Fifth Third Bancorp's (FITB) CEO Greg Carmichael on Q4 2015 Results - Earnings Call Transcript

| About: Fifth Third (FITB)

Fifth Third Bancorp (NASDAQ:FITB)

Q4 2015 Earnings Conference Call

January 21, 2016 09:00 ET

Executives

Jim Eglseder - Manager, Investor Relations

Greg Carmichael - President and Chief Executive Officer

Tayfun Tuzun - Chief Financial Officer

Lars Anderson - Chief Operating Officer

Frank Forrest - Chief Risk Officer

Jamie Leonard - Treasurer

Analysts

Brian Foran - Autonomous

Erika Najarian - BofA Merrill Lynch

Matt O’Connor - Deutsche Bank

Matt Burnell - Wells Fargo Securities

David Eads - UBS

John Pancari - Evercore

Mike Mayo - CLSA

Ken Usdin - Jefferies

Operator

Good morning. My name is Juana and I will be your conference operator today. At this time, I would like to welcome everyone to the Fifth Third Bank’s Fourth Quarter Earnings Conference Call. [Operator Instructions] Thank you. Jim Eglseder, you may begin your conference.

Jim Eglseder

Thanks, Juana and good morning. Today, we will be talking with you about our fourth quarter and full year 2015 results. This discussion may contain certain forward-looking statements about Fifth Third pertaining to our financial condition, results of operations, plans and objectives. These statements involve risks and uncertainties that could cause results to differ materially from historical performances and these statements. We have identified some of these factors in our forward-looking cautionary statement at the end of our earnings release and in other materials and we encourage you to review them. Fifth Third undertakes no obligation and would not expect to update any such forward-looking statements after the date of this call.

I am joined on the call by several people today. Our President and CEO, Greg Carmichael; CFO, Tayfun Tuzun; Chief Operating Officer, Lars Anderson; Chief Risk Officer, Frank Forrest; and our Treasurer, Jamie Leonard. During the question-and-answer period, please provide your name and that of your firm to the operator.

With that, I will turn the call over to Greg.

Greg Carmichael

Thanks, Jim and thank all of you for joining us this morning. For 2015, we reported full year net income available to common shareholders of $1.6 billion. Our full year earnings growth of 60% reflected significant returns from the sale of a portion of our Vantiv ownership and thoughtful management of our balance sheet given the uncertain pace of interest rate increases. 2015 was an important year of accomplishments and results were highlighted by return on assets of 1.22% and return on common equity of 11.3%. Despite the $94 million impact of the deposit advance product, our net interest income was relatively flat. We invest in our businesses and the talent across the organization strengthens our balance sheet and further enhanced our risk and compliance infrastructure.

Full year net interest income declined only 1% as growth otherwise offset the lost revenue from the reduction in income related to the deposit advance product. Year-over-year core fee income growth was 3%. As we grow fee income, we will seek to add capital efficient and growth-oriented products and services in order to deepen client relationships. Our intention is to reduce our dependency on more volatile spread income or complementing an already rich menu of products that we offer our clients. Along those lines, you may have seen our recent announcement regarding the hiring of a long-tenured insurance executive who have successfully grown and run and integrated bank-owned insurance program. We are excited about this business and we will explore other areas of opportunity for expansion of products and services we offer today.

As we are maintaining our focus on revenue growth, we are keeping operating leverage on the top of our priority list. While expenses were up this year, we are confident in our ability to return to positive operating leverage once the increases in our risk and compliance areas begin to flatten, which we believe will happen later this year. As we said on many occasions, we will continue to invest in our businesses while we look to partially fund those investments through savings in our core operations and investments in our future capabilities. Tayfun will cover some additional details of our investments so you can get a better idea of the impact and trajectory we are looking at. We are committed to achieving positive operating leverage and we believe we have the right plans in place to make that happen.

For 2015, average core deposits were up 6% for the year, while average loan balances were up 2%, resulting in a core deposit-to-loan ratio of 106%. Balance sheet strength is a core focus for me and my team as our goal is to be a top performer across the business cycle with lower volatility of earnings. We continue to reposition the loan portfolio for consistent performance through the cycle as we focus on higher quality relationships. This is the path we have been pursuing for the last several years as you can see in the average PDs of our commercial book that we have discussed in our some of our presentations over the last year. More recently, we have taken actions to reduce exposure to certain sectors in order to reduce the sources of some of our early earnings volatility. Tayfun will discuss some of our efforts in this commentary.

Looking beyond some of the discreet items in 2015, underlying credit performance and metrics continued to improve as NPAs and delinquencies remains at levels that we have not seen since before the crisis. Our intention is to operate a business model with better credit performance predictability. With our focus on operating metrics, we also made significant progress on our strategic plans throughout the year. We announced plans to rationalize parts of our branch network, which will save $60 million annually. We closed or sold 41 branches last year and we have two transactions that are scheduled to close near the end of the first quarter that included additional 34 branches. In total, we are about two-thirds of the way through the project and we expect the remaining 32 branches to be closed by June 30.

Also during the year, we concluded three significant legal settlements and reduced the size of our Vantiv position. I know I have covered many of these items before, but I think it’s important for us to highlight the pattern of active, disciplined decision-making we have demonstrated as we continue to reposition the company for future success. Vantiv continue to be a source of significant returns for our shareholders and the year was capped by a number of transactions related to our ownership. We have taken important steps towards reducing our direct ownership stake in Vantiv in the best interest of our stakeholders, while reducing a significant amount of volatility associated with our warrant position. During the fourth quarter, we sold approximately 8 million shares, sold or settled two-thirds of the warrant and sold a portion of future TRA payments, which unlock nearly $0.5 billion of value. Vantiv continues to perform well and we are happy to participate in their success.

To maximize returns to our shareholders, we executed in a well-planned manner on all three pieces of our financial interest namely: the TRA, warrants and direct ownership. We still hold a significant ownership stake in the company, which we believe will result in healthy returns for our shareholders. For the third consecutive year, we returned more than 75% of our earnings back to shareholders. We expect that would rank us near the top of our peers. In 2015, we returned 42% of earnings via share buybacks, which reduced our share count by 39 million shares. Dividends represent 30% of earnings and combined, we achieved a core payout ratio of 72%. In addition to our core payout ratio, the Vantiv proceeds were used to repurchase an additional 9.25 million shares of our common stock. In aggregate, we have returned 78% of our earnings back to shareholders.

So, now a few comments about the fourth quarter. We reported net income to common shareholders of $634 million in earnings per diluted share of $0.79, including $0.38 of volumes that Tayfun will go over in more detail. The largest impact on the quarter was the monetization of a portion of our ownership in Vantiv that I just mentioned.

