The operator welcomes everyone to the Citizens Financial Group Third Quarter 2023 Earnings Conference Call, and introduces the speakers. Chairman and CEO Bruce Van Saun, CFO John Woods, Head of Consumer Banking Brendan Coughlin, and Head of Commercial Banking Don McCree will provide an overview of the third quarter results. The speakers will reference the third quarter earnings presentation, which can be found on the Investor Relations website. The speakers will also discuss forward-looking statements and non-GAAP financial measures. Bruce Van Saun highlights the company's focus on maintaining a strong balance sheet, with a CET1 ratio of 10.4% and a spot loan-to-deposit ratio of 84% at quarter end.

In the second paragraph, the company discusses their focus on increasing liquidity and building their ACL reserve. They also mention their successful execution of strategic initiatives, such as the launch of their Private Bank and their efforts in New York City. However, their underlying EPS for the quarter was slightly lower due to market volatility and delayed capital markets deals. The company includes a slide in their presentation that breaks down the performance of their core business, Private Bank, and Non-Core division. They expect the Private Bank to become profitable by mid-2024 and Non-Core to decrease significantly in the coming quarters, which will help improve overall results.

The company has initiated a review of expenses to keep them flat in 2024 due to macro uncertainty and revenue pressure. They expect key trends to stabilize in Q4, with a decline in NII, a bounce back in fees, stable expenses and credit costs, and buying back some stock. The year has been challenging, but the company is working hard and taking actions to position themselves well in the medium term. In the third quarter, they generated underlying net income of $448 million and EPS of $0.89. The Private Bank start-up investment and the Non-Core portfolio had a negative impact on results, but the legacy core bank had a solid underwriting ROTCE of 15.3%. The Private Bank investment will become increasingly accretive in the future, while the Non-Core portfolio will run off quickly.

In the third quarter, the company's total net interest income decreased by 4% and their margin decreased by 14 basis points, in line with expectations. The company's deposits increased slightly and they continued to optimize their balance sheet by increasing their cash and securities. The Non-Core portfolio also decreased. The company's credit metrics remained solid and they recorded a provision for credit losses and a reserve build. They also repurchased $250 million of common shares and had a strong CET1 ratio. However, their tangible book value per share decreased due to AOCI impacts. The decrease in net interest income was primarily due to deposit repricing and other factors such as noninterest-bearing deposit migration and the impact of the liquidity build.

Despite challenges from market volatility and higher long rates, the company's positive interest-bearing deposit beta and strong deposit franchise helped mitigate the impact on fees. Fees were down 3% due to lower capital markets and card fees, but mortgage banking fees increased. Expenses were kept stable, excluding a private bank start-up investment. Average and period end loans were down due to Non-Core portfolio runoff, partially offset by growth in mortgage and home equity.

In the sixth paragraph of the article, the speaker discusses the decrease in average core loans by 1%, primarily due to lower loan demand in the commercial sector and a selective approach to new lending. However, period-end core loans remain stable. The speaker also mentions a slight decrease in commercial line utilization as clients deleverage in the current economic environment. On slides 11 and 12, the speaker highlights the growth in period-end deposits, led by commercial and consumer deposits, and the efficient management of these deposits in a rising interest rate environment. The credit section on slide 13 reports stable net charge-offs and a slight increase in non-accrual loans, driven by an increase in General Office. Finally, slide 14 discusses the allowance for credit losses.

The overall coverage ratio for the company has increased to 1.55%, with a reserve build of $19 million and a rundown of the Non-Core portfolio. The General Office reserve coverage has increased to 9.5% and is based on a very adverse scenario, with a peak to trough decline of 68% in office values, an 18-20% default rate, and a loss severity of 50%. This coverage is considered strong and the company's experienced CRE team is actively managing the portfolio to minimize losses. The company's CET1 ratio has increased to 10.4% and $450 million has been returned to shareholders through dividends and share repurchases.

The bank plans to maintain strong capital and liquidity levels to prepare for potential regulatory changes. They are pursuing various business initiatives, such as expanding their sponsor relationships and investing in their Treasury Solutions and consumer banking, to drive growth and improve performance over the medium term. They are also experiencing success in their expansion into the New York Metro area and the build-out of their Private Bank.

