Q4 2020 Citizens Financial Group Inc Earnings Call
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So how are you watching woke up and work.
Good morning, everyone and welcome to the citizens financial group fourth quarter, and full year, 'twenty and 'twenty earnings Conference call.
My name is Ellen and I'll be your operator for today.
Currently all participants are in a listen only mode. Following the presentation, we will conduct a brief question and answer session Hasbro.
And as a reminder, this event is being recorded.
Now I'll turn the call over to Christian and Silberberg Executive Vice President Investor Relations Christian you may begin.
Thank you Alan good morning, everyone and thank you for joining us.
This morning, our chairman and CEO, Bruce and so on and CFO, John Woods will provide an overview of fourth quarter and full year results referencing our presentation, which you can find on our Investor Relations website.
After the presentation, we'll be happy to take question Brendan Coughlin head of consumer banking and Don Mccree head of commercial banking are on thank you to provide additional color. Our comments today will include forward looking statements, which and subject to risks and uncertainties that may cause our results to differ materially from expectations. These are outlined for you all.
Review on page two of the presentation. We also reference non-GAAP financial measures. So it's important to review our GAAP results on page three of the presentation and the reconciliation and the appendix with that I will hand over to Bruce.
Okay, Thanks, Chris and good morning, everyone and thanks for joining our call today.
We are pleased with the financial performance that we delivered for the fourth quarter and for the full year as we proved adaptable and resilient given the unprecedented challenges of 2020.
We continue to demonstrate the diversification and resilience of our business model as our mortgage and capital markets businesses delivered strong fourth quarter performance.
We remain highly focused on taking care of customers with our retail branches opened and our teams working on the next round of PPP loans.
We feel we're managing our risk well and we continue to make progress on our strategic initiatives, which will position us well for future growth and for franchise value.
I'll comment briefly on a few of the financial headlines and then I'll, let John take you through the details our underlying Q4 EPS was $1 four our RFG CE was 12, 9% both are up from a year ago quarter, and we delivered 2% operating leverage year on year.
Note that the full year operating leverage was 4% and our PPA and our growth was 12%.
Q4, our credit provision was $124 million versus $110 million on a year ago on a pretty seasonal basis as the normalization of provisions to more front book origination levels helped drive our strong returns.
On the capital front, we maintained a strong ACL ratio of 2% to 4%.
PPP loans and our CET one ratio was 10%.
This strong capital and reserve position gives us a great deal of capital management flexibility and 2021.
We announced a $750 million share purchase authorization today and it.
And we will commence activity during the quarter.
Also we will look to put our capital and ample liquidity position to work and finding attractive opportunities for loan growth.
Our credit metrics, all are trending favorable with Nco's, npa's and criticized assets, all lower and the quarter and a further drop and customers and forbearance.
We continue to allocate additional reserves to the industry segments, most affected by the pandemic and Lockdowns and we feel that our coverage overall is very strong.
With respect to our guidance for 2021, we assume a steadily improving economy and GDP growth of around 5%.
Relative to current consensus, we see slightly higher revenue and expenses and <unk> as well as much better performance on credit.
We see Ncos at $50 to 65 basis points for 'twenty and 'twenty, one which is relative to a 56 basis points in 'twenty and 'twenty.
Provision will be less and charge offs on how big the reserve release will be as dependent on the path of economic recovery.
Big picture, we will transition to slightly lower <unk> and 2021, given our outperformance and mortgage in 2020, but this will be more than made up for by lower credit costs as our earnings and returns and balance back towards pre COVID-19 levels.
So all it all a very strong year of execution and delivery for all stakeholders by citizens and 2020, and we feel we are well positioned to do well and 2021 and continue our journey towards becoming a top performing bank.
I would like to and my remarks by thanking our colleagues for rising to the occasion and delivering a great effort in 2020.
And we know we can count on you again and the new year.
And with that I'll turn it over to John.
Thanks, Bruce and good morning, everyone, let's start with a brief overview of our headlines for the quarter.
This was an outstanding quarter for citizens and strong fee income and good expense discipline, and improving credit and continued steady execution against our strategic initiatives.
For the full year, we delivered record underlying PPE and are up 12% against the challenging backdrop driven by record fee income up 24% with record results across mortgage capital markets and wealth.