Core fourth quarter results were in line with our expectations. We view the Fed December rate move as a positive first step towards a normalized environment, but there is uncertainty around the extent and timing of the future rate decisions. Our loan growth was impacted by larger than normal pay-downs and payoffs. However, we are starting the year with a strong origination activity and our outlook for 2016 remains in line with the nominal GDP outlook. Fourth quarter reflects the efforts to position ourselves for growth. We are refocusing our resources on businesses with higher growth return potential that will enable us to achieve our objective of outperformance through the cycle. In addition to that, we are making investments in infrastructure designed to improve our service delivery and efficiency.

Our fee business has produced stable results despite lower levels of capital markets activity. We are pleased with the low level charge-offs of 34 basis points. We are closely managing our expenses with a sharp focus on extracting efficiencies from our day-to-day operations. Our non-interest expense in the fourth quarter was up 2% driven by risk management technology investments and a substantial contribution to our charitable foundation. Current results reflect the ongoing benign environment. We are cognizant of global volatilities that are creating anxiety in the markets, but we believe that our exposures are conservatively underwritten and we have limited aggregate exposures in the more volatile sectors. We view 2016 as an important transition year as we position our company to achieve operating leverage in a sustainable manner regardless of the rate environment.

In 2015, we have taken important steps in that direction and we will continue our efforts in 2016. We are working on long-term revenue growth as well as expense efficiencies to achieve our goal. We have taken actions to reduce run rate expenses in order to partially fund strategic investments and we expect expenses related to our risk and compliance infrastructure to peak in 2016. We will continue to reallocate resources to improve profitability with reduced volatility. We are committed to achieving the industry leading level of operational results that you have historically seen from us. Our 18,000 employees are our most important asset and I am extremely proud of what they accomplished in 2015. They did a great job of taking care of our customers and driving shareholder value. I want to thank all of our employees for their hard work and dedication in 2015 and I look forward to their contributions to our success in 2016.

Thank you. With that, I will turn it over to Tayfun to discuss our fourth quarter operating results and our outlook for the remainder of the year.

Tayfun Tuzun

Thanks Greg. Good morning and thank you for joining us. Let’s start with the financial summary on Page 3 of the presentation. For the fourth quarter, we reported net income to common shareholders of $634 million or $0.79 per diluted share. There were a number of items that affected earnings in the quarter as Greg mentioned. These items can be found on Page 2 of our release and the net impact was a benefit of $0.38 per share. We have been patient and deliberate in our actions related to our Vantiv ownership and we have delivered significant value to our shareholders. The benefits of the transactions are sufficiently self evident.

With that, let’s move to the average balance sheet on Page 4 of the presentation. Average portfolio balances were $221 million higher than the third quarter and the period end balances were down about $1 billion as payoffs and pay downs, especially in December impacted our net growth. The payoffs were higher than expected, especially in commercial real estate, which reached almost $1 billion this quarter as construction projects refinanced into permanent financing. During the quarter, we maintained our strategy of keeping a shorter duration in our commercial real estate portfolio. Some of these payoffs were slated for the first quarter and as such, it was a timing issue as they exited the portfolio earlier than expected. In addition, we have actively reduced exposures in certain segments of the portfolio such as commodity trading, in line with our goal to reduce volatility, especially in the current environment. I would like to point out that although the market sensitivity to the economic environment increased over the last few weeks, we discussed our rather cautious perspective on the economic environment with you in October and indicated that our actions reflected our views on the overall economic conditions and the age of the current credit cycle.

As some of the production also shifted from the fourth quarter into the first, we are starting the year with a healthy amount of activity. New production coupons have remained stable, but the credit spread widening seen in the high yield market has not yet reached bank loan credit spreads. Consumer loans were flat with last quarter and continue to display similar trends to recent quarters. Average investment securities increased by $700 million in the fourth quarter or 2% sequentially. Average core deposits increased $1 billion from the third quarter, driven by higher demand deposit and money market account balances. Our LCR ratio was 115% at the end of the quarter.

Moving to NII on Page 5 of the presentation, taxable equivalent net interest income decreased $2 million sequentially to $904 million, primarily driven by the full quarter impact of the $2.4 billion of wholesale debt issuances in the third quarter and our auto loan securitization completed in November. The net interest margin was 285 basis points, down 4 basis points from the third quarter, driven by the impact of those debt issuances, slower prepayments reducing net discount accretion on the investment portfolio and an increased short-term cash position during the quarter. Our margin for the second half of the year was 2.87%. The results related to NII and NIM were very much in line with our expectations and guidance.

Shifting to fees on Page 6 of the presentation, fourth quarter non-interest income was $1.1 billion compared with $713 million in the third quarter. Results included a net $490 million of pretax Vantiv items we have already discussed. We show fee income, adjusted for primarily Vantiv related items on Slide 6 of $623 million, an increase of $32 million or 5% sequentially. This growth included the annual payment under our tax receivable agreement with Vantiv, which was $31 million this quarter. Corporate banking fees of $104 million were flat sequentially. The volatility towards the end of the year clearly impacted our client activity in capital markets. It is no surprise that the gap was more pronounced in loan syndications as the slowdown in those markets has been widely publicized. Mortgage banking net revenue of $74 million was up $3 million sequentially. Originations were $1.8 billion in the fourth quarter, with 49% purchase volume. 80% of the origination came from the retail and direct channels and 20% from the correspondent channel. Gain on sale margins were up 6 basis points sequentially.

Net servicing asset valuation adjustments, which include amortization and valuation adjustments, were negative $16 million this quarter versus negative $29 million last quarter. Deposit service charges decreased 1% from the third quarter and increased 1% relative to the fourth quarter of 2014. Deposit service charges this quarter were impacted by a 3% reduction in consumer service charges, primarily due to a roll out in the fourth quarter of a more simplified checking product line up. Total investment advisory revenue of $102 million decreased 1% sequentially, primarily due to lower retail brokerage revenues, partially offset by personal asset management and specialty services revenue growth.

We show non-interest expense on Page 7 of the presentation. Expenses were $963 million compared with $943 million in the third quarter. The sequential increase was primarily due to a $10 million contribution to Fifth Third Foundation, technology expenses and higher net occupancy expense, which was partially impacted by the real estate decisions in one of the consumer markets that we are exiting this year. Our total employee expenses were up approximately $65 million in 2015. That number included the impact of inflationary adjustments, severance, as well as the change in the composition of our total employee base. Although our year-over-year headcount is down, the reduction is mainly in our retail branch network and the adds are in risk and compliance. By nature of those job functions, the average compensation related to our new employees is higher than those that left the bank.

