Fifth Third CEO: Deregulation will up competition for banks

Bloomberg

UPDATE: This article includes comments from an interview with CEO Tim Spence.

Banks are still optimistic that deregulation under the Trump administration will help offset some of the recent turbulence from recent tariff policies. But there's a caveat.

Fifth Third Bancorp CEO Tim Spence said Thursday that while the government will likely ease up on burdensome rules around capital and liquidity, the new regime will also mean banks are going to "need to compete with everybody," as certain compliance requirements for nonbanks are also rolled back.

"In almost every category, certainly in consumer, we compete with fintech companies, and in commercial increasingly," Spence said. "I think you want to be careful what you wish for, because if we go from a lot of regulation to no regulation, now it's the Wild Wild West."

Rules around payment rails, master accounts and deposit insurance benefit banks, Spence said. He added that expanding access to nonbanks and fintechs can make competition more challenging.

Spence said that he thinks bank deregulation, which he hopes would expand the industry's flexibility to originate more loans, is "really critical" to "reignite private sector growth."

Rules should be tailored, he said, "but not for the pendulum to swing to the other end of the spectrum." That said, Spence added that more competition can help the industry improve, and noted that Fifth Third has built a commercial payments business that caters to certain fintechs with services like cash management and commercial cards.

The Trump administration has already made moves to pull back on rules and regulations that have held back fintechs in recent years, including approving certain acquisitions and signaling a change in tone on enforcement.

"It's important for all of us to continue to try to get the overheads down in the business. And to be able to make the investments that we've got to continue to make in AI and technology and all of the other things that are so important to the way that we're going to serve customers in the future," Spence said on an analyst call to discuss the bank's first-quarter earnings. "There's no question in my mind that in the future, there are going to be fewer banks than there are today."

The Cincinnati-based bank has been focusing its own investment efforts on remixing its branch network in the Southeast in efforts to nab more low-cost deposits, along with its commercial payments business. Spence said that Fifth Third has kept a lid on expenses, and that some of those gains have come from investments that the bank has made in technology and automation.

As uncertainty weighs on the macroeconomic outlook, Spence said the $213 billion-asset bank can tighten its expense growth, and still deliver the net interest income it had guided for in January — which would be a record for the bank.

"We don't believe that it's credible to think that the capital markets will recover sufficiently to cover up the softness that we're all going to see in the first half of the year," Spence said. "So if fees are down, expenses are going to come down as well."

But Spence told American Banker that certain investments — in areas that are deemed to build long-term value — are nonnegotiable. Fifth Third is prioritizing its Southeast branch growth. The company grew commercial banker headcount in the region by 25% last year, and is slated to increase it by another 15% this year.

Investments in AI and core platforms, which the CEO said drive down overhead, can't be compromised either.

He said that if there's more turmoil, the bank can dial back spending in areas where payoff will be slower. As it is, expenses are slated to increase by some $100 to $150 million this year.

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Fifth Third expects loan growth for the year to come in higher than previously anticipated — making it an outlier in the banking sector — while fee income will likely fall short of expectations from January.

In the first quarter, the bank posted earnings per share of 71 cents, above consensus analyst estimates of 70 cents. Net interest income of $1.4 billion was up about 3.6% from the previous year, with full-year guidance predicting a 5% to 6% climb between 2024 and 2025.

The initial magnitude of tariff announcements surprised Fifth Third's commercial clients, Spence said. Now, those companies are generally holding off on making structural changes to their supply chains, and are instead focused on passing prices along to consumers, Spence said.

But while inflation may go up, he said unemployment has been less of a concern in conversations he's having.

The market volatility has also spurred Fifth Third's commercial clients to put major strategic moves, like acquisitions, on hold, Spence said. He said one of the bank's clients, a pipe manufacturer, just paused a deal amid a lack of clarity about future policies and turbulence.

"His comment was, 'If I do the deal today,' — and they were close — 'I'm either a hero or an idiot. And I don't like decisions where there are binary outcomes,'" Spence said. "So the first thing is, there just has to be some certainty."

Chief Financial Officer Bryan Preston added that Fifth Third hasn't seen a sharp turn in credit quality, and the bank has been building on reserves due to the economic forecast. The bank's provision for loan losses of $174 million is up 84% from a year ago.

The bank has also been working on a bottom-up review of its commercial portfolio.

"Today, we are focused on what is in front of us as opposed to what is behind," Spence said on the earnings call, noting it's not clear what the final tariff policies, or their effects, will be. "What we can do is to ensure that our business mix is more naturally resilient, run our balance sheet defensively, and retain optionality so that we can react quickly as conditions change."