Ladies and gentlemen, thank you for standing by. Welcome to the Fifth Third Bancorp 1Q '20 Earnings Call. [Operator Instructions]. Thank you. I would now like to hand the conference over to your host, Mr. Chris Doll. Sir, the floor is yours. .

Thank you, Laura. Good morning, and thank you all for joining us. Today, we'll be discussing our financial results for the first quarter of 2020. Please review the cautionary statements on our materials, which can be found in our earnings release and presentation.

These materials contain reconciliations to non-GAAP measures, along with information pertaining to the use of non-GAAP measures as well as forward-looking statements about Fifth Third's performance. We undertake no obligation to and would not expect to update any such forward-looking statements after the date of this call.

This morning, I'm joined by our President and CEO, Greg Carmichael; CFO, Tayfun Tuzun; Chief Risk Officer, Jamie Leonard; and Chief Credit Officer, Richard Stein. Following prepared remarks by Greg and Tayfun, we will open the call for questions. Let me turn the call over now to Greg for his comments..

Thanks, Chris, and thank all of you for joining us this morning. Given the unprecedented nature of the environment, I will focus most of my commentary on the proactive steps we are taking to navigate this crisis due to the pandemic. And then Tayfun will provide more details related to the quarterly financial results in his remarks.

As all of you are aware, the events over the past couple of months related to the COVID-19 health crisis and resulting economic fallout has led us to reprioritize our focus. We are taking significant and ongoing actions to serve our customers, protect our employees and assist our communities.

We believe these proactive steps will ultimately deliver long-term sustainable value for all stakeholders, including our shareholders. Starting in early February, the executive team and the Board began actively planning and prioritizing the organization's response efforts.

We quickly mobilized our workforce to accommodate remote access for a large number of employees. Currently, more than 50% of our workforce is working remotely across the company. And for many groups, that number is over 95%.

For employees who are not able to do their job remotely, we have established social distancing and enhanced cleaning measures based on CDC guidelines. Throughout these uncertain times, we have been proactively communicating with our customers and employees.

We have issued more than a dozen press releases, several fact sheets and numerous proactive outreaches to our customers in addition to ongoing updates on our website.

We have also significantly increased the frequency of communications with our employees in order to keep them informed of the latest developments, recommendations and health precautions. From a customer perspective, we are leveraging the strength of our balance sheet to help address the economic challenges many of our customers are facing.

We are prudently extending credit to customers where we support economic activity. In March alone, we extended $13 billion of new credit, including approximately $8 billion from C&I line drills.

In addition to keeping our traditional lending channels open, we are also participating in government-sponsored programs established as part of the Cares Act such as the SBA PPP and the forthcoming Main Street Lending Program. With respect to PPP, we assisted approximately 10,000 clients to employ over 300,000 employees totaling nearly $3.5 billion.

To maximize our support, we recently announced we suspended share repurchases. And as Tayfun will discuss in greater detail, we continue to have strong capital and equity levels to weather a prolonged downturn.

In addition to utilizing our strong balance sheet, we are directly supporting consumers and businesses by keeping 99% of our branches open and fully operational with modified health protocols and amended hours as appropriate. We continue to process over 100,000 branch transactions per day, underpinning our role as an essential service provider.

And for many of their banking needs, we continue to encourage our customers to use our highly rated digital platforms in addition to our network of approximately 53,000 fee-free ATMs. Furthermore, we continue to proactively engage with our customers.

Our bankers have personally connected with 2 million customers over the past month to see how they are doing under these circumstances, both personally and financially, and to offer systems as needed under our extensive financial hardship relief programs.

In March, we began providing relief in the form of payment deferrals and forbearances to customers across a wide array of lending products. We also suspended vehicle repossessions in home foreclosures.

Since the roll of our systems programs, we have processed over 96,000 hardship requests, which represents approximately $1.5 billion in Fifth Third loan balances in addition to $6 billion from our mortgage servicing portfolio. As I mentioned, taking care of our employees is a top priority.

