Fifth Third Bancorp will continue to prioritize nonbank M&A, with bank acquisitions remaining a secondary component of the company's strategy.
"Bank acquisitions continue to be a lower priority, as they have been for many years," incoming CEO Timothy Spence said at an investor conference. "We will maintain our disciplined approach to deploying capital in order to support organic growth, pay a strong dividend, fund nonbank acquisitions to produce profitable growth and accelerate our digital efforts."
Fifth Third's recent acquisitions of Provide Inc. and Dividend Finance LLC will accelerate the high-quality asset growth of the bank, Spence said.
Fifth Third completed its acquisition of Provide, a financial technology healthcare practice finance firm, in August 2021 and its acquisition of Dividend, a consumer lender in the solar and sustainable home improvement markets, in May 2022.
The Provide acquisition "is a relationship business for us, with over 70% of Provide customers also signing up for a deposits or payments service and a high-quality source of loan growth," Spence said.
Dividend is already generating origination volumes exceeding Fifth Third's original targets after just one month, Spence said. The bank now expects loan originations from the platform of about $1.2 billion in the second half, 20% more than its original estimate.
Preparing for recession
With markets reeling from economic uncertainty, inflation and rising Federal Reserve interest rates, Fifth Third is managing credit exposure via underwriting standards and client selection, Spence said, adding that the company expects to outperform its peers if credit losses increase.
"Our consumer portfolios remain extremely resilient from both a credit and a deposit balance perspective," Spence said. "Deposit balances for households remain elevated well above pre-pandemic levels across all wealth segments, which has not eroded over the past few months despite elevated inflation."
Fifth Third executives were hopeful for a "soft landing," a term for the Fed's efforts to tame inflation without catalyzing a recession, as late as April, but now the company is prepared for a "bumpier ride," CFO James Leonard said. Given the rising rate environment, the company now expects faster deployment of excess cash into securities and net interest income to increase 14% to 15% this year, a 1-point increase from prior expectations, Leonard said.
"We're seeing that play out in the fee guide, as well as, you see some of the asset sensitivity and balance sheet positioning in some of the peers," Leonard said. "For us, we're still really leveraging the strength of our deposit franchise and feel confident in our ability to manage."
Fifth Third is insulated from credit losses at the bottom 10% of the credit spectrum, because commercial real estate makes up a relatively small portion of the company's portfolio and 86% of the company's depositors are homeowners, Spence said. So far, the company has not experienced a negative impact on credit from inflation.
"The bank maintains the lowest allocation of commercial real estate of any of its peers, and we know there's some stress in those sectors that make up a smaller share of Fifth Third," Spence said. "We have very limited exposure to the sectors of the economy that we expect to feel it."
