Q1 2020 Earnings Call
Good morning, everyone and welcome to the citizens Financial Group first quarter 2020 earnings Conference call. My name is Alan I'll be your operator today.
Currently all participants are in the listen only mode. Following the presentation. We will conduct a brief question answer session. As a reminder, this event is being recorded now I'll turn the call over to Ellen Taylor head of Investor Relations you may begin.
[laughter].
We seem to have lost the feed from the main room.
Good.
[laughter] Allie good morning.
Third party data.
Very long way.
This morning, our chairman.
<unk>.
Yes, I jotted was well provide.
Well that's all.
[laughter] station, which you can find any better [laughter].
<unk>.
Right Andy Kaufman.
Our banking.
[laughter] or.
To provide additional color now for some quick housekeeping.
Well and [laughter], which are subject to risks and uncertainty and your shirt working in the back or what they called Wendell for Germany [laughter].
[laughter] and our 29 thing form 10-K, we already gone beyond.
Sure. So it's important to review our hurdle.
I see a lot of information about these backed or no reconciliation to GAAP.
Finally, one [laughter] correct, one right and with that.
Good morning.
Thanks Alan.
Good morning, everyone and thanks for joining our call.
We're in the mid unprecedented times with the Corona virus, representing an onstream enemy, that's wrecking travel People's lives with our economy.
A large regional bank, we have an important role play supporting our customers sort of these challenge [laughter], providing essential services to ensure smooth functional you're trying to me.
Hi, I'm pleased with our performance to date.
Citizens is rising to the occasion.
We are working with borrowers on loan modifications.
That's the government programs to ensure that have that's possible chance to make it should be crisis.
Yeah and use our strong balance sheet to meet over 7 billion in commercial line Josh.
We've kept our branches open to serve individual and small businesses.
We have two thirds of our staff working remotely and we have taken precautions to protect those college must report you work it provided them with additional compensation.
And we have made $5 million in France small businesses nonprofit partners to help our communities through these difficult times in short we are doing a lot of responsible corporate citizen should be doing.
Our financial performance in Q1 was heading towards an excellent quarter prior to the disruption caused by Copel 19th in March Nonetheless, we had a very good revenue and James get ourselves based by record orders revenue strong loan growth and expanding.
If you talk in charge offs as our credit cost 61.
Had a 94 cents corridor.
But of course, the news peaceful accounting standard requires a recalibration of lifetime losses on the loan portfolio given the significantly changed macro apart.
Slide 600 million provision, representing a 463 million or 85 cents reserve build over charge offs.
Such underlying EPS was nine cents in the quarter.
We've got six cents notable items talk to our top program and cycle of integration costs. So reported vcs was three cents.
No. This is more front loaded than many analysts to bottle. So deep recession in Q2 qualify that the shape recovery forecasts, which is true would take us back to more normal provision levels over the balance of 20 Twond.
Recovers watershed provisions will be higher.
Said, there's a great deal of uncertainty over the economic helpful.
Yes, good that we have strong balance sheet position.
One at 9.4%, our LPR at 95% a strong LPR with an enormous contingent liquidity.
Our tangible book value per share held steady at $32.
And we're confident we'll sustain a strong level of PPNR over the balance.
Our decision to suspend share repurchases. So the balance with 2020 should maintain a strong CET one ratio through varying economic scenarios, including new shaped recovery.
We have provided significant granular information on our credit portfolios at our investor deck.
We believe we have maintained a highly prudent credit risk discipline.
And as a reminder, R&D tax credit losses have consistently better than the peer average.
We continue to make progress on all the strategic initiatives that we had teed up for 2020.
Our colleagues have been fantastic job.
With the Kogas 19 related prices, while also making sure we are hitting our key you deliverables.
Current environment presents new risks and opportunities we're looking for ways to incorporate these into our strategy within ice works coming out of the crisis stronger than our peers.
You're not cutting back on investments designed to drive future customer acquisition and revenue growth.
All in all a challenging time, we're handling thanks, well I hope you and your families are healthy and say.
With that let me offer welcome to Brendan that's our new head of consumer and now I'll turn it over to job.
Thanks, Bruce and good morning, everyone.
On page four let's start with a brief overview of our headlines as we navigate this unprecedented environment.
We entered the fragrance from a position of balance sheet strength.
Example, after the stress experienced in March we ended the quarter. This CET one ratio of 9.4%, even after increasing our allowance for credit losses, 2.2 billion and funding approximately $7 billion wind down.
Very helpful loss ratio of 1.73% compares well to stress loss scenarios is robust appears.
And our tangible book value per share at quarter end was nearly $32 per share, which is stable versus fourth quarter.
Our liquidity ratios are stable within LDR of approximately 96% and we remain in compliance with the LCR.
Earnings at the PPNR level proved resilient as we generated record revenues and fee income while absorbing significant negative 19.
Got it.
Absolutely. So we remain committed to investing in a strategic initiatives, including the topics transformation program and our portfolio of strategic revenue initiatives.
Moving to page five I'll cover some going away from your supporting our customers.
Many of our customers have been directly impacted by the pandemic.
Moving to a system during this difficult time.
Well, taking appropriate steps to mitigate risk.
So far we go they came into loans were about 70000 mutual customers and about 2400 small businesses.
The number of commercial clients have taken a defensive position to prepare to weather the storm.
April 15th we fund.
Billions on commercial laundry.
After an initial loss to draw down on Monday March we've seen the pace of line draws slowed considerably.
Finally, we have been might really working day and night you facilities.
Payroll protection program for smaller company with less than 500 employees.
As of April 15th we have received applications from over 35000 companies have approximately $4 billion launch registered with the FDA.
Okay and covers diesel.
We increased our allowance for credit losses by approximately $900 million to 2.2 billion at March 31st.
Simply 1.3 doing that Iraq.
This was created in two steps.
First with the previously communicated day, one impact of 451 million effective January onest.
The second what's your reserve build at 436 million recorded as part of the first quarter provision of 600 million.
Also included $137 million in charge offs.
At quarter end, the auto loans ratio was 1.73%.
Retail portfolio had an allowance for loan ratio 2.31%.
It's been longer duration or unsecured loans.
Commercial portfolios have an allowance to loans ratio of 1.2%.
We had also marked the key aspects of a macroeconomic scenario, which is a foundational element that this usually reserve estimate.
