risk management€¦ · models or risk management systems or controls; (17) fluctuation of fifth...

1 Fifth Third Bancorp | All Rights Reserved

Risk Management

Frank Forrest

Executive Vice President

Chief Risk Officer


Cautionary statement This presentation contains statements that we believe are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended,

and Rule 175 promulgated thereunder, and Section 21E of the Securities Exchange Act of 1934, as amended, and Rule 3b-6 promulgated thereunder. These

statements relate to our financial condition, results of operations, plans, objectives, future performance or business. They usually can be identified by the use of forward-

looking language such as “will likely result,” “may,” “are expected to,” “is anticipated,” “potential,” “estimate,” “forecast,” “projected,” “intends to,” or may include other

similar words or phrases such as “believes,” “plans,” “trend,” “objective,” “continue,” “remain,” or similar expressions, or future or conditional verbs such as “will,”

“would,” “should,” “could,” “might,” “can,” or similar verbs. You should not place undue reliance on these statements, as they are subject to risks and uncertainties,

including but not limited to the risk factors set forth in our most recent Annual Report on Form 10-K, as updated by our Quarterly Reports on Form 10-Q. When

considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements we may make. Moreover,

you should treat these statements as speaking only as of the date they are made and based only on information then actually known to us. We undertake no obligation

to release revisions to these forward-looking statements or reflect events or circumstances after the date of this document.

There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors

that might cause such a difference include, but are not limited to: (1) general economic or real estate market conditions, either nationally or in the states in which Fifth

Third, one or more acquired entities and/or the combined company do business, weaken or are less favorable than expected; (2) deteriorating credit quality; (3) political

developments, wars or other hostilities may disrupt or increase volatility in securities markets or other economic conditions; (4) changes in the interest rate environment

reduce interest margins; (5) prepayment speeds, loan origination and sale volumes, charge-offs and loan loss provisions; (6) Fifth Third’s ability to maintain required

capital levels and adequate sources of funding and liquidity; (7) maintaining capital requirements and adequate sources of funding and liquidity may limit Fifth Third’s

operations and potential growth; (8) changes and trends in capital markets; (9) problems encountered by larger or similar financial institutions may adversely affect the

banking industry and/or Fifth Third; (10) competitive pressures among depository institutions increase significantly; (11) changes in customer preferences or information

technology systems; (12) effects of critical accounting policies and judgments; (13) changes in accounting policies or procedures as may be required by the Financial

Accounting Standards Board (FASB) or other regulatory agencies; (14) legislative or regulatory changes or actions, or significant litigation, adversely affect Fifth Third,

one or more acquired entities and/or the combined company or the businesses in which Fifth Third, one or more acquired entities and/or the combined company are

engaged, including the Dodd-Frank Wall Street Reform and Consumer Protection Act; (15) ability to maintain favorable ratings from rating agencies; (16) failure of

models or risk management systems or controls; (17) fluctuation of Fifth Third’s stock price; (18) ability to attract and retain key personnel; (19) ability to receive

dividends from its subsidiaries; (20) potentially dilutive effect of future acquisitions on current shareholders’ ownership of Fifth Third; (21) declines in the value of Fifth

Third’s goodwill or other intangible assets; (22) effects of accounting or financial results of one or more acquired entities ; (23) difficulties from Fifth Third’s investment in,

relationship with, and nature of the operations of Vantiv Holding, LLC; (24) loss of income from any sale or potential sale of businesses; (25) difficulties in separating the

operations of any branches or other assets divested; (26) losses or adverse impacts on the carrying values of branches and long-lived assets in connection with their

sales or anticipated sales; (27) inability to achieve expected benefits from branch consolidations and planned sales within desired timeframes, if at all; (28) ability to

secure confidential information and deliver products and services through the use of computer systems and telecommunications networks; (29) the negotiation and (if

any) implementation by Vantiv, Inc. and/or Worldpay Group plc of the potential acquisition of Worldpay Group plc by Vantiv, Inc. and such other actions as Vantiv, Inc.

and Worldpay Group plc may take in furtherance thereof; and (30) the impact of reputational risk created by these developments on such matters as business

generation and retention, funding and liquidity.