We achieved the ambitious top six call to deliver approximately $225 million and run rate expense savings, including approximately 140 million of in year benefits, which supported our ongoing investments and strategic initiatives and financial performance targets.
To this and we improved our efficiency ratio over 200 basis points to 56% by delivering 4% positive operating leverage for the year.
We expect further expense benefit of approximately 205 to 225.002 million 21, which puts the program on track to deliver on a total pre tax run rate benefit of 400 million to $425 million by the end of 200 by the end of 2021.
Strong loan growth of around 6% reflects increased demand and education and point of sale financing as well as PPP loans.
Average deposits grew even faster at 13% a result of government stimulus impact on consumers and commercial clients building liquidity.
Roughly for the full year was seven 5%, which includes a negative five 4% impact associated with our reserve build under Cecil.
Our ACL at year end 2020, more than doubled compared with last year on our year and set one ratio of 10% was unchanged on the year.
Strong P. PNR funded the ACL build 6% loan growth and stable dividends.
And finally, our tangible book value per share was 32.
72 cents, a quarter and up 2% compared with a year ago.
Next I'll refer to just a couple of slides and give you some key takeaways from the fourth quarter, and then outline our outlook for 2021 and the first quarter.
We reported underlying net income of $480 million.
As of $1, four and revenue of $1 7 billion.
Our underlying ROTC with 12, 9% up around 400 basis points as a result of our strong revenue performance expense discipline and improvements and credit as the economy recovers.
Net interest income on slide six was down only 1% linked quarter due to lower commercial loan balances and lower net.
However, despite the challenging rate backdrop, our margin held up well with the eight basis point decline linked quarter, driven by a nine basis point impact from elevated cash balances on strong deposit flows.
Lower asset yields were offset by our improved funding mix as we grew low cost deposits DDA up 4% and we continued to lower interest bearing deposit costs down eight basis points to 27 basis points.
Given the recent stimulus we expect continued strong deposit flows and the first quarter. So elevated cash will continue to impact margin and the near term.
We will remain proactive and pricing down deposits and pursuing attractive loan growth opportunities in areas like point of sale finance and education as well as an attractive commercial segments.
On slide seven and eight we delivered solid fees results again, this quarter, reflecting our ongoing efforts to invest in and diversify our revenue streams.
Mortgage fees were down approximately 30% this quarter due to declines and margins and volumes from exceptional levels last quarter.
However, and mortgage fees were nevertheless, more than double the levels from a year ago, which continues to provide good revenue diversification benefit and this low rate environment.
Capital market fees hit record levels up 52% linked quarter and 33% year on year, driven by strong results from M&A advisory and accelerating activity and loan syndications.
Foreign exchange and interest rate products revenue was also strong up 30% linked quarter with higher customer activity levels tied to increased variable rate loan originations.
We delivered positive operating leverage of 2% year over year and improved our efficiency ratio to 56, 8% as expenses were well controlled.
Average core loans on slide 10 were down 1% linked quarter, reflecting commercial pay offs and decline in loan yields and line utilization to about 32% versus a historical average of roughly 37%.
This was partially offset by growth and retail and and our education mortgage and point of sale financial portfolios.
Looking at year over year trends core loans were up approximately 4% due to PPP education and mortgage.
On slide 11 deposit flows have been elevated, especially and low cost categories and our liquidity ratios remained strong.
Average deposits were up 3% linked quarter, and 16% year over year as consumers and small businesses benefited from government stimulus and clients built liquidity.
We are very pleased with our progress on deposit costs, which declined 24% or six basis points to 19 basis points during the quarter.
Interest bearing deposit costs were down eight basis points to 27 basis points.
We continue to drive a shift towards lower cost categories with average DDA growth of 4% on a linked quarter basis, and 42% year over year.
We expect to drive and interest bearing deposit costs down to the low to mid teens by the end of the year as we execute our deposit playbook to manage costs down across all channels, while improving our overall funding mix.
Moving on to credit on Slide 12, our metrics were positive this quarter net charge offs were down nine basis points to 61 basis points linked quarter.
This is at the lower end of our guidance given better than expected improvement in commercial.
Commercial charge offs and this quarter, primarily came from segments most impacted by COVID-19, such as retail casual dining and energy.