During the year, we added 373 people in our risk and compliance functions for an incremental compensation cost of approximately $21 million and that number will continue to grow in 2016. I will share those details with you shortly. As expected, our technology expenses increased this quarter, although somewhat less than we anticipated. Project calendars typically impact our technology expenditures, but in general, the direction is in line with our expectations and guidance. Card and processing expenses were also up, primarily on costs associated with our EMV project. We are spending a lot of time on controllable expenses with all of our business lines and will continue to enforce a tight level of control on our operations.

Turning to credit results on Page 8, net charge-offs were $80 million or 34 basis points in the fourth quarter. As a reminder, in the third quarter, excluding the student loan backed commercial credit, net charge-offs were $86 million or 37 basis points. As expected, we returned to more normalized charge-off levels this quarter. Non-performing assets, excluding loans held for sale, increased $41 million from the previous quarter to $647 million, bringing the NPL ratio to 55 basis points and the NPA ratio to 70 basis points. Within commercial, NPAs increased $49 million from the third quarter, primarily due to an $89 million increase in C&I partially offset by a $38 million decline in commercial real estate NPAs. Consumer NPAs decreased $8 million from the third quarter to 62 basis points, primarily driven by a $5 million decline in Residential Mortgage and a $5 million decline in home equity NPAs.

Our consumer loan portfolio has continued to show steady improvement throughout the year reflective of the high credit quality standards that we are maintaining in our underwriting. The allowance for loan and lease losses increased $11 million. The resulting reserve coverage is at 1.37% of loans and leases compared with 1.35% last quarter and 252% of NPLs.

As we discussed last quarter, we are cognizant of where we are in the credit cycle. The global concerns associated with a diverse set of factors reaching from geopolitical to fundamental economic performance are well-known. Although we are a predominantly domestic bank, it is difficult to take comfort purely around the health of the U.S. economy relative to the rest of the world. In this environment and in light of the absolute low levels of our credit metrics, we need to point out that these levels maybe subject to potential volatility from time to time. As an added element of credit discussion, given the global economic weakness and volatility, certain segments in commercial lending are appropriately getting more attention and we would like to review our portfolio more closely with you with respect to these industries on Slide 9.

In isolation and in aggregate, our exposures in these three sectors are small both relative to our total capital as well as relative to our total loans. Our energy portfolio outstanding at the end of the quarter was $1.7 billion relatively small at 2% of the portfolio. Of this amount, just under half are in senior secured reserve based loans. Outstandings in the energy portfolio increased $107 million from the third quarter with growth in the midstream sector. At current forward strip oil prices, we continued to remain appropriately secured preserving our previous statements about our loss given default exposures on the RBL secured portfolio. So far, we had no exposures to any of the E&P companies that have filed for bankruptcy. The outstanding balances of roughly $300 million in oilfield services have a higher propensity for loss given default.

In the fourth quarter, $22 million of the increase in NPLs came from the oilfield services sector within the energy portfolio. We are monitoring our energy portfolio very closely, including stress testing in the portfolio for lower oil price scenarios. Should low oil prices persist through 2017, we will see continued reserve build and increased credit costs over that same period.

We discussed our commodity trading exposure with you last quarter and during that conversation, we indicated our intent to effectively exit a large majority of our relationships. We are now reporting to you that our outstandings have declined to approximately $300 million, down by 34% since the second quarter. Furthermore, the credit distribution of the remaining outstandings is indicative of the quality of the portfolio as we will continue to wind it down. To repeat what we said before, this is a short-term portfolio and we will execute the planned exits with no expected losses. Our proactive efforts here demonstrate our willingness to act decisively.

In commercial real estate, while our growth in the last two years has been strong, it should be viewed in the context of a low starting point after being less active for a few years. Fifth Third’s portfolio is one of the smallest percentages of total loans among our peers. Our current expectations for credit performance are based upon disciplined client selection, underwriting with an established conservative policies, guidelines and concentration limits that include product and geographic concentrations. Disciplined client selection relies on targeting-proven experienced developers, investors and sponsors with strong balance sheets, diversified sources of cash flow and access to capital with demonstrated resilience through the cycle. Furthermore, our underwriting standards emphasize conservative cash flows and we focus on upfront cash equity contributions relative to cost versus loan to values that can be inflated by historically low cap rates.

For each market, we conduct our own dilution analysis and focus on markets with multiple demand drivers and lower volatility. Specific to multifamily, we are sensitive not only to market demand and household generation, but also affordability as in some markets rents are rising faster than wages as the housing market returns. This has caused us to back off in certain markets. In short, we feel very comfortable with our commercial real estate exposure albeit a small percentage of loans.

Looking at capital on Slide 10, capital levels continue to be strong. Our common equity Tier 1 ratio increased to 9.8% from 9.4%, a very strong quarterly move, especially given the impact of buybacks associated with Vantiv gains. In addition to the level of income, the reduction in the size of the warrant position, which reduced our risk-weighted assets contributed to the increase in the ratio.

At the end of the fourth quarter, common shares outstanding were down approximately $10 million. During the quarter, we announced the common stock repurchase of $215 million from Vantiv proceeds, which settled on the January 14 and reduced the fourth quarter share count by 9.25 million shares. As Greg mentioned, our payout ratio was very healthy at above 75% this year. In light of our discussions about the ongoing investments in our risk and compliance infrastructure as well as other strategic investments, we have provided more details on the nature of some of these investments as well as our financial expectations. These details are provided on Slide 11 and 12.

We are going through a period of higher investments and added expenses related to the enhancements in our risk and compliance infrastructure. These expenses are mostly related to headcount in compliance in other areas in risk management, including operational risk. But in addition to higher compensation expense, we are also investing in technology.

As you can see on Slide 11, the incremental expenses have had a significant impact on our run-rate in 2015 and will impact the run-rate in 2016 as well. While we added 373 employees in risk and compliance, we reduced the total employee count in other areas by 464 in 2015 resulting in a net decrease of 91. As we have shared with you in the past, we expect the rate of increase in our compensation expense in risk and compliance to peak this year. As such, we don’t expect to see a repeat of this picture in 2017. We also don’t expect to see a similar increase in technology expenses associated with our risk and compliance infrastructure beyond 2016.

On Slide 12, we wanted to give you a perspective on the nature of some of these investments in our retail and consumer businesses and also provide you with our expectations on the level and timing of the financial returns. As you know, we have already taken significant steps by focusing on optimizing branch staffing through both job family redesign and headcount reductions, while at the same time reengineering our branch operating model and network. By reinvesting a portion of these savings in the business, we believe that we have a significant opportunity to accelerate our digital capabilities to reap the benefits of increased customer satisfaction, revenue growth and continued operational efficiency.