You should refer to our periodic and current reports filed with the Securities and Exchange Commission, or “SEC,” for further information on other factors, which could

cause actual results to be significantly different from those expressed or implied by these forward-looking statements.

In this presentation, we may sometimes provide non-GAAP financial information. Please note that although non-GAAP financial measures provide useful insight to

analysts, investors and regulators, they should not be considered in isolation or relied upon as a substitute for analysis using GAAP measures. If applicable, we provide

GAAP reconciliations for non-GAAP measures in a later slide in this presentation which is also available in the investor relations section of our website, www.53.com.


Risk Management mission

To ensure enterprise risks are managed within our risk appetite

and in alignment with our strategic and financial plans.

We manage risk through disciplined programs and practices

designed to:

Drive consistent performance through the cycle

Ensure regulatory compliance

Enable proactive client solutions

Optimize the use of capital

1

2

3

4


Frank Forrest

Chief Risk Officer

Risk management organization has been enhanced

• Consolidated risk management, credit, and compliance functions in 2014

• Improved depth of risk management talent throughout the organization

• Average of 26 years of experience across the leadership team at large financial

institutions

Enterprise and

operational

risk

management

Compliance

risk

management

Credit risk

management

Capital

markets &

treasury risk

management

Model risk

management

Credit risk

review


$65M incremental investment in people

$10M investment in process

$84M investment in technology

Transformed risk management infrastructure across the

bank

• ~$160 million invested to strengthen compliance and risk management over the

last 5 years

• Key enhancements in risk and compliance programs, governance & board

reporting, culture, and organizational design

Identify

Measure/ Assess

Manage/ Mitigate

Monitor

Report

Credit Risk

Market Risk

Liquidity Risk

Compliance Risk

Operational Risk

Legal Risk

Reputation Risk

Strategic Risk


Targeted areas of focus

6

Compliance risk Operational risk

• Compliance risk management

• Financial crimes compliance

• Regulatory change management

• Operational risk management

• Vendor risk management

• Fraud risk management

• Cyber risk management

Improved identification,

monitoring and reporting

of financial crimes,

vendor risk, fraud risk,

and cyber risk

Increased focus and

oversight of high risk

processes and timely

response to regulatory

changes

Strengthened execution

of compliance and

operational risk programs

and overall control

environment

Improved management of compliance and operational

risk has substantially improved our risk profile


Conduct Risk is well managed across the organization in

alignment with our core values

Our Corporate Responsibility and Reputation Office focuses

on five key areas:

• Corporate responsibility and ethics

• Community & economic development

• Diversity & social responsibility

• Corporate communications

• Reputation

Oversight and governance of conduct risk includes:

• Code of business conduct & ethics

• Culture and conduct risk dashboard

• Annual risk assessment of incentive plans

• Corporate Responsibility & Reputation Committee

Fifth Third Compass


Significant progress has been made to enhance risk

management across all risk categories

All risk categories are at solid or strong maturity

Progress is reported to our Board of Directors on a quarterly basis

Strong risk management

• Credit risk

• Market risk

• Liquidity risk

• Compliance risk

• Operational risk

• Legal risk

• Reputational risk

• Strategic risk

Maturity assessment


Enhanced compliance and risk management practices

have contributed to significant reduction in operational

losses

• Since the peak in 2013, losses have been reduced by over 60%

• Significant reduction in legal losses, including resolution of material regulatory

matters, has driven the decline in operational losses

1Total Operational Losses includes legal, process and fraud losses 2 YTD annualized

Operational loss1 trends

165

99

172

209

168

51

70

2010 2011 2012 2013 2014 2015 2016 2017

59

$ MM

3Q17 YTD2


Credit

Risk Management


4.23%

0.60%

3.62%

0.29%

4Q09 3Q10 2Q11 1Q12 4Q12 3Q13 2Q14 1Q15 4Q15 3Q16 2Q17

Total Bancorp NPA ratio Total Bancorp charge-off rate

Disciplined credit risk management has resulted in

improved asset quality

36%

22%

13%

15%

11% 3% C&I, Commercial Lease

Commercial Real Estate

Residential Mortgage

Home Equity

Auto Loans

Other Consumer

48%

13%

17%

8%

10%

4%

Significant decrease in non-performing assets (NPA) and credit losses

Portfolio distribution 2007 Portfolio distribution 2017

3Q17


Re-aligned strategies to reduce risk profile

• Exited or curtailed several business that no longer fit our risk profile

• Improved portfolio composition should perform more consistently through the

cycle

• New growth strategies are aligned with risk appetite for effective balance of risk