Non accrual loans decreased 20% linked quarter with a $302 million decrease and commercial driven by charge offs return to accrual and repayment activity.
In addition, our commercial criticized loans decreased 18% from $5 7 billion and <unk> to $4 6 million and <unk>.
Given the performance of the portfolio and improvement and the macroeconomic outlook and reserves came down slightly but remained robust and in the quarter at $2, two 4%, excluding PPP loans compared with $2 two 9% at the end of the third quarter.
And this primarily reflects net charge offs exceeding reserving needs for new loan originations.
We have some detailed credit slides and the appendix from you referenced but I'll note that our reserve coverage for commercial excluding Pvp was two 5% at the end of the year slightly up from the third quarter and.
And within that our coverage for identified sectors of concern increased from a prudent and eight 2% at the end of the year from seven 7% at the end of the core and at the end of the third quarter.
The benefit to reserves from and improving macroeconomic backdrop offset qualitative overlays and further built reserves on these areas of concern.
We remain.
And we maintained excellent balance sheet strength as shown on slide 13 and.
Increasing our set one ratio from nine 8% and <unk> to 10% at the end of the year, which is at the top of our target operating range.
Given positive credit credit trends and capital strength, our board of directors have has authorized the company to repurchase up to $750 million of common stock beginning in first quarter of 2021.
Before I move on to our outlook, let me highlight some highlight some exciting things that are happening across the company on slide 15.
On the consumer side, we are focused on national expansion and the citizens access and integrating some of our lending businesses to further develop our national value proposition.
We recently announced the expansion of our national point of sale offering from merchants through our citizens pay offering and we are continuing to add new merchants to our point of sale platform as we expand into new verticals.
We are very excited about and announced an expected next week with a major retailer to provide payment options for their customers, who want a transparent and predictable way to finance purchases through a fully digital experience.
In addition, we're making great strides on our digital transformation, having launched our new mobile app on Android and the fourth quarter and iOS just this month.
We've seen our active mobile households increased 15% year over year and the majority of our deposit transactions continue to be executed outside the branch.
In commercial we have built out a robust corporate finance advisory model and we continue to rank near the top of our peers and customer satisfaction as we help our customers navigate this challenging environment.
And now for some high level commentary on the outlook for 2021 on slide 16.
We expect NII will be down slightly given NIM expected to be down and the high single digits compared to 2020, which should be largely offset by loan growth.
Loans should be up mid to high single digits on and on a spot basis with acceleration in the back half of the year with average loans and approximately 2%.
Overall interest, earning assets should be up about one 5% to 2%.
This assumes elevated cash levels come down gradually over the course of 2021.
Fee income is expected to be down high single digits off the record 2020 level, reflecting lower mortgage banking fees from 2020 record levels at.
And at the same time, we expect good performance and capital markets wealth and other categories that were impacted by COVID-19 last year.
Noninterest expense is expected to be up just one 5% to 2% given and benefits from our top program, partly offset by higher volume related expenses and mortgage and reinvestment and strategic initiatives.
We expect net charge offs will be and the range of 50 to 65 basis points of average loans with a meaningful reserve release through provision.
Now, let's cover the outlook for the first quarter on slide 17.
We expect NII to be down slightly due to day count.
And on earning assets and NIM are expected to be broadly stable.
Fee income is expected to be down high single digits, reflecting lower mortgage banking fees as margin margins continue to tighten as well as seasonal impacts.
Noninterest expense is expected to be up 2% to 3%, reflecting seasonality and compensation.
We expect net charge offs to be and the range of 50 to 60 basis points of average loans and.
We also expect another quarter with provision less and charge offs based on expected loan growth levels and macroeconomic trends.
To wrap up this was a strong quarter for citizens and a good finish to two per year as we continue to navigate successfully through the COVID-19 prices and demonstrate the resilience of our franchise.
We are well positioned to have another strong year in 2021.
With that I'll hand, it back over to Bruce.
Alright, Thank you John and the operator, let's open it up to some Q&A.
Thank you Ms depends on where we are now ready for the Q&A portion of the conference call.
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Yeah.
Our first question will come from the line of Scott <unk> with Piper Sandler per go ahead. Please.
Good morning, guys. Thank you for taking my question.
And let's say Bruce for.
