Prepared remarks
Hello, and thank you for joining us. My name is Regina, and I will be your conference operator today. I would like to welcome everyone to the Fifth Third Bancorp Fourth Quarter 2024 Earnings Conference Call. All lines have been muted to minimize background noise. After the speakers' remarks, we will have a question-and-answer session. Now, I will hand the conference over to Matt Curoe, Senior Director of Investor Relations. Please proceed.
Good morning, everyone. Welcome to Fifth Third's fourth quarter 2024 earnings call. This morning, our Chairman, CEO and President, Tim Spence; and CFO, Bryan Preston, will provide an overview of our fourth quarter results and outlook. Our Chief Credit Officer, Greg Schroeck, has also joined for the Q&A portion of the call. Please review the cautionary statements in our materials, which can be found in our earnings release and presentation. These materials contain information regarding the use of non-GAAP measures and reconciliations to the GAAP results, as well as forward-looking statements about Fifth Third's performance. These statements speak only as of January 21, 2025, and Fifth Third undertakes no obligation to update them. Following prepared remarks by Tim and Bryan, we will open up the call for questions. With that, let me turn it over to Tim.
Thanks, Matt, and good morning, everyone. At Fifth Third, we believe great banks distinguish themselves not by how they perform in benign environments, but rather by how they navigate uncertain ones. They achieve this through a diversified business mix, defensive balance sheet positioning, and by obsessing over the details in day-to-day operations while investing for the long-term. This morning, we reported earnings per share of $0.85 or $0.90, excluding certain items outlined on Page 2 of the release, exceeding the guidance we provided in our third quarter earnings call. We achieved an adjusted return on equity of 13.7%, the highest among all peers who have reported thus far. Revenues for the quarter grew 2% sequentially and 2% year-over-year. Core adjusted PPNR exceeded $1 billion for the first time in several quarters and our adjusted efficiency ratio improved to 54.7%. The fourth quarter capped the year with the industry outlook for interest rates, loan growth, regulation, and capital markets activity all changed significantly.
Despite this, we delivered strong and predictable results. Our full year return on assets of 1.17%, return on tangible common equity, excluding AOCI, of 14%, and efficiency ratio of 57.1%, all finished among the top in our peer group. We were one of only a few banks to achieve full year guidance for NII, fees, expenses, PPNR, and net charge-offs that was provided back in January. Our NIM inflected in the first quarter as we said it would. NII inflected in the second quarter as we said it would. We returned to positive operating leverage in the fourth quarter on both a sequential and a year-over-year basis, as we said we would. We resumed share repurchases in the second quarter, and raised our dividend in the third quarter. In total, for the year, we returned $1.6 billion of capital to our shareholders, while also increasing our CET1 ratio by more than 20 basis points. Competitive barriers are exceedingly difficult to build in the banking business.
The only way we know how to build them is to invest continuously in a limited number of strategies over a sustained period of time. Our growth strategies are well-known and have been consistent for several years now. Their impact is evidenced in our 2024 results and reflected in the third-party accolades that we received during the year. Our investments to expand our Southeast branch footprint and in our differentiated momentum banking platform continued to drive outsized growth in granular low-cost deposits. For the second consecutive year, Fifth Third was number one among all large banks in year-over-year retail deposit growth measured on a cap deposit basis. We generated year-over-year household growth of 2.3%, punctuated by 6% growth in the Southeast. And we also won JD Power's Retail Banking Satisfaction Award for the Florida region. The 31 de novo branch locations we opened in 2024 and the 60 new branches we expect to open in the Southeast in 2025 should set us up well to continue to gain market share.
On lending, our investments to generate granular diversified loan originations without compromising on pricing or risk gained momentum throughout the year and contributed to a strong finish. On a sequential end-of-period basis, we grew loans 3%, or a bit more than 1% faster than the HA. Growth was balanced between consumer and commercial and across product categories, including from our through-the-cycle commitment to the auto business, strong C&I production from the middle market and key CIB verticals, and continued growth from our Provide and Dividend Fintech platforms. In the middle market, we expanded our Relationship Manager headcount by 25% in the Southeast and in our expansion markets over the course of 2024. Fourth quarter middle market loan production reached a three-year high, increasing over 50% sequentially and over 70% year-over-year, and we also saw a modest uptick in utilization.
Our C&I pipelines in the middle market are at record levels heading into 2025, and we expect to add another 5% to 10% to RM headcount over the course of the year. On fees, our Commercial Payments business grew fee revenues by 8% in 2024, and we processed $17 trillion in volume. Our managed services offerings and Newline led the way on growth and nearly 40% of all new Commercial Payments relationships had no credit attached. In addition, Care Sheet, Global Finance, and This Week in Fintech all recognized Newline with awards for technology innovation. The ramp from new and expanded relationships won during the year, including Stripe and Trustly, will give us a head start on a strong 2025. In Wealth and Asset Management, total assets under management grew 17% year-over-year, up roughly $10 billion to $69 billion in total AUM. Our Fifth Third Private Bank, Fifth Third Securities, and Fifth Third Wealth Advisors business units all delivered strong performance, and we were recognized for the sixth consecutive year as Best Private Bank by Global Finance.