and return

Commercial real estate

• Reduced portfolio by 20%

• Exited selected segments of the market

2013 2014

Leveraged lending

• Reduced high risk “enterprise value”-reliant loans

2015 2017 2016

Consumer Indirect auto

• Eliminated Auto Pass Through Program

Mortgage

• Exited wholesale broker origination channels (~35% of total originations volume)

Mortgage

• Sold ~50% of residential mortgage Trouble Debt Restructured loans

Client Selection

• Strategically exited relationships that no longer met our desired risk profile

International

• Repositioned segment to align to Middle Market client strategy

Consumer Indirect auto

• Changed dealer pricing practices

• Reduced originations due to pricing competition in prime auto space

Commodity

• Exited lending to commodity trader segment


Consumer Credit


46 - 48%

20 – 22%

15 - 17%

7 - 9%

6 - 8% Mortgage

Auto

Home Equity

Card

Unsecured PersonalLending and OtherConsumer Loans

2.58%

0.33%

1.67%

0.29%

8.79%

3.67%

4.20%

0.07%

2009 2010 2011 2012 2013 2014 2015 2016

Home Equity

Auto

Card

Mortgage

0.61%

3.20%

0.48%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Growth strategies for Consumer lending products will

remain within risk appetite Consumer Portfolio annual net charge-off rate

Long-term portfolio mix

Consumer charge-offs by product type

Long-term outlook

0.45 - 0.55%

Long-term growth objectives

3Q17 YTD

Mortgage

Product Type

Balances Projected Growth

Auto

Home Equity

Card

Unsecured personal

lending and other

consumer loans

$16.3

$9.2

$7.1

$2.2

$1.2

3Q17 quarterly average balance ($ BN)