At quarter end, we elected to use the March 27, baseline, which integrates coming 19 effects is hoping scenario.
Given the uncertainty or the continued economic outcome. We also included an alternate maybe transaction area and internally generated here.
Further we incorporated the Los Angeles and factor to fully accounted for the benefit of our expected customer assistance efforts and the impact of the various government support that went on our portfolio.
In general economic scenario assumes a steep drop in GDP into Q, followed by a de sheeting recovering in the second half of the year.
This scenario plays out provision requirements over the balance of 2014 Shakopee logo.
And then to get back to fever, or it takes longer than the economy to recover and we are looking out to you or I'll shoot recovery.
Our government programs are less effective.
Could require meaningful additions tradition.
Now, let me do maybe to the highlights of our underlying results covered on slide seven today.
Despite backdrop of covered 19 pandemic and seasonal related reserve.
Our results highlight our operational discipline and the benefit of our diversified business model.
We have record revenues and fee income.
And improved net interest margin and strong liquidity to fund the measures.
Fourth quarter, we probably easier nine says you got a four cents year over year 90 cents next quarter, driven by 85 cents impact of proven 19 reserve build a 463 million.
PPNR 670.
3% year over year generally slightly when quarter, despite cokemaking headwind.
The seasonality.
We saw strong balance sheet growth, including 2% average loan growth.
Hi growth of 7%, which benefited.
And helped offset the impact of were challenging rate environment.
And record fees were driven by record results for mortgage Thank you Paul.
We also saw strong underlying performance in capital markets.
Thanks, Hi, RP before kind of once you get back.
Okay.
Net interest income increased 1% linked quarter has the benefit of 1% interest, earning asset growth and improved mix was partially offset by the impact of the more challenging rate environment and data.
Net interest margin increased four basis points linked quarter loan yield benefited from widening LIBOR, Hawaii franchise as well as mix.
Our proactive pricing actions produce and 11 basis points decline in deposit costs, which helped mitigate you'll put headwinds as one month LIBOR dropped 30 basis points.
Moving to fees on slide 10.
Non interest income was up 16% year over year relatively stable levels on a linked quarter basis.
Record results mortgage banking and trust and investment service fees were partially offset by the impact of 19 that included a total of $36 million a fair value Mark downs on bone treating and got a customer derivative assets in the linked quarter as well as the impact of the shutdown in other categories.
On a sequential basis mortgage banking fees achieved another record by doubling to 159 million, which reflected strong refinance volumes and improved gain on sale money.
Well management posted another solid performance with trust and investment services fees up 2% sequentially strong managed money sales offset the impact of market to market declines.
Total marketing to 43 million decreased 23 million to record fourth quarter levels, driven by $21 million. It marks were trading.
Foreign exchange, an interest rate product revenues decreased 25 million from record fourth quarter levels, including a $15 million production from a net.
Given the falling rates and lower activity cosmetic reduced variable term lending volume.
Turning to make the web non interest expense increased $30 million or 3% linked quarter, largely reflecting seasonality and higher revenue based compensation.
Salaries and employee benefits were up 9% given the FICA tax in fourth quarter, one key match seasonal impacts along with higher compensation tied to strong strong mortgage originations in the quarter.
Year over year, non interest expenses of 5% largely reflecting the impact of growth oriented investment annual merit in revenue based compensation, which were partially offset by efficiencies generated from our top programs.
Let's now discuss loan trends on page 12.
Average core loans were up 2% linked quarter and up 3% before the impact of loan sales activity tied to our balance sheet optimization initiatives.
During the quarter, we sold an additional $500 million non relationship mortgages, which coupled with fourth quarter activity reduced average loan almost $1 billion.
On a linked quarter basis core commercial loans were up 3% driven by the impact of higher lines your health and strength in theory.
Core retail loans were up 1% linked quarter and up 2% before the impact of balloon can help activity given growth in education and merchant financing partnerships.
On a linked quarter basis.
And we'll go to 7% driven by 15% increase in commercial given higher line of credit utilization and relatively stable we kellogg's.
Moving to expertise.
We saw nice average deposits were up 1% linked quarter and 5% year over year as we benefited from investments we've made over the past several years to expanded into capabilities.
On a hearing them basis deposits were up 7% keeping pace with loan growth.
We continue to manage down or deposit costs across all channels, reducing CD rates, we felt money market approval rate in taking down the savings rate.
And managing commercial deposits aggressively.
As a result, our interest bearing deposit costs were down 15 basis points.
Now, let's move on page 14 and cover credit.
We continue to adjust the impact of the cobot 19 endemic and instituted a variety of measures to identify and monitor area of potential potential risk.
Nonperforming loans increased 11% linked quarter, driven by 69 million dollar increase in commercial largely tied to a few non correlated mom and modestly higher retail.
The NPL ratio of 61 basis points increased two basis points linked quarter and improved two basis points year over year.
Net charge offs came in at 46 basis points in the quarter up modestly linked quarter, reflecting an increase in commercial partially offset by a decrease in retail.
The allowance for credit losses to nonaccrual loans ratio ended the quarter at 283% compared with.
9% in the first quarter 2019 upfront.
184% in the fourth quarter 2018.
Turning to page 15.
We have been highly disciplined on credit with prudent risk appetite.
In consumer we remain focused on super Prime and prime borrowers, but.
The weighted average FICO score across our portfolio to seven Fixie and approximately 90% of the retail portfolio has a refreshed HEICO 60 or better.
Overall, our commercial portfolio was highly granular and diversified in terms of geography industry and asset class.
Roughly 60% of the portfolio investment grade on a bond equivalent ladies basis and risk ratings improved year over year.
And we really are doing peers commercial.
We have been very disciplined around core inflection and focus on Fox fusion developers that we've seen performed well and responsible.
Our cycle.
Slide 16, it's also important to note that our company run DFS purely adverse scenario results performed in line with better than the peer average, which we believe indicates that we are relatively well position to manage through the current crisis.
On page 17, we highlight the granular and diversified nature of our commercial portfolio along with the areas and commercial that are getting most most immediately impacted by the could 19 shutdown and low energy prices.
We have run at these guys across the majority of the commercial portfolio to identify cash flow and liquidity vulnerabilities with an eye towards helping our customers through these challenging times, while taking additional steps to more tightly manage risk.
Together these factors accounted for approximately 11% of total CFG alone.
