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Fifth Third projects 40% deposit beta, $155M payout from hedging as rates fall

Fifth Third Bancorp expects to handle the falling rate environment better than almost any other bank.

Management said during the Oct. 22 third-quarter earnings call that they expect to reap $155 million from Fifth Third's hedging positions, which the bank secured well before the downturn in the interest rate outlook. An executive said the $155 million payout assumes a Federal Reserve rate cut in October and two more in 2020: one in March and another in September.

"If those rate cuts play out, those $11 billion of hedges are going to make $155 million. So that's $15 million in the fourth quarter, and then the rest is spread across 2020," the executive said.

Fifth Third expects its net interest margin to decline by 5 basis points to 6 basis points year over year in the 2020 first quarter, which the executive said should represent "best-in-class performance." The executive added that the hedging position paid out $2 million in the first three quarters of this year.

For the 2019 fourth quarter, Fifth Third expects its net interest margin to decline by 4 basis points to 5 basis points from the 3.25% figure reported in the third quarter. CFO Tayfun Tuzun said the bank expects its margin to expand from there in the 2020 first quarter due to the hedging payouts. For full year 2020, the bank expects its margin to be 3.2% to 3.25%, with the low end assuming two rate cuts and the high end if there are no rate cuts.

As the Fed cuts rates, Fifth Third expects to book a deposit beta of 41%, meaning it would be able to reduce its interest-bearing and sweep deposit rates by 41% of the decline in the Fed's rates. On the way up, the bank's deposit beta was roughly 70%, management said.

Assuming a Fed rate cut in the third quarter, Fifth Third expects interest-bearing core deposit costs to decline by roughly 15 basis points to 18 basis points in the fourth quarter. An executive said the bank is confident in realizing the roughly 40% deposit beta from the three rate cuts this year, which presumes the October rate cut. The executive said Fifth Third reduced its go-to-market rates on retail deposits to 1% from 1.5% at roughly midway through the third quarter as it eschews online bank competition.