20%

26%

53%

2017

760+

720-759

660-719

<660

Unsecured Personal Lending is targeted for growth

within our prudent risk profile

• Targeting growth in Unsecured Personal Lending based on response to digital

transformation and consumer borrowing preference

• Currently 4% of Consumer portfolio, projected to rise to 6% - 8% over time

• Average Yield of 6.89% in 3Q17

• Weighted Average FICO at origination

has remained consistent

• Expected loss rate of 0.50 - 1.00%

FICO Score at origination


Term at origination

1.40% 1.36% 1.35% 1.50%

1.74% 1.61% 1.61%

1.83% 1.90% 1.83% 1.90%

1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17

Balance Spread

5%

38% 31%

25% 23%

35% 41%

2006 2017

760+ 720-759

660-719 <660

6%

24%

66%

5%

Q3 2017

>=76 Months 64 - 75 Months

54 - 63 Months <=53 Months

0.51%

1.67%

0.37%

2005 2007 2009 2011 2013 2015 3Q17YTD

Consumer Auto strategy is focused on driving better

risk adjusted returns

Auto balance and spread Auto portfolio annual net charge-off ratio

Long-term outlook

0.35 - 0.45%

FICO score at origination

• Successfully driving better risk-adjusted returns

in a highly competitive market through

disciplined pricing

• Strategically reduced volume to improve spreads

• Continue to focus on prime/super prime

originations; weighted average origination FICO

approximately ~750

• Extended terms (76+ months) limited to less

than 6% of originations

11.9

9.2

$ BN


5.6%1

8.8%

4.0%

2005 2007 2009 2011 2013 2015 3Q17YTD

5% 9%

25% 25%

23% 20%

47% 46%

2006 2017

760+

720-759

660-719

<660

Consumer Card strategy focused on disciplined growth

12005 losses elevated due to bankruptcy law change which

pulled forward losses that likely would have been occurred in

2006/2007

FICO Score at origination

• $2.2 billion portfolio; 6% of overall Consumer Portfolio

• Strategy to grow portfolio within risk appetite with measured and managed

approach

• Leveraging advanced analytics to improve credit decisions

Consumer Card annual net charge-off ratio

Long-term outlook

3.70 - 4.70%


Commercial Credit


0.34%

3.99%

0.22%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 3Q17 YTD

22.2%

5.5% 5.7%

0.7%

17.5%

6.5%

33.8%

2.5%

4Q09 3Q10 2Q11 1Q12 4Q12 3Q13 2Q14 1Q15 4Q15 3Q16 2Q17

Total Commercial Criticized % Total Commercial NPA %

C&I Criticized % CRE Criticized %

Continued asset quality improvement

• Well diversified portfolio; managed through strict industry and concentration limits

• Favorable credit quality trends across criticized, non-performing assets, and losses

Commercial Portfolio annual net charge-off rate

Commercial portfolio Commercial Portfolio criticized and non-performing assets

Versus peers:

• Criticized

asset ratio

most improved

since 20151

• CRE criticized

assets of

2.48% in top

quartile, and

well below pre-

crisis levels1

Long-term outlook

0.25 – 0.35%

1Source: SNL and company filings as of 3Q17

3Q17 average

74%

10%

8%

8%

C&I

Mortgage

Construction

Lease


16%

29%

16%

11%

8%

10%

7%

4%

2%

13%

1%

2% 4%

14%

10%

28%

1%

4%

4%

2%

10%

2%

2%

Apartment Office Retail Industrial Hospitality Mini Storage Dormatory Residential Home Builder Land Other CRE Non-CRE UnsecuredDormitory

• CRE is 15% of our total commercial loan portfolio by exposure

• Land and Residential Home Builder exposure has declined by $6 billion since 2007, and is now 11% of portfolio compared to 42% in 2007

• Largest concentration in multi-family which historically has shown better performance

• Portfolio is managed by seasoned CRE professionals in a centralized unit

1,672 1,767 820 737 265 112 21

1,548

2,965 378 254 215 Q4 2007

0% 50%100%

Commercial Real Estate portfolio composition different

today

1Loans secured by non-real estate assets

4Q 2007 Balance percentage

3Q 2017 Balance percentage

1


Shared National Credit portfolio is well diversified with

solid credit quality

3.41% 3.96%

6.50%

5.33% 4.71%

7.92%

6.80% 7.17%

5.63% 5.50%

2013 2014 2015 2016 3Q17

SNC Criticized % Commercial Criticized %

Business Services 22%

Retail 16%

Financial Services 14%

Manufacturing 14%

HealthCare 8%

Rental and Leasing 7%

Commodities 6%

Energy 5%

Real Estate 4%

Transportation & Warehousing

2%

Utilities 1%

Public Sector 1%

By industry sector

• We have relationships beyond credit with approximately 75% of SNC clients

• Independently underwrite each transaction

• Borrowers are investment grade or near investment grade

• Supportive of Vertical and Capital Markets strategy

SNC criticized assets compared to

total commercial portfolio

SNC net charge-offs compared to

total commercial portfolio

0.19% 0.16%

0.11%

0.34%

0.17%

0.44%

0.48% 0.46%

0.33%

0.22%

2013 2014 2015 2016 3Q17

SNC NCO % Commerical NCO %

YTD YTD

Commercial


• Strengthened risk leadership, programs, and governance

• Enhanced risk culture and accountability

• Significantly improved asset quality

• Substantially reduced operational losses

• Well positioned with our regulators

These outcomes have positioned us to perform well

through all cycles

In summary, we have transformed risk management and

are achieving sustainable outcomes


Frank Forrest Bio

Executive Vice President

Chief Risk Officer

Date Joined Fifth Third:

September 2013

Positions Held at Fifth Third:

2013 Chief Risk Officer

Frank Forrest, executive vice president and chief risk officer, assumed his current role in

September 2013. He is responsible for all risk management and governance functions,

including relationships with key regulatory agencies.

His team leads enterprise programs and initiatives for managing risk and sustaining a strong

risk culture across the enterprise. Responsibilities include development and implementation

of Fifth Third’s risk management framework, risk appetite, and risk management and

mitigation strategies. These teams manage credit, compliance, operational, market,

strategic, liquidity, and model risk to support balanced, profitable growth.