Specifically, the investment in our integrated customer experience and branch digitization infrastructure is a critical component of our consumer bank strategy. Our omni-channel approach, one that truly integrates all of our customer’s touch points across our physical, virtual and digital channels reflects the changes in customer demographics as well as the broader shift in customer behavior. These investments will enable our customers to connect with the banks seamlessly from activities that range from how they obtain advice, to open accounts, to complete simple transactions. In addition to improved revenue prospects of all products, we expect significant cost savings, especially when combined with our investments in branch digitization and back office automation.

Although we are in the middle of executing our branch optimization strategy, our investments here could potentially provide other opportunities, which will depend on our future success in execution and the timing and extent of our change in our customer’s behavior. The financial returns associated with these investments are very attractive and not based on aggressive assumptions about the overall economic conditions. As such, we are not delaying the timing even in the current low growth environment. The payback periods are short and are meaningfully contributive to income going forward. The financial returns are expected to be even higher as a result of improved customer service quality. We believe that our shareholders will be rewarded well with these investments.

In combination, we will incur higher expenses in both risk and compliance and strategic investments in 2016, which will elevate the expense growth this year. As our outlook for the year will show you, we are funding a portion of these investments with savings in our operations. For example, we expect our total compensation expenses this year to increase by roughly the same amount as the increase in the risk and compliance related compensation, which means that we are expecting no additional increase in total compensation in other areas, excluding one-time expenses, despite merit increases and other inflationary factors. The positive year-over-year impact on revenues associated with our strategic investments beyond 2016 and the beneficial impact of flattening expenses combined for a positive – for a very positive impact on operating leverage in earnings.

Turning to the outlook, our basic economic outlook is based on recent consensus market expectations of 2% to 3% real U.S. GDP growth with low inflation. On average, we should expect our industry to achieve overall loan growth approximating GDP growth. In commercial lending, we expect our loan growth to exceed 3%, supported partially by our strategic investments. We expect to see a decline in consumer loan portfolio, including the impact of the loan sales associated with our exit from St. Louis and Pittsburgh markets in the first half of this year, which is approximately $270 million. Outside the asset sales, the largest impact will come from our auto loan portfolio where we expect no improvement in market conditions to increase the shareholder returns. With the LCR-related investments largely behind us, our portfolio investments will be opportunistic in this environment. We expect to increase the size of the portfolio, but the timing will be dependent on rates and other balance sheet dynamics. In our outlook, we have two rate increases in 2016, one in June and one in September. In that scenario, based upon our outlook for loan growth, we expect a roughly 2% to 3% increase in NII on a year-over-year basis.

NIM should also expand 3 basis points to 4 basis points from the fourth quarter 2015 level as the benefit of future rate hikes is partially offset by loan yield compression and potential funding actions. If there are no further rate increases in 2016 and including the impact of the dividend reduction on the Fed stockholdings, we would expect a slightly higher NII and a stable NIM compared with full year 2015 levels, given a more conservative outlook on loan growth based on the economic environment that would lead to Feds in action. While recognizing the challenges in the current environment, especially in the oil and gas sector, at this point in our base case outlook, we still expect our credit performance to remain relatively stable. We expect our provision to exceed charge-offs in 2016. We currently expect our non-interest income to increase between 4% and 5%, excluding the impact of 2015 Vantiv-related gains.

Moving to expenses, as we just discussed 2016 is an important transition year in our company. It is a year in which we will start executing a number of strategic investments, which will lead to accelerated revenue growth, expense savings as well as operational excellence company wide with a reasonably short payback period. As we also just discussed, we expect to see the slope of our risk and compliance related expenses to flatten this year. When combined with our run rate earnings growth, this picture bodes very well for our outlook beyond 2016, with an improved earnings project trajectory. More importantly, we are going through this transition as we continue to grow our revenues and achieve solid return on our shareholders’ capital in 2016.

Except for the increases in compensation related to risk and compliance that I just covered, excluding any one-time items we expect to keep our total compensation expenses flat this year including ongoing inflationary adjustments, merit increases and performance-based compensation. We expect roughly a $60 million increase in our technology expenses. As we just discussed, these investments have either very attractive return profile and/or are related to improvements in our infrastructure. Our year-over-year total expense growth is expected to be approximately 4.5% to 5% over our reported expenses in 2015, including an estimate for the impact of the proposed change in the FDIC assessment fee and the estimated one-time impact of an early retirement offer that is currently available to eligible employees, which will reduce our run rate expenses going forward.

The growth is exaggerated partly due to an increase in the amortization of our low-income housing investments in 2016 and other one-time benefits that we experienced in 2015. Together, these two items make-up approximately 2% of the increase in total expenses. In addition, as we just shared with you that we expect an increase approximately $75 million in total expenses related to our risk and compliance infrastructure, which is another 2% of our total expense base in 2015. Our intent is to show that we are funding all other expense growth including non-risk related strategic investments, with savings elsewhere as these two items add up in dollar terms to a large portion of our entire year-over-year increase. For the first quarter, we expect net interest margin to be up 2 basis points to 3 basis points as the impact of the rate increase and day count is offset by the loan yield compression and the Fed dividend cut. Within NII, the reduction of the Fed dividend rate, loan yield compression and one less day in the quarter were slightly more than offset the benefit of the December rate increase and will result in a decline of about $5 million.

Total fee income should be similar to last year’s first quarter as most fee revenue lines, including deposit fees, card and processing revenue and corporate banking fees tend to be seasonably low. And we will not have the benefit of the Vantiv TRA payment in the first quarter. We will see higher expenses in the quarter, primarily due to seasonally higher FICA and unemployment expense, much like we saw last year, continued investment in risk management and compliance and the impact from the early retirement offer. We currently expect net charge-offs to be approximately in line with the first quarter 2015 levels. We also would like to remind you that the revenue expectations that we shared with you today do not include potential but currently un-forecasted items such as Vantiv warrant marks or gains or losses on share sales. Our goal is to solidify our earnings growth trajectory and improve shareholder returns and we have a plan to achieve that.

With that, I will turn it over to Greg for closing comments.

Greg Carmichael

Thanks Tayfun. In closing, 2016 is an important transition year for our company. We are investing in our businesses and infrastructure to improve the returns to our shareholders beyond the near-term and to grow our company profitably through this cycle with lower volatility. We will continue to manage and grow our exposures prudently, especially in recognition of the current volatility. And we look forward to sharing our progress with you throughout the year.

With that, Juana, please open the lines for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Brian Foran with Autonomous. Your line is open.

Brian Foran

Hi, good morning.

Greg Carmichael

Good morning.

Brian Foran

Maybe on the credit, appreciate the comments on the 1Q ‘16 charge-off expectations in the broader message that things are stable, so I don’t want to miss the forest for the trees, but zeroing in just on C&I and some of the deterioration in NPAs there, that you and others have seen, I mean I guess in your experience, what are the best leading indicators you watch for commercial credit and what are they telling you right now, both overall and maybe specifically, if you exclude energy, is everything else stable, improving or getting worse, are there any the industries that are starting to pop-up on your watch list beyond energy?