Overall, we think that the percentage of our portfolio concentration subsidiaries are perceived risk are largely at or below peer median.
[laughter] highlighting on the slide covenant package that we consider to be risk mitigant to these portfolios and we have individual tear sheets in the appendix on each industry that provides more detail on the factors we are monitoring.
Moving to slide 18 on retail credit.
Our refresh FICA scores on the consumer side of the house are around 760, and 70% of the portfolio to collateralize. So for some of the areas that percent potential concern I would just highlight briefly in education, we got again very high Heiko.
Good luck is 95% Cotai.
Any indication refinanced portfolio borrowers opinion, the workforce for six years on average.
85% of them head of have advanced degrees.
30 of the portfolio has been coastline.
The consumer unsecured book includes $2.5 billion of short duration merging partnership loans, largely driven by the Apple platform.
As well as loans through May have been 80, and Microsoft and affirmed will comment on.
It's important to note that the vast majority of this portfolio subject to loss sharing arrangement.
And the remaining $1.5 billion as our unsecured installment portfolio, which has a very high focus scores of 760 on average.
As with commercial we've included more details on these consumer portfolios in the appendix.
On page 19, as previously mentioned, we feel well positioned to manage through the current environment strong capital and liquidity positions.
Strong deposit growth kept pace with elevated loan growth meeting our liquidity metrics setting.
We haven't diversified funding profile with a very strongly supported causes and substantial capacity to do more for our clients as they management practice.
In March we announced that he would see share repurchases and with the extensive and David pandemic disruption, becoming clearer we have decided to extend that to the ended the year to ensure the capital levels are strong loan demand.
We expect to remain well capitalized and intend to maintain the dividend at the current level.
Let me just wondering I wonder you exciting things are happening across the company.
While we are first and foremost focusing on helping our clients we have not stopped working to help build better company.
We are driving forward on our strategic initiative, so that we emerge well positioned for the future.
We are continuing to execute on the transformational program and we're also moving forward as our major strategic revenue initiatives, while considering new opportunities arising from the current environment in an effort to drive higher revenue growth coming out of the crisis.
Moving to page 21.
Given the impact of the pandemic, it's challenging to predict Apple for the future and we no longer affirming our full year 2020 got.
Nonetheless, we do however were to offer some higher level commentary on T. categories for full year 2021 reminder, that we currently expect a few more than you shape recovery start to play out in the back half of the year.
We believe we can deliver modest growth in net interest income, which includes the benefit of the PPP program.
We expect this strong loan growth more than offsetting the decrease in managing risks.
Non interest income is now expected broadly stable as strength of mortgage is offset by Covance 19 during weaknesses and other categories.
The outlook for Pete will depend upon the pace and magnitude recovery in second half 2020.
Non interest expense is expected to be up modestly given higher compensation tied to stronger mortgage production and impacts from currently team, which includes government lending programs and customer relief efforts.
Provision expense has the greatest potential variability in 2020 and will depend on the depth of the recession and the piece of recovery.
We expect to see strong loan growth driven by higher my androgen commercial the impact of government programs like TPP as well as with the increased demand in education and merchant financing.
At the same time, we anticipate a strong increase in commercial and retail deposits, reflecting heightened liquidity given fed actions and the low rate environment.
Our regulatory capital ratios are expected to strengthen some current levels under the we should be recovery scenario as net income coupled with the suspension your buybacks through year end more than offset the impact of higher RWS.
Even in more and more severe economic scenarios, we expect our capital ratios to meet remains strong and above requires minimums.
Now, let's move to page 22 for some high level commentary on the second quarter.
We expect to be up low to mid single digits and strong loan growth more than offset the sizable decreasing NIM.
Hey, guys expected to be down in the low to mid single digit range, reflecting cobot 19 impacts on service charges card and other fees.
Non interest expense is expected to be up slightly given the cobot 1919 impacts mentioned earlier.
Yes, we would expect positive operating leverage in the quarter.
For this expense will depend on the depth of recession and patient recovery.
Finally, we expect significant loan growth, reflecting line draws on commercial the impact of government programs and increased demand in education.
Our capital liquidity in funding conditions are expected to remain strong.
To sum up on page 23 focus on delivering well for our stockholders these challenging time.
Strong balance sheet and leadership team and colleagues.
Thats confidence they will rise publications.
Ill turn it back to Bruce.
Okay. Thank you John and operator, let's open it up to date for those.
Thank you Mr. events on no we are ready for the Q and a portion of the conference call.
If you like to ask a question. Please press one then zero on your Touchtone phone.
Hearing indication that you've been placed in Q and you may remove yourself from the Q at anytime by repeating the one than zero command.
You are honest speakerphone, please pick up your handset for pressing any buttons and also make sure that your phone is on muted as well again for questions. At this time press one then zero.
Our first question will come for line of Erika Najarian go ahead. Please.
Hi, good morning.
All right.
Thank you so much for all the detail that you provided I'm wondering as we think about a potential w. shape recovery.
So does the economic parameters are playing out.
This pandemic compared to the key staff scenarios that imply a cumulative loss rate of 4.1% over nine quarters.
Yeah, So I'm going to start off from that Erika I mean, I think the way that we look at that's just big picture.
Yes, how when you look at our reserve to loans ratio to currency is 2.2 billion that we have not 1.73% that really positions us well when you go back and look at the 2018 cycle last time, we went through that process and it also positions us well for the 2020 cycle for pay.
Based upon our internal estimates.
How much coverage, we're creating so just to cover a few numbers on that front.
You go back to me the fed scenarios and look at the adverse scenario and there's been a fair amount of analysis.
Traits that the rate environments and other aspects of the adverse are pretty similar to what we're going through today and our $2.2 billion would represent 86 million I'll start 86%.
Coverage.
Those losses and the after a scenario in terms of our internal estimates.
In fact numbers would be around 55% if you and we think we'll do better than the AD we've had remapping issues that have.
Gone in our favor we consistently estimated losses that will be lower than the fat.
I would indicate that even if you look at the fed models, we have 55% coverage of the adverse scenario for back that.
You fast forward to even if there was the severely adverse scenario.
Similar to what the fed scenario would indicate in 2020.
Coverage would be around 45% we believe is.
Maybe better than.
Other than maybe some some some peers given the comments made earlier about where we think our loss ratios are going to come out. So we think that positions us very well.
Nick I'll stop there and see if that that's responses.
Got it and then my follow up question is.