In addition to our safety measures, we have announced special payments of up to $1,000 per employee for those providing essential banking services. These measures have helped maintain call center operations and branch personnel at appropriate levels.

For our communities, we recently committed nearly $9 million in philanthropic funds to help address the effects of COVID-19 pandemic. We will continue to take proactive and aggressive measures to help mitigate the effects of the downturn.

From a macro perspective, while we do not know the duration or severity of the crisis, we have spent many years preparing for a downturn by strengthening our balance sheet through a disciplined approach to credit and by increasing our capital and liquidity levels. We have also improved and diversified our revenue streams in our loan portfolios.

Finally, we evaluate our firm-wide resilience through stress testing our balance sheet under a range of conditions worse than the last crisis and more severe than a regulatory run stress test. Since the financial crisis, we have taken several steps, which have put us in a very strong position.

We transformed our overall approach to credit risk management, centralized credit underwriting and added stringent geographics, sector and product level concentration limits. We exited certain commercial real estate segments and have remained disciplined in our existing CRE portfolio.

The client selection focused on top-tier developers and virtually no land loans. We also continue to maintain an underweight position relative to our peers. We exited businesses such as commodity trader lending and mezzanine lending. 3 years ago, we exited $5 billion in commercial loans, given the risk return profile.

This has helped reduce our leveraged lending exposures by over 50%. We have also reduced our indirect commercial leasing portfolio by almost $2 billion over the past 2 years, which has significantly lowered our exposure to certain assets such as commercial aircrafts and railcars.

Lastly, we have maintained our credit discipline in our consumer portfolio with a weighted average FICO score above 750. We have consistently communicated our through-the-cycle principles of disciplined client selection conservative underwriting and an overall balance sheet managed approach focused on long-term performance horizon.

Our unwavering adherence to these principles and our balance sheet strength gives us confidence as we navigate this environment.

Our first quarter operating results reflect the strength of our franchise and the strategic decisions we made in managing our balance sheet, our interest rate risk and our liquidity risk exposures in light of the rapid and widespread economic deterioration we saw towards the end of the quarter.

Net interest income, net interest margin, noninterest income and expenses all performed in line with or better than our January guidance, with a net charge-off ratio also consistent with our previous expectations. Tayfun will discuss the changes in our allowance in more detail.

Similar to what you have seen from many of our peers, our reserves reflect the CECL adoption, the economic impacts of COVID-19, lower oil prices and the impact of loan growth during the quarter. As I mentioned earlier, we believe that we are in a very strong position from both a capital and liquidity perspective.

We are continuing to evaluate potential economic scenarios, but we currently believe our capital position is strong enough to maintain our current dividend if these conditions persist through the end of the year or remain well capitalized.

Before I turn it over to Tayfun to discuss our results and our outlook, I'd like to once again thank our employees. I am very proud of the way you have responded in extraordinary ways to support our customers, our communities and each other as we navigate these unprecedented times.

With that, I'll turn it over to Tayfun to discuss our first quarter results and our current outlook..

a significantly weaker economic outlook, including a lower oil price, higher funded loan balances and the impact of unprecedented fiscal and monetary stimulus. The overall approach is a combination of quantitative model-based estimates and qualitative overlays.

We use a three year reasonable and supportable period, followed by a two year reversion to historic losses. The quantitative process is based on multiple economic scenarios.

The expectation for the two predominant macroeconomic factors is a sharp downturn in GDP and a rise in unemployment in the next two quarters, the impacts of which are partially cushioned by the aggressive levels of fiscal and monetary stimulus, leading to a very weak recovery in the fourth quarter.

The challenge associated with calibrating our expectations is, as other banks have discussed, the speed at which the real-time updates to the economic forecasts are changing.

