Bryan Preston
Executive Vice President and Chief Financial Officer at Fifth Third Bancorp
Thanks, Tim, and thank you to everyone joining us today. 2023 was a very different year than what we were expecting 12 months ago. For Fifth Third, our success in outperforming this year was driven by our intentional actions to create and maintain flexibility for navigating uncertainty. As we enter 2024, we are very pleased with the results from 2023 and how we continue to be well-positioned for a wide range of economic outcomes. We have optionality in our balance sheet and diversification of our business mix that will allow us to adapt to changing environments. As Tim mentioned, achieving this positioning requires discipline and years of deliberate investments.
Our full year financial performance in 2023 benefited from this long-term investment. Fifth Third delivered industry-leading deposit growth of 5%, record revenue of $8.7 billion and 100 basis points of capital accretion during the year, all while maintaining expense and credit discipline. We delivered another solid quarter to-end the year. Adjusting for the FDIC special assessment and the other discrete items listed on Page 2 of our release, return on assets was 1.3%, ROTCE was 17% and our efficiency ratio was 55%.
Additionally, we completed our risk weighted asset diet in the fourth quarter, which reduced RWA by 3%, which was a little more than we previously estimated. The diet combined with our strong earnings led to a nearly 50 basis point increase in CET1 during the quarter, which ended at 10.3%. This capital accretion combined with the rallying market rates during the fourth quarter resulted in our pro forma CET1 ratio including the AOCI impact from unrealized losses on AFS securities increasing to 7.7% at year end, well above the 7% minimum.
Net interest income for the quarter was $1.4 billion, which was consistent with our expectations. While NII continues to be impacted by the increasing cost of deposits due to higher market interest rates, we've been able to build a robust liquidity position by generating peer leading core deposit growth. Our core interest bearing deposit costs increased 24 basis points sequentially reflecting a cycle to date interest bearing core deposit beta of 54% in the fourth quarter. We believe maintaining significant liquidity on balance sheet is a prudent decision given the uncertain economic and regulatory environments.
Our short-term investments which are primarily comprised of our cash at the Fed increased $8.6 billion in the fourth quarter on an average basis and drove all of the 13 basis points sequential decrease in NIM. Excluding the impacts of securities gains losses and the Visa total return swap, adjusted non-interest income increased 3% sequentially due to the growth in commercial banking, mortgage, wealth and card and processing revenues, as well as the normal fourth quarter impact of the TRA. The growth in commercial banking fees was driven by strong institutional brokerage and improved corporate bond fees, partially offset by lower lease for marketing revenue.
Fourth quarter noninterest income was also impacted by the decision to eliminate our extended overdraft fee, which was the driver of the decrease in service charges on deposits. Compared to the prior year, noninterest income decreased 3% primarily due to a $25 million reduction in TRA revenue. Adjusted non-interest expense increased 2% sequentially primarily driven by the impact of the non-qualified deferred compensation mark-to-market, which is mostly offset in securities gains losses. Excluding the impact of the NQDC mark, which was a $17 million expense in the fourth quarter compared to a $5 million benefit in the prior quarter, expenses were flat sequentially. Compared to the prior year, fourth quarter expenses were down 1%, which reflects our ongoing commitment to expense discipline Tim mentioned earlier.
Moving to the balance sheet. As expected, total average portfolio loans and leases decreased 2% sequentially, most significantly driven by the 3% decrease in average total commercial loans. Our corporate banking business experienced the biggest reduction due to the RWA diet with period end corporate banking total commitments decreasing 6% and unused commitments decreasing 4%. Period end commercial revolver utilization rate was 35%, a 1% decrease from the prior quarter. Average total consumer portfolio loans and leases decreased 1% sequentially due to our intentional pullback in indirect auto and the overall slowdown in residential mortgage originations given the rate environment, partially offset by growth from dividend finance.
Average core deposits increased 3% sequentially driven by the growth in interest checking, money market and customer CD balances. DDA migration is showing signs of deceleration with fourth quarter showing the smallest dollar decline in DDA balances since the onset of the rate hiking cycle even when adjusting for normal seasonal strength at year end. DDAs as a percent of core deposits were 26% for the quarter compared to 28% in the prior quarter. In addition to the migration impact, this measure is negatively impacted by the strong interest bearing core deposit growth from new consumer and commercial relationships.
