The operator introduces the Citizens Financial Group First Quarter Earnings Conference Call and turns it over to Kristin Silberberg, Executive Vice President of Investor Relations. The CEO, CFO, and heads of Consumer and Commercial Banking provide an overview of the first quarter results. They mention forward-looking statements and non-GAAP financial measures. Overall, the quarter was solid with strong defense and stable NIM, but a modest decline in NII and flat expenses.

Citizens has met expectations for credit trends and repurchased shares, and their guide for the second quarter and full year remains consistent. The Private Bank and New York City Metro initiatives are making good progress, and the commercial bank is well-positioned for deal activity. The TOP 9 program is allowing for self-funded growth investments and the bank is in a good position to navigate uncertainties. Over the past decade, Citizens has undergone a transformation and is now focused on building a premier private bank and wealth franchise. Their balance sheet and expense base have been managed well, and there is still more to do. Overall, it is an exciting time for Citizens.

John Woods, the speaker, begins by thanking Bruce for the introduction and addressing the positive start to the year. He mentions the solid first quarter results, improved macro environment, and stable margin and credit performance. Woods also highlights the company's strong balance sheet, capital levels, liquidity, and credit reserve position. He then discusses the first quarter financial results, including underlying net income and EPS, with a negative impact from the private bank and non-core portfolio. Notable items for the quarter were also mentioned, with an underlying ROCE of 10.6%. Woods emphasizes the importance of playing through defense and ends by mentioning the strong balance sheet position and improvements made to the funding and liquidity profile in the first quarter.

The company's pro forma LCR was strong at 120%, exceeding the requirement of 100%. The period-end LDR improved to 81% and FHLB borrowings were reduced. The company also increased its structural funding base through successful senior and auto collateralized issuances. Credit trends were in line with expectations, with NCOs at 50 basis points and an ACL coverage ratio of 1.61%. The company is well positioned for the medium term with expected tailwinds to NIM. The Private Bank is performing well and the company is poised to benefit from an improving capital markets environment. Net interest income decreased by 3% due to a stable margin and a decrease in average interest-earning assets.

The NIM walk on Slide 5 shows that our margin was flat due to higher asset yields and non-core runoff being offset by higher funding costs and the impact of swaps. Our cumulative interest-bearing deposit beta remains in the low 50s and the rate of deposit migration is slowing. Our fees were up 3% due to improved performance in capital markets and card results. Our Capital Markets business holds a top 3 position and achieved the #1 spot this quarter. Our deal pipelines are strong and we are seeing positive momentum in capital markets. In card, we had a nice increase due to a strategic conversion to Mastercard. Our expenses were stable and we will continue to execute our TOP program to self-fund growth initiatives. Period end and average loans were down 2% linked quarter.

In the sixth paragraph, the decline in commercial loans and non-core portfolio runoff were the main drivers of the decrease in loans. This was due to lower client demand and a selective approach to lending in the uncertain market. However, deposits saw growth, particularly in the retail and private bank sectors. The bank's deposit franchise is well-diversified and efficiently managed, with a majority of deposits being granular and secured. Credit performance saw a slight increase in net charge-offs and non-accrual loans, driven by commercial charge-offs and runoff of the auto portfolio.

The allowance for credit losses has increased by 2 basis points, reflecting stable reserves and lower loan balances. The reserve for the general office portfolio has also increased slightly. The bank has maintained a strong balance sheet with a CET1 ratio of 10.6%. They have resumed common share repurchases and returned a total of $497 million to shareholders in the first quarter. The bank has a strong consumer bank, with a focus on relationship-based lending and scaling their wealth business. They have seen a 20% increase in retail deposits year-on-year in the New York Metro area.

The speaker gives an update on the progress of their private bank, which is filling the void left by bank failures. They have seen growth in deposits, loans, and investments, and have opened a new office in Palm Beach. They also have a strong commercial bank that serves middle market, mid-corporate, and sponsor clients. They expect a decrease in NII but an increase in non-interest income, stable or slightly lower expenses, and a CET1 of 10.5% with planned share repurchases. They reaffirm their full year 2024 guide.

