosby, director of banking and equity strategies at Vining Sparks, was left wanting a little more.
“When you’re through with this you just end up being the best Fifth Third Bank you can be,” Mosby said in an interview after the call. “It’s not about, we’re gonna be a better consumer bank or we’re gonna focus on a certain product mix.”
Christopher Marinac, director of research at FIG Partners in Atlanta, is willing to give the management team the benefit of the doubt for now.
“I think they want to be a high-performing regional bank,” Marinac said. Compared with regionals like Comerica, Huntington Bancshares and KeyCorp, Marinac said of Fifth Third: “They see themselves as having the ability to break out to a higher profit trajectory. The challenge is that that takes several quarters to achieve, and the market is somewhat impatient.”
Without factoring in any interest rate increases or changes in the operating environment, the bank originally planned to hit its benchmarks by the end of 2019. Now that it has benefited from the Fed’s interest rate bump, Fifth Third says it is on track to hit the low end of those goals sometime in 2018.
Fifth Third also deployed at least $8 billion of a total of $30 billion it has committed to its markets in the form of mortgage, small-business and community development lending. That is part of an effort to boost the bank’s “needs to improve” CRA rating it received last summer. That rating covered the 2011-13 period.
Marinac was encouraged by the improvement in net interest margin and by the suggestion that Fifth Third could meet some North Star goals ahead of time. Yet he was also a little disappointed in the decline in fee income. The net interest margin expanded 11 basis points year over year to 3.02%, while noninterest income declined 18% to $523 million.
“I think in the big picture, they’re absolutely heading in the right direction,” Marinac said.
Mosby said it will be clearer next year whether Fifth Third’s profit plan is working. Though he said he is unworried that Fifth Third did not fully answer questions about what type of identity it is striving for, Mosby said he had encouraged Fifth Third to keep that in mind.
“At the end of the day, you have to create the strategy as well as the financial optimization,” Mosby said. “You have to say, what customers, what businesses, are we gonna serve best?”