Frank Forrest

Hi, this is Frank. Good question. Our – first off, our non-performing assets were up 5 basis points to 70 basis points. That’s still at a low point for us over the past 7 years to 8 years and it compares very favorably to our peers. We are down 12 basis points year-over-year or $97 million overall. The increases that we saw were a couple of energy credits that are quite frankly are just making their way through the restructuring process, which is to be expected. And then it was really just spread over a number of smaller middle market credits on a couple of leveraged credits, so there was nothing there that jumped out as far as sectors. We do look at high yield spreads, there is clearly a correlation between high yield spreads and future loan losses on the commercial sector and we follow that and they are going up both on the energy side and outside of the energy side. So, we will continue to monitor and watch that over time. But our performance overall, the core of our middle market book, the mid cap book and the large cap book is still performing very, very well outside of energy, to answer your question, with no really discernible trends either in geography or products that are cause for concern at this time. So, our intent is up like everybody else. We are looking at a lot of leading indicators. We are managing credit very closely. But at this point, we still feel good overall about our portfolio for the year. As you recall, we had one outlier in the third quarter, which was a large student loan that was made back in 2007 that we restructured and rode off. But if you exclude that one large problem loan, our charge-offs for the year for the entire company were very tightly ranged between 34 basis points and 41 basis points, so very predicable. And at this point, we have only $22 million in NPAs and the energy sector that could change, but at this point, it’s 1.3% of the energy book. So, I hope that’s responsive to your question.

Brian Foran

That’s very responsive. It’s a little depressing that you first got service back to the front of the conference calls, but I appreciate the help and that’s all I had.

Frank Forrest

Thank you.

Operator

Your next question comes from Erika Najarian with BofA Merrill Lynch. Your line is open.

Erika Najarian

Hi, good morning.

Greg Carmichael

Good morning.

Erika Najarian

Could you remind us in terms of how the Fed treats some of the outsized gains from Vantiv relative to your ability to buyback stock? We understand that beyond your – the core PPNR you generate, you are allowed to use some of the gains to buyback stock. I am wondering if I am calculating gains of $490 million related to Vantiv this quarter, how much of that is free for buybacks according to your 2015 approved plan?

Tayfun Tuzun

Yes. This is Tayfun, Erika. So, we have – as we have done over the past, I think 3 years, we have asked and obtained approval to convert after-tax net gains on share sales into buybacks. So, the portion of the gains from direct after-tax gains, are eligible for buybacks and that’s indicative of the size of the buyback that we executed this year. The warrant gains whether they are through sales of the warrants or whether they are through mark-to-market or not, they are not part of it, because they are just a mark-to-market. And then the TRA transaction which generated $49 million in gains also is not part of our CCAR application. We clearly will be reviewing our perspectives on these types of transactions in the upcoming CCAR process and we will update you as to our thoughts when we are ready to do that for you.

Erika Najarian

Got it. And just a second follow-up question I think. We really appreciate the fact that 2016 is a transition year for expenses and thank you for the detail on expenses. I am wondering as we look beyond the transition year, Greg, what do you think is natural range in terms of the efficiency ratio for this company as you think about the puts and takes in terms of the benefits of these investments? And I guess a range is appreciated given that everybody has different assumptions for the rate outlook?

Greg Carmichael

Thanks, Erika. First off, when you look at these investments, as Tayfun mentioned, they are very short-term returns. So, we are very committed to these investments and executing well against these investments both from an efficiency perspective and from a revenue opportunity. That’s why we are making those investments. At the end of the day, when you look at our long-term view and efficiency ratio in the mid-50, sub-60 is extremely important to us and we are never going to lose sight of that to get back to that level. We believe these investments being made now and early executed well will allow us to move in that direction sooner than later.

Erika Najarian

Great, thank you.

Operator

Your next question comes from Paul Miller with FBR. Your line is open.

Greg Carmichael

Good morning, Paul.

Tayfun Tuzun

Good morning, Paul.

Greg Carmichael

Okay. Well, let’s move to the next one and then we will take Paul’s question later when he comes back.

Operator

Okay. Your next question comes from Matt O’Connor with Deutsche Bank. Your line is open.

Greg Carmichael

Hey, Matt.

Matt O’Connor

Good morning.

Greg Carmichael

Good morning, Matt.

Matt O’Connor

Circling back on the expense outlook, can you give us some of the pieces in terms of the FDIC cost increase that you expect I know it’s hitting everyone and then also the early retirement hit?

Tayfun Tuzun

Yes. Let me make a comment on the early retirement and then I will turn it over to Jamie for the FDIC comment. The early retirement, we are just still in the process. We don’t know exactly what the exact numbers are, Matt. So, we will give you an update at the end of the quarter on that as we still need to go through the process.

Jamie Leonard

Yes. Matt, on the FDIC, the way we have embedded it in the outlook is that this would be a quarterly run-rate item, not a one-time charge. And for us, the gross impact annually is about $50 million. But then within the proposed rules, you would get a rebate or a credit against that. So, the net impact to us is about $25 million a year.

Matt O’Connor

Okay. And then what I am trying to get at is as we think about the kind of exit expense base coming out of the 2016 into 2017 and the early retirement hit, we obviously would back out. I don’t know about the amortization and tax benefits going up, but I am just trying to get a sense of ballpark, how many of the things that you provided for 2016 may drop off as we get to 2017, including the ramp up in some of the risk compliance technology, I don’t know if those just flatten out or they actually go down?

Tayfun Tuzun

Let me take it and then I will turn it over to Greg for broader comments on the directions. In terms of the individual items, we shared with you the risk and compliance-related increase. As we discussed, we expect that increase to flatten and it is clearly our goal to closely look at all of our expense adds there, look at all the processes and look for opportunities to reengineer some of these processes and include some technological solutions which we believe are possible. It’s typical to yet estimate what that impact would be. In terms of the low income housing piece, I can tell you that our estimated year-over-year increase in that line item is about $30 million from ‘15 into ‘16. So, that we will update you and we will see if the activity level and the economics in that portfolio would continue in that direction. It’s difficult to estimate that at this point. So, as we are exiting 2016, as we look ahead assuming the two rate increases that we built into our forecast on the revenue side assuming that we hit the non-interest income growth that we shared with you, we would be exiting this year at a lower efficiency ratio compared to the first half of the year. I mean, we will be moving towards low 60s, there is no question based on this outlook.

Greg Carmichael

The only thing I would add, Matt, is when you look at these investments, especially around risk and compliance and associated investments in technology and supporting those initiatives, we also expect to continue to see improvement in our operational losses. For our losses, legal reserves and so forth would naturally be an outcome we expect to get and are going to work hard to make sure we realize those benefits also as we go into 2017.