You are one of the other members of management team just any visibility or further color you can give on to the expectation for loan growth to accelerate later in the year I certainly understand that.
Sort of the expectation, but you know as we look at the H eight data et cetera, There's just not a lot of visibility from from the outside so it would be curious to hear any thoughts debt.
Did you have and what kind of what gives you confidence into that trajectory sure well let me.
And a tee it up and then I'll assets on to talking about commercial and Brendan and talk about consumer but.
What I would say is that on the commercial side.
There's there's a lot of cash on.
On the sidelines with investors with PE funds.
That is looking for opportunities to go to work.
Seeing M&A pipelines.
And a record quarter for M&A and the fourth quarter and we see good pipelines coming into the year. So I think.
Related to.
And a increased transactions and money flowing into the market that should spur some financing opportunities.
And that would probably be the big thing the other thing is that.
Line draws are at historic lows, we're probably running at 32% to 33% and we historically were at 37, and we briefly touched 50.
And everybody drew down their cash at the height of the Covid breweries.
And so I think as the economy picks up we should start to see more real investment and the economy.
And also gives us some expectation that the second half could see that.
Line utilization pull up a bit.
And then on the consumer side, we just have.
Such a broad array of.
Portfolios and lending opportunities.
Many of which benefit from the low rate environment. So mortgage should still continue to see a heavy.
Level of originations and.
The student loan refinancing business has also been strong and we would expect to see that continue as well.
We talk about our point of sale financial financing business with citizens pay.
We've continued to grow the customer base and see.
See some real opportunities for that business as well, so I'll stop there and thats kind of the headlines and maybe Don you could talk a little deeper about commercial yeah, I I'd say first thing to note as client activity is really high right now and.
Conversations across the entire I'd say 90 per cent of the client base are completely different levels and they were six months ago. So everybody was hunkered down and their bunkers and trying to build liquidity trying to refinance their balance sheets and that was the theme for 2020.
I think Bruce said it correctly I think as we get into the back end of 2021, and we begin to get some economic recovery, which I think will happen.
We think a lot of those conversations will turn into transactions and we're seeing really record M&A pipelines, we're seeing record capital markets pipelines right now.
And we're seeing just a tone of clients looking to take advantage of what could be a recovering economy.
And remember that the good news here is that a lot of the companies that we were worried about six months ago now have huge cash balances on the balance sheet. So we've moved beyond the credit concerns and now into the opportunistic.
Activities of individuals' Ceos and individual boards of how do they want to climb out of the pandemic and.
And I, just I just from seeing a very different level of confidence.
Everywhere, except for very small business, which I hope the stimulus package will begin to build that confidence and the smaller companies Yep Yep, great Brendan how about consumer yeah sure well I guess I'll just start on a quick point on credit and we continue to have confidence that the health of the consumer is relatively strong and while we're not out of the woods all indicators suggest strained.
Which gives us confidence to lend money out and into the car.
<unk>, our forbearance levels are as long as the band, which is predominantly dominated by mortgage where we have great <unk> coverage and our delinquency rates are the lowest they've been in quite some time. So you put that together and it gives us from a banking perspective confidence that the consumer area and as I say place to stimulate growth just hit on a couple of the assets Bruce mentioned mortgage we expect a run up and.
<unk> next year as John pointed out margins will come down, but we will see some balance sheet growth as we project the mortgage markets and potentially hit around $3 five trillion, which is a bit up year over year, which is which is very strong student loan refinancing a lot like mortgage and a down rate environment has a little bit of a few months, our normalized quarterly originations for student loan refi.
And I was about 350 million and prior to rates ticking down in Q4, we hit $811 million. So we continue to see a very strong uptick in demand there, which by the way as an incredibly strong customer for the future of this franchise.
Young <unk> high credit profile customer that we've got a lot of aspirations to grow the rest of the bank point of sale in 2020, non Apple part of the portfolio basically tripled in size with all the new partners that we brought on board and we continue to expect that to be the case with strong growth in 2021 and lastly on.
Just say our auto business is printed some of the highest returns we've seen in quite some time for the back half of this year.
And while we still think that we are in.
Reasonably good spot for concentration long term and want to moderate the growth and auto we opportunistically given the cash that we have on hand see some opportunities for very moderate.
And auto.