The company expects NII to decrease by 6-9%, in line with previous guidance, but other components of PPNR are on track. NCOs are expected to be around 50 basis points for the year. The target CET1 ratio for 2024 is 10.5%, and share repurchases will depend on the external environment and loan growth. The impact of swaps and non-core portfolio on NII and NIM through 2027 is shown on Slide 25. In 4Q 2024, higher swap expense will be offset by the NII benefit from non-core rundown. In the medium term, there will be a significant NII tailwind and NIM benefit from non-core and swaps, partially offset by the asset-sensitive core balance sheet, resulting in a medium-term NIM range of 3.25% to 3.4%. The company is confident in its ability to hit its medium-term return target of 16-18%.

During a Q&A session, Bruce Van Saun and John Woods discussed the company's financial guidance. They reiterated their expectations for NII, but noted that the main drivers to achieve this are the strong net interest margin trends and investments made in the deposit franchise. They also expect the net interest margin to be at the high end of the previously stated range due to better deposit levels and lower interest-bearing deposit costs. The front book back book dynamic is also playing a significant role in their positive outlook.

The speaker discusses their confidence in hitting their net interest income range, which may come in at the upper end of their original estimate due to strong net interest margin. They also mention that loan demand may be towards the lower end of the range, but this is offset by execution of strategic initiatives and potential rebound in commercial activity in the second half of the year. The speaker also mentions taking advantage of lower cost funding sources to help bolster net interest margin.

In the paragraph, the speaker discusses the impact of lower loan growth on the company's capital and their plans for stock repurchases. They also address the increase in losses in the office portfolio and explain that it is expected and being carefully managed. The speaker reassures that there are no surprises and the situation is being handled well. The company has reduced their general office loans and the charge-offs have been minimal.

The company has experienced charge-offs due to selling properties and paying off loans. However, they have also had paydowns and are confident in their ability to work through the losses. The coverage ratio for office properties remains high and the rate of increase is slowing, indicating that they may be able to start drawing down on reserves in the future. The reserve levels are currently well above the severity of losses, and the company expects a 71% decline in property values. This is more severe than any previous financial downturn.

John Woods and Bruce Van Saun discuss the losses and reserves for the company, stating that they have charged off about 6% and have a reserve coverage of over 16%. They also address the negative deposit migration, noting that it has been decelerating and stabilizing, with DDA levels remaining at 21%. They expect this trend to continue until the first cut out of the Fed, but it is having a diminishing impact on net interest margin. Overall, the contribution of their deposit franchise to net interest margin trends is excellent.

The company is confident about its future growth due to strategic initiatives and opportunities in the New York Metro area. They expect DDA to flatten out and grow in the latter part of the year, which will support their net interest margin. The company has transformed its deposit book to be better and is outperforming peers. Customer deposits have been stable and the COVID burn down is slowing. Overall deposits are back to pre-COVID levels on an inflation-adjusted basis.

The speaker discusses the current state of loan growth and deposit growth for the company. They mention that loan growth may come in at the lower end of expectations due to weaker line utilization. They also mention that deposit growth may be around 1-2%, but this could change depending on market conditions.

The speaker discusses the current trend of low loan utilization, but expects it to pick up in the second half of the year due to increased commercial activity and opportunities in the retail sector. They also mention the impact of the bond markets and a more positive outlook on the economy among clients. The speaker also mentions a strategic shift towards higher-returning assets.

The bank is seeing strong loan growth due to their strategic use of capital in areas with sustainable revenue sources. Deposits have also remained steady, with growth expected to support loan growth in the future. The Private Bank has seen significant deposit growth and this trend is expected to continue. The bank has resumed buybacks and may consider further buybacks in the future, depending on their CET1 levels.

The strong capital position of the company allows for flexibility in terms of buybacks and cushioning against uncertainties. The top priority is to put capital towards supporting customers and clients, followed by supporting the dividend and returning excess capital to shareholders. The pace of buybacks will depend on loan demand and the macroeconomic environment, with a front-loaded plan for the year due to expected loan growth in the second half.

During a conference call, Bruce Van Saun and John Pancari discuss the potential impact of loan growth and interest rate cuts on net charge-offs. Van Saun notes that the credit quality of their C&I and consumer loan portfolios is strong and they have not seen any adverse migrations in delinquencies or NPAs. McCree adds that they have not made any assumptions about benefitting from lower rates in their forecast.