Matt O’Connor

Okay, thanks for all the color.

Greg Carmichael

Thank you.

Operator

Your next question comes from Matt Burnell with Wells Fargo Securities. Your line is open.

Matt Burnell

Good morning. Thanks for taking my question. Just maybe a question for you, Tayfun, in terms of the demand for loans, I know you mentioned that you are expecting loan growth in 2016 will be roughly the same rate as real GDP. That’s a little bit lower than you would normally expect. So, I guess I am curious where you are seeing lower levels of demand and I presume that the market challenges have only been a couple of weeks, so that has really not weighed on borrower sentiment, but how long would that have to continue before borrowers might get more, might get even more cautious in terms of borrowing?

Tayfun Tuzun

Yes. I am going to give you a brief response and will turn it over to Lars Anderson to give his perspectives on loan growth, especially on the commercial side. Overall, as you know, our total loan portfolio has done pretty well especially with strength in commercial. On the consumer side with deliberate actions on auto loan portfolio, we have clearly experienced the lower growth rate in the past year or two and we are projecting that into 2016 as we are not seeing changes in economic conditions. But in return, we are spending – our retail and consumer loan teams are spending quite a bit of time in moving the direction in home equity loans and credit cards up. And we are confident that some of these strategic and tactical moves will improve growth rates in those two portfolios. Now, we have always been cautious in terms of guiding the market for loan growth, as we do believe that in general our sector over a long period of time should match GDP growth. But clearly, in interim periods, we will have strategic actions to go over that. And so with that I am going to turn it over to Lars because I think he has good feedback and color on those actions what we are thinking about the commercial loan portfolio.

Lars Anderson

Yes. Thank you, Tayfun. And frankly as recently as just the last few days I have had interaction with a number of clients in the marketplace. So I think this is pretty contemporary feedback. We are seeing a growing sense of caution from our client base. And frankly, that is really across almost all of our businesses, maybe an exception could be in the healthcare sector where they continue to have a level of confidence is some of the uncertainty was taken out in the end of last year there. And frankly, we are benefiting from that as we have invested in that and we continue to see nice growth there. Our goal is going to be obviously to outperform the nominal GDP as we look at 2016 through executing our business model that I think is very well received. And that business model is really one centered on having industry expertise with some of the best bankers in the marketplace, with very well thought through developed business lines. Now those business lines like I mentioned in healthcare, in retail and a number of other verticals have clearly outperformed. But we haven’t stopped there, we are continuing to look for other opportunities to move market share. We have added our gaming and leisure. We are looking at our telecom media, telecommunications group, our food and ag group, a number of other opportunities there, where we are able to attract some very high quality talent, both on the line and in credit, in order for us to I think outperform the marketplace. I would also remind you that we have very attractive geographic markets throughout our footprint. If you look at the performance of just core commercial kind of middle market businesses in North Carolina, in Chicago, in Florida and other markets on a common quarter basis, we are up over 6% over the past year. We are going to continue to execute in those markets. We have a very well received value proposition in the marketplace. We are very focused on blocking and tackling and developing deeper relationships. One last thing I would add onto that, this is not just about credit and loans, this is about relationships and relationship returns and building them for the long haul, not just for the next quarter, but for years to come and we are seeing that play out even as we speak. So I have a lot of confidence as we look at ’16, however it us against an uncertain economic backdrop.

Matt Burnell

Thanks for that color, that’s very helpful. And just finally for me, you did see quite a large percentage decline in the commodity portfolio balance, I realize it’s only about $300 million now, but given the relatively short-term nature of that portfolio, you have mentioned in the past, when do you expect that will go down to zero?

Greg Carmichael

Matt, this is Greg. First off, it probably won’t go to zero. We got a few key clients that are U.S. centric that we have a strong relationship with, ancillary business that we are going to continue to manage and do business with. So but you are going to expect, it will be down significantly from the – even the 300 mark on a relatively short period of time, but it will never go to zero right now.

Matt Burnell

Alright. Okay. Thanks very much.

Operator

Your next question comes from David Eads with UBS. Your line is open.

Greg Carmichael

Good morning David.

David Eads

Hi, good morning. Maybe if you guys could dig in under the service a little bit on the outlook for fee revenues, the 4% to 5% growth is pretty encouraging, but curious, kind of where – I would expect kind of maybe stronger growth in capital markets and cards, parts of that businesses and then kind of curious where you are shaking out on the mortgage and service charge side of things?

Greg Carmichael

So, just to clarify the 4% to 5% growth is based on the 2015 base adjusting for roughly $700 million in Vantiv-related gains, which includes the warrant mark to market throughout the year. So you are looking at basically about a $2.3 billion base in 2015, so the growth is off of that number.

David Eads

Sure, exactly.

Greg Carmichael

So what we are looking at is growth in capital markets, which I think Lars will provide some color on with all of our investments in added talent, we are expecting good amount of growth. I think we are expecting growth in our payments business, our payments processing should continue to give us added revenues based on our outlook. Mortgage, excluding the unpredictable MSR performance and at this point, based upon our interest rate outlook, we have to realize the tenures under 2% right now which may change some of these expectations. But under more normalized credit outlook, we would be about at the same place we were in 2015. We are expecting growth in our private banking and investment advisory business. We have done very well, that’s been based on fairly stable sources of income. But the larger growth is expected to come from capital markets and I will turn it over to Lars for comments on that.

Lars Anderson

Yes. So that’s frankly I think one of the most exciting opportunities that we have got on a go forward basis. Now, clearly as you know capital markets is largely influenced by the overall activity in the overall macroeconomic environment and how that leaches into the U.S. markets. Something to keep in mind today, our capital markets business is certainly heavily centered around the debt capital markets, risk management and what I am talking about that, it’s interest rate risk management, commodities and FX and with the uncertainties in the market, that obviously impacted the fourth quarter. But in a more normalized environment, we have got some really talented bankers with some deep relationships. We are very well positioned. And I would tell you, in our capital markets pipeline, we are actually are setup with clients for some nice activity once there is more certainty with our clients as we move into 2016. In addition to that, we are trying to diversify our capital markets platform, build out our M&A advisory platform. And I think that we have some very nice opportunities throughout ‘16 and ‘17 on a go forward basis. And lastly, again going back to the blocking and tackling, I think we have done a really nice job of building out a really high quality wealth management family practice kind of business as a company. But where we have an opportunity is to further integrate that across our platform, to open up our commercial and corporate bank and really deepen these relationships. And I see some revenue opportunity as well a strengthening long-term relationships consistent with our long-term strategy and that’s not just in our wealth management IA business that includes our treasury management products where we have a number of specific actions and initiatives that we have underway for 2016 to drive those results.