Last, we continued to make good progress on modernizing our operating platform. We completed general ledger and clearing platform conversions during the year and launched term deposits on a modern cloud core. Our cross-functional lean value streams have achieved more than $150 million in annualized savings, and headcount declined 1% year-over-year. These initiatives continue to improve execution quality and provide funding for the investments in our growth strategies. Looking ahead to 2025, there are many reasons to feel optimistic about the banking sector. The underlying economy is solid and most business owners are more optimistic about 2025 than they were about 2024. The combination of front-end rates above zero and some steepness in the yield curve is a more constructive setup than we've had in quite some time. We may also be on the cusp of a shift in the direction of regulation, which could unlock new opportunities.
With that said, recent history is a good reminder that things can shift very quickly. The modern economy is the most complex adaptive system the world has ever seen and complex systems react to change in unexpected ways. Come what will, we are pleased with the positioning of our company. We remain confident in achieving record NII in 2025, and delivering full year positive operating leverage across a range of interest rate environments. Our credit portfolio remains well diversified and proactively managed, and the risks are well understood. We will continue to focus on stability, profitability, and growth in that order, and to stay balanced in our positioning while investing with the long term in mind. Before I turn it over to Bryan, I want to say thank you to our employees for the way you support our customers and our communities, and for your commitment to getting 1% better every day. You make our company the special place it is. With that, Bryan will provide additional details on the quarter and our outlook for 2025.
Thanks, Tim, and thank you to everyone joining us today. Our fourth quarter results demonstrated the ongoing strength and momentum of our company. With a resilient balance sheet and diversified income streams, we achieved 3% sequential growth in adjusted revenue. That revenue performance, combined with our ongoing expense discipline, resulted in a 5% sequential pre-provision net revenue increase in the fourth quarter on an adjusted basis. As Tim mentioned, our strong profitability allowed us to return over $1.6 billion of capital to our shareholders in 2024, including the $300 million share repurchase executed in the fourth quarter. We delivered $3 billion of sequential growth in end-of-period loans and maintained our CET1 ratio consistent with our near-term operating target of 10.5%. In addition to the $630 million in stock we repurchased in 2024, our tangible book value per share, inclusive of the impact of AOCI, increased 6% from the previous year despite the 10-year treasury increasing nearly 70 basis points.
The strategy in our investment portfolio to focus on investments with known cash flows through bullet and locked-out securities will continue to benefit us as these positions pull to par. Even with the increase in rates, the securities we maintained and available for sale realized an improvement in our unrealized loss position since the end of last year. Highlighted on Page 2 of our release, our reported results were impacted by certain items. These include costs related to the Visa/MasterCard interchange litigation and a contribution to our foundation, partially offset by benefits related to an updated estimate for the FDIC special assessment and the resolution of a prior period state tax item. Net interest income for the quarter continued its positive momentum, increasing 1% sequentially to $1.4 billion with net interest margin improving 7 basis points. Proactive balance sheet management resulted in a 35 basis point reduction in the cost of interest-bearing deposits.
These actions, along with the loan growth and the continued repricing benefit on fixed-rate assets, more than offset the decrease in yield on our floating rate assets. Loan growth accelerated in December, resulting in a strong period-end loan growth of 3% with average loans increasing 1% sequentially. Period-end commercial loans were up 3%, and average balances were relatively stable. We saw broad-based strength in production across our middle market footprint, led by our Chicago, Indiana, Carolinas, and Georgia regions, as well as a rebound in our corporate banking verticals. The utilization improved a point, some of which we expect is normal year-end seasonality. Average and period-end consumer loans were up 2% from the prior quarter, reflecting increases in indirect auto and residential mortgages. Both asset classes also saw sequential increases in yield due to the continued front book, back book repricing benefits on these fixed-rate portfolios.
Shifting to deposits. Average core deposits were up 1% sequentially, driven by higher interest checking balances in Commercial. This core deposit performance combined with the flexibility provided by our elevated cash position, allowed us to meet our expected down rate beta targets and further reduce higher cost short-term wholesale borrowings. Interest-bearing core deposits peaked at 2.99% in August and were down to 2.49% in the month of December, representing a core deposit beta in the upper 50s. Total core deposits have increased by $1.6 billion over that same horizon. As always, our focus remains on prudently managing total funding costs, while maintaining a strong liquidity position. We are very pleased with the 38 basis point sequential decrease in interest-bearing liability costs. Our balanced approach will continue to provide us with flexibility needed to continue our NII growth trajectory to a record 2025 as we head into another uncertain rate environment.
Demand deposit balances as a percent of core deposits remained at 24% during the quarter, consistent with our expectations. Balances were stable on both an end-of-period and average basis compared to the third quarter. We believe this balance level will be maintained as short-term rates are likely to be relatively stable over the near term. We ended the quarter with full Category 1 LCR compliance at 125% and our loan-to-core deposit ratio was 73%, up 2% from the prior quarter. Moving to fees. During the fourth quarter, we updated the non-interest income captions on our income statement to better align disclosures to our most significant business activities, which includes the addition of commercial payments and capital markets line items. The appendix of our presentation provides more detail on the caption changes. Excluding the impacts of the securities gains and losses and the Visa total return swap, adjusted non-interest income in the fourth quarter increased 5% compared to the same quarter last year.
