The paragraph is a transcript from the Citizens Financial Group's Third Quarter Earnings Conference Call. Alan, the operator, introduces the call, and Kristin Silberberg, the Executive Vice President of Investor Relations, outlines the agenda. The Chairman and CEO, Bruce Van Saun, and CFO, John Woods, will present the third-quarter results, with additional insights from Brendan Coughlin and Don McCree. They mention the availability of a presentation on their investor relations website and note that the discussion will include forward-looking statements and non-GAAP financial measures, with relevant details in the presentation. Bruce Van Saun then begins by stating that the company is executing well despite uncertainties, highlighting progress on strategic initiatives, a strong balance sheet, and stable profitability, noting that the private bank had a successful quarter.

In the recent quarter, the company reported growth in deposits to $5.6 billion and assets under management to $4.1 billion, with new private banking expansions in California. They achieved financial breakeven in late Q3 and anticipate profitability in Q4. The commercial bank maintained strong standings in sponsor leveraged loan arrangements. Growth was noted in the New York City Metro initiative, and the firm plans to sponsor the New York City Marathon to enhance its market presence. The company achieved significant financial benefits through its TOP 9 initiative and is planning further gains with TOP 10. Non-core assets were reduced by $1 billion, and liquidity was used to lower high-cost funding. Efforts are ongoing to exit certain lending relationships and reduce commercial real estate exposure. The CET1 ratio is 10.6% (9.2% adjusted for AOCI), $325 million in stock was repurchased, spot LDR is 80.8%, and Federal Home Loan Bank advances are low. They expect an increase in loan demand in upcoming quarters.

The company's P&L was affected by forward starting swaps and delayed fees, but they managed expenses well and credit performance met expectations. They anticipate a rebound in net interest income (NII) and fees in Q4, contributing to positive operating leverage. Although they will mostly meet their yearly guidance, balance sheet volume and a higher allowance for credit losses (ACL) could impact NII. The company remains confident in their medium-term outlook and plans to continue share repurchases. They are focusing on transforming their consumer bank, strengthening their commercial bank position, and enhancing their private bank. John Woods notes that Q3 was a low point for earnings, and they expect improvements due to NIM benefits, rising fees, and expense control, which will provide momentum into 2025. Their strong balance sheet and liquidity support their strategic initiatives.

In the third quarter, the company reported an underlying net income of $392 million, with an EPS of $0.79 and a ROTCE of 9.7%, despite a $0.11 negative impact from a non-core portfolio. The private bank reached breakeven mid-quarter and is expected to contribute positively to earnings in the fourth quarter. The company's capital position is strong, with a CET1 ratio of 10.6% and a pro-forma LCR of 122%, exceeding the Category 1 requirement. Stock buybacks totaled $325 million. The ACL coverage ratio decreased slightly due to an improved economic outlook, while the general office reserve increased. Net interest income declined by 2.9% due to lower NIM, affected by higher hedge costs. Capital market fees also decreased by 30% following a strong second quarter, influenced by seasonal trends and deferred M&A deals.

The paragraph reports on a 40% year-over-year increase in capital markets fees, driven by bond underwriting and M&A advisory, despite slight declines in client hedging and mortgage banking fees. Wealth fees rose due to increased AUM, though transactional sales decreased. Total AUM reached $30 billion. Expenses decreased by 1.3% quarter-on-quarter, with strategic investment continuing, and the TOP 9 program aiming for a $135 million benefit by year-end. A TOP 10 program is planned for further efficiencies by 2025. Average loans fell 1% due to limited demand and portfolio optimization, although core loans grew by $800 million, notably from private banking and retail mortgages, with the private bank's loans increasing by $630 million to $2 billion.

The paragraph reports on the bank's financial performance, highlighting an increase in retail loans by $750 million due to growth in mortgage and home equity, while commercial loans decreased by $580 million due to paydowns and lower client demand. Deposits remained broadly stable despite a 1% decrease at period-end, mainly due to the paydown of higher-cost treasury deposits, partially offset by a $1.6 billion increase in private bank deposits. Interest-bearing deposit costs rose slightly, with total deposit costs and funds remaining stable. The deposit franchise performed well, with around 70% being stable consumer deposits and 68% insured or secured. Net charge-offs increased to 54 basis points due to seasonal auto impacts, while non-accrual loans rose 10% due to issues in commercial real estate.

The paragraph discusses the bank's current state of Non-Performing Assets (NPAs), highlighting stability in criticized classified loans and the resolution of workouts. It notes a slight decline in the overall credit loss coverage ratio to 1.61%, attributed to an improving economic outlook and changes in loan composition. The general office portfolio has decreased by $150 million, with a reserve coverage increase to 12.1%. Despite challenges in this sector, the current reserve is deemed strong, covering severe scenarios. The bank has absorbed $364 million in cumulative losses in the general office segment, translating to a near 20% loss rate from March 2023. Over the past 18 months, exposure to the general office has been reduced by $1 billion to $3.2 billion through paydowns and charge-offs. Additionally, the bank's CET1 ratio remains robust at 10.6%, with a slight improvement when adjusted for regulatory changes.