David Eads

Thanks. That’s helpful. And as a follow-up, just kind of curious how you think about the Vantiv stake from here, you obviously given – presumably you guys would have some desire to increase buybacks at current valuations and would you consider moving faster on Vantiv to kind of give some more dry powder there?

Greg Carmichael

Dave, we will continue looking at that opportunity. As we have demonstrated over the past, we have been very prudent on how and the timing of when we execute those opportunities, as you saw us execute in the fourth quarter very succinctly. So, there are opportunities there. We are evaluating it. And once again, we will continue to look at that through the eyes of what’s best for our shareholders.

Tayfun Tuzun

Yes. I just want to remind you that when we sold our shares, the stock price was at $52. They are down to $42, despite the fact that our share price has moved down, theirs been as well. So it’s always a relative perspective on just particularly the relationship between the two stock prices.

Greg Carmichael

But put to that end, we have communicated that our intention is to continue to sell down our position at Vantiv and we are going to do that in a very thoughtful methodical manner.

David Eads

Great, thank you.

Operator

Your next question comes from John Pancari. Your line is open with Evercore.

Greg Carmichael

Hey, John.

John Pancari

Good morning. I just want to go back to the non-performers and sorry if I missed anything on that front. The increase in the commercial NPAs, again, how much of that was energy?

Frank Forrest

It was about 25% of the ultimate increase in the NPAs, almost everything else was spread out amongst middle market loans.

John Pancari

Okay. And what is the total energy non-performers as of now?

Frank Forrest

22 million.

John Pancari

Okay. And also on energy, do you have the percentage of the portfolio that’s criticized? And then separately, do you have the percentage of the portfolio that’s investment grade?

Frank Forrest

The percentage of the portfolio, I will give it to you in two numbers. The percentage of the portfolio that will be classified, which I think is the more meaningful number, which is the definition of a problem loan from our regulatory teams is 22%. Our criticized assets on top of that would be a total of 36%. The criticize includes loans that have potential credit weaknesses that are not well defined and they are considered a problem loan. So, 22% of our books is the way we look at it is problematic in some form of another. It doesn’t mean we are going to lose money. But by definition, the problematic 70% is not. I don’t have the exact percentage of what’s investment grade in our portfolio. However, when you look at the distribution of the energy books, as Tayfun said it’s $1.7 billion in outstandings, it’s 2% of total loans, 44% of it is reserve-based and 18% is oilfield services. Those two categories make up 97% of our criticized assets. So, that’s where the focus is. You take the other 36% is basically an upstream and midstream, which didn’t perform very, very well and there is a fairly high percentage of those that are investment grade, but I don’t have the exact percentage of those.

Greg Carmichael

And Frank, one additional thing I would add is 100% of those NPLs are in the oilfield services. They are not in midstream. They are not in our reserve-based lending portfolio.

Frank Forrest

Yes, they are. Again, we feel very good as a senior secured lender with the exposure we have in the reserve-based portfolio. And that is the bulk actually is criticized assets. When you look at where there is potential loss, it would be on the oilfield services, it’s only a $300 million portfolio at the end of the day. There is about 25% of that, that’s distressed at this point in time, which is a very small number relative to the size of our book and the size of our capital.

John Pancari

Okay. And then if you could remind me the updated size of the shared national credit portfolio as of December 31?

Frank Forrest

It’s 46% of our total commercials.

John Pancari

46% of total commercial loans?

Frank Forrest

Yes.

John Pancari

Okay. What’s the dollar amount?

Frank Forrest

Hold on, we will get it for you.

John Pancari

Okay. And then I guess also, what was the change in that portfolio linked quarter?

Frank Forrest

Yes. I see. On a linked quarter basis, that was down about $800 million.

Tayfun Tuzun

Yes. It’s just under $26 billion.

Greg Carmichael

Yes. And I would also note that the number of age-ended SNC credits increased on a linked quarter basis also.

Frank Forrest

The other point on the – this comes up I think each quarter, I think the other point that percentage is a fairly high percentage. However, that portfolio has a better asset quality composition than our overall portfolio. It’s predominantly investment grade, near investment grade has performed very, very well overall for us for a long period of time. We underwrite every loan for an account. We don’t buy blind from anybody. We have senior bankers, most of which have come from the major money setter banks in the last two to three years both in credit and on the line and we underwrite every one of those credits that’s on an account and therefore it’s performing very, very well.

John Pancari

Okay. And then lastly again apologies if I missed this and if I did, you can just give me a short answer. But can you just give us your updated comments around the manufacturing environment in your markets I know you had flagged some developing concerns in that area?

Frank Forrest

Well, I will start with the second part of your question. And frankly, I do not see developing concerns at this point. In fact, the manufacturing sector continues to be very strong. The credit metrics of that profile continue to look like what we have seen over the past couple of years. They are generating high profits on a relative basis, historic basis, generating excess liquidity. I think that did lead to some of the decline in the utilization rates that we saw at the end of the quarter. I would tell you that in the southern part of our franchise, the Georgia’s, Florida’s and even into Florida to some extent, those markets look good as well as Michigan we began to see some recovery as well as North Carolina.

John Pancari

Okay, great. Alright, thank you.

Operator

Your next question comes from Mike Mayo with CLSA. Your line is open.

Greg Carmichael

Hey, Mike.

Mike Mayo

Hi. Okay, just with the expense guidance, but before we go there, what are your reserves for the energy loans?

Frank Forrest

Hi, Mike, 4.75% currently and we continue to evaluate this on a quarterly basis.

Mike Mayo

Okay. And you said, if oil stays low, you will have to increase those reserves, I guess what’s the dollar amount if that’s $1.7 billion times the 4.75%?

Frank Forrest

Yes.

Mike Mayo

So, how much might those reserves have to go up if oil stays at 30 or you are fine at 30 you are just talking lower?

Frank Forrest

Yes. The reserves that we have in place today are based on the current condition of the portfolio. If it goes down to $25 for a sustained period of time, then those reserves will go up. I can’t tell you at this point what number that will go up, because they are not correlated directly. But certainly, they would go up if we have a continued sustained decrease in oil, but that’s based on where we are today, which is what we have to use for GAAP accounting.

Mike Mayo

Okay. So, you are at least good today at $30.

Frank Forrest

Yes, we are.

Mike Mayo

Okay, good. Just how they feel better about the expense guidance? And maybe I want to make sure I have the numbers correct. So, 4.5% to 5% expense growth for 2016. So that would be about $180 million?

Frank Forrest

Yes, I mean, you are in the ballpark.