Capital Markets, Wealth and Commercial Payments all delivered strong fee results, driven by our sustained strategic growth investments in products and sales personnel. Capital markets grew 16% over the prior year with increases in loan syndications, debt capital markets, and M&A advisory revenue. We continue to see activity below prior year levels in our customer hedging and institutional brokerage fees. In Wealth, fees grew 11% over the prior year to $163 million due to AUM growth and increased transactional activity at Fifth Third Securities. The new Commercial Payments caption includes TAM (ph) fees and earnings credits that were previously included in service charges on deposits and commercial card and sponsorship revenue that was previously reported in card and processing revenue. Compared to the prior year, Commercial Payments revenue increased 7%, driven by treasury management net fee equivalent growth, which was up 11%.
We continue to acquire new clients in treasury management products in our managed services and in Newline. The securities losses of $8 million were primarily from the mark-to-market impact of our non-qualified deferred compensation plan, which is offset in compensation expense. Moving to expenses. Excluding the items noted on Page 2 of our release, our adjusted non-interest expense was up 1% from the year-ago quarter and decreased 1% sequentially. The previously mentioned deferred compensation mark reduced expenses by $7 million for the quarter compared to expense increases of $10 million and $13 million in the prior and year-ago quarters, respectively. Excluding the impact of the deferred comp mark, the year-over-year expense growth was 2% and sequential expense growth was 1%. While investments in technology, branches, and sales personnel have and will continue to drive expense increases, these costs continue to be partially funded through the savings generated by our value stream efficiency programs.
Shifting to credit. The net charge-off ratio was 46 basis points, in line with our expectations for the quarter and down 2 basis points sequentially. Commercial charge-offs were 32 basis points, down 8 basis points. Consumer charge-offs were up 6 basis points, which primarily reflects the normal seasonal fourth quarter uptick we see in our indirect auto and card portfolios, as well as the continued seasoning of the 2022 vintages in our Solar and RV portfolios. Consistent with broader industry data, the 2022 consumer vintage appears to be a modest underperformer relative to other origination periods. Early stage delinquencies, 30 to 89 days past due, increased only 1 basis point and remained near the lowest levels we have experienced over the last decade. Our NPA ratio increased 9 basis points sequentially to 71 basis points. Commercial NPAs contributed $122 million to the increase from the prior quarter and consumer NPAs were up only $15 million.
Within Commercial, our CRE portfolio continues to perform well with no net charge-offs during the quarter and a stable NPA ratio of 46 basis points. Additionally, total Commercial criticized assets decreased by $435 million, an 8% reduction during the quarter. Our provision expense for the quarter resulted in a $43 million build in our allowance for credit losses. This build was primarily attributable to the strong growth in period-end loans and a modest deterioration in the Moody's macroeconomic scenarios. Our ACL coverage ratio was 2.08%, down 1 basis point from the third quarter. We made no changes to our scenario weightings during the quarter. Moving to capital. We ended the quarter with a CET1 ratio of 10.5%, significantly exceeding our buffered minimum of 7.7% and consistent with our near-term target. Our pro forma CET1 ratio, including the AOCI impact of the securities portfolio is 8.1%, up 32 basis points year-over-year.
We anticipate continued improvement in the unrealized losses in our securities portfolio, given that approximately 60% of the fixed-rate securities in our AFS portfolio are in bullet or locked-out structures, which provides a high degree of certainty to our principal cash flow expectations. Assuming the forward curve is realized, approximately 18% of the AOCI related to the securities losses will accrete back into equity by the end of 2025, increasing tangible book value per share by 5% before considering any future earnings. During the quarter, our $300 million share repurchase reduced our share count by 6.7 million shares. Moving to our current outlook. We entered 2025 with strong momentum and a resilient balance sheet and remain confident in our ability to achieve record NII and full-year positive operating leverage. We expect full-year NII to increase 5% to 6%. This outlook uses the forward curve at the start of January, which assumed 25 basis point rate cuts in March and October.
We would not change our NII guidance for 2025, even if we assume that no cuts will occur. We expect full-year average total loans to be up 3% to 4% compared to 2024, with the increase primarily driven by the broad-based improvement in C&I combined with continued growth in auto loans. We are assuming that the cash position, securities portfolio, and commercial revolver utilization all remain relatively stable throughout 2025. Full-year adjusted non-interest income is expected to be up 3% to 6%, reflecting continued revenue growth in Commercial Payments, Capital Markets, and Wealth and Asset Management, partially offset by the continued run-off of the operating lease business, muted mortgage originations given the rate environment, and the year-over-year impact of the final TRA revenue occurring in 2024. We expect full-year adjusted non-interest expense to be up 3% to 4% compared to 2024. Our expense outlook assumes accelerated branch openings in high growth Southeast markets and continued sales force additions in middle market, Commercial Payments, and Wealth to increase our production capacity to support our strategic growth initiatives.