The paragraph highlights the company's strong financial performance, with capital ratios surpassing peers and significant shareholder returns through share repurchases and dividends. The company outlines its strategy centered on a transformed consumer bank, a leading commercial bank, and a growing private banking and wealth management franchise. They emphasize their strong position in the New York metro market and leadership among super-regional banks, particularly in serving sponsors and middle-market companies. Optimism is expressed for future growth, aided by a favorable economic outlook and successful capital markets business. The private bank is experiencing positive momentum with a significant increase in deposits and loan growth.

The company announced the addition of a private banking team in Southern California and plans to open new offices in the Bay area. They've already expanded in San Francisco, Mill Valley, Palm Beach, and Boston. The private bank's revenue increased by 64% in the third quarter, with expectations to contribute to earnings in the fourth quarter and significantly impact EPS next year. They anticipate a 1.5% to 2.5% rise in net interest income for the fourth quarter, driven by various factors including improved net interest margin and strong deal pipelines. Non-interest expenses are projected to rise by about 2%, with expectations of positive operating leverage. Net charge-offs are expected to remain stable, and the CET1 ratio should also remain broadly stable with planned share repurchases. The medium-term forecast projects a net interest margin of 3.25% to 3.4% by 2027.

The company reported a solid quarter with strong performance in capital markets, wealth, and credit, and is maintaining a robust capital and reserve position, high liquidity, and a long-term funding strategy in preparation for future regulatory changes and challenges. They are also advancing strategic initiatives to boost performance in the medium-term and are confident in achieving their 16% to 18% return target. The speaker then opens up the Q&A session, with Scott Siefers from Piper Sandler asking about the company's margin progression and medium-term strategy. John Woods responds, beginning with details on fourth-quarter expectations.

The paragraph discusses several financial drivers that are contributing to positive trends in the company's performance. It highlights the role of non-core contributions and active balance sheet management, including fixed asset repricing and strategies like front book versus back book. A significant point made is the improvement in deposit migration, which is expected to shift from negative to neutral or slightly positive by the fourth quarter, easing a previous challenge. Bruce Van Saun mentions the growth in deposits from the private bank and anticipates seasonal increases in demand deposits in the fourth quarter. John Woods adds that their asset sensitivity will be mitigated by changes in balance sheet trends and receipt swaps, which are expected to become beneficial moving forward.

In the paragraph, the speaker discusses strategies and positive outcomes for managing down betas in their deposit portfolio, highlighting proactive efforts on both consumer and commercial sides. They express confidence in reaching a goal of 5 basis points and maintaining a consistent trend into the fourth quarter. Looking further ahead to the fourth quarter of 2025, they detail similar themes, predicting growth in net interest margin (NIM) driven by factors like their fixed loan portfolio and securities, expecting anywhere from 200 to 300 basis points of front book back book benefit.

The paragraph discusses the financial strategy and outlook for a private bank in New York Metro, highlighting the impact of strategic initiatives on deposits. It anticipates approaching a 3% growth by the end of 2025, with significant protection against interest rate declines due to a stable swap portfolio lasting until mid-2026. The bank remains slightly asset-sensitive, but other factors contribute to a net positive outlook by the end of 2025. Bruce Van Saun notes a potential additional boost in the fourth quarter. Matt O'Connor from Deutsche Bank questions why net interest income appears weaker than expected, suggesting a larger Federal Reserve rate cut and slower loan growth. John Woods explains the bank's slight asset sensitivity and notes a shift in deposit trends, with low-cost migration decreasing more than anticipated but now tending towards neutrality or positivity following the Fed's rate cut. This shift is expected to yield positive results going into the fourth quarter.

In the paragraph, Bruce Van Saun and John Woods discuss their company's loan growth expectations and operating leverage. Van Saun notes that while there was some loan growth in the private bank, it wasn't as substantial as anticipated, but expects improvement as interest rates decrease. He also mentions expected growth in commercial bank loans. John Woods highlights potential for significant operating leverage, especially with the expected increase in net interest margin (NIM) and outlines plans to provide more details on future expectations in January. Van Saun adds that NIM growth doesn't significantly impact expenses, which should directly benefit their financials. Additionally, they foresee continued growth in fees from areas like capital markets and the payments and wealth businesses, despite the associated expenses.

The paragraph discusses the expected positive operating leverage for the period from 2025 to 2027, emphasizing that revenue growth is being achieved without significant increases in expenses due to a fixed cost base, particularly in the private bank. Brendan Coughlin mentions that the team is working through compensation guarantees, which means revenue is increasing without additional costs, leading to positive operating leverage. Bruce Van Saun reaffirms this point and addresses a question from John Pancari about loan growth dynamics. Bruce states that while no significant loan growth is expected in the fourth quarter, there are indications of demand increasing, particularly in the private bank, without relying on major catalysts like rate cuts or election clarity.

The paragraph discusses the positive outlook in the financial sector, highlighting increased activity and growth potential in subscription lines within private equity, which saw strong growth in the previous quarter. Don McCree notes there's increased confidence among core commercial and industrial (C&I) clients, particularly in the middle market, as the economy stabilizes and interest rates decline, which may lead to more working capital investment. The refinancing of loans in public securities markets has pressured core asset levels, but this trend appears to be stabilizing, suggesting potential net growth in the core book by 2025. Bruce Van Saun invites Brendan Coughlin to discuss consumer and private banking topics next.