The base scenario assumes that GDP growth will slowly start to recover in the fourth quarter and will reach a year-over-year growth of approximately 3% in 2021, with the unemployment rate remaining above 6% throughout 2021.

The more stressful scenario has GDP continuing to decline through the first quarter of 2021 and unemployment staying about 7% for almost the entire 3-year reasonable and supportable forecast period. The oil price under the base case reaches $33 in the fourth quarter, but under the more stressful scenario remains below $30 through 2021.

As a reference point, we compare our current reserve level with a 9-quarter total loss estimates within the 2 most recent severe stress test runs that we ran, including the 2019 stress test that we ran last year despite the fact that we were not required to submit, and the 2020 stress test that we recently submitted to the Fed, in addition to the most recent Fed-run adverse and severe stress tests from 2018.

Our current reserves stand at 76% of the 9-quarter cumulative losses projected under the 2018 Fed adverse scenario, 44% of the 9-quarter losses under the 2018 Fed severe scenario, 50% of the 9-quarter losses under the 2019 severe scenario, and 54% of the 9-quarter losses under the 2020 severe scenario that we just submitted.

In the absence of better visibility on future levels of economic activity, these reference points give you some guidance on the strength of our current ACL ratio of 2.13%. In addition, we still have approximately $200 million or 17 basis points of our total loans and remaining discounts associated to the MB portfolio.

As other management teams have mentioned during their earnings calls, most of the economic scenarios published since the end of the quarter are forecasting a weaker outlook compared to previous forecasts. As more quantitative and qualitative information becomes available, we will incorporate them into our reserve analysis.

As the significant fiscal and monetary support is likely to reduce the impact of both the near-term decline in the GDP and the increase in unemployment, the more meaningful impact on reserve levels will be the shape of the recovery and the level of the economic activity in the post-recovery period. Turning to Slide 14.

Our capital and liquidity positions remained very strong during the quarter. Our CET1 ratio ended the quarter at 9.4%, over 280 basis points above the well-capitalized minimum. Given the various dynamics during the quarter, we are providing you a CET1 reconciliation between net income, RWA growth, CECL adoption and the impact of dividends.

As a reminder, we did not repurchase shares during the first quarter. As you can see, the majority of the 39 basis point change in CET1 was attributable to line draws from the commercial book, along with the impact of CECL. Dividend payouts constitute a smaller portion of the change in fees.

Understandably, the topic of dividend sustainability is of major interest to our shareholders. We believe that we are similar to other banks in that we are entering this downturn from a position of strength, and that strength will be able to withstand severe downturns.

That does not mean that dividends will be sustainable in all scenarios, but at this time, we expect to maintain our dividends, which our Board will continue to evaluate based on the data available. Our tangible book value per share was $22.02 this quarter, up 18% year-over-year. We have grown our book value for 5 consecutive quarters.

At the end of the quarter, our unrealized pretax gain in our securities and hedge portfolios was approximately $3.3 billion, which is not included in our regulatory capital ratios. From a liquidity perspective, we have over $80 billion in readily available and contingent liquidity.

Although we are no longer subject to the LCR, we have since continued to stress test our positions on a monthly basis under 7 different types of liquidity scenarios, and we then hold ourselves to the most stressful scenario. Our liquid securities positions have not changed since our phase outs of the LCR.

Slide 15 provides a summary of our current outlook. Given the uncertain environment, we are withdrawing our previous full year guidance until we get more visibility on the economic environment.

For the second quarter, based on the line draws at the end of the first quarter and PPP activities, we expect low double-digit growth in average commercial loans and relatively stable consumer loans.

Net interest income should grow slightly as a result of higher loan outstandings, while NIM tightens based on my earlier discussion on our interest rate sensitivity. In addition to the impact of the rate environment, NIM will also be impacted by the PPP loans and the amount of short-term liquidity on the balance sheet.

Noninterest income and expenses are both expected to decline by high single to low double digits from their current levels, reflecting the impact of COVID-19 related impacts. Total net charge-offs are expected to be in the 45 to 50 basis points range.