In total, our guide implies full-year adjusted revenue to be up 4% to 6%, PPNR to grow in the 6% to 7% range, and positive operating leverage closer to 2%. Moving to credit. We expect 2025 net charge-offs to be between 40 basis points and 49 basis points. Assuming no changes in macroeconomic forecasts, we expect the provision to build between $50 million and $100 million due to loan growth. Moving to our outlook for the first quarter. We expect NII to be flat with the fourth quarter of 2024 as the benefits of loan growth, fixed-rate asset repricing, and the continued reduction in the cost of interest-bearing liabilities should offset the impact of two fewer days. We expect average total loan balances to increase 2% in the first quarter due to continued momentum in C&I and auto. Excluding the impact of the TRA, we expect non-interest income to be down 6% to 7% compared to the fourth quarter, mainly due to normal seasonality in card spend, capital markets activity, and other Commercial Banking revenue.
First quarter adjusted non-interest expense is expected to be up 8% compared to the fourth quarter. As is always the case, our first quarter expenses are impacted by seasonal items associated with the timing of compensation awards and payroll taxes. Excluding the seasonal items of approximately $100 million, expenses would be flat in the first quarter. We expect first quarter charge-offs to be in the 45 basis point to 49 basis point range and expect the ACL build will be $10 million to $25 million due to loan growth. Finally, we expect to execute $225 million in share repurchases in the first quarter, with future quarter share repurchases dependent on the level of loan growth. We will continue to target our CET1 ratio around 10.5%, while we await more clarity around the future of the capital rules and other regulations. In summary, with our resilient balance sheet, diversified revenue streams, and disciplined expense and credit risk management, 2025 is set to be a year of continuing long-term investments, record NII, positive operating leverage, and strong returns for our shareholders. With that, let me turn it over to Matt to open the call for Q&A.
Thanks, Bryan. Before we start Q&A, given the time we have this morning, we ask that you limit yourself to one question and one follow-up, and then return to the queue if you have additional questions. Operator, please open the call for Q&A.
Questions and answers
Our first question will come from Scott Siefers with Piper Sandler. Please go ahead.
Good morning, guys. Thanks for taking the question. Maybe Tim or Bryan, I was hoping you could just provide a little more context as to how you see loan demand developing through the year. Your commentary, I'd say recently has been much more encouraging. You discussed things like the robust commercial pipelines, etc. So just maybe some additional color on how you see things developing.
Sure, Scott. This may be a bit hard to hear for a Miami grad, but we needed to show that it's not just Ohio State that can score early in the year. We're pleased with the fourth quarter, especially since we've been anticipating growth for some time. We just needed to get through the election to start seeing results. I believe the upcoming sales force additions and ongoing activities will position us well. We've emphasized the need for diverse loan origination sources because certain channels can perform better at different times. In the fourth quarter, most channels were effective. On the consumer front, auto sales have been strong for us all year. When other banks were pulling back, we explained that the auto sector is cyclical and can be advantageous at specific points, and we're currently experiencing one of those advantageous times. We expect positive developments here. Home equity, particularly through fintech platforms, finished strong last year, and we anticipate moderate growth this year.
On the commercial side, we saw widespread growth, with about a quarter's worth of production achieved in the six weeks after the election as we began to clear the backlog. Sequentially, 13 out of 15 regions and two out of three verticals showed growth during the quarter. While we did benefit somewhat from seasonality, especially in areas like mortgage warehouses, the underlying trends indicate potential for growth above the market average. We still have a record pipeline in the middle market, bolstered by the sales force additions from last year, which is reflected in the numbers. We experienced a 1% increase in utilization, which is encouraging. We spoke with nearly two dozen clients after the election, and over 80% expressed greater optimism for 2025 compared to 2024. About half of them plan to accelerate their investments, and a third of those intend to do so by increasing credit utilization or seeking new facilities.
There’s a notable increase in optimism regarding mergers and acquisitions. However, the main concern we hear from middle market clients is labor availability, which has overtaken inflation, interest rates, and even supply chain issues tied to tariffs in terms of worry. Overall, I think the outlook is encouraging. Just as last night's game reminded us of Notre Dame's late rally, we shouldn't declare victory after the first quarter.
Perfect. Thank you. And like all the analogies in there, so thanks. And then, Bryan, I think you had suggested you wouldn't change the guide based on more or fewer cuts implies you're, I guess, pretty agnostic to changes in rates. How would you characterize your rate sensitivity now versus where you'd like it to be? I'm guessing, it's pretty much where you wanted, but would just appreciate your thoughts.
We're quite satisfied with our current position. We maintain a neutral stance at the moment. As Tim mentioned, the diversity of our loan origination platforms and the flexibility provided by our balance sheet's liquidity allow us to adjust our sensitivity to assets or liabilities based on the prevailing environmental conditions. We find this positioning favorable in the current situation.
Perfect. All right. Thank you, guys.
Thank you.
