The second half the year will be "very challenging" for US banks when it comes to liquidity, according to Fifth Third Bancorp CFO James Leonard.

The national debt limit increase, quantitative tightening, the likely resumption of student loan payments and rising deposit competition will lead to a tough road ahead, Leonard said June 14 during an industry conference.

"Our view, and [it] may not be the popular one, is that the back half of 2023 is going to be a very challenging six months from a liquidity perspective," the CFO said. Fifth Third is preparing for a tough environment by "positioning the balance sheet very defensively."

"We're sitting on $9 billion, $10 billion of excess cash every day because we believe the next six months will be a very difficult liquidity environment," Leonard said.

As liquidity pressures intensify, banks that have run their businesses defensively will fare better than banks that started the year expecting to a lot of balance sheet growth, President and CEO Timothy Spence said during the presentation. Even so, Spence cautioned against discounting the industry's ability to adjust.

"We tend to overestimate the degree to which change is permanent when there's a new issue that materializes in the industry and then underestimate our ability as a sector to restructure," Spence said.

The bank is feeling some pressure and reduced its net interest income guidance to 3% to 5% growth on a full-year basis, down from the previous guidance of 7% to 10% growth. The change in guidance is due to faster-than-expected migration to interest-bearing accounts from demand deposit accounts (DDAs), an outlook for a full-year deposit beta in the low 50s, and softer loan demand, Leonard said. Among those factors, the erosion of DDAs as a percentage of total deposits was the largest factor in the changed NII guidance, Leonard added.

Nonetheless, Fifth Third executives "feel good" about the company's ability to counteract that erosion and defend its deposit book in the long term, Leonard said, adding that erosion of DDAs stopped this month.