The operator introduces the Citizens Financial Group Fourth Quarter and Full Year 2023 Earnings Conference Call and hands it over to Kristin Silberberg, Executive Vice President of Investor Relations. The CEO, CFO, and heads of Consumer Banking and Commercial Banking will provide an overview of the company's fourth quarter and full year results. The presentation, which can be found on the investor relations website, will include forward-looking statements and non-GAAP financial measures. CEO Bruce Van Saun thanks everyone for joining the call and mentions that 2023 was an exceptional year.

The bank faced a dynamic environment with the Fed's efforts to control inflation, bank failures, and regulatory proposals. They focused on strong defense, with a strong balance sheet and risk management. On offense, they pursued initiatives such as building the private bank and expanding in New York City. Despite some financial pressure, they achieved a 13.5% underlying return on tangible common equity and returned capital to shareholders. In the fourth quarter, they saw smaller declines in net interest income compared to the previous quarter.

The company saw a slight increase in fees and is optimistic about the market's tone in 2024. They have taken cost actions and are reducing expenses while protecting their critical initiatives. Credit quality is strong, with a decrease in criticized loans. They did not buy back stock in Q4 but plan to in Q1 and through 2024. NII is expected to decline and then increase, with anticipated benefits from swap and noncore runoff. Fee growth is expected, led by capital markets. Net charge offs will rise modestly, but there may be ACL releases. The company's priorities for 2024 include technology and digital initiatives. They feel well positioned for outperformance and thank their colleagues for their efforts in 2023.

In the fourth quarter of 2023, the company demonstrated strong financial performance and resilience in a turbulent environment. They had a solid balance sheet and strong liquidity, allowing them to execute their strategic initiatives and invest in the private bank. The underlying net income for the quarter was $426 million and EPS was $0.85. The quarter was impacted by notable items such as the FDIC special assessment and severance expenses. The private bank is currently dilutive to results but is expected to become accretive in the future. It has already raised $1.2 billion in deposits, with a significant portion being non-interest bearing.

The non-core portfolio is currently negatively impacting the company's results but is expected to decrease in the future. The company ended the year with a strong balance sheet and increased liquidity. Net interest income decreased by 2% due to a lower net interest margin, offset by an increase in average interest earning assets. The decline in NIM was primarily due to higher funding costs and swaps, while the impact of the company's liquidity build was neutral. The company expects the trend of deposit migration to continue to slow until the Fed cuts rates.

The bank's deposit franchise has performed well, with their beta in line with their peers. Fees were up 2% due to improved capital markets and a record performance from the wealth sector. However, mortgage banking fees were lower due to high mortgage rates. Expenses were down slightly, but there were notable items that impacted the overall expense. Average and period end loans were down 2% and 3% respectively compared to the previous quarter.

The decrease in loans was due to non-core portfolio runoff and a decline in commercial loans, but was partly offset by growth in mortgage and home equity loans. The decline in commercial loans was due to lower demand and a selective approach to lending in the current market. Deposits remained stable, with an increase in consumer deposits and a decrease in commercial deposits due to efforts to optimize liquidity. Interest-bearing deposit costs increased, but the deposit franchise is diversified and efficiently managed. Net charge-offs increased slightly from the previous quarter.

The company is pleased with stable commercial charge offs and a decline in criticized loans. The allowance for credit losses increased due to lower portfolio balances, and the company has already taken a significant amount of charge offs. The company's balance sheet remains strong with high CET1 and TCE ratios, and they have consistently outperformed their peers. Shareholders received $198 million in dividends in the fourth quarter, and share repurchases are expected to resume in the first quarter.

The bank plans to maintain strong capital and liquidity levels to prepare for potential regulatory changes. They have seen success in their private bank initiative, with $1.2 billion in deposits raised. The bank is also expanding in key markets and focusing on expense discipline to reinvest in their businesses. Their TOP 8 program has achieved a pretax run rate benefit of $115 million.

Citizens Financial Group has launched a new program called TOP 9 with the goal of achieving $135 million in pretax benefits by the end of 2024. This program focuses on efficiency through automation and the use of AI, as well as simplifying the organization and reducing expenses. The company has already made progress by exiting the auto and wholesale mortgage businesses and reducing headcount. They are also targeting a limited expense growth of 1% to 1.5% in 2024, offset by investments in the private bank. The company is also working on optimizing their balance sheet through their non-core strategy and relationship-based lending. The non-core portfolio is expected to decline by $6.4 billion by the end of 2025.

The company plans to use remaining cash paydowns to reduce wholesale funding and support organic loan growth. They will also reallocate capital to support growth in retail and commercial lending through the private bank. They are focusing on higher return relationships in the commercial portfolio and managing their deposit book, wholesale funding, securities portfolio, and capital base. The company expects a decline in NII and average loans, but predicts spot loan growth in the second half of the year. They also anticipate controlled deposit costs and a decrease in rates starting in May.