Our next question comes from the line of Mike Mayo with Wells Fargo. Please go ahead.
Hi, I have a lengthy question but I'm looking for a brief response. You've mentioned record pipelines in the middle market, a 1% increase in loan utilization, and that 13 out of 15 markets have shown improvement with two of three verticals also improving. It appears that your customers are feeling more optimistic. Are you predicting a turnaround in commercial loan growth for Fifth Third, for the industry, or for both? What is your level of confidence regarding this?
If you want a short answer, then my answer is maybe. The thing that I always worry about is uncertainty. The economy is a pretty complex system that is resistant to simulation and can change unpredictably. The backdrop is more favorable than it has been. For customers, there is a benefit from rate cuts, and there is more certainty regarding the direction of regulation. We need to pay attention to the discussions about the labor market and labor availability concerning immigration and deportations, as we should see much more clarity there soon. If those issues are resolved and we don’t encounter significant supply chain disruptions, we can expect some expansion in the C&I portfolio. However, please do not assume 12% annualized growth in your models for Fifth Third.
Sounds good. All right. Thank you.
Thank you.
Our next question comes from the line of Gerard Cassidy with RBC. Please go ahead.
Hi. Good morning. This is Thomas Leddy standing in for Gerard. You saw a good drop in deposit rates in the fourth quarter. Could you just give us a little more color on what your outlook is for deposit rates in 2025, assuming the Fed is finished cutting?
Yeah. We'll continue to get a little bit of cost out if the Fed is done at this point. We have a little bit of a first quarter tailwind benefiting in this space as we'll get some full quarter impact of the December cut. Additionally, we have almost $8 billion of CDs maturing in the first quarter, that's at a weighted average rate of about 4.3% right now, that's going to give us some flexibility as well. Beyond that, it's really going to be dependent on loan growth. If it becomes a more robust loan growth year potentially, we do think deposit competition could tick up a little bit. But in general, we feel good about our positioning. With the cash position, we’re in a spot where if we needed to, we could actually take down our loan-to-deposit ratio a little bit and fund some of that loan growth with that excess cash like we did this quarter, but we have a lot of flexibility to navigate those costs.
Okay. Thank you. That's helpful. And then just quickly, can you give us any color on the uptick we saw in C&I non-accruals this quarter?
The increase was primarily due to five commercial borrowers, with an average loan size of $32 million. There were no notable industry or geographic trends and no concentrations among these borrowers. We are maintaining our standing just a few basis points above our 10-year commercial average, which indicates stability from that perspective. Each non-performing asset is evaluated on an individual basis, considering financial risks, and these evaluations are reflected in our financial results through specific reserves or charge-offs. The largest inflows of non-performing assets this quarter are projected to be resolved or reduced within the first half of the year, either through debt reduction or complete repayment. This situation exemplifies our commitment to collaborating with borrowers facing challenges to achieve mutually beneficial outcomes.
Okay. Great. That's helpful color. Thank you for taking my questions.
Our next question comes from the line of Ebrahim Poonawala with Bank of America. Please go ahead.
Hey, good morning.
Hey, Ebrahim.
Hey, Tim. I want to go back to the beginning regarding consistent investments in branches in the Southeast. Can you remind us about the benefits from branches opened two, three, or four years ago? If loan growth increases in the industry, should we expect Fifth Third to excel in loan and deposit growth because of these investments? Please share what the returns have been as you assess these investments, and also discuss any specific markets or areas where growth is planned for 2025. Thanks.
Sure, I'll address the second part of your question while I'll let Bryan discuss the first part.
The average age of our Southeast branches, particularly the new builds, is currently about three years, and we plan to construct another 50 in 2025. We're still in the early stages of ramping up in terms of average balance, which positions us well for acquiring customers and continuing to see substantial deposit growth, similar to what we've experienced over the past few years. This will significantly contribute to our net interest income performance. On the asset side, the improvements are linked to the additional sales force we've implemented, including new teams in various markets and a 20% increase in middle market sales personnel over the last couple of years. These factors will provide strong support for us in terms of net interest income.
Yeah. And I think the callback here is, what we talk about a lot is the degree to which we pride flexibility. The nice thing about having these engines online is it really does give us the ability to toggle between growing deposits when we want to do that or leveraging the fact that we have great liquidity to manage margins. So we make those decisions based on the environment, what the needs of the balance sheet are, as Bryan was saying. In terms of the markets, you can sort of think about that what we've done in a few waves here. The first wave, the new branch builds were disproportionately concentrated in Nashville, North Carolina, and Southwest Florida. The next wave here when you look at these branches coming online this year and next year. The Southeast Coast, so not Dade County, but Broward North, Central Florida and North Florida will all see a material increase in branch activity along with South Carolina, and I think we get our first branch open in Birmingham this year. The other big driver in a two year to three year timeframe less so in 2025, is that we're going to see a nice pickup in Atlanta, and in the Atlanta area, we have several branches that will be coming online there.