The bank's new team of bankers has already brought in $500 million in deposits and investments and plans to open Private Banking centers in key markets. The bank's balance sheet optimization program is progressing well and is expected to reduce the Non-Core portfolio by $7.6 billion by 2025. The cash paydowns will be used to build core bank liquidity and support relationship-based loan growth. The capital recaptured from the reduction in Non-Core RWA will be used to support the growth of the Private Bank. The TOP program is also on track to deliver a $115 million pretax benefit by year-end and the bank is looking for further efficiency opportunities through automation and AI.

The company is facing pressure on revenue due to the current rate environment and is targeting to keep expenses flat in 2024. They have a multiyear plan to migrate to a next-gen tech cloud and are committed to achieving carbon neutrality by 2035. For the fourth quarter, they expect a decrease in net interest income, an increase in noninterest income, stable noninterest expense, and an increase in net charge-offs. They are confident in their reserve coverage and will continue to benefit from loan runoff.

John discusses the expected increase in the company's Common Equity Tier 1 and the potential for share repurchases. He also mentions the target for flat underlying expenses in 2024, including the Private Bank and excluding the anticipated FDIC special assessment. The company has included a slide in the appendix on the impact of swaps through 2027, with higher swap expenses expected in 2024 but a decrease in 2025-2027 as swaps run off and the Fed normalizes short rates. Overall, the company delivered solid results in a dynamic environment and is well-positioned with a strong capital, liquidity, and funding position. This will help them navigate through potential regulatory requirements and take advantage of opportunities in their strategic priorities. The call is then opened up for Q&A, with the first question addressing uncertainty around the company's NII trajectory for 2024 in a higher for longer interest rate environment.

The investors are trying to understand the impact of the increase in notional swaps and balance sheet optimization on the bank's net interest income (NII). The bank expects a mid-single-digit headwind on NII due to deposit migration and a slight impact from building liquidity. However, the bank is confident in its ability to maintain a 3% net interest margin and exit 4Q '24 with a 3% NIM.

The speaker explains that there could be some fluctuations in the interest rate in the fourth quarter, but they expect things to play out as expected. They mention the swap portfolio increasing in the second half of 2024, potentially leading to cuts from the Fed. However, they also highlight mitigants such as the Non-Core portfolio, contributions from the Private Bank, and balance sheet optimization efforts. They believe that the NIM could potentially reach 3% by the end of 2024, but this could be affected by the Fed's actions.

In the fourth quarter, the net interest margin is expected to be around 3% excluding the impact of liquidity builds. This will be driven by various factors such as Non-Core, Private Bank, asset front book, back book, and BSO. However, the rate cuts in the second half of 2024 may act as mitigants. The company will provide more clarity in January. An analyst asks for clarification on the fourth quarter margin.

The speaker is discussing the expected margin for the company, which is expected to be lower than 3% due to liquidity build. They anticipate loan growth in the second half of 2024, but until then, the Non-Core loan runoff will continue to drive declines in the loan portfolio. There have been pre-announcements of charge-offs in the shared national credit space.

Don McCree and John Woods discuss the bank's exposure to shared national credits and how they fared in the recent exam. McCree mentions that they had more upgrades than downgrades and did not have any forced charge-offs. The bank has been reducing their participations as part of their BSO exercise and treats these types of deals the same as any other credit extension. Brendan Coughlin adds that they are looking at the total relationship returns and will extricate themselves from any credit participation that does not provide the expected cross-sell opportunities.

In the last quarter, the bank had $900 million in new loans and $1.6 billion in BSO activity. The competition is also focusing on full relationship credits rather than speculative opportunities. The bank's deposit beta is in line with industry standards and they have seen a decelerating migration out of noninterest-bearing deposits. This trend is expected to continue as the Fed remains on hold.

Brendan Coughlin discusses the bank's low-cost deposit book, which has been supported by pandemic stimulus. The bank has analytics and benchmarking to track its performance, and it is currently #2 in DDA consumer migration. The bank's growth and beta on the consumer side are better than peers, indicating the quality of its franchise and customer base. The bank expects the pay down of low-cost deposits to slow, but it will continue to outperform peers and maintain stability in its low-cost book.