Suck up some of the excess cash that we have on hand with a very short duration assets that will burn off pretty quickly. So all in all we're pretty confident on the ability to drive pretty substantial consumer growth next year.
Okay.
Thanks for the question Scott.
Your next question will come from the line of Matt O'connor with Deutsche Bank Go ahead. Your line is open.
Good morning.
Right.
And obviously been very strong deposit growth from the industry, including at citizens, but do you have any sense of how much of that might be sticky.
And of longer term here, obviously, you've invested and the Treasury management business, which you know.
Arguably it's brought in from deposits, but how do you frame kind of what might be sticky versus what what I'll leave when a central banks start to unwind it.
Yeah, I'll jump in there Matt and.
We have seen significant deposit flows and we do think some of this will stick around and just give us gave us the opportunity to optimize on the deposit side, we have significant rundown going on and the term deposit side of things and Youre seeing DDA.
Increase and it gives us our offer and opportunity to interact with those customers more deeply but we do think.
Good good.
A portion of these deposits will be sticky you've got.
The balance parking has held on longer than we thought.
Stimulus stimulus will rise.
And we.
And we suspect that some of it will run down and as you think about cash balances and 2021, we do expect cash balances to come down gradually over the year, but thats not all due to deposits running off it's really us and optimizing our deposits and deploying those dose deposits into loan growth throughout the year. So.
A good portion of it will stick around.
Let me add one point on the consumer side, when you strip away the surge deposits and.
The last three years, leading up to Covid.
And Ben performing top of peer set on low cost deposits and then we try to create that away in 2021, we believe that's still the case and so and that's driven by underlying health of consumer engagement metrics and the consumer bank and so I believe we are and a very strong position, putting all the COVID-19 surge deposits.
And <unk> to continue to outperform peers for at least the next 12 months, Yes, Let me just add one thing that on the commercial side of our Treasury sales were up 31% last year on the back of a lot of the investments that we've made over the last four to five years and that business. So not all of that will result in DDA growth, but some of it well some of it will be free.
And so a little V. DDA. So we're seeing sales momentum on the treasury side, which is which is quite healthy.
And somewhat related what's your appetite to add securities either at these yields are you know what our price point going forward, obviously, you're optimistic on growing loans.
Which is going to absorb from a deposits and liquidity on the medicine.
And do you think about the Securities book, where we are seeing some banks grow quite meaningfully even as rates have come down from mortgage box.
Thank you.
Yes, thanks for that Matt I mean, we've been patient on this.
Through the second half of 2020 and have held off and <unk>.
<unk> cash balances to rise like like many have as well and in part the reason for that was given the levels.
Or mortgage backs, which is where we primarily.
On.
Operate and our and our Securities book the levels that were not attractive.
As you get into the early part of 2021, the levels have improved a little bit and so we may we may find ourselves considering investing the cash flows that we otherwise would get back on prepayments lets say and later later in the quarter February or March we may we may find ourselves and <unk>.
<unk> some of that and January sort of a pre investment if you will and then stop and see where that plays out, but you won't see us going and heavily reinvesting all of this cash and long term mortgage backed securities.
I think that to the extent that we want a cash a little bit of this rate rise and early in the quarter, we've done a little bit of that and.
And we May do a little more if rates continue to.
Hang on or possibly rise and it's more of a dollar cost averaging situation and put a little bit to work and wait and see rather than piling all this cash and too.
Into securities at these levels.
I would just add Matt that to me, it's a it's really terrific that we have this much cash.
A pre funds the loan growth and that's really where we're targeting.
Loan growth will be better than securities growth and our view.
And it also allows us to take reasonably aggressive pricing actions to drive some of the.
Balances away so.
And we've got our game plan here, if we see a little flex up and securities rates, we're ready to to engage but at this point, we're being fairly disciplined and cautious.
Thank you.
Your next question will come from the line of Erika Najarian with Bank of America. Your line is open.
When modems and Joanne.
Your line is open go ahead.
Hi, good morning.
And my first question Bruce is on the.
The buyback process for this year, you know heard you loud and clear that and the board authorized $715 million.
And so it's I guess, it's and the two part question and number one are you opting in or opting out of participating in this year's stress test.
And opting out does that give you leeway in terms of your your repurchase side and what is the timing of that $750 million.