The company expects their net interest margin to reach its lowest point in the middle of the year and to average around 2.8% to 2.85% for the full year. They anticipate a decrease in swap expenses in 2024, but a subsequent increase in non-interest income, led by a rebound in capital markets. Expenses are expected to increase slightly, while NCOs are expected to average around 50 basis points. The company plans to resume share repurchases in the first quarter and maintain a strong CET1 ratio of 10.5% by the end of the year.

The company expects to see positive operating leverage in the second half of the year and aims to achieve a 16% to 18% ROTCE in the medium term. They anticipate strong returns from their core business, fees, and private bank, as well as a boost from the runoff of their non-core portfolio. They will maintain a prudent risk appetite and focus on returning capital to shareholders. Their CET1 ratio is expected to remain within a target range of 10% to 10.5%. The first quarter may be impacted by seasonal factors. The company remains resilient and well-positioned to deliver attractive returns to shareholders in the future.

The company is focused on optimizing its balance sheet and allocating capital to drive deeper relationship business and improve performance in the medium term. They expect spot loan growth in the second half of 2024, driven by increased commercial activity and utilization, as well as opportunities in the private bank for both loans and deposits. The private bank has already seen strong deposit growth and expects loan growth to pick up in 2024.

The speaker discusses the strong deposit print for the private bank in Q4 and the expectation of lending to pick up in 2024 due to the interest rate environment. They mention that lending has been led by commercial lending, particularly in the private equity and venture space, and that they expect a more balanced loan book over time. They also plan to use partner loan programs to connect the corporate side with private banking. The commercial side saw some dampening of loan growth due to a mix of utilization and bond execution.

The increase in fee income for the bank is expected to be driven by a strong pipeline in capital markets and a pickup in M&A advisory, underwriting, and global markets. Wealth fees are also expected to continue to grow. The bank is particularly excited about the potential for increased activity in the private equity space in the back end of 2024.

In this paragraph, Brendan Coughlin discusses the progress and plans for the wealth management business at Citizen Bank. He mentions that 2024 will be an important year, as they are looking to attract new talent and connect their private banking and wealth management sides. They also plan to rebrand their platform to "Citizen private wealth management." Coughlin also mentions the recent exit of the wholesale mortgage business and the success of their acquisition of Franklin American. He notes that their MSR concentration is strong compared to peers and they are one of the only lenders in the wholesale mortgage market.

The speaker discusses the challenges faced by margins and the outlook for rates, which may not lead to a significant increase in refinance activity. As a result, the decision was made to move on from the wholesale mortgage business and focus on the retail mortgage business for relationship lending. Despite lower rates, the mortgage market is expected to remain relatively stable, with a potential uptick in originations in 2024. The servicing business may see some pressure, but the bank is confident in their current mortgage performance. They plan to continue allocating resources to deep relationship-based customers in both the private bank and core retail business. The speaker also mentions expense cuts made during the quarter, primarily in the private bank, and assures that they are not cutting too much in other areas.

The speaker discusses the diligence of the bank in managing staffing levels and seeking efficiencies. They mention a playbook for eliminating underperformers and redistributing work, but important areas like risk and audit were spared from reductions. The bank has a relatively modest reduction of 3.5% in total staff count and is in good shape for 2024. The deposit growth from the private bank is accretive to the low-cost profile and has a very attractive mix and overall cost.

The speaker discusses the breakdown of deposits and the credit and reserve fronts. They expect losses to peak in 2024 and anticipate continued growth in the CRE general office sector. They also mention working on restructurings and predict this process will continue through 2024 and potentially into 2025.

The speaker discusses the factors that will drive changes in the company's reserves, including a slow normalization in consumer activity and a positive outlook for C&I. They also mention the possibility of reducing reserves if there is a soft landing or shallow recession. The company has been consistently building reserves each quarter, but may start to draw them down as charge-offs stabilize. The speaker's colleague adds that the company has a conservative economic outlook and sees stability in the performance of their loan book.

The build of loans is a driver of ACL and the company is rotating away from risky loans and building a strong portfolio. They expect to resume buybacks in the first quarter of 2024 and will prioritize a strong dividend and putting capital to work for clients.

In this paragraph, Bruce Van Saun, the CEO of Citizens Financial Group, discusses the company's strong financial position and its plans for capital deployment. He mentions that when market conditions moderate, the company will give back to shareholders in the form of buybacks. He also states that he is happy to be buying the company's stock at current levels as he sees it as great value. When asked about future investments, Van Saun says the company is focused on backing its organic initiatives, such as the private bank and expanding its presence in the New York marketplace. He also mentions the potential for investing in businesses like payments as they go through changes, and continuing to make investments in fee-based capabilities, particularly in the commercial sector.