Wondering if you can help quantify the magnitude of net interest margin decline in the second quarter and of that magnitude how much would be attributed to the payment protection program and if we assume that those loans pay off by third quarter does that mean that NIM could be at a higher starting point.
In third quarter versus QQ.
Yes. Good question, so wed look through it as you start off with the rate environment itself and given given the LIBOR.
Spread widening out in the first quarter, we really havent felt all of the impact of.
The rate cuts from one keeling, there's an expectation that that'll narrowing in the in the second quarter, it's a wide ore and waste in general we have.
Expectations will be down call, it 70 basis points or so across the curve both in the short ending the long end.
In the past we've indicated that for every 25 basis points. You wouldn't you would you would see about $15 million.
Packed with.
With respect to NIM.
And so that will help you.
Up you triangulate.
For that 15 million is typically in the neighborhood of 300 basis points. So so if you triangulate all of that that'll that'll give you a sense for maybe.
Impact due to rate.
The other aspects we have to look out into Q was mix as you mentioned, how large the PPP program be that isn't dilutive.
What is our mix in the rest of the loan portfolio, we're seeing reasonably good loan demand underlying the PDP and other other line drops so thats all happened in our education portfolios and merchant finance that we indicated earlier that actually provides a benefit so but when you look at all those things, we still think that there will be in.
There will be seeing meaningful significant decline and net interest margin given rates in the second quarter.
The forward your question about their quarter.
Based on how we're planning to account for PPP, which at the moment looks like will flow through the anti line and if you think about that forgiveness cycle here, we're going to amortize the fees that we expect to earn on the TPP program over the contractual life of the alone.
Up through the forgiveness day. So if you expect maybe eight to 10 weeks after funding that there could be some forgiveness on the majority of lumpy forgiven. Given this is intended to be a grant program you would see all that come into Eni in the third quarter on all driving net interest margin then that would recent net interest margin higher in the third quarter.
And I would just add there.
So.
You commented on NIM, but felt was side of the fact that we're calling and to be up in Q2, because about it the volume effect should offset the NIM contraction.
Got it thank you for taking my question.
Okay.
Your next question will come from the line of Ken Zerbe.
One moment please.
Your line open go ahead.
Great. Thanks.
I really appreciate the guidance you gave on slide six about C., So I think it outside tremendously.
The question I have just your first bullet there you talked about using Moody's baseline, but you're also saying you're using your own internal assumptions can you just talk a little bit more about your own internal assumptions are they more severe or less severe than Moody's and how much. We did you put it on your own assumptions versus the Moody's assumptions. Thanks.
Yes, a couple of thoughts on that so.
I think our baseline scenario that has that overweight if the movies at least 27.
The internal scenario I would say is maybe equal to slightly more senior debt.
Hi, Matt scenario, we have another movie scenario at the time that we were closing our books I think the 327 was based on what's really one of the most effective Moody's scenarios that were out it was out there. So we had another one so with slightly.
Less than that come in.
Endemic driven so we used three in general, but the majority was really.
It's really focused on this moody's baseline.
The other scenarios had a variety of other.
Lenses lenders associated with it I mean, we have this 18% down.
With that with GDP and 9% on unemployment, but as an example, our internal scenario would have gotten on an unemployment up to 11%.
So just to give you a sense for how we we mix and match here, there's a significant amount of uncertainty, which is why we use multiple scenarios and we think that helps inform the ultimate ultimate outcome.
Okay.
I would add Ken to that we were.
Trying to be as conservative as we could I think by taking that very late.
Forecast into account, we've certainly been watching.
We're hesitant movies scenario model means.
And I'd say, it's moved a little more conservatively.
Hard to say.
What exactly how that translates into impact on our reserve at this point I think we just have to see more data play out before we could look at that so.
Recession as either deeper, which currently looks like that typically the case.
The.
Every and south extending a little bit, which I'm not sure necessarily is the case, which is up to see I mean, there's certainly a bit groundswell for starting to reopen the economy given the pain that everybody's substrates. So we'll just have to watch those two factors and then go back and update change as we get to the ended the second quarter.
Okay, Great and then just one other question on the same slide you mentioned that if there is a U shape recovery. For example, you could have meaningfully higher provisions.
I understand the concept, but I guess my question really is like it seems that you're the assumptions you've made went from let's say good period right to you and before the pandemic to something really bad including the deep recession.
Can you just help us understand if.
There is a U shape recovery and it takes another quarter for things to get better why does provision.
Why why why would provision be meaningfully higher.
The next step I mean at a higher than first quarter, but why would it be is fairly large given the vast majority of your assumptions that you've already made for the vast majority the negative revisions so to speak if that makes sense to your economic models.
Maybe I'll answer it this way can I mean I think.
One thing to weak as Bruce mentioned, we did look and notice that since March 27, Moody's has updated I think it was on April as early as for April 13th earlier. This week and as we've said, we're seeing some eye popping GDP numbers that come out the onset of 18 to 30 etcetera I think.
The it gets is one thing, but the length of that business did the downturn in terms of whether its use another.
At a very at a very big picture I think one way to think about this is if something like that will occur I would.
Basically.
I think we're positioned in a way that our capital ratios, which are around 9.4% at the end of the quarter would remained broadly stable to up slightly even if we were to directionally considerable another scenario that would have no.
Certain asked the aspects of Moody's update that would have taken GDP down to 30% and I think that that focus it's about it's articulating capital strengthen our allowance to loan coverage. We would of course increase it would get to something with a to handle on it as opposed to 173 and but nevertheless.
Our capital ratios, which would be broadly stable to up potentially even up slightly under one of those scenarios I would just to your specific question as to why Ken.
I'd say, if it takes longer to get back to the operating economy, clearly there's more stress on companies.
The chat opened and start collecting revenues and serving customers.
And then clearly individually stock it back to work has quickly. So there's more stressing individuals. So you just have to get recalibration on that and a and C or that that picture. So I think it's possible I think we put a good number on the board here in the first quarter and.
I have to wait and see how much adjustment we'd estimate based on further input that NHS I think John did underscore the big point, which is our capital ratio was strong and can absorb that and so we feel that we can both meets the loan demand coming in from our customers put away what we need to if you need.
More reserves and still maintain a very strong capital position.
All right. Thank you very much.
Your next question will come from line of Terry Mcevoy with Stephens go ahead.
Alright, thanks, good morning.
