The (relatively) new boss at Fifth Third Bancorp certainly has a lot of irons in the fire.
Greg Carmichael, who succeeded Kevin Kabat nearly a year ago as the Cincinnati company's chief executive, on Thursday outlined the steps he's taking to reposition the $143 billion-asset company. A less risky balance sheet and improved returns are high on his priority list, although it may take a while to check those boxes.
"You don't see it now, but you will see it in the future when chargeoffs and nonperforming assets are at a more normalized level and [there are] lower loan losses," said Terry McEvoy, an analyst at Stephens.
Carmichael's three-pronged plan, dubbed Project North Star, seeks a blend of cost cuts and revenue enhancements by 2019 that are supposed to be worth $800 million a year. About $265 million of that total is slated come from the expense cuts; some of the revenue growth is supposed to come from new consumer lending initiatives.
Beyond the $800 million goal, Project North Star aims to improve return on equity and return on assets, which were 12.8% and 1.44%, respectively at Sept. 30. Additionally, he wants the company's efficiency ratio to consistently fall below 60%; the ratio was 55.5% in the third quarter, but it was over 60% in the first two quarters of this year.
Many of the initiatives are well underway. Fifth Third will either sell or close a total of 150 branches before Jan. 1, generating about $72 million in savings each year. More branches could be cut as customers continue to move to mobile and online banking, Carmichael said, though he did not give any estimates of future branch reductions.
"It really is driven by the consumer preferences. And you are seeing that migration ... to our mobile apps, our digital capabilities," Carmichael said during a conference call Thursday to discuss third-quarter results.
However, efforts to rein in expenses will nevertheless be bumpy. Noninterest expense in the third quarter rose 3% year over year to $973 million.
Fifth Third has already started to de-risk its balance sheet, in part by shifting its held-for-investment mortgages toward high-quality credits, said Bain Rumohr, an analyst at Fitch Ratings. Additionally, its exposure to commodities such as coal fell to $35 million from $391 million a year ago.
"We are essentially out of the coal business," Frank Forrest, chief risk officer, said during the call.
Finally, Carmichael hopes to spur loan and fee-income growth by tilting Fifth Third's loan book more toward consumer lending. Currently, the mix stands at 61% commercial and 39% consumer. He declined to provide a target mix.
In a bid to boost home lending, Fifth Third plans a total overhaul of the technology platform that underpins its mortgage business. It is replacing a "legacy IBM platform" with a single loan-origination software package from Black Knight Financial Services.
The IBM platform "is not very efficient and it doesn't have digital capabilities for documents, signatures and workflow management," Carmichael said. "The new platform is completely digital. We will have a complete reengineering."
Carmichael has also closed Fifth Third's brokered mortgage business, which had represented 30% of its mortgage volume. Instead, Fifth Third will emphasize retail, direct and correspondent mortgage sales. Mortgage banking income has declined in the short term, falling 7% in the third quarter to $66 million. But Carmichael "wants to grow the mortgage business."
Moreover, Carmichael wants to increase lending in credit cards and boost fee revenue from insurance. "We have a good credit card offering, but not a great offering," he said. "We think the card business could be a significant opportunity for us."
But not every consumer category is getting a push, as Fifth Third is pulling back from indirect auto lending.
In the final analysis, Fifth Third's strategy has some debatable elements, such as its decision to sell down its position in its Vantiv payments subsidiary, said Christopher Wolfe, an analyst at Fitch Ratings.
"Their current performance has not been in line with their peers," Rumohr said.
Fitch on Oct. 4 cut its rating for the bank to negative from stable because in recent quarters its earnings have underperformed its rivals after outperforming them in previous years. The rating was also lowered because if Fifth Third follows through on its stated intention to sell off some or most of its stake in Vantiv, then it will lose the income that it has been receiving from Vantiv, although selling it will generate a gain, Fitch said.
Project North Star could help Fifth Third become a more consistent performer, though it may take a while to come to fruition, Wolfe said.
"They're obviously looking at ways to improve their core earnings," he said.