The company's M&A size and scale is good, allowing them to be selective in potential acquisitions. They have been successful in acquiring Clarfeld and are currently focused on bringing teams onto their platform to scale up their private wealth division. The company's franchise is in good shape and they have initiatives in place to outperform their peers. If needed, the company can flex their expenses down, but they are also focused on long-term growth and achieving their targeted return on equity.

The speaker, Ebrahim Poonawala, thanks the operator and asks a question about the bank's balance sheet. The operator then introduces Scott Siefers from Piper Sandler, who asks about the impact of potential interest rate cuts on the bank's net interest income (NII). John Woods, another speaker, responds that the bank is currently close to neutral in terms of its balance sheet and expects deposit migration to continue moderating. He also mentions that the first interest rate cut is expected in the second quarter and that a slight bias towards fewer cuts this year would be okay. Bruce Van Saun, another speaker, adds that a return to a normal yield curve would also benefit NII in the medium term.

John Woods and Bruce Van Saun of Citizens Financial Group discuss the impact of liquidity building efforts on net interest margins (NIM). They state that the liquidity build has been a headwind to NIM, but it is now complete and will not affect NII going forward. They also mention that the PPNR is expected to bottom in the second quarter, and NII may bottom at a similar time due to the impact of swaps.

The NII is expected to bottom out in the next quarter, but other factors like fee and loan growth will help offset any potential losses. In the long term, the NIM is expected to reach 3.25% to 3.40%, with the swap portfolio providing a significant boost. Deposit costs and beta will also play a role, with deposit migration stabilizing in mid-2024 and potential downward beta expected as interest rates continue to decrease.

The speaker discusses the company's outlook for 2024 and the dynamics of net interest income, mentioning a possible three handle for the underlying NIM in 2025. They also mention an exit rate of 2.85% in the fourth quarter of 2024 and crossing the 3% level on the way to 3.25%. The speaker acknowledges the company's success in transforming since going public.

John Woods and Bruce Van Saun discuss the medium-term outlook for ROTCE (return on tangible common equity) at a comprehensive company. They expect the fee percentage to increase from 25% to 30% as they focus on relationship opportunities with attractive deposit and fee-based opportunities. The ROTCE is expected to be north of 1%, with a return on tangible assets of 125 basis points. In terms of the private bank mix, they anticipate a 75%-25% fee percentage and potential upside over time due to the high percentage of low-cost deposits and the pricing of capital call lines.

The speaker discusses the performance of the bank's business lending and HELOCs and how it will contribute to a good return on equity. They also mention their targets for the end of 2025 and how their current financial profile aligns with those goals. The speaker then discusses the potential impact of the Basel III endgame on the bank, particularly in terms of RWA increases and potential effects on lending activities.

The flaws in the proposal for Basel III have been well-documented, particularly in regards to mortgage lending and credit card lines. The operational risk increases may have a bigger impact on larger banks, but even if the proposal had gone through as initially proposed, it would have only had a modest impact on the bank's RWA. The bank's strong capital position allows them to absorb any regulatory impacts and focus on playing offense rather than catching up.

The speaker, Bruce Van Saun, discusses the company's guidance on the median term for the total company, legacy, core, and ROTCE of 15% to 17%. He mentions significant share repurchases and states that the company's dividend payout and buyback ratio has been over 100% and under 100% in the past, but over a 10-year average it is about 75%. He also mentions that the company's priorities are dividend, supporting organic growth, and share repurchases. Another speaker, John Woods, adds that they had a 95% capital return with performance in 2023 and that over time, the capital return will be in the 75% to 100% range. The next question asks about the pressure on consumer deposit rates, to which the speaker responds that some peers have mentioned that commercial deposit rates will come down quickly, but there may be continued pressure on consumer deposit rates as consumers move towards higher rate accounts.

The speaker discusses the performance of the company's consumer deposit franchise, noting that they have outperformed their peers and are expecting this trend to continue. They also mention a slowdown in consumer behavior related to excess stimulus and anticipate this to continue as interest rates decrease. However, there have been no significant changes in competitive dynamics yet.

The speaker discusses the competitive advantage of Citizens Access as a platform for managing interest-bearing growth. They also mention the potential for a decrease in interest-bearing deposits on the consumer side and their plans to balance out their CD and liquid savings balances. In terms of credit, they feel good about their multifamily portfolio and expect low loss content.

The speakers discuss how the decrease in interest rates will benefit the company's cash flow and debt coverage ratio. They also note that the multifamily property market is different from the general office market and is still active, providing a positive impact on the company. They thank the participants for joining the call and end the discussion.

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