Maybe starting with fee income I was hoping you could expand a bit on your second quarter outlook. I know you mentioned service charges in cards, but any insight in thoughts and to see mortgage.
Capital markets.
Yes, I'll go to start off I mean, I think that.
We've seen.
Another record quarter in mortgage.
And record record and wealth.
No on the capital markets fronts.
I'll be your frankly before the long tree Mark that we Chuck which had an impact of 21 million in the quarter, we revenue, having an exceptional quarter on top of.
Exceptionally exceptional quarter in fourth imports you so.
Mortgage outlook is still quite strong we had.
An excellent quarter, one Q I think our early expectations are that wheelhouse.
A similar performance into Q I mean, it's early days and things can move quickly but.
From what we've seen in April.
Although maybe lock volumes may not be quite as strong as they were in the fourth quarter first quarter Im margins has really.
Frankly increased to levels that weve never seen before given all of the operational capacity issues across.
The the industry and we've been a source of.
Of.
Financial strength and execution certainty and that has driven our margins up and Morgan and allowed us to gain market share as well, absolutely and were to and we're taking share across all our channels, which is really excellent to see it positions us extremely well.
And and in the wealth space, we've been able to to have frankly manage money sales.
Really.
Nice uptake there that's been offsetting our market a market declines and.
Thank you too good momentum on that front.
Okay, and then in capital markets, it's it's a really market dependent so.
Theres or somebody else.
Brendan offer further perspective on consumer than Don you could offer a comment on the.
Commercial yes, well said I think John on the mortgage the nonbank Sarah.
Having some challenges as well so we're assuming that the thanks for sharing supporting your comments around margin widening out we expect that probably continue our pipeline is extremely fall we're growing our outflows.
Mildly through Q1 into Q2, so we expect mortgage to continue to be extremely strong through the quarter on the service charge line.
Our debit transactional volume was down at the end of March 35% to 40% what's driving that.
The pull back in Q2, both on debit fees, but also less transactions leads to less overdraft occurrences. So we do expect that to recover towards the back half of Q2 broadly in line with our guidance and be shaped recovery through Q3 in Q4, but that's putting some strain on.
On Q2 for service charges, and so I think John covered the wealth story really well so anything that add on capital markets. I think it's in general deal activity will be low because of the uncertainty in the environment.
A couple of encouraging signs are beginning to see eminent huge inflows into the high yield funds over the last couple of days were actually seeing more high yield issuances companies try to garner more liquidity and buffer there other liquidity position. So we're benefiting a little bit from that now and.
You'll remember that we also bought another boutique M&A from this quarter and they happen to be very focused on restaurant restructuring business and so are beginning to see some opportunistic slow there and I'll. Just I'll also mention that we're actually seeing some quite strong activity in our IR p. businesses right now as soon as companies actually are garnering.
Liquidity that restructuring existing swaps and putting some swaps on the books.
To take advantage of the current position and on the Mark to John talked about we've actually seen about 30% of that of course already as we are seeing rallies in both the leverage loan market and the high yield market. So some of that's come back to us already so we're cautious but we're seeing a few signs of life out there.
Thank you.
M&A because says.
We'll go next to the line of Matt O'connor with Deutsche Bank go ahead.
Good morning.
So theres been some ongoing concern on the market that you take more credit risk and I think some of the details that you provide today said alleviate there was concern.
Okay. Here, we are entering a credit cycle and I think this as a chance to show that your credit.
Not worse than others.
Obviously your estimates internally.
At better than peers, but as we think out over the next several quarters couple of years.
What are the metrics that we should be looking at to evaluate your car performance first other than it it sounds like an obvious question, but but obviously, there's all these payments of hurdles going on.
So it may not be a straightforward as kind of look at the traditional trends.
But wondering how you would think about and frame that.
Yeah, Let me start and then John if you could tick up but.
It's almost a I remember.
When we did have that perception out there that we've had grown faster than it will then well so we have people inside the shops today.
Just rates a jetted recession, and then we can prove it really almost wish for recession. So be careful what you wish spot because I'd be happy. This is there anybody orders and good years without.
During the recession, but here we are so.
I think we feel really really good first off on the consumer side of the house said.
Each of those portfolios that we have huge stage.
Very conservative risk appetite Super Prime high time.
Interest spaces, where we think we can get good risk adjusted returns even with that conservative this profile and so.
You saw us growth explore a pioneer the growth of the education refinanced market, which we think is one such place.
Also in our merchant financing.
Unsecured business, where we have loss sharing arrangements with very strong credit Counterparties that also I think gives us a very good risk adjusted rate of return in those portfolios and so some of the the fed modeling doesn't take that off I mean, we obviously have the ability to understand that.
That up so I do think will end up performing well on the consumer saw better than expectations, and I think better than peers, and so that would be kind of the bedrock that you should be watching that hopefully you'll see us so with that.
And then similarly commercial.
We have as we've grown the book, we've actually growing faster with bigger companies bigger bigger customers in the mid corporate space and those customers tend to be more highly rated thing than the middle market companies.
And so there again that should benefit us.
When we when we go through this period.
I think they've also been very disciplined in terms of the industries that we're banking trying to be say well diversified.
And make sure hope physicians are granular and so I think that should also provide a benefit.
In the areas of commercial real estate or.
Sponsors. We've also kept a list of Counterparties that we want to deal with type quite tight.
Folks that we know would you know and have done business with for a long time, we think they're good operators, we think they trick or treat their base while.
So I think that should also.
In our favor and that I guess you'd look at the same things you'd be looking at.
The charge off rate in those portfolios.
Overtime. So anyway, I think we will have that depleting time. So we feel good about how we maintained our disciplined them, how we've done so and repositioned ourselves to make higher net interest margin and better returns while.
Keeping an incredible discipline on the this part of the equation.
Yes, maybe just to add to that so.
I think you asked about metrics I mean, I guess I'd break it down.
We charge offs.
I have always been lagging they may be even more lagging in this cycle than than in the past given all the forbearance activities that we're going to be engaging and but nevertheless, we won't be monitoring that monitoring them.
The current positioning we I think we keep an eye on reserves to total loans, which we indicated was 1.733% today.
I would also.
Maybe just just highlight the diversification across the balance sheet can keep an eye on that.
We are right around 50 50 in terms of commercial retail and when you dig into each one of those books, whether it's in the commercial side.