In summary, our first quarter results were strong and continue to demonstrate the progress we've made over the past few years, improving our resiliency, diversifying our revenues and proactively managing the balance sheet.

That being said, we are in an unprecedented environment right now and have limited visibility with respect to the economic path forward. We will continue to rely on the same principles, disciplined client selection, and service underwriting and a focus on a long-term performance horizon, which gives us confidence as we navigate this environment.

With that, let me turn it over to Chris to open the call up for Q&A..

Thanks, Tayfun. [Operator Instructions]. Laura, please open the call for questions..

[Operator Instructions]. Your first question comes from the line of Saul Martinez from UBS..

I wanted to ask about the outlook for credit and the interplay there with your reserving. And your reserve -- as you highlighted, Tayfun, your reserve levels are very high versus -- and they're especially high versus peers, so the 213 basis points.

It's not only high versus other regionals, but I think even more striking is just within product category, C&I at 168 basis points, way above -- I think anybody who live -- on reserve ratios on resi and home equity despite seeming the high-risk -- high-quality portfolio, sorry.

So I know there's a lot -- and you talked about your estimates in your process and your assumptions.

But I guess, I just wanted your perspective a little bit on, to what extent your reserving as a function of taking maybe a more conservative stance than others within the confines of plausible scenarios? Or to what extent it actually reflects perhaps a riskier portfolio or at least a portfolio that might be more susceptible to a downturn in terms of the impact on lifetime losses?.

Thanks, Saul. Good question. Obviously, it is a broad question. And the difficulty here is the environment has changed so quickly it is difficult to compare one bank's ratios and coverage to another.

But having said that, what we gave you on Page 12 of the slide presentation, is a similar set of coverage numbers for stress test runs that other banks have. And clearly, our coverage levels are exceeding those losses that we have predicted through our models compared to other banks.

What we have done is we have incorporated the -- as the environment continued to deteriorate in March into the end of the quarter, and basically reflected a fairly drastic change in the economic environment, not only in the second or third quarter, but try to project a weaker recovery into the second year and third year because we are looking at a 3-year R&S period here.

And I gave you some statistics around our assumptions. In our minds, the current fiscal and monetary policies are likely to cushion the second and third quarter impacts but are not going to be necessarily providing a significant support to the latter years.

So our reserve levels, as conservative as they are at 2.35%, do reflect a slowly recovering economy rather than a V-shaped recovery. Underlying those numbers is also the quality of the portfolio that we have. We shared with you statistics on our consumer and mortgage portfolios, and we are also sharing some details on the commercial.

The commercial book -- I think Jamie and Richard can comment on the commercial book, but the portions of the commercials that are exposed to COVID-19 also tend to be the book that has more large corporate exposures, more heavy sick exposures.

So all of those combined, hard to compare our numbers to another, but we do believe that we've appropriately accounted for a weak outlook, slow recovery and the quality of the portfolio that we have in place. Jamie or Richard, I don't know if you guys want to add more..

Yes, Saul, so as I stepped into this chair and started looking at the portfolio, the 1 thing that stands out to me is just how intentional we have been about where we do business with the clients that we select, that should be resilient in times of stress.

And frankly, the focus for us has been on companies with larger scale that should be able to persevere in this environment. And so our loan book, I would tell you, is comprised of high-quality liquid resilient names, and the best data we could use to prove that point is the shared national credit information that we included on the page.

And as you can see, it's a very high percentage of 75%..

No, [indiscernible] suggests that this is like -- obviously, we continue to evaluate the data as it comes. We continue to evaluate these new programs. And we -- at the end of this quarter, we'll do that evaluation again just like every other bank will do. And then we'll share you with you the results of our analysis..