Got it. That's helpful. I have a quick question about the fees. While you may not have as extensive a capital markets franchise as some competitors, could you give us an idea of how revenue growth from Wealth and Payments markets, as shown on Slide 7, is related to loan growth? Should we consider any of these as strategies for acquiring clients?
Yeah. Okay. Great question. I'll just take it by business. So Wealth, not dependent on balance sheeting loans. We have like $7 in AUM for every $1 in deposits and what $15 or something like that in AUM for every $1 in loans. It really is a wealth management sort of fiduciary-focused franchise. It is not balance sheet dependent at all. Commercial Payments, it's sort of half-half, right? I gave the number there that 40% of the new relationships we added last year were Payments-led. Say that in other direction. We added almost one new Commercial Payment relationship that have no credit attached to it for every relationship that we did. But certainly, the balance sheet supports what has been high-single digit, low double-digit growth rates. It's just not reliant on it. And the Newline platform, in particular, is an important driver there. On the Capital Markets side of the equation, much more of what we do in that space is essentially cross selling to existing commercial banking clients.
We built a really strong middle market franchise. The hedging activity is great there, that would happen principally to clients, who make use of the balance sheet. The M&A activity, our M&A franchise half the engagements roughly come from inside the house as opposed to being independent, which is what we want, right? It's the mechanism for monetizing the attachment point that you get out of the commercial lending business. And certainly, as it relates to the CIB strategy, the focus on capital markets growth there really does link. I just believe we have a long way to go to get to full penetration inside our existing book of business. So I'm pretty confident in our ability to continue to grow capital markets fees at a rate that exceeds the balance sheet by a healthy margin.
That's helpful. Thanks, Tim.
Your next question comes from the line of Manan Gosalia with Morgan Stanley. Please go ahead.
Hey, Manan.
Hi. Good morning. On Capital, I hear you on keeping the reported CET1 at 10.5%. The question was, how are you thinking about CET1 including AOCI? I know some of your peers are operating or looking to operate in that 9% to 10% range. There is some volatility here on the long end of the curve. So I guess the question is, do you have a target for CET1, including AOCI? And how are you thinking about buybacks and capital management from here?
We plan to maintain our CET1, including AOCI, above 8% for now, and we anticipate it will increase over time as we see a pull to par in our investment portfolio. The AFS portfolio is currently positioned at the center of the curve, with a duration under 4%, specifically around 3.8%. The price sensitivity of this portfolio has significantly improved, giving us confidence in the AOCI accretion we expect in the coming years. This leads us to believe that, regardless of future capital regulations, we will not have any difficulties meeting our targets. Regarding buybacks, our capital priorities will focus on supporting organic growth, upholding a strong dividend, and then considering buybacks. We expect the ultimate level of buybacks to be around the 10.5% mark, aligning with the loan growth we achieve each quarter.
I understand. You mentioned that you'll maintain or gradually increase that CET1 including AOCI. Is there a point at which this could affect loan growth and influence RWA guidance at some point?
We don't see anything at this point that would create a situation where we would pull back meaningfully from a loan growth perspective.
Perfect. Thank you.
Your next question comes from the line of Brian Foran with Truist Securities. Please go ahead.
Welcome back, Brian.
Thank you. So on the Commercial Payments, first of all, thank you for breaking that out and giving us more disclosure. I know it's an area you've invested and feel like you're kind of pulling away from the pack. When we look at it being 20% of fees, up 8% year-over-year, I think you kind of gave us a couple of times 40% of new Commercial relationships, where Payments-led. Do you have any sense, like, if we got this disclosure from all your peers, are you a little higher? Are you a lot higher? And what's the main metric you think you would stand out on?
Yeah. Great question. So I will say to begin with the reason that we changed our reporting is because it is confusing to see it. So it was confusing for us previously. It's confusing for peers. And the metrics that I like here because they are public and they're transparent as you can do a lot of comparison on your own utilizing data from sources like Nacha or the Nielsen report or I think EY does a benchmarking study and otherwise. And you can look at total volumes per dollar of Commercial deposits. And that essentially calculates a turnover ratio for you and the higher the turnover ratio, the more payment centric the business is. So we're definitely overweight this business relative to others. Look, I think we have 3.5 times roughly the market share, if you were to look at the individual product categories nationally in major Commercial Payments rails that we would have in C&I lending just as a point of triangulation.
And I know we're growing faster than the industry is overall because again, we got to look at the benchmarking data on industry growth rates. And I think the other thing that's been helpful for us is because we have this business working with third-party software developers, a little bit counterintuitively, we're actually a beneficiary when traditional FIs lose market share to non-banks because Newline grows when partners like Stripe or Corpay or whatever Toast, Nuvei, etc. Trustly bracks (ph) when they outgrow the players in their individual markets. And we get good data from Greenwich Associates that suggest we have sort of top in the peer group penetration rates in terms of active treasury management relationships with our lending customers. I'm not going to give the exact number, but it's a mid-80s number for us in terms of penetration there. So like, that's the way I would short of debt reckoning, try to triangulate our position relative to others, but it would be great if everybody adopted our captions and then you'd be able to know.