The bank's low-cost deposit growth is expected to continue due to stability in individual customer liquidity and strong performance in household acquisition. The bank is also controlling expenses, with the outlook for next year being flat, including the costs of the Private Bank build-out. The build-out expenses for this quarter were $35 million.

John Woods and Brendan Coughlin discuss the expected trend of costs going forward, with a projected 5% contribution to EPS. There will be modest upticks in the low 40s in Q4 due to hiring and securing Private Banking offices. The structure of the comp will not result in incremental costs as revenues come in. The TOP program has been successful and costs are expected to hold flat, implying a turnaround by the end of the year.

Bruce and John are discussing the company's plans for cost savings in the upcoming year. They mention that the TOP program has been a consistent contributor to positive operating leverage, but in order to achieve flat results, they will need to go beyond that. This may involve looking at employment levels, business activities, and leveraging technology like AI. They also plan to carefully evaluate expenses and prioritize investments in areas that will drive growth.

The speaker, John Woods, agrees with Bruce's assessment of the company's performance and mentions the importance of focusing on organizational matters and third-party spending. He also mentions the need to protect initiatives that will drive long-term success. The next question from an analyst is about the competition for consumer deposits and how it may affect the company's performance. Brendan Coughlin responds by saying that there is heavy competition for deposits and they are managing it well with a strong foundation of low-cost, engaged customers. They also have additional tools, such as Citizens Access, to help manage competitive intensity and maintain strong relationships with customers.

The speaker discusses the effectiveness of their strategy in raising money and managing interest-bearing costs. They also mention their relationship-based approach to competing for deposits and their expectation for continued competition in the first half of the year. They add that the rate environment is expected to become more favorable in the future.

Bruce Van Saun mentions that as they enter 2024, there will be a net loan shrink, but they are not pressured to grow deposits and can still improve their loan-to-deposit ratio. Manan Gosalia asks about LCR requirements and John Woods explains that regulatory requirements are causing banks to become more asset sensitive, and their Non-Core portfolio running off also has a tailwind to asset sensitivity. They are currently around neutral.

The speaker discusses the factors that may affect the net interest income trajectory for the upcoming year, including asset sensitivity and liquidity build. They also mention that they will provide more information on their expectations for 2024 in January and that the swap portfolio and Non-Core rundown may help mitigate any potential declines in net interest income.

The speaker mentions that the timeframes of 2025 to 2027 will likely see a more neutral Fed posture, resulting in a significant tailwind for net interest margin and NII. They also mention a locked-in tailwind from terminated swaps during this time period. The speaker calls 2024 a transition year as the Fed normalizes rates and the balance sheet optimization takes hold. There is reluctance to commit to a 3% exit rate due to uncertainty around new liquidity regulations, but the ambition is still to reach this rate by the end of 2024. The impact of rate cuts versus a higher for longer scenario is not specifically mentioned.

The speaker is discussing how the company's position is relatively neutral when it comes to changes in interest rates. They calculate their position using gradual increases of 100 and 200 basis points and generally make money in those environments. The speaker also mentions that the forward curve is favorable to them and they prefer a steeper yield curve. However, they are still okay with small moves either way. They believe that having cuts at a slow pace is better in the long term and prefer short rates to be around 3.00 to 3.50 over the long term.

The speaker believes that it would be beneficial for the industry to have a gradual decline in rates over the next two years, which would allow for an upward sloping yield curve. They also mention that expenses will be flat next year, including Private Bank and Non-Core expenses. In terms of rates, the speaker clarifies that a small increase or decrease in rates would both be positive for the company's net interest income.

The speaker discusses the potential impact of small changes in interest rates on net interest income (NII) and the bank's positioning. They mention that a small increase in rates would be a positive and a small cut would have a small negative impact. They also clarify that this is for the immediate future, but they are optimistic about a gradual decline in rates over time. They expect expenses to remain stable in the next year, but there may be a variable element tied to capital markets revenues.

The speaker is discussing the budget process and how they plan to keep expenses flat for the next year. They also mention taking into account the current state of the capital markets and finding ways to offset any additional payouts. The call is then turned over to Mr. Van Saun for closing remarks.

This summary was generated with AI and may contain some inaccuracies.