And I know this gets into the weeds but some elements of your modeling, 3-year reasonable supportable and why not maybe on the more conservative side than in some other peers. But 1 follow-up question. You did have the second consecutive quarter where you had a pretty elevated amount of nonperforming loan formation in your commercial book.

If you can talk to that, and was any of that related to sort of piece of accounting noise with PCI moving to PCD and then getting reclassified into nonaccrual? Or was there actually something underlying that as suggesting some worsening credit trend in some parts of your book?.

Yes. So on the first part of the question, there is very little impact on the PCI to PCD transition. So the NPA inflows that you see in the deck of about $175 million was driven by several factors. One -- about 1/3 of the inflow was a single real estate mall exposure.

About 1/4 of the NPA formation is actually in smaller businesses, business banking, lower middle market. And then the remainder, when you look at what drove it, it's really spread across industries and geographies, but the 1 common thread is that they're all predominantly in the service industry.

So professional, medical, education, financial advisory. So pretty widespread there..

Your next question comes from the line of Matt O'Connor from Deutsche Bank..

I was wondering if you could comment at all in terms of the PPP loans going to, I guess, those small businesses that need them the most.

I mean, obviously, this is kind of a broader question than just Fifth Third, but it seems like a little bit of a free for all, and there's just been some articles out there about maybe some bigger companies getting the loans and not really kind of criteria for deciding who gets it and just wondering if you could comment on that, on your thoughts..

Yes, Matt, this is Greg. As I mentioned, we processed about 10,000 loans for our customers to the tune about $3.5 billion. The average loan size is about $350,000, $370,000.

So that -- for our portfolio, I think it was pretty broad-based, but we did a good job, I think, at servicing both the LMI community businesses, small businesses in general, very few of our loans were up for that $9 million to $10 million range.

So for our portfolio, I think we did a pretty good job of opportunities much through the system as we could in the short time that we had available -- the system was available to us. Hopefully, that gets refunded tomorrow at the latest. We've got more resources there because we definitely have a larger pent-up demand for the PPP program.

But overall, with respect to Fifth Third, I think we did a nice job on -- the size of our loans indicate that we served a large portion of the smaller businesses that are out there versus the larger business. I've read the headlines. I've seen some of the challenges that other banks are faced with as far as prioritizing loans. We did not do that.

We worked as hard as we could to get many loans through the system. A lot of that depends on the complexity of the request itself and the ownership structure of companies, kind of dictated how much we can get through at what pace if your loan got through or not.

But once again, we've already input a significant additional number of applications, hopeful that the window will open here shortly, and we'll get those through..

And any sense on, call it, what the pipeline is for when there's additional funding?.

Yes. Well, obviously, I think most bankers would agree, and most people would agree that the additional $300 billion is not going to be adequate to serve the total demand that's out there right now. We expect that $300 billion to $350 billion to be absorbed pretty quickly, even faster than the last 350 were absorbed.

So we think it's going to be very fast, and we don't think it's going to be adequate. We think the demand is going to continue to outpace the available funds..

Your next question comes from the line of Erika Najarian from Bank of America..

So just to piggyback off of Saul's question. You took a significant reserve build and still earned $0.04, with the stock at $16.75 and tangible book value per share of $22, so clearly, the market is fearful of tangible book erosion.

And I guess my question here is, in the realistic scenarios for economic stress that you see, and it seems like your band of expectations are reasonable, do you see yourself continuing to earn positive earnings during the duration of this downturn?.

Good question. I will not comment on this [indiscernible] Look, I mean, I think our -- away from reserve builds and loss expectations, I think the underlying PPNR activity is going to continue to look good. We intend to manage our expenses at an appropriate level relative to the environment.

We have a strong protection against a lower rate environment, and we have diversified revenue streams. So the company has strong ability to generate capital on earnings in this environment. As I mentioned earlier, it is a little difficult to predict exactly what will happen to the provision and the charge-offs.