The paragraph discusses the evolving dynamics in the consumer lending market. It notes a slowdown in rundown of non-core consumer loans from last year and highlights growth in the mortgage and home equity sectors. Despite most U.S. mortgages being locked at low rates, there's potential for growth in the HELOC market due to the significant home equity accumulated over recent years. Additionally, a shift is anticipated in student loan refinancing as federal payment collections resume, potentially increasing activity among young adults with strong credit. The private banking sector may also see more credit use as interest rates decrease, with many currently preferring cash transactions.

The paragraph discusses the financial outlook and strategies related to interest rate dynamics and credit management. As interest rates decrease, there's confidence that high-net-worth customers will utilize more credit for investments and business growth, enhancing demand. The focus on strong deposit strategies and operational improvements aims to capture a larger share of each customer's banking activities. John Pancari inquires about the peaking of non-performing assets (NPAs) and stable charge-offs expected in the fourth quarter, despite an increase in auto delinquencies. Bruce Van Saun responds by addressing the challenges of the general office portfolio, indicating it's a long-term issue being managed with significant reserves and collaboration with borrowers to reach satisfactory solutions.

The paragraph discusses the management of charge-offs and non-performing assets (NPAs) in the commercial real estate (CRE) sector. It notes that while the timings for recognizing charge-offs and NPAs can fluctuate, this quarter saw lower CRE charge-offs but a slight increase in NPAs. The stability of criticized and classified loans over the past four quarters provides reassurance. Don McCree highlights the predictability of the credit situation, with no surprises in recent quarters, and mentions upcoming charge-offs. There was a small increase in C&I charge-offs due to long-term resolution of loans. Despite challenges, the overall credit outlook is stable, with liquidity returning to the real estate market, aiding in reducing exposures. Brendan Coughlin agrees with this assessment.

The paragraph discusses the current state of net charge-offs in consumer lending, specifically in comparison to pre-COVID levels, indicating stability in this area. It addresses the auto lending sector, noting that recent low charge-off rates were influenced by seasonal factors and strong recovery in used vehicle values. The auto portfolio is reportedly performing as expected, despite challenges in interpreting delinquency data due to diminished new originations. This results in longer assessment times for delinquency stabilization. Additionally, a question by Erika Najarian from UBS addresses details about swap agreements in their financial documents. She seeks confirmation on the termination of certain swaps, their accounting treatment, and mentions an anticipated net interest margin (NIM) target of 3% by the fourth quarter of 2025.

In the third quarter, John Woods discussed the aggressive expectations for Federal Reserve rate cuts, with the yield curve suggesting seven to eight cuts by the second quarter of next year. His team decided to terminate $4 billion in short-dated receive-fixed swaps set to mature in May 2025, capitalizing on the predicted rate cuts to lock in financial benefits and protection against lower rates. The decision to terminate was favorable, as it provided the intended protection. The financial impact of this termination will be amortized over the remaining life of the swaps until May 2025. Woods also mentioned that their net interest margin remains stable across various rate environments until mid-2026, owing to their slightly asset-sensitive position and the swap portfolio.

In the paragraph, Erika Najarian questions John Woods about achieving a 3% rate environment and the favorable impact of a terminated swap, which she thought would be the difference between the SOFR and the received fixed rate until May 2025. John explains that the termination of the swap is based on the forward curve at the time of termination. Regarding NIM expansion for the next quarter, John states they aim for a deposit beta nearing 40% by the quarter's end, with commercial sectors leading and proactive strategies in the consumer segment. The focus is on driving solid deposit growth at an attractive cost of funds. The operator then introduces a question from Manan Gosalia of Morgan Stanley, who seeks further clarification on the deposit beta topic.

In the paragraph, John Woods discusses expectations for deposit rates following recent Federal Reserve rate cuts. He anticipates two more rate reductions in the fourth quarter based on the forward curve data. Applying a 40% beta to the anticipated average SOFR rate, Woods projects a decline in net interest-bearing deposit costs. When questioned about the impact of multiple rate cuts over time, Woods explains that longer down cycles allow for more reduction in deposit costs. He expects the down cycle betas to range between 50% and 55%, gradually increasing from around 40% by the end of the fourth quarter. Bruce Van Saun adds that this pattern of gradual change mirrors the previous acceleration observed during the up cycle.

In the paragraph, Manan Gosalia asks about the spread benefit between front book and back book balances and what fixed rate securities and loans are maturing. John Woods responds, noting that a metric of 200 to 300 basis points is useful, with approximately $750 million in residential mortgages and securities turning over quarterly. This turnover is expected to contribute to growth over the coming years. Although actively managing the securities portfolio, there are no plans for significant repositioning. Bruce Van Saun adds that there is built-in momentum to increase the Net Interest Margin (NIM), reducing the need to expend capital for that purpose. The conference call concludes with expressions of gratitude from Bruce Van Saun and the operator.

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