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 overly bullish.
Executives at the $ 202 billion-asset company defended their $ 15 million release and the thinking behind it during a conference call Thursday with analysts to discuss third-quarter results. Fifth Third’s reserve release and projection that its net expense ratio will remain “well below” 1% through 2021 were more optimistic than most other regional banks this earnings season.
Regions Financial in Birmingham, Alabama, for example, recorded an allowance for loan losses of $ 113 million, higher than a year earlier but still lower than the previous quarter. Likewise, Zions Bancorp., In Salt Lake City, set aside $ 55 million for potential loan losses, down from $ 10 million a year earlier and $ 168 million in June.
And while Regions and Zions controlled the net charges well, leaders also adopted a cautious tone on reserve releases, saying they may not have come out of the woods yet.
With so many variables unknown – including the development and deployment of a coronavirus vaccine – Fifth Third’s relative optimism has sparked many back and forth with analysts.
“A negative provision appears to be an outlier,” said Mike Mayo, analyst at Wells Fargo Securities. “Are you sure you want to set the tone for this stage of the negative hold cycle?” I mean, you might be right, but you might be wrong. But we don’t really know how it’s going to play out.
Executives responded: net write-offs were low at 0.35%, the company has already set aside substantial reserves in the first half of the year, they are seeing some recovery in commercial lending pipelines, and they generally feel confident in the risk profile of their clients.
Fifth Third’s allowance for loan losses as a percentage of total loans was 2.49% as of September 30, significantly higher than its 0.83% ratio of non-performing assets to total assets.
“We think we’re in pretty good shape until the second half of next year,” CEO Greg Carmichael said in response to another analyst who put more emphasis on the company’s expectations for 2021 and 2022.
Admittedly, Fifth Third was not the only one to release reserves in the third quarter. Umpqua Holdings in Portland, Ore. Released $ 338,000 in loan loss reserves, against allowances totaling more than $ 200 million in the previous two quarters. Boston Private Financial released $ 2.8 million.
Boston Private’s move reflected “improving economic forecast … and a post on residential lending coupled with improving carry-forward trends,” Steven Gaven, chief financial officer of the $ 9.4 billion company, said Thursday. of dollars, during a conference call to discuss quarterly results.
Boston Private had set aside $ 44 million in the previous two quarters, and its allowance, as a percentage of total loans, was 1.17% as of September 30. In comparison, its ratio of non-performing loans to total loans ended the third quarter at 0.57%. .
Executives at Citizens Financial Group in Providence, RI, said last week that unless the economic outlook worsens, the company with $ 180 billion in assets could start releasing reserves in the fourth quarter. According to them, the charges should be stable over the rest of the year.
“We are seeing broad signs of optimism and some improvement in the overall business portfolio,” President and CEO Bruce Van Saun said on the Citizens quarterly earnings conference call.
On the consumer side, Van Saun said Citizens had “really, really healthy trends… to the point of surprising” delinquency. “So we feel really good there too.”
Fifth Third’s third quarter profit increased nearly 6% from a year ago to $ 581 million. Earnings per share of 78 cents is 18 cents higher than the average estimate of analysts polled by FactSet Research Systems.
Net interest income was down 2% from the second quarter and 6% from a year ago to $ 1.2 billion. Its net interest margin stood at 2.58%, down 74 basis points and 17 basis points respectively.
Several streams of commission income helped to balance the decline in net interest income. At $ 722 million, total non-interest income was 2% lower than the previous year, but 11% higher than the prior quarter. Wealth and asset management income and commercial banking income increased on an annual basis. Although slightly lower than in the third quarter of last year, card and processing revenues rose 12% from the second quarter to $ 92 million, as consumer spending habits rebounded .
Carmichael said Fifth Third was continually on the lookout for non-bank acquisitions that could further strengthen its fee income business, such as wealth and asset management.
Spending increased slightly from the previous year to $ 1.1 billion. Executives presented a plan to further reduce non-interest spending by an additional $ 200 million starting next year.
Paul Davis contributed to this article.