But clearly, our intent is to continue to outpace the impact of the credit here. And this is one of those environments where, unfortunately, looking longer than beyond 1 or 2 quarters is extremely difficult. So we will give you a better update as we get a better read on the environment.

But obviously, we believe strongly in our ability to manage this company at profitable levels..

And just my follow-up question is, you noted that there would be a total impact of 4 to 5 basis points on the net interest margin. If we consider each 25 basis point of decline in the short end plus what's happened to the long end.

And I'm wondering, does that include the PPP impact? And does that include the reduction in deposit cost that you anticipate? And how do you plan to fund the PPP loans that are coming on balance sheet?.

Yes. So we did not give any NIM guidance this quarter, and that was on purpose. I think the general dynamics around NIM and the impact of lower short-term rates and a flatter curve at lower rates is pretty set for us. As I mentioned, it's 4 to 5 basis points per move.

The reason why we chose not to give guidance this quarter is because there are 3 -- I view the second quarter as a transitionary quarter. There are 3 main impacts. One of them is the very high levels of liquidity that we are carrying on our books. I mentioned that March carried a significantly more liquidity on our balance sheet.

Here in early April, we're carrying even more because some of the government programs are starting to throw cash. The second 1 is PPP, as you mentioned. And the third 1 is the LIBOR/Fed fund spread. We expect LIBOR/Fed fund spread to tighten throughout the quarter from the current levels.

And what we also believe is the high level of liquidity that we're carrying in our balance sheet is going to give us a better ability to manage the deposit rates down during the quarter. So all those together, the second quarter is going to be 1 of those quarters that's going to be very busy.

But beyond the second quarter, that relationship between rate moves and the curve shape and our NIM impact holds pretty tightly. 4 to 5 basis points is a pretty good number that you can use..

Your next question comes from the line of John Pancari from Evercore ISI..

For the detail on Slide 12, I think it's very helpful. And I acknowledge that similar to the prior comments that your reserves are booked to a level that's higher than peers. Can you discuss your confidence in your reserve relative to the DFAST numbers that you cited? I guess there approximating around 50% of DFAST, severe.

Given that you are factoring in a U shape essentially versus a V, why wouldn't you think that those numbers should be higher? Not that I've got a problem with it or anything.

I'm just saying if it is factoring in a U, should that warrant possibly a level that's higher than about 50% of the severe DFAST?.

In order to achieve a better level of precision, we need to know more about this environment. This -- we are giving you these reference points as a comparison. I think the scenarios that underlie the DFAST are known, and they are quite severe. But no stress scenario is like the other one.

And this one, in particular, is going to be very different in the sense that these support programs are yet to be evaluated with respect to how they impact the recovery path and where we are going to end up. That's a big difference because in most classic stress tests, usually the economy comes back at 1 point to where it starts.

What we don't know today is where this economy is going to end up and the recovery period flattens out to a -- So I'm very hesitant to answer your question because we just don't know enough about the nature of this downturn. But at least showing you the DFAST results gives you the ability to compare us with others.

And then as this economy develops, then we have the ability to reshape our expectations..

No. Great. Okay. And then the -- another question on the reserve.

Do you have the allocation of the reserve to the high-impact areas that you flagged?.

So we did not provide that, John. So relative to the 2.1%, one would assume it's north of that number, but we did not disclose that percentage..

Okay. All right. That's fine. And then 1 last question, if I could. Just on the loan modifications.

How much of your loan modifications have been done on the commercial side of the portfolio? And do you have any industry concentrations really where you're starting to see those deferrals?.

Yes. So within the commercial segment, we've actually had a fairly limited number of requests in the commercial side to the consumer side. We've only had about 400 or so, and it's predominantly covenant waivers for terms in 2020, and that's roughly $2 billion of outstandings, and that's led by car dealers, hotels and restaurants.

When it comes to restructured or modified actual dollars, that's very small to date, with only $200 million in loan balances. And probably the 1 sector with the most activity would be restaurants. You see that on Slide 9, our $1.9 billion in outstandings.