Areas of interest to a concern are all in the low very low percentages of the overall book.
And and geographically diversified as well and they are you going there was on the right either on the retail consumer side of things you mostly collateralized.
He is that we understand the billion businesses for very long time, and where we are not collateralized, it's distributors across several different asset classes not all Carmen were in student learning card, we had emerging financing theres a personal unsecured products. So so we think that is the name of the game. There. So those are the current metrics forward looking metrics.
Really comes down to stress results, which we fared better than meeting in the past and our internal modeling, which we have thought.
I have been increasing levels of sophistication overtime, and and we've been back testing and trying to keep current so I think those the three areas you want to monitor when you're thinking about things through the cycle.
And can you just a call helpful color I'd just remind us.
This slide 16, where you talk about your internal.
Stress test showing loss rates going down 50, Bips for US last year, you remind us what drove that without risking our model changes or.
Just remind us what drove that big drop thank you.
Yes, I think there was a couple of things I think the.
Over time.
Doing great job.
Mapping our risk ratings.
To that we will basically had.
And frankly are under appreciated the strength of the risk ratings across the portfolio. So that was the driver of the improvement secondly, the full effect of loss sharing arrangements.
In our emerging finance portfolios were being fully del Tim.
Third just over time the put the the noncore portfolio has been fall out than has been dropping which had some higher loss content has gotten down so very small level. So those are the things that come to mind for me in terms of what the drivers work.
And I think also the the cumulative benefit of the DSO is also being picked up as well.
Okay.
Our next question will be from Brian for end with Autonomous go ahead. Please.
Right.
Mr per Mcf.
Mr Brand. We've lost your line if you would hit one than zero again, we can try to open there once more.
And next crop.
[laughter] around your line is open yes can you hear me.
Yep.
Okay, sorry about that.
Going back to the stress test.
I Wonder if you could you speak a little more to impact that said support and broader government stimulus and I'm sure. It's hard to put a number on it but it gets the thing that striking to me if I look at unemployment in GDP, clearly, we're probably going be worse at least for little while.
But on the other side.
Stock markets at 13 down to.
People, because credit yields would 6.5% where they're likely to at 4% today.
So when you think about the balance between the macro versus asset prices.
Clearly the macros, probably the biggest input, but how much of a buffer or shock absorber do those.
Better asset prices in your mind.
Okay.
Yeah.
Not sure I fully appreciate it can start you're asking I think the the of thrust of the question is.
The fed has.
As we stepped up here, if I understand and Oh Thats made a big difference in the markets certainly the pricing of assets has come in which as a signal that.
Credit quality says, it's better potentially.
Companies will experienced less stress at least for solving so as long as to the fed is playing the way that play and.
So how how much.
Wait to replace that when we when they try to do our modeling and looked at the there is everything that we're doing is that because of the question surplus. So the question.
That was yes. Thank you.
I'd say, there's a couple of things one when you.
It has a meaningful impact I mean, I think thats one of the big.
Items that distinguish this current stress environment from possibly a model environment, she would see coming out of the fat.
[laughter]. So so that when you go back I'm, just wondering if you cycle and receiving the results. There. They don't have this massive stimulus that we have given reasonable rate too.
In our in our outlooks and so that is embedded.
And Thats not just the government actions, which are significant along the fiscal front end the monetary from its also our internal actions that are idiosyncratic and all the things that we're doing to get ahead of that.
That are very hard to model.
Hey, like forbearance exactly forbearance that we're doing all the modifications that we're doing how aggressive or being there.
And our insights and instincts around where to target those efforts.
We felt that it in our modeling along with the overall, although overall support from the government that's a meaningful impact at the other thing to keep in mind and I should add to the other the other important distinction when you look back at severely adverse scenarios is that all of this scenarios are all new shape you heard from Bruce earlier, you shapes, our very strong.
Paul.
These shapes up also and so even if GDP in prior severely adverse scenarios don't fall by as much as we're all saying there that it could fall today. The fact that stays low for such a long period of time is the creates all that stress in the prior severely adverse scenarios. So when you fast forward, where we are today, what we are assuming.
Or what we have in our numbers as more of a stronger recovery into Hs more reshaped and we also have the support.
So net support of the stimulus and our internal actions I do I do think though it's safe to say.
We've never seen and made at the fed has pulled out all their tools from their tool kit from the last go around and then they've added more.
And that the fiscal stimulus Bill was said Ginormous.
And and very extensive and faster in terms of trying to get the cash out to help companies and to help individuals and so.
We really don't have much to qualify in terms of modeling all of that.
That kind of easing off of TDR treatment on for Theres, two encouraged that others delta that hasn't been prior models. So there's just a lot of uncertainty overall it.
With this modeling.
All base are doing the best buy 10, both with the scenario and then try to some of the offsets from federal government actions from.
The.
Federal Reserve actions 11 from the internal actions.
Which is what I'd say.
Just need more time to clarify.
What is that should pictures fees as we go through the second quarter.
It could sneak in one more if I just think about your ability to meet the dollars CG one capital.
Over the next year like total loss absorption capacity.
I guess, you've got 650 million to quarter, maybe 700 million of PPNR.
Yes, I mean, it seems like you would have some securities gains get harvest, if you needed to which would put into C. One capital and then you've got.
Some relief on the seasonal accounting.
And you can it seems like you add it all up.
The loss absorption so to speak over the next four quarters, maybe just like 3 billion or something that is that sort of a fair way to think about it.
Yes, so ill gotten started I would probably just say its ample.
We are very focused on.
Continuing to deliver strong levels of at our I think that's one of the first slides of the feds when we see.
Notwithstanding.
All of the change may environment.
Get our level of was still up versus a year ago in the first quarter of it was close to flat on a sequential quarter basis, and we think there's a good ability to sustain that over the balance of the year. So you basically start with that.
We have.
Obviously, some DSO actions that we could take.
We needed to.
At least some argo the ways.
Also create some additional capacity and then I think on the capital lines.
We'll take our dividend to secure but we've curtailed buybacks for the rest of the year. So if you looked at all together.
I'd say are very confident in our outlook, but if the situation worsens we have very.
Very strong capital position levers to pull and inability to.
Continue to post CET one ratio is yes, I guess I'd just add to that I mean, I think this mentioned stability in PPNR. That's that's one of the first lines of defense and our diversified increasingly diversified business model across and I and across fees is really.