It would. Maybe, if I could sneak in a follow-up on the guidance on Page 15, definitely appreciate your comments going out of your way to mention that 2024, you kind of hit the guidance on all lines and very few banks did that. So you're assumingly giving us a down the fairway plan here. You've touched on all the individual line items, but maybe just kind of wrapping it up, if there were kind of one or two upside and downside risks you were thinking about for the year, what would you highlight within everything you've given us?
Yeah. I think loan growth is certainly going to be a question and the deposit costs will be a question. So I think just with my treasury background, I'm always going to be nervous about NII, but we certainly feel good about the trajectory that we're on. And then just overall market activity from a fee perspective. We had a fairly soft first half of 2024 in capital markets. We're not expecting that to repeat in 2025, but those markets-based businesses are always the one where you can see some volatility.
Awesome. Thank you so much.
Our next question comes from the line of John Pancari with Evercore. Please go ahead.
Hey, John.
Good morning. Regarding capital, I understand your focus on deployment priorities, with organic growth still being the top priority, followed by dividends and buybacks. How are you viewing M&A, considering both non-bank acquisitions and the overall banking perspective, especially with the changes in Washington and evolving regulatory requirements that necessitate more scale? I would like to hear your updated thoughts on this, Tim. Thank you.
Sure. I'm happy to share my thoughts. The context is important to consider; the U.S. has the least consolidated banking system globally, and I believe it's the least consolidated sector within the U.S. economy as well. It's somewhat like managing floodwaters; eventually, we will see more consolidation in this area, and I think that’s a good thing. Treasury Secretary Bessent stated clearly in his testimony that he desires increased competition among larger banks. In our situation, we could have made the math work before this year, and I am confident we could have secured a deal approval earlier as well. Our stance hasn't changed in this respect. We value the density in the markets where we operate and believe in the importance of diversification and balance within our franchise. Additionally, we recognize the need for not just the overall investment levels but also the human capital to leverage the ongoing tech innovations.
I recently visited Silicon Valley, and the energy there regarding new developments is palpable. Banks must be ready to compete with tech-native companies, especially as this administration is likely to ease some regulatory constraints that have been in place, helping those companies thrive. What we will not do is pursue scale at any cost. We have the ability to grow without relying on mergers and acquisitions, which isn't something every company can claim. This is evident from our franchise’s growth rates. We aim to make informed decisions as opportunities arise. On the non-bank side, we continue to explore ways to enhance our capabilities in managed services and Commercial Payments, and we are active in that space. We aren't typically large buyers of major companies, so don’t expect us to acquire a publicly traded tech firm recklessly. We often look for businesses with proven product-market fit that may lack distribution, as those present real franchise value, especially when combining tech with a reliable product, rather than acquiring talent which often requires continuous investment every few years.
Got it. Okay, Tim. Thank you for that. That's helpful. And then, separately, it's clear you guys have certainly been executing better than many of your peers in terms of your growth and your returns and hitting your targets as you had noted earlier in the call as well. As we look at your broader returns, I mean, you're here in the high-teens, 18% to 19% return on tangible common equity here. You're in the mid-50s efficiency ratio. As you look at 2025, which is a year, where we expect some underlying improvement in the macro backdrop, how do you view the return profile for the third as you're looking at ROTCE and operating efficiency for the year, and then possibly even beyond that, where do you think the returns are heading towards?
I take great pride in the fact that you don't need to follow a long deductive logic chain to feel confident in our ability to achieve returns above our cost of equity. We are either nearing or within reach of our return targets in terms of good operational practices for the company. When considering stability, profitability, and growth, we appreciate the predictability of the business and are proud of that. We believe there isn't much work left to be done in that area. From an asset-liability management perspective, we are in a neutral position and cautious regarding credit. For example, the fourth-quarter production showed better dollar-weighted performance than our existing portfolio, which we feel positive about. Our profitability is in the mid to high teens, and our return on tangible common equity with a mid-50s efficiency ratio seems quite encouraging. We anticipate some operating leverage this year, likely around 2%, if our expectations hold true. However, our main objective isn't to push returns from 18% to 19% or improve our efficiency ratio from 55% to 54%. Instead, our focus is on sustaining those levels and increasing tangible book value per share, which is essential for the next phase of our franchise, assuming we continue to have a favorable backdrop as you mentioned.
Thanks, Tim. Very helpful.
Your next question comes from the line of Matt O'Connor with Deutsche Bank. Please go ahead.
Hey, Matt.
Good morning. You mentioned that middle market customers are facing challenges with labor, which I assume is affecting loan demand and the conversion of pipelines into actual volumes. Are they optimistic that these issues will eventually resolve? Are they looking to leverage technology to mitigate these challenges, and what plans do they have in place, if any?