By segment, average commercial deposits increased 5% sequentially, while both consumer and wealth deposits increased 1%. As a result of our balance sheet positioning, RWA diet and success growing deposits, we achieved a loan to core deposit ratio of 72% at year end, which continues to rank as the best compared to our regional peers. As Tim mentioned, we ended the year with full Category 1 LCR compliance at 129%. The strong funding profile provides us with great flexibility as we enter 2024.
Moving to credit. Asset quality trends remain strong and below historical averages. The net charge-off ratio was 33 basis points, which was down 9 basis points sequentially and consistent with our guidance. 30 to 89 day delinquencies are flat compared to the end of 2022. The NPL ratio increased 8 basis points to 59 basis points, but remains below our 10-year average of 65 basis points. We will maintain our credit discipline focusing on generating and maintaining granular high quality relationships.
In consumer, we remain focused on lending to homeowners, which is a segment less impacted by inflationary pressures and have maintained our conservative underwriting policies. However, we are beginning and expect to continue to see normalization of delinquency and credit loss trends from the historically low levels experienced over the last couple years. From an overall credit risk management perspective, we continue to assess forward looking client vulnerabilities based on firm specific and industry trends and closely monitor all exposures where inflation and higher for longer interest rates may cause stress.
Moving to the ACL. While our reserve coverage increased 1 basis points sequentially to 2.12%, the ACL balance decreased by $41 million due to lower period end loans, which was the primary driver of the release. We continue to utilize Moody's macroeconomic scenarios when evaluating our allowance and made no changes to our scenario weightings. Our capital build is pacing ahead of the expectations we set at the beginning of the RWA diet. We are highly confident in our ability to build our CET1 ratio to 10.5% by June 2024.
As Tim mentioned, on January 3, we made the decision to hold $12.6 billion of securities until maturity resulting in the reclassification to HTM during 2024.
This decision reduces the risk of potential capital volatility associated with investment security market price fluctuations under the proposed capital rules. We continue to expect improvement in the unrealized losses in our remaining AFS portfolio resulting in approximately 32% of our current loss position accreting back into equity by the end of 2025 and approximately 66% by 2028 assuming the forward curve plays out.
After the transfer to HTM, 65% of the remaining AFS portfolio is in bullet or locked out securities, which provides a high degree of certainty to our principal cash flow expectations. We continue to believe that 10.5% is an appropriate near-term operating level for our capital. And as Tim mentioned, we expect to resume share repurchases during the second half of 2024 assuming the economic environment remains stable and the capital rules are finalized consistent with the MPR.
Moving to our current outlook. We expect full year average total loans to be down 2% compared to 2023 with the decrease primarily driven by the impact of the RWA diet on commercial loans in indirect consumer, as well as lower mortgage production due to the higher rate environment, partially offset by the continued growth of dividend improvised. While we expect full year average total loans to decrease, we expect average total loans in the fourth quarter of 2024 to be up 2% compared to the fourth quarter of 2023. Commercial balances are expected to be up low single-digits by the end of 2024 and dividend originations are projected between $2.5 billion and $3 billion for the full year.
We are also assuming commercial revolver utilization to remain stable. For the first quarter of 2024, we expect average total loan balances to be down 1%, again driven by the full quarter impact of the RWA diet. Both commercial and consumer loans should be down around 1%. Dividend finance originations are projected to be $400 million to $500 million in the first quarter. Total loan balances should be relatively stable throughout the first quarter. We expect deposit growth to continue during 2024 with full year average core deposits increasing 2% to 3%. While we expect DDA migration to continue given the high absolute level of interest rates, the pace of migration will be sensitive to the path of the Fed funds rate in 2024.
If rates remain at current levels, we could see the DDA mix dip below 25% by the fourth quarter of 2024. However, we would expect to show a more stable composition if the more aggressive rate cut forecast were to be realized.