Moving on that front, our transformation programs are are helping on that front.
I would also mention batch.
I think you mentioned securities.
Just based upon where rates are we exclude.
Given the we've excluded Sci from our capital ratios, but but if you were too.
Fewer to take a look at that that's in the that's almost $1 billion of.
Mark said that our unrealized and so thats part of the balance sheet strength that you would want to look at.
In the event steps that you are trying to figure out that part of the story as well I mean all in.
Our WH expected to rise during the year and it's our scenarios hold we expect that hours are CET one ratio as they are going to be stable to rising throughout the year. So you put all that together and I think thats hopefully responsive to your.
Triangulate, what you're trying to get too in terms of $1 of capital strength will be okay. Thank you next question.
We will next go to line of Gerard Cassidy with RBC go ahead.
Thank you good morning, Bruce coming John.
Sure.
No.
The transparency of your slide deck is one of the best so thank you can do that.
It's very helpful for all of US in on slide five what do you give us some good detail on the forbearance.
And then understood.
The boat busting to answer, but two parts what percentage of your portfolio do you think will actually asked for bear interest.
The commercial in the retail and then second.
Tony You then it's going to monitor loans that are that go into forbearance and actually a little needs to be charged bombs or they're going to be non accruals, but initially going into programs because there is putting permitted to do that.
Can you share, but this some of the guardrails that you might have to develop to make sure. The you know any again not doing a purpose, but there was an extended print then.
Limitation here.
Okay. So gerard insist on the commercial side, we've actually done an extremely detailed liquidity cash burn analysis across Florida across the portfolio and Bucketed are up our clients into three buckets, one a bucket that we need for some kind of restructuring and.
We don't recall at forbearance and the.
In the in the commercial bank for some kind of payment relief for restructuring payments and Thats, a very small portion of the portfolio like less than 5%. Then there is another maybe call. It 20, 25%, where we think two or three quarters out they're going to east covenant restructuring and maybe some well leased from covenants, depending how the recovery.
Materializes and then the vast majority of the portfolio. We hit works just fine from a cash on cash standpoint. So we're really looking at everything cash on cash at this point and it'll be developing but we're very comfortable that it's a relatively limited number of people in our portfolio, they're going to need really pain relief.
Hey, John the consumer side, we've got about 4% of our portfolios and forbearance status at the moment.
The majority of those are.
Three model forbearance programs.
Interesting as we're seeing a meaningful amount of our form errand to customers that are actually cash falling and still making their payments and so we believe a large percentage of the our customer bases to assess the safety net.
Not yet under duress, yet so we're working hard on analytics to sub sub segment, our forbearance portfolio to.
Identify further treatments as they come off the 90 days if there are some that have.
Significant stress, we can't make their payment we've got another lever for another 90 days prior to having them roll through charge off and for those that waited through the quarter successfully they'll come back into full principal and interest payments. So we've got a variety of collections tactics and support tactics to our customers to help them make the right choices a variety of.
Other levers and our collection shop.
Should alternative programs make more sense, a full forbearance as well so.
We'll see how the next few months goes.
Caribbean.
Thank you for sure.
Next question.
That will come from line of can use done with Jefferies go ahead. Please.
Hey, Thanks, good morning.
I just wanted to ask a little bit about.
On the line draw as you guys mentioned in the one of the earlier slide obviously, how they had slowed through April and Tom do usage has been in the industry's most affected I wanted to ask you about you mentioned that's about 60% of the draws are converted to deposits and what do we take away from that meaning is it that the other 40% might be being used or is it that.
There was just arent current customers and you know do you expect how do you expect it you know any sense that weather if the line draws are less at this point.
That you're going to start to go see some of these just get paid down if if if in fact, we do get the V shape and how quickly. Thanks, Yeah I would actually say we are seeing some pay downs already I think I think early days say the first two weeks of the pandemic. We saw a lot of preemptive draws inside particularly in that kind of critical segment, which is where they respond.
Contracted so the bigger companies felt very liquid a strong balance sheets. So.
We have placed frankly don't have a lot of capacity for draw. So they were really concentrated in the and the crossover sector. Some of those are starting to come back and what we've seen over the last actually two weeks is more deposit inflow kind of and scale than we've seen line drawn. So I think there's a lot of all just very defensive behavior early.
I just got their heads around one whether theyre banks were going to be there and I think a lot of Katherine banks and those are beginning to come back.
And then and then just where was the thing going on that's corners much liquidity. So the market seems to have come down significantly people will draw on payback, but we see it had a regular way right now and what we do expect to some of those deposits city, but getting to be used as companies go through periods of disruption. So we would expect a regular downdraft.
Of the deposits that are sitting with us and that's really why we did this cash burn analysis that are yet I talked about on direct question, we really see a client by client and track I make sure. We are analytics or I think the important thing too is that we.
Did see nice deposit growth away from just the company's soumitro exactly exactly.
I think theres.
Good good the confidence that our LDR, it's going to continue to say well behaved, particularly with all the liquidity that's in the system.
Yep excellent and then Bruce off just a follow up on the prior slide you talk about.
Assessing new opportunities arising from the current environment I'm. Just wondering is that a is that any change in what do you had already been contemplating in terms of continuing to add to the franchise and what what types of things do you think might go up here for you strategically in that regard.
So we had done.
Last year, when we rolled out top six a fair amount of work on our just strategic thinking of where some opportunities where we have strikes that we'd have a right to win that region.
Leverage so strikes to find new revenue streams. The way, we did with education refinance or we did with our merchant partnerships and so.
Growing citizens access to digital bank, taking it to the next level was one.
Better serving small businesses Smbs is another and then going taking our merchant business and some new directions, I think all those things still make a lot of sense and we're continuing to keep up our investments there.
We're also looking at how has the world changed and are there additional offerings certainly the world's becoming more digital as people have to stay home when we see tremendous sub upsurge in folks using the online and mobile platform and so what does that mean for the future.
Does it mean that.
For example.
The wealth offering for.
Mass affluent that they might be more willing to deal with a virtual advisors that business now going to take off. So we're just looking at a whole bunch of.
Brainstorming sessions, so think through the world's going to be different how do we play how do we make some additional investments and re tweak our overall way of doing business and the strategy.
All right got it thank you guys.
Thanks.
We'll go next the line of John Pancari with Evercore ISI go ahead.
Good morning.