The speaker discusses their company's approach to forecasting charge-offs and their current outlook on the rate environment. They also mention that their delinquency levels are down and they feel confident in their position even in a higher rate environment. When asked about office maturities, they cannot predict when net charge-offs may peak but they are comfortable with how things are progressing. The questioner also mentions the improvement in capital markets fees.

John Woods and Bruce Van Saun discuss the drivers of fee progression, including strong performance in capital markets, card fees, and wealth trust and investment services. They also mention potential areas of weakness, such as service charges and mortgage, but express confidence that these will bounce back over the course of the year. Overall, they are optimistic about the trajectory of fees for the full year.

The analyst asks about the impact of the swap book on the company's net interest income and the CFO explains that the $35 million drag in the first quarter to fourth quarter is inclusive of all active swaps and the positive benefit from non-core activities. He also mentions that the net interest margin trends are coming in slightly better and that the terminated swaps will contribute to future tailwinds. The CFO also confirms that the analyst's understanding of the 4Q components is correct.

During the earnings call, Bruce Van Saun explains that the company's guidance for a decrease in net interest margin (NIM) for the year already takes into account the step-up in swaps in the second and third quarters. He also mentions that the company's confidence in the NIM outlook is due to the higher for longer interest rate environment and the company's ability to absorb the impact of the swaps. The biggest factors that could affect the NIM range for the year are volume, particularly in the private bank and commercial sectors. However, based on current trends and conversations with customers, the company is highly confident that these factors will materialize. John Woods agrees with this assessment.

The speaker discusses the company's good balance sheet performance despite a slight decrease in loan demand. They attribute this to various factors such as a favorable deposit and funding mix, pay-fixed swaps, and a strong core balance sheet. They clarify that they expect to perform well in terms of net interest margin and may even surpass expectations. The speaker also mentions that the balance sheet is expected to grow in the medium-term, with a focus on remixing and running off non-core assets.

The speaker discusses the company's balance sheet optimization program and how it will lead to growth in interest-earning assets in the second half of the year. They also mention plans for growth in the medium-term and potential for strong growth in the future through selective investments and focusing on primary relationships. They mention being busy with strategic actions in 2023 and their current focus on organic growth initiatives.

The company is not interested in inorganic opportunities and is focused on executing their current initiatives well. They are considering team lift outs to expand their private wealth capabilities, but will only pursue those that are accretive and fit their strategy. The company is currently in discussions with various teams and expects to attract top talent. The impact on capital for these potential lift outs is minimal.

The breakeven of the private bank is expected to occur in the second half of the year, with a minimal impact on capital. Loan growth has been slow due to customer caution about the economy and competition from private credit, although opportunities have arisen to refinance loans from private credit into the bank syndicated lending market. Private credit is most active in the leverage buyout market, which the bank does not hold much of on its balance sheet.

The speaker discusses the impact of fee lines on the company's balance sheet and mentions that flows are a major driving factor of their NII guide. They also mention that they expect to hit the better end of their NII range, even if net loan growth is lower than expected. The speaker reiterates that they are confident in their NII range and expect to be at the upper end of the range due to trends and performance in the first quarter.

The speaker from KBW asks about the decrease in C&I yields and the impact of swaps on the NIM. The response explains that the swaps are already factored into the NIM and the decrease in yields is due to a mix shift. The overall NIM was flat for the quarter. The speaker then asks about the outlook for the securities book, to which the response states that the liquidity build is mostly complete.

The speaker discusses the current and future proportion of securities book as a percentage of overall interest-earning assets, which is expected to remain consistent. They also mention the strength of their liquidity position and their deposit franchise. In response to a question, they mention considering putting on more duration on the securities side and potentially using downside protection to mitigate potential impacts on net interest margin in the future.

The company has added $7 billion in pay-fixed swaps to their portfolio in order to reduce the duration of their securities book and protect against potential interest rate cuts. They plan to continue shortening the duration of the securities book and remain an asset-sensitive balance sheet. They will be opportunistic in adding downside protection in the future, but only at attractive entry points.

During a conference call, Don McCree and John Woods from Citizens discussed the company's corporate behavior and its shift from non-interest-bearing (NIB) to interest-bearing (IB) balances in a higher interest rate environment. They noted that this shift has slowed down and the company's DDA (demand deposit account) has remained stable at 21%. They expect this stability to continue and even see growth in the future due to strategic initiatives and contributions from the private bank. The call concluded with a thank you from Bruce Van Saun, the company's representative.

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