Fifth Third sets clear limit on CRE loans

Fifth Third Bancorp is continuing to show caution in the commercial real estate market, as work-from-home arrangements persist more than two years after the start of the COVID-19 pandemic.

The main area of concern is the office sector, incoming CEO Tim Spence said in an interview Tuesday. He doesn’t expect a collapse in the market, but he did suggest that changes in white-collar work patterns will create difficulties for certain properties.

“It’s not a bet against the in-person collaboration model,” said Spence, who was announced earlier this month as the pick to replace outgoing CEO Greg Carmichael. “There were just some buildings there bought at a time when occupancy rates and rent-per-square-foot were different.”

Fifth Third forecast 9%-10% growth in average commercial loans and leases this year, which was higher than its January forecast. But those improved commercial lending expectations were tempered by a weaker consumer lending outlook.


Under Carmichael’s leadership, Cincinnati-based Fifth Third steered away from risky bets in commercial real estate as the sector has boomed in recent years.

Fifth Third’s book of commercial mortgage and commercial construction loans totaled $16.1 billion at the end of March, down more than 3% from the same period last year. Just 0.30% of the portfolio was classified as nonperforming, down from 0.86% one year earlier.

Carmichael said during Fifth Third’s quarterly earnings call Tuesday that commercial real estate loans make up a smaller percentage of the company’s capital than is the case at peer banks.

What office space Fifth Third is financing has been limited to proven Class-A buildings in major gateway cities, Chief Credit Officer Richard Stein said during the earnings call. He said that Fifth Third continues to monitor the office-building segment.

“Office is one that we’re watching long-term, just given the structural changes in that space,” he said.

Fifth Third now expects its commercial unit to outperform previous expectations, as other kinds of lending to businesses picks up.

On Tuesday, the $211 billion-asset bank forecast 9%-10% growth in average commercial loans and leases this year, up from guidance of 7%-8% in January.

But Fifth Third’s higher expectations for commercial lending were tempered by a weaker consumer lending outlook. The bank had previously forecast growth of 3%-4% in its consumer business, but it now expects consumer loans to stay flat.

Fifth Third is one of many banks that stands to benefit from a more aggressive stance by the Federal Reserve on raising borrowing rates, which should result in higher net interest income. But generating fee revenue was a challenge in the first quarter — noninterest income declined more than 8% from a year earlier. Fifth Third expects it to be flat to down 1% for 2022.

During the first quarter, Fifth Third reported $474 million of net income, down 29% year-over-year.

Spence said the company is open to acquiring nonbank companies that could generate revenue quickly, similar to its purchase last year of the healthcare fintech Provide.

“Where we see someone else who’s built a really great mousetrap and allows us to get to market quickly, then we’re going to buy it,” he said.

Noninterest expenses held steady from a year ago — and are expected to grow by only 1%-2% for the year, even as the company gives another raise to its frontline workers. Fifth Third will offer a $20-per-hour minimum wage to its workers beginning July 4, the company announced Monday.

Spence said that the decision to raise its minimum wage was driven by rising inflation, which is disproportionately impacting those in the broader workforce who earn the least.

“Our people are awesome, and our culture held up very well during the pandemic,” he said in the interview.

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