The good news is we're favorably weighted with only 35% is in dining and 65% fast food quick service. So about 80% of the book continues to remain open. Those that are closed are predominantly in the in-dining category. So overall, some activity here in the modifications, but it's still a little early.

We'll see how it plays out over the course of the year..

Your next question comes from the line of Gerard Cassidy from RBC..

You gave us very good detail on a number of your different risks that you have on the portfolios today. And in the opening comments, Greg, you mentioned that I think about 96,000 fee waivers have been executed, also deferrals on loans up to $1.5 billion. That, I think, represents just under 5% of the consumer loan portfolio.

Do you guys have any expectations of where those deferrals may peak out at as a percentage of your portfolio?.

Yes. Let me start and I'll throw it over to Jamie here. First off, it's 96,000 [indiscernible] requests, not fee waivers.

So it's 96,000 requests in total, which a lot of that included, obviously, both forbearances and deferrals in our loan book also, but the fee waiver is actually much smaller now because -- Jamie, number is at 400? Give me that number.

Waivers?.

About $0.5 million in fee waivers..

Yes..

And so Gerard, in terms of the hardship relief to date by product, and this is through the end of last week, so a little bit updated for April activity. What we're seeing is a lot of the fixed rate or fixed payment products have the higher request levels. So autos at 5%. Mortgages in our owned portfolio are at 4% of the portfolio.

And then as you see the minimum monthly payments lower in home equity and credit card, they're at 2% and 3%. So as we model, obviously, we expect this to rise as unemployment rises, but the ultimate amount of hardship relief that we give will ultimately depend on where unemployment picks out.

And for us, right now on most products, we're offering 90-day loan payment deferrals. And then in mortgage, we offer the 6-month forbearance. So we'll continue to update you as the quarter transpires..

And then obviously, the focus this quarter for you and others has always been on credit quality, the provisions.

Equally as important, Tayfun, as you pointed out, is PPNR, can you share with us your outlook for PPNR from the standpoint that, obviously, the second quarter end-of-period first quarter loans from the industry was extremely high due to the drawdowns and revenues, obviously, will benefit from that in the second quarter.

But as we get into the third and fourth quarters and the unemployment rate goes up, underwriting standards tighten, should we anticipate that PPNR revenues start to shrink for you guys just because of the environment we're in?.

I think, Gerard, here's my take on the year.

I do believe that, assuming these drawdowns will stay with us for a while, the higher loan balances will provide a decent amount of support against the lower rate environment, and assuming that we manage the deposit rates down and our liquidity positions optimally, the year, despite the fact that it is a -- the worst-case scenario beyond just negative interest rates for banks, the balance sheet should support a decent healthy level of NII.

In terms of the sequence of quarters from second into third into fourth, I think we will probably see a changing fee picture here because clearly, the economy stopped, and that will have a near-term negative impact on fees in the second quarter from spend levels to asset management based on equity levels and to some capital markets activity.

Our expectation is, assuming that things start somehow normalizing either into the second half of the second quarter or the third quarter, we should see a little healthier fee picture in the second half of the year. And then the expense side of it, we clearly are going to benefit from lower expenses that are tied to activity.

And then we will start making some decisions on our end based on this environment. So in general, you are going -- the second quarter definitely is going to be a transition quarter. But I do believe that as we look into the third and fourth quarter, we are going to start seeing some normalizing PPNR activity -- PPNR levels..

Your next question comes from the line of Vivek Juneja from JPMorgan..

Couple of questions.

Firstly, on your oil and gas exposure, can you talk a little bit about where you are in your reserve-based redetermination and what that could mean for the loans?.

Yes, it's Richard. We're about 1/3 of the way through the redeterminations. And at this point, we've seen about a 16% drop in oil-based borrowing basis and about a 12% drop-through those that are gas-based producers..

Okay.