Mike Mayo

Okay. And then of that, you have $75 million for risk and compliance, $60 million for technologies, that’s up to $135 million, FDIC, another $25 million, now we are up to $160 million, so most of it is for those factors?

Greg Carmichael

And Mike that’s $75 million, this is Greg, included the technology associated with the risk and compliance investments.

Tayfun Tuzun

So, there is some overlap there.

Greg Carmichael

Some overlap there.

Tayfun Tuzun

But when you add up those numbers, those are very big numbers that you can see in most of that growth guidance, Mike. So, I mean, I guess what we are telling you is that we clearly are looking for efficiencies elsewhere in order to be able to fund some of these investments.

Mike Mayo

Okay. So, $75 million for risk, compliance and technology?

Tayfun Tuzun

$75 million includes the technology portion of risk and compliance. On top of that, we have additional non-risk and compliance strategic investments. So, $75 million is just -- the total – the $75 million is the increase related to total expenses in risk and compliance, compensation plus technology.

Mike Mayo

And the non-risk strategic investment expense delta is what again?

Tayfun Tuzun

We expect our IT expenses to go up by 25%, which is roughly $60 million, so the difference would be everything else that we do.

Mike Mayo

Okay. So, if we still get to most of that, so non-risk strategic investments are $60 million, tech for risk and compliance, $75 million and FDIC assessment, net $25 million?

Greg Carmichael

No, I just want to clarify this. Total expenses related to risk and compliance, which includes compensation and IT, is about $75 million. Total increase in IT is roughly, let’s say, $60 million, $65 million. Of that, there is a portion of those already in risk and compliance, which is roughly I think if I am not mistaken, $20 million type. So, there is another $40 million in IT in addition to the $20 million that goes to risk, which adds up to the $60 million type increase in IT expenses in the year.

Mike Mayo

Okay, so $75 million plus $40 million plus $25 million?

Greg Carmichael

And then the $25 million is the FDIC related. And then also there is some expected numbers around the early retirement that we have included in our guidance. So, when you add them all up and that’s why we are optimistic about the beyond 2016 growth because some of – a number of those will not show up as a year-over-year increase once we get to the end of 2016.

Mike Mayo

Okay. So, then your revenue guidance, I guess you are guiding for negative operating leverage here just I guess 4% to 5% higher core fees, but only slightly higher NII if rates don’t go up, so...?

Greg Carmichael

We are not guiding to operating leverage if rates don’t go up.

Mike Mayo

So I guess – I have just moved the lens back a little bit, so Greg you are new CEO and you have a chance to put your imprint on the organization and you are coming in there and you are spending a lot of money and this isn’t unique just to Fifth Third, I mean you have other banks that absorb these higher expenses and still at least try to get positive operating leverage, I know maybe you see a great opportunity for 2 or 3 years out and you say, hey it’s worth having this negative operating leverage upfront to have even better positive operating leverage down the road, but how do you reconcile the idea that other banks have similar expenses, but aren’t guiding for this degree of negative operating leverage if rates don’t go up with the idea of hey you are a new CEO, you see some unique opportunities down the road, it’s worth it?

Greg Carmichael

Mike, I would really as we said before this is a transition. We do see those unique opportunities and we know how to implement technology. Every investment we are making in technology and when you just heard the numbers, we are really focused on either driving efficiencies that we are going to get paid for in short order, a whole branch digitalization or new mortgage loan platform, mobile enhancements fraud detection, those type of things we are going to get paid for in 2017. In addition to that, the focus on driving revenue, revenue in the near-term that will materialize as we go through into 2016 and into 2017, a very meaningful to the health of our business. And then on the compliance side of the house, we have to make those investments and that really gets focused on the quality of everything we do and we should see the benefit of that as I mentioned earlier, we expect to lower legal reserves, lower operational losses that we absolutely are expecting a little model wind to 2017 as we move into those years. But they are extremely important investments. We are going to make those investments, it is transformational and we will get paid well for those. And as we move into 2017, you will see those outcomes.

Tayfun Tuzun

And Mike, I also want to remind you I have mentioned this during my script, about $30 million of that expense increase is related to the increased amortization in our low income housing investments, so you need to add that as well.

Mike Mayo

That’s helpful. Last follow-up, so for looking to 2017 for like the really nice payback, what metric can you hold out there saying, hey this is really what we are looking for either in 2017, by the end of 2017?

Greg Carmichael

So look, I mean I think again if the world plays out the way we laid it out, we would expect to exit 2016 in the low-60s type efficiency ratio. So assuming that we are correct, that we can actually hit the peaks in a number of these large expense items throughout 2017, we have a good chance to take the efficiency ratio down even further from that.

Mike Mayo

Alright. Thank you.

Greg Carmichael

Thank you, Mike.

Operator

The final question comes from Ken Usdin with Jefferies. Your line is open.

Ken Usdin

Hey guys. Just one quick one on the NIM outlook, you mentioned you get a couple of – you get more help from the initial fee hike than from the offsetting factors and I am just wondering the offsetting factors, what are you just continuing to see from either book rollover or spread compression and at what point do you just expect that to kind of normalize out where if we got future hikes, we would see the incremental benefits for the NIM? Thanks.

Jamie Leonard

Ken, it’s Jamie. I would tell you as Tayfun laid out in his prepared remarks, we would certainly have assets into the balance sheet that is benefited by the rate hike in December as well as the future moves we are forecasting. There are a couple of macro factors as well as several idiosyncratic factors that create headwinds for us in that environment. The macro factors is you touched on, the pricing pressures in this low rate environment with new productions coming in on the sheet, less than on yields on the pay-down and payoffs and then you have the impact of the Fed stock dividend reduction. And I think those factors are impacting everybody. For Fifth Third specifically, as Lars touched on, you have C&I loan yield compression from this remixing as we are focused on disciplined growth and a better credit profile of client and that compression should dissipate in the back half of ’16. And then you have for us also early access, continued attrition as we are not enrolling new customers. And then as Tayfun touched on, our outlook and the auto book production declined. We did about $5 billion this year. We expect that number to be around $3 billion in 2016. And then finally on the funding side, what we baked into our NII outlook is to have a pretty dynamic year on the funding side and with about $2.5 billion in maturities with 3-year issuances that are currently around 1% interest rate, our outlook assumes that we go out a little bit longer term and better position the company from a funding profile for 2017 and beyond. So all of those items are baked into that NII outlook and with all that said we still expect NII to grow 2% to 3% in 2016.

Ken Usdin

Got it. Alright. Thanks for that.

Greg Carmichael

Thank you.

Operator

This concludes today’s conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

About this article:

Expand
Tagged: , Regional - Midwest Banks,
Error in this transcript? Let us know.
Contact us to add your company to our coverage or use transcripts in your business.
Learn more about Seeking Alpha transcripts here.