Oh, just just to confirm so when it comes to your loan loss reserve level now post to build that you put through this quarter.
So based on what you know now and your assumption for the.
Direction of the.
Okay. How this plays out.
There's nothing you see that happened in April after you close the books that will point to the need for an additional loan loss reserve build in second quarter for cobot.
Well I'll start off there I mean, John as I mentioned earlier I mean, you clearly moodys scenarios has had worsened.
We have to digest, what we're hearing.
You know in seeing in those updates.
As I mentioned, we have as one of our base scenarios, we have GDP falling 80%, whether it be shaped recovery into age.
The update for Moody's indicates GDP falling 30%, but nevertheless, so recovery later on.
We have an internal that just just as it relates to John specific question about closing your books I mean that scenario came out this week elsewhere close so.
I think we had the best information at the time, we did our clothes that I think we leaned on being at the conservative and.
The assumptions that we took a but as we go through a bunch of April it may be that people think this will be a bit different it may last a little longer and we'd have to come back and reassess that.
Okay Alright. Thank you guys just wanted to put that in context of what you were assuming in terms of the shape of the recovery and what was dialed in.
Okay and then.
Separately in terms of you on slide 16 your stressed.
Alex is that you ran.
Resulting in the 4.1, what was the stress CE Q1 output from when you ran that.
Yes, the stress he one would be in the neighborhood in a severely adverse scenario in you know I guess I'd say, it's really in terms of what we submitted.
For 2020 in a severely adverse scenario using our estimates of losses, which we we believe are quite prudent and and and predictive we would be in the neighborhood of 8% upset loan.
Okay got it alright, Thanks, and then one probably a little better probably a little bit Arnie I look at I mean, thats, probably maybe a I've known temporary low point, but you'd be MD something in the only half range. If you go quarter by quarter, we do the nine quarter outlook at some are ranging between eight and a half.
Got it Okay and did you disclose the amount of loan loss reserve against that 15 billion of.
Higher risk sectors that you flagged.
No we did not.
Okay got it alright, thank you.
Yep.
Yes, one last question too from the line of Saul Martinez with would you be US go ahead. Please.
Hi, Thanks for taking my question so.
I wanted to follow up on.
I think it was tends question just it's a bigger more bigger picture question obviously.
We're all kind of focused on whats directly in front of US right now, but during times like these that you often we'll see more meaningful structural change more meaningful inflections in this competitive backdrop consumer behavior.
I'm wondering if you have any perspective on that I mean, it's had time to take step back in and kind of think about where the PUC could be going and.
How the.
This situation.
Will will influence that and in addition to that how you think about your own strategy in that environment. For example does it.
Makes it assumes that the importance of investing in being successful with the citizens access.
Strategy that much more importantly, the client acquisition tool. So just more of a broader question on the industry and how you think about.
How you sort of recalibrate by recalibrate your strategic initiatives.
To kick off on that one yeah, I mean on the consumer side. The on the most obvious trend is an acceleration of one that was already happening which is a drive to digitization. So I look at all the things that we haven't flight.
Some of which we've got.
Up on our peers like you pointed out to the Sun's access on a national banking digital franchise like merchants finance.
Like the future of our brick and mortar distribution network, how do we reposition at for consumers that have gotten used to coming in less frequently but still being able to manage their money effectively and get advice and Bruce pointed out virtual wealth advisors. We got a lot of these things in motion we got.
Significant investment at our mobile and online banking platform that should start to go live in beta form in Q2.
But as an acceleration of a lot of those things. So we're spending some time to figure out.
How do we get out on our funnel, what you've done more how do we capitalize on consumer trends that are changing very rapidly situationally, we think that could be very sustaining.
And I think the level of confidence I have is high because we're in a position of strength to have all these things already in motion with teams, making progress and taking share in the market. So we're trying to figure out which ones are those pick and choose to really put some significant accelerate acceleration I mean, thats, how I sort of see it on the consumer side great.
So I spend.
Just one quick follow up on on Cecil then.
If we do see a longer recovery and not to be shaped recovery.
You did give some soon hopefully.
For instance on on your allowance by by product type and it seems this quarter the reserve build was really.
Spread out across consumer commercial book, what segments would you stink or most vulnerable to reserve true ups and and because I do think your your loan book is a little different from a lot of other peers. You do have a lot of loan types with wait longer weighted average meeting surety switch for any given loss costs.
We will have higher reserve. So I'm just curious like how we should think about sort of the evolution. Those reserve rates. If you were to have to build greater reserves.
Yeah, So 26 of them materials, I mean, we gave us a breakout.
But the what drove the.
Thanks points that we put up I mean, I think you know what you'll see so in the first place being very very.
Punitive standard in terms of versus incur losses as you mentioned so those categories that have a lot of or have some longer maturity associated with them. So I do look at in school as as a place that would be that would be a driver.
Other other.
Areas, where there is higher loss content, but there's also higher returns such as target unsecured that's an area that keep an eye on.
And so does it to the jump out to me on page 26.
On the commercial from some of the some of the areas inside commercial maybe you didn't show up a little bit less less loss content, but.
But those are the top to that I see on page 20. So.
Why is going to school, so much higher than Rifai.
Or maybe isn't obviously you can think about the that to you. What we mentioned below earlier that maybe rank interesting comment on this that these are really high FICO.
Yes basically.
Great credit risk grade grades.
Yes relationship opportunity people that that in the workforce, but on average six years.
The average comp as a six or your comp type.
Borrower.
Pretty high quality versus being.
Its goal differing one you've got usually have a parent guarantee on that but the thing that really kilowatt indices still calculations maturity. In these areas have 10, 12 15 year loans in many cases, so so thats why that number is high we we don't necessarily.
I think we'll have any immediacy to charge offs on those portfolios, but that's where they still doesn't doesn't always give you. The answer you would expect that in fact delinquency on those portfolios has moved much at all yet and so we're early innings on watching those portfolios, but we're we're liking what we're seeing so far it's really duration remember into also as a fee.
Four year deferment period were for the graduates that extends the duration there too.
That's really what's driving the c. silk and I've got a seasonal difference okay got it goes it up all right. Thanks.
Sure.
So anyway, thanks, everyone for dialing in today.
Reshape your interest and support.
Good day, and they say well.
And ladies and gentlemen that will conclude your conference call for today. Thank you for your participation.
You may now disconnect speakers, please hold while a transfer back in.