Fifth Third defends decision to release loan-loss reserves

Fifth Third Bancorp in Cincinnati was one of the few banking companies to release reserves in the third quarter, raising questions about whether its economic forecast is too rosy.

Executives at the $202 billion-asset company defended their $15 million release and the thinking behind it during a Thursday conference call with analysts to discuss third-quarter results. Fifth Third’s reserve release and projection that its net charge-off ratio will stay “well below” 1% through 2021 were more bullish than most other regional banks have been this earnings season.

Regions Financial in Birmingham, Ala., for example, recorded a $113 million loan-loss provision, higher than a year earlier, but still lower than the prior quarter. Similarly, Zions Bancorp. in Salt Lake City set aside $55 million for potential loan losses, compared with $10 million a year earlier and $168 million in June.

And while both Regions and Zions held net charge-offs well under control, executives also struck a cautious tone on reserve releases, saying they may not be out of the woods just yet.

With so many unknown variables — including the development and deployment of a coronavirus vaccine — Fifth Third’s relative optimism touched off a lot of back and forth with analysts.

“A negative provision seems like an outlier,” said Mike Mayo, an analyst at Wells Fargo Securities. “Do you really want to set a tone at this stage of the cycle of taking a negative provision? I mean, you might be right, but you might be wrong. But we don’t really know how this is going to play out.”

Executives countered: Net charge-offs were low at 0.35%, the company already put aside substantial reserves in the first half of the year, they’re seeing some pickup in commercial loan pipelines, and they feel generally confident in the risk profile of their customers.

Fifth Third’s loan-loss allowance as a percentage of total loans was 2.49% on Sept. 30, significantly higher than its 0.83% ratio of nonperforming assets to total assets.

“We think we’re in pretty good shape until we get into the second half of next year,” Chairman, President and CEO Greg Carmichael said in response to another analyst who pressed further about the company’s expectations for 2021 and 2022.

To be sure, Fifth Third wasn’t alone in releasing reserves in the third quarter. Umpqua Holdings in Portland, Ore., released $338,000 in loan-loss reserves, compared with provisions totaling more than $200 million over the prior two quarters. Boston Private Financial released $2.8 million.

Boston Private’s move reflected “improved economic forecasts … and a release on residential loans associated with improving deferral trends,” Steven Gaven, the $9.4 billion-asset company’s chief financial officer, said Thursday during a conference call to discuss quarterly results.

Boston Private had set aside $44 million in the prior two quarters, and its allowance, as a percentage of total loans, was 1.17% on Sept. 30. In comparison, its ratio of nonperforming loans to total loans ended the third quarter at 0.57%.

Executives at Citizens Financial Group in Providence, R.I., said last week that barring deterioration in the economic outlook, the $180 billion-asset company could start releasing reserves in the fourth quarter. Their view was that charge-offs should be stable over the rest of this year.

“We’re seeing some broad signs of optimism and some improvement in the overall commercial book,” Chairman and CEO Bruce Van Saun said during Citizens’ quarterly earnings call.

On the consumer side, Van Saun said Citizens has “had really, really healthy trends … to the point of being surprising” in terms of delinquencies. “So we feel really good there as well.”

Fifth Third’s third-quarter profit rose nearly 6% from a year earlier to $581 million. Earnings per share of 78 cents came in 18 cents higher than the mean estimate of analysts surveyed by FactSet Research Systems.

Net interest income fell 2% from the second quarter and 6% from a year earlier to $1.2 billion. Its net interest margin stood at 2.58%, down 74 and 17 basis points, respectively.

Several fee income streams helped to balance out declining net interest income. At $722 million, total noninterest income was 2% lower than a year earlier but 11% higher than the prior quarter. Wealth and asset management revenue and commercial banking revenue grew on a yearly basis. Though slightly lower than in the third quarter of last year, card and processing revenue rose 12% from the second quarter to $92 million, as consumer spending patterns picked up.

Carmichael said Fifth Third has been continually looking for nonbank acquisitions that could further bolster its fee income businesses, such as wealth and asset management.

Expenses ticked up slightly from a year earlier to $1.1 billion. Executives outlined a plan to further trim noninterest expenses by another $200 million beginning next year.

Paul Davis contributed to this article.


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