And then I think, you said you've got a breakeven, Tayfun, you said of $18 production price?.

Yes. What Tayfun was describing was we went through the portfolio and looked at the average breakeven lifting cost for our portfolio. So think about what it takes to get it out of the ground, and what it costs and what it would take to service interest for that portfolio. That's about $18 when you benchmark it to NYMEX.

What Tayfun didn't give you, and I think this is important for the portfolio, we also say on Slide 10, the portfolio is 80% hedged for 2020. Those hedges give our producers about $14.5 of benefit, net benefit. So if you think about -- you had the hedges to it, it's $4 or $5 breakeven..

Okay. And those hedges, it sounds like a lot of them mature by the end of 2020..

What we've described on Slide 10 is the percentage of production that is hedged is 80% in '20, and then it rolls down to 30% in '21..

Okay, okay.

And then what happens to those loans as those hedges roll off? Do you get to be done and the borrower has to figure out how to handle the funding? Or how does it work? Can you walk us through that?.

For those under reserve-based structure, the borrowing base is redetermined every 6 months. So there will be a fall redetermination that will be based on current production, current reserves and the outlook from prices at that time. So the borrowing base and the loan amount that we're willing to lend gets reset every 6 months.

So to the extent prices improve, that will change the borrowing base. To the extent they don't, the borrowing base would come down..

Okay. Great.

And, Jamie, any color on the casino exposure of $2 billion?.

The casino exposure on Slide 9, the top part of the page of Slide 9 refers to lending to the operating companies within the casino and then the CRE portion would be, obviously, building the hotel and going along with it. We -- really, the names are large companies, high-quality, resilient. So again, we feel like we're well positioned.

And while there may be losses in this portfolio, we feel like the lost content is very manageable..

It's Richard again. The only thing I'd add is, in addition to high-quality names, we're diversified by operator types, so global operators. Some native American and some regional.

And in each case, high quality operators, usually where they -- to the extent they are regional, they have got a great franchise area that is either given to them by regulation or demographics that give them a ton of resiliency and less competition..

Your next question comes from the line of Scott Siefers from Piper Sandler..

I guess, first of all, I just want to echo some of the prior comments, really good detail and appreciate the disclosure. And I think at this point, just 1 small question, sort of a follow-up on the deferrals. I guess I'm just curious on the commercial side.

And even though it's early, I was hoping you might be able to give a little insight as to how you would expect sort of the, I guess, the re-due diligence process to go as we come up on the end of the deferral time period and how will that go? Sort of willingness to defer again? Or how does that entire process work through?.

Yes.

So on the mortgage, are you talking on the consumer side, Scott?.

No. Actually, even though it's relatively small, I'm actually more curious about the commercial side..

Yes. So the commercial side will just continue on a case-by-case basis with each client. The covenant relief period expire. As we're executing on these covenant waivers, we have been adding some additional liquidity capital retention requirements as well. So we feel like the process has been productive. It's been a good dialogue with clients.

And so that will just continue over the course of the year..

Okay. Perfect.

And then at what point do you sort of -- I mean, I guess it's all case by case, but at what point do you sort of make the decision as to, okay, we could continue to sort of forbear on this or maybe it needs to be a downgraded charge-off, et cetera?.

Yes. Hey, it's Richard. So we review the portfolio actively and for the names that are going to be more impacted at least quarterly. But there is active management, active dialogue. And so as new information comes in, we adjust our internal risk ratings.

And then as we have financial reporting, that would be the other driver that would change our view on our risk. To the extent that borrowers continue to perform in line with expectations, we would expect to continue the deferrals and the forbearance that we've agreed to..

There are no question at this time. You may now continue, Chris..

Thank you, Kyle, and thank you all for your interest in Fifth Third. If you have any follow-up questions, please contact the Investor Relations department, and we'll be happy to assist you..

That concludes today's conference call. You may now disconnect. Thank you for your participation..