Previously, Frank held numerous positions in credit and risk management at Bank of

America Merrill Lynch, including Managing Director - Quality Control for Mortgage Banking,

Global Debt Products executive and Commercial Banking Risk Management

executive. Prior to joining Bank of America, Frank worked for eight years at the U.S.

Department of Treasury, Office of the Comptroller of the Currency as a national bank

examiner.

Education

Frank graduated from Florida State University with Bachelor of Science degrees in

accounting and finance.

Professional and Civic

Frank recently served on the Wake Forest University College Board of Visitors (2010-14).

For more than 10 years, he served Providence Day School, Charlotte, NC on the board of

advisors, board of trustees and finally chairman of the board of trustees.


14% 3%

30%

15%

25%

26%

30%

55%

2006 2017

760+

720-759

660-719

<660

764 766 769 766

74 72 72 73

2014 2015 2016 2017 YTD

WA FICO WALTV

0.23%

5.42%

0.05%

2005 2007 2009 2011 2013 2015 YTD 3Q17

Mortgage portfolio managed well with minimal losses

FICO distribution at origination

Mortgage portfolio annual net charge-off rate

Trend weighted average FICO and LTV

Long-term outlook

0.05 - 0.10%


19%

8%

23%

16%

55%

76%

2006 2017

760+

720-759

660-719

<660

0.44%

2.58%

0.26%

2005 2007 2009 2011 2013 2015 YTD 3Q17

Home Equity portfolio managed to risk appetite

780 780 778 776

64 66 66 68

WA FICO WA CLTV

Home Equity portfolio annual net charge-off rate

FICO distribution at origination Trend weighted average FICO and LTV

Long-term outlook

0.27 - 0.37%


Limited higher-risk retailer exposure with stringent client

selection

• $3.1B of higher-risk Retailer exposure, which represents 3% of the portfolio

• ~98% of Specialty & general C&I balances are ABL or investment grade; ~2% of balances are criticized

• ~16% of CRE balances are investment grade; ~1% of balances are criticized

• Retail C&I general and specialty retailers: Weighted Average ABL borrowing base of ~85%

$861MM

CRE

$1.9BN

Specialty

& general

C&I2

• $1.51BN: specialty retailers

• $365MM: general retailers

$466MM

REIT

• $627MM: mortgage

• $234MM: construction

• $466MM in balances to REITs with retail-

heavy focus (subset of $1.3BN total REIT portfolio, targeting malls, strip centers, lifestyle

centers, etc. as their primary investment vehicles)

1End of period total loans & leases including HFS as of 9/30/2017 2In addition to C&I loans to specialty and general retailers, Retail Trade NAICS industry classification also includes $2.2BN in C&I loans to grocery & drug, gas stations &

convenience, and motor vehicle parts borrowers

3% $3.1BN

Higher-risk retail

Total Loans and Leases1 Portfolio composition


Market Risk is managed to a low risk tolerance

• Prudent management of interest rate risk in recognition of uncertain environment

• Client focused Capital Market activities – limited market risk

• Subject to Independent Risk oversight program

• Governed by Asset Liability Management Committee (ALCO) and Market Risk

Management Committee

1.52%

0.96%

3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17

+200 bps Ramp +100 bps Ramp Limit

Limit (4)%

4.73%

3.03%

3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17

+200 bps Ramp +100 bps Ramp Limit

Limit (6)%

NII at risk (months 1 - 12) NII at risk (months 13 - 24)


• Liquidity Coverage Ratio well within regulatory minimums

– Measured and managed daily

• Holding Company has cash to satisfy obligations for 21 months in a stressed environment

• Transparent disclosures

• Subject to independent risk oversight program

• Based on initial U.S. NPR, we believe we would be compliant if and when NSFR is issued

• Governed by Asset and Liability Committee (ALCO) and Liquidity Risk Management Committee

Strong liquidity position

92%

112% 108% 108% 107%

116% 118%

110% 115%

128%

119% 115%

124%

3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17

Required minimums:

90% starting Jan 1, 2016

100% starting Jan 1, 2017

Modified liquidity coverage ratio

risk management€¦ · models or risk management systems or controls; (17) fluctuation of fifth...

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