Fifth Third Bancorp — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Fifth Third is a diversified U.S. bank headquartered in Cincinnati, with $205.4 billion in assets and four reportable segments: Commercial Banking, Branch Banking, Consumer Lending, and Wealth and Asset Management.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue, FTE | $1.952 billion | $1.853 billion | $3.881 billion | $3.757 billion |
| Net interest income, GAAP | $1.208 billion | $1.200 billion | $2.385 billion | $2.429 billion |
| Net income | $709 million | $195 million | $1.403 billion | $243 million |
| Net income available to common shareholders | $674 million | $163 million | $1.348 billion | $193 million |
| Diluted EPS | $0.94 | $0.23 | $1.87 | $0.27 |
| Net interest margin, FTE | 2.63% | 2.75% | 2.62% | 2.99% |
| Efficiency ratio, FTE | 59.1% | 60.5% | 61.0% | 61.8% |
Profit growth chiefly reflected a swing from credit-loss provisions in 2020 to credit-loss benefits in 2021: a $115 million benefit in Q2 and $288 million for the first half, versus provisions of $485 million and $1.125 billion, respectively. The benefit reflected improved economic forecasts and credit quality and lower period-end loan balances. Net charge-offs were 0.16% of average portfolio loans in Q2, down from 0.44% a year earlier.
Noninterest income rose 14% in Q2 and 13% year to date. Growth in commercial banking, deposit service charges, wealth management, and card revenue was partly offset by lower mortgage banking revenue. Noninterest expense rose 3% in Q2 and 2% year to date. Q2 return on average assets was 1.38%; return on average common equity was 13.0%.
Balance sheet, liquidity, and capital
- At June 30, assets were $205.4 billion, portfolio loans and leases were $107.7 billion, and deposits were $162.3 billion. Total loans including held-for-sale loans were nearly unchanged from year-end 2020; commercial balances declined while consumer balances grew.
- Deposits increased $3.2 billion from December 31, 2020, with growth concentrated in demand and savings balances. Borrowings fell $2.6 billion to $13.8 billion, largely following long-term debt redemptions and repayments.
- Cash and due from banks were $3.3 billion and other short-term investments were $32.4 billion. Management reported more than $100 billion in available liquidity and said the Bancorp could meet contractual obligations and dividends for 30 months without capital-market access or upstream Bank dividends.
- For the six months, operating cash flow was $123 million, versus $1.952 billion in 2020; investing activities provided $388 million, compared with $32.691 billion used in 2020; financing activities used $373 million, compared with $30.682 billion provided in 2020. Cash-flow comparisons were substantially affected by changes in short-term investments and deposits.
- Regulatory capital ratios at June 30: CET1 10.37%, Tier 1 risk-based 11.83%, total risk-based 14.60%, and Tier 1 leverage 8.55%. The ratios include the elected CECL capital transition. Tangible common equity to tangible assets, excluding AOCI, was 7.28%.
Material changes and management commentary
- FTE net interest income increased 1% in Q2 year over year but declined 2% for the first half. Lower market rates and reduced commercial and other loan balances pressured asset yields; lower deposit and wholesale funding costs and PPP loan income partly offset the pressure. Management expected net interest margin to remain constrained by elevated excess cash balances.
- Nonperforming assets declined to $697 million from $870 million at year-end 2020; nonperforming portfolio assets were 0.61% of portfolio loans and leases and OREO, versus 0.79%. The allowance for loan and lease losses fell to $2.033 billion from $2.453 billion; total ACL was 2.06% of portfolio loans, versus 2.41%.
- COVID-19 and government stimulus continued to affect balances, credit performance, and operations. PPP loans totaled $3.7 billion at June 30. Management cited an improving but uneven recovery, with Delta-variant resurgence and slower vaccination progress as downside risks. It also noted inflation and supply and labor constraints.
- The ACL’s economic outlook assumptions remain important: management reported that using the downside scenario alone would increase the quantitative ACL by approximately $763 million, before any additional qualitative adjustments.
- The Federal Reserve lifted pandemic-related capital distribution limits effective July 1, 2021. Fifth Third completed $527 million of accelerated repurchases in the first half and declared common dividends of $0.27 per share in Q2. On July 27, it paid $550 million for a further accelerated repurchase, with final settlement expected by September 29, 2021.
- Mortgage banking revenue declined as servicing-right valuation adjustments and lower servicing revenue offset higher mortgage originations. The MSR portfolio’s fair value was $818 million at June 30. Other notable items included private-equity and equity-method investment gains and a $37 million Q2 loss on the Visa Class B share swap.
Risks, contingencies, and unusual items
- Key risks include continued pandemic effects, credit deterioration and sector concentrations, interest-rate changes, excess liquidity’s effect on margin, and the LIBOR transition. The filing says the full effect of replacing LIBOR remains unclear.
- Legal matters include the CFPB and consumer class actions concerning alleged unauthorized accounts, shareholder litigation, and the Visa/Mastercard merchant interchange litigation. Fifth Third estimated reasonably possible legal and regulatory losses of up to approximately $49 million above accruals where estimable; other possible losses could not be estimated. Management said it did not expect the matters to have a material adverse effect on consolidated financial position, while acknowledging an unfavorable outcome could materially affect results in a particular period.
- Mortgage representation-and-warranty reserves were $9 million; the company estimated reasonably possible losses up to approximately $11 million above that reserve.
- Management identified cyber, fraud, third-party service-provider, regulatory, and reputational risks, including elevated operational risks associated with remote work and pandemic relief programs.
Most important facts for investors to verify
- How much of the earnings improvement is sustainable after the unusually large credit-loss reserve release, and how credit performance and the ACL evolve.
- Whether deposit-driven excess liquidity continues to suppress net interest margin, and how loan growth, rates, and PPP forgiveness affect net interest income.
- Whether consumer and commercial credit quality remains resilient as relief programs and stimulus effects diminish, particularly in pandemic-affected industries and mortgage forbearance balances.
- Actual capital distributions and share-repurchase settlement after the July $550 million transaction, alongside regulatory capital levels and the CECL transition.
- Developments in the CFPB, shareholder, interchange, and other legal matters, including any change to reserves or estimated exposure.