Shifting to the income statement. Given the impact of the RWA diet on average loan balances and the impact of higher deposit costs, we expect full year NII to decrease 2% to 4%. Our forecast assumes our security portfolio remains relatively stable and our cash levels begin a slow, but steady decrease throughout 2024. This outlook is consistent with the forward curve as of early January, which projected six total rate cuts. Given the uncertainty regarding the rate outlook, our balance sheet is positioned such that even with fewer rate cuts such as the three cut scenario being projected by the FOMC, we would expect to see only a modest deterioration in our NII outlook and would still fall within our full year guidance of down 2% to 4%.
We expect NII in the first quarter to be down 2% to 3% sequentially, reflecting the impact of the lower average loan balances, a lower day count in the quarter and higher deposit costs. Our current outlook assumes interest bearing core deposit costs, which were 289 basis points in the fourth quarter of 2023, increased 5 to 10 basis points in the first quarter, a deceleration from the 24 basis point increase experienced in the fourth quarter. With rate cuts forecasted to begin in late March and continue through the end of the year, we would expect deposit costs to decrease throughout the remainder of 2024. Under this outlook, the terminal beta for the rising rate cycle would be in the mid-50s for interest bearing core deposits.
We continue to believe we are at our NIM trough in the fourth quarter of 2023. However, another quarter of outperformance in deposit growth resulting in a higher-than-expected cash position while a good outcome could impact NIM by a few more basis points. Barring a significant change in economic outlook, we would expect NII to stabilize and then begin growing sequentially during the remainder of 2024. We expect adjusted noninterest income to be up 1% to 2% in 2024 reflecting continued growth in treasury management revenue, capital market fees and wealth and asset management revenue, partially offset by the full year impact of the elimination of our extended overdraft fee.
We expect mortgage origination will remain muted in 2024 and net servicing revenue to decrease modestly as the servicing portfolio UPB continues to amortize lower. Adjusted other noninterest income which excludes the impact of the Visa total return swap is expected to decline by over 15% as TRA revenue will decrease from $22 million in 2023 to $10 million in the fourth quarter of 2024 and we are not including any large onetime private equity gains in our forecast. We expect first quarter adjusted noninterest income to be down 3% to 4% compared to the fourth quarter excluding the impacts of the TRA, largely reflecting seasonal factors.
Normal seasonal items include lower capital markets activity and M&A activity, partially offset by seasonal strength in wealth from tax planning. We expect full year adjusted noninterest expense to be up around 1% compared to 2023. Our expense outlook assumes continued investments in technology with tech expense growth in the mid to high single-digits and sales force additions in middle market, treasury management and wealth. We will also close 29 branches in 2024 to offset costs associated with the 31 new branches opening in our high-growth Southeast markets.
We expect first quarter total adjusted noninterest expense to be up around 8% compared to the fourth quarter. As is always the case for us, our first quarter expenses are impacted by seasonal items associated with the timing of compensation awards and payroll taxes. Excluding the seasonal items, expenses would be flat in the first quarter. In total, our guide implies full year adjusted revenue to be down 1% to 2% and PPNR to decline in the 4% to 5% range. This outcome will result in an efficiency ratio of around 57% for the full year, a modest increase relative to 2023 driven by the decrease in NII. As Tim mentioned, we expect positive operating leverage in the second half of 2024 compared to the second half of 2023.
Moving to credit. We continue to expect 2024 net charge-offs to be in the 35 to 45 basis point range as credit continues to normalize with first quarter net charge-offs in the 35 to 40 basis point range. As we return to loan growth, we expect to resume provision builds. Assuming no change to the economic outlook, loan growth and mix is expected to drive a $100 million to $150 million of provision build for the year with the first quarter being in the $0 to $25 million range. The provision build over the last three quarters of the year should be fairly even.
In summary, 2024 is expected to be a year of transition as we begin the shift to a rate cutting cycle. With our well-positioned balance sheet, disciplined credit risk management and commitment to delivering strong performance through the cycle, we will continue to generate long-term sustainable value for shareholders, customers, communities and employees.
With that, let me turn it over to Matt to open the call up for Q&A.