That's a great question. It really depends on the sector. For the manufacturing and logistics side, there is a belief that gains can still be achieved. For instance, we've implemented facilities to support retooling in manufacturing and warehouses, which have increased efficiency by using robots for picking high-volume items. These robots can reorganize inventory overnight, making pickers more effective in the morning. In healthcare, there’s hope that the number of graduates from nursing schools will eventually exceed demand, reducing reliance on traveling nurses. However, I am less optimistic about this for our healthcare clients. In sectors like services, construction, and retail, there is concern about labor trends. The U.S. has a negative birth rate, and due to demographic changes, more people are retiring than entering the workforce. This presents a structural challenge that won’t improve without technological advancements to boost productivity. Clients express a mix of optimism about the labor market cooling, though current job reports do not indicate that is happening. We will have to wait and see if a functional immigration program can provide additional documented labor in the U.S.
That's interesting color. And then you guys are pretty balanced, I think, between large corporate and middle market. Are there kind of different themes in the large corporate, meaning they're less pressured by labor? And then as you think about just bringing it all together, as you think about your C&I growth, do you think it will be more large corporate or middle market driven this year if you had to adjust? And then I'm done. Thank you.
Yeah. I'll take the second one first. I think the goal here is balance, like, we want over time, we have gotten more granular. We made some progress on granularity, which was an important part of the strategy of Fifth Third. So the sort of small business, business banking, middle market segment, ideally will grow a little bit faster than corporate banking. I don't expect corporate banking to outgrow the middle market. And meaningfully, the plan was set to have good balance and consistent focus on granularity there, including within corporate banking for that matter. Do you want the other part of it, Bryan, of the question?
In general, we expect corporate banking and larger companies to handle labor pressures better than the middle market. We believe this trend will continue due to their investment capacity, which allows them to invest in automation and switch to different labor markets, providing more flexibility. Additionally, these businesses typically have more pricing power to pass costs through to attract the right labor. Therefore, in banking, scale is significant and applies to the C&I portfolio as well. I agree with this viewpoint.
All right. Great. Thank you for all that.
Our next question comes from the line of Erika Najarian with UBS. Please go ahead.
Hey, Erika.
Hi. Good morning. Just two quick follow-up questions. Bryan, as we think about the net interest income outlook, could you share with us how you expect the net interest margin to traject from that 2.97%? And do you have a view if we have a 4% neutral rate, what the normalized margin would be for Fifth Third under that scenario?
Yeah. We expect margin to continue to improve a few basis points each quarter throughout the year. Certainly, there's a big wildcard associated with the cash position in any individual quarter. The 7 basis point increase this quarter obviously was partly attributable to that cash position coming down some due to that loan growth that we saw as well as liability management actions. We've been talking for a while now that getting back into the 320s in this kind of rate environment is achievable for us. Certainly, though, the shape of the curve and the mix of the balance sheet is going to be a big driver in that. But we feel good about the trajectory that we're on in both NII and NIM will continue to improve each quarter throughout the year.
Got it. And maybe the next follow-up question is for Tim. I believe the stress capital buffer that Fifth Third received was 3.2% last year. I'm wondering as you think about the embedded risk in the balance sheet, if you think it's worth it to participate off-cycle to revisit that stress capital buffer?
Yeah. Great question. No, it doesn't make sense for us to do it just because it's not a binding constraint for us today, Erika. I am optimistic that we're going to get more transparency out of the stress tests, given the Fed's announcement and subsequently, the litigation filing from the VPI, and that'll be quite helpful. But today, whether that stress capital buffer was 2.5 or 3.2 or 3.5 really, it doesn't matter.
Our final question will come from the line of Christopher Marinac with Janney Montgomery Scott. Please go ahead.
Thanks. Good morning. Just wanted to ask about additional C&I utilization as well as any upgrade downgrade trends from the criticized and classified.
On the C&I utilization front, it increased by about a point, landing in the 36% range at the end of the quarter, and it has remained in that range at the start of this quarter. We are not anticipating any significant changes in utilization for the remainder of the year and expect it to remain relatively stable. Now, regarding the CRIP front?
Yeah. As it relates to the CRIP, as Bryan mentioned, we were down $435 million in the fourth quarter. Our ratio was down just over 7%. 90% of the criticized portfolio, including our NPAs are current. So I feel really good about the progress we've made. We said last quarter on this call, we expected to see criticized reduce a little bit. We continue to work through those troubled assets. So I feel good about the trend. I feel good about the portfolio. It continues to maintain a great balanced mix, a strong concentration, limit disciplines. So I feel good about the current asset quality.
Great. We'll leave it there. Thank you both very much.
Thanks. Matt is indicating that we're wrapping up. Before we finish, I want to express my thoughts for those in California affected by the wildfires, especially our employees, clients, and partners in that area. From what I've heard, we've been fortunate. I'm very proud of the commercial banking presence we've established in California over the years, with a remarkable 50% compound annual growth rate, focused on the middle market, and nearly self-funded. It's truly impressive. I also have a personal connection to that region; my dad grew up in the Altadena Pasadena area, where my grandparents are buried, making those communities very special to me. Fifth Third will contribute to helping these communities rebuild, as I know they will. Matt, please continue.
Thanks, Tim. And thanks everyone for your interest in Fifth Third. Please contact the Investor Relations department if you have any follow-up questions. Regina, you may now disconnect the call.
That will conclude today's call. Thank you all for joining. You may now disconnect.