Sure, maybe I'll start and junk and.
And some color but.
But we haven't made that determination yet as to whether they will opt in or opt out and there's some nuances that are that.
And that could be tailwind for us and then also the bloated balance sheets and defense model runs expenses based on the size of your balance sheet that could be a headwind. So we're kind of calibrating that and we have to make a decision by February 15th.
Its been extended to March 15th March or April 1st.
And they're saying okay, great. Thanks, thanks for that.
And that color John.
Hi.
It gives us a little more time to mull, it over but regardless of whether we.
Opt in or opt out we have plenty of flexibility here.
Two.
Buy back our stock and.
But I think we can be reasonably aggressive the thing that's more of a limiter for us is going to be our capital range, which is our internal targets of 975 to 10 non.
Not really worried about hitting the stress capital buffer so we.
We set the program up with a big and upsize. It I think we can do.
<unk> net earnings.
After the <unk> growth and.
There is some wildcards as to how big the reserve release could be so I think we have.
On a decent amount of authorization to to cover that if we get favorability on that so.
We would expect most of this would be executed this year.
And it could it could easily go over into next year and some of that depends on the amount of loan growth and.
The amount on the reserve release and any color Yeah, No I think that's right I mean, and they just gave us a little bit of flexibility there in terms of.
I think it's now April fast and free we can we can take our time and and determine whether it makes sense to opt in but.
Bruce laid it out well in terms of the tradeoffs with it's really we've seen some changes and the fed model that would help our P P and R.
<unk> profile and the fact that we keep generating high levels of PNR is good as it relates to.
And how they forecast as we understand it on some of the history. So that those are all positives that might lead us towards opting and but then as Bruce articulated and we also now understand that all of this cash that we're holding shows up and total assets and then we understand that the model basically converts that into expenses that we're somehow going to incur and so were going.
And I have to frankly, just put pen to paper here and and calculate what we think.
And the benefits are of opting in and we will also get to see the scenario and evaluate all of that but more importantly, the SCB is not a constraint and it's basically our operating levels and so it's sort of an academic exercise and a lot of ways in terms of whether we opt in or not.
This coming year.
And I think Bruce handle D.
And the buyback question.
Got it and Mike.
My second question is yes.
And on your non interest expense non interest expense outlook.
Really appreciate on slide 28, which breaks down and how you're how you're glad you did getting from 2020 to 2021 and and I guess my question here is.
And this is 1.5% to 2% outlook.
Fully reflective of what sounds like a more optimistic outlook for second half loan growth as well as mortgage volume and.
And if any of those components disappoint you did does that slide you at the lower end of the range or out of the range.
I guess I'm thinking of it.
And if revenues disappoint and what would this look like.
Yes.
And I think we always maintain flexibility.
To.
Kept on expenses, if we're not seeing the revenues come through obviously the earlier and the year.
And have visibility and make that call youre going to have a bigger impact on the expense base and the current year you can see on that slide Erika that theres volume driven expenses that would be the first ones to adjust and they could adjust even lower than that range, but then some of the strategic investments that.
We're making we could we can space those out a bit as well and then we could always go back to the well and look to upsize. The top program again, so I think there's there's a number of avenues, we have and levers that we can pull.
If it if it came to that at this point, however, we're pretty sanguine debt.
The economy is going to be recovering and.
And it'll be a little slower going and the first half of the year, but actually pick up quite nicely and the second half year, So thats the call and that we're making.
And I might just jump in and add debt mortgages and creates a fair bit of variability on the expense line and.
If you just kind of normalize for mortgage expenses.
Noninterest expense is flat.
Really from 2019 to 2020 to 2021, so I think that's an important point ex the mortgage growth, yes, the mortgage growth and if you just kind of normalize it back for 2019 levels and.
And that sort of allows us to on and on an ex mortgage basis, if you're continuing to drive positive operating leverage throughout each of those years, which is which is important.
Very helpful. Thank you.
Your next question will come from the line of Jonathan <unk> with Evercore ISI. Your line is open.
Good morning.
Hi morning.
Wanted to see if you could.
Bruce possibly give us your updated thoughts on on M&A.
And just given your capital levels and and given the opportunities you're starting to see develop on the.
On the banking side and even on the capital markets and I wanted to get your thoughts on.
Both on the whole bank side as.
As well as non banks, particularly I know you've mentioned the capital markets opportunities. So interested if you're.
Flooring deepening your banking capabilities on that front. Thanks.
Sure.
Well it was a relatively quiet year for us and 2020 not for lack of trying and so on certain.
<unk> looked at a number of things and had a number of conversations but we remained very disciplined buyers and in terms of the financial profile that we need to see and then also the strategic and cultural fit.
And so.
We will continue to I think have had outreach and engaged and those dialogues.
We'll see if we can get some things done and 21.
In terms of our focus we've been consistently over the last several years on augmenting our capabilities and our.
In terms of acquiring fee based businesses. So we can do more for our customers.
And that was one of the gaps that we had.
But from the IPO days was that we weren't at scale and certain activities that are quite important and are important to our customers.
And so I think we've pretty much address the mortgage area.
And yet to fully address the wealth opportunity and so we're still active and conversations and the wealth space.
And then also and the M&A, we've got on a long way towards.
Cementing that capability here, but there could be selective opportunities for us too.
And <unk> industry vertical approach with some some boutique acquisitions in terms of whole bank.
We I think see what's going on and there's a race for scale.
And.
And there may be some things that.
And it turned out to be interesting there but.
We've been quite disciplined and our approach there and we've really just prioritize organic growth prioritize the growth of our digital bank.
I have to see something that made a lot of sense from a financial standpoint.
<unk> based capabilities and geography.
For us to moving that direction, but we're certainly open to it and we will kind of keep keep the periscope out and see if theres anything that makes sense.
Thank you that's helpful and then separately on the.
And regarding your merchant partnerships just wanted to see if you can give us an update there on how they've been performing as they have been performing as expected when it comes to the the returns from this program and are you expecting to add more this year and I'll ask Brendan to handle that one Brendan.
Short answer is yes. They have when you look at the credit performance of the merchant business again, while we're not out of the woods on the environment around us the delinquency on that.
And that has been <unk>.
<unk> are down.
And the percentage of those customers have found their way into forbearance is negligible and so that portfolio is operating essentially like theres no recession going on around us and Thats a lot driven by the positive selected the customer base and.
And the frictionless digital experience that.
We created the payment gets automatically drafted out of the customer's account.
Every month and so we're very.
Encouraged by those signs of credit performance.
Turn to the business our credit card like.
But the risk profile seems to be lower than credit card likes youre getting outsized returns from.
From the portfolio than you otherwise would expect so we're excited about that as I mentioned we are.
And also excited about the growth that we generated in 2021, we had two or three key partners entering the year and we're going to exit the year with 10% to 12 and as John teased and.
And about a weeks time, we'll have relatively large announcement about another big partnership that we got and play and with the introduction of citizens pay which is sort of our new platform that really takes that business to the next level.
Very very encouraged by.
The opportunity and the marketplace and our first mover advantage and Youre seeing more and more talk about this and the industry.
Retailers and merchants are now looking at this as a way that they can dramatically improve their sales and.
A down economy, and so we're getting more and more inbound calls from companies looking for us to help them reengineer their sales process and try and give them a revenue boost so we're very excited about this we think it's very distinctive part of citizens and we remain poised to capitalize on the opportunity.
Okay. Thank you for you and niche and your next question will come from the line of Gerard Cassidy with RBC go ahead. Your line is open.
Good morning, Bruce Good morning, Jim.
Sure.
John can you share on this.
Obviously, you guys have been very clear about the outlook for credit, which is which is good for 2021.
And loan loss reserve, releasing that you and your peers are very likely to see because of the improving.
Condoms, especially on your second lien and for the year can you tell us what you think the loan loss reserve to loans will get too because if I recall based on your data I think the post Cecil reserve level on January one 2020 was 147% you're obviously well above that do you think that's is that a target.
And an area that we should kind of look too and the future will be something higher.
Yes, I mean, I think it's a good question Gerard I mean, I think that.
It's a good.
Sort of anchor point, when you look back on something in the neighborhood of 145 on day one seasonal.
On the one thing that we think about regarding that 145 is that we haven't had a credit cycle.
And for close I guess around a decade, leading into that $1 45. So there was a probability weighting that would expect and credit cycle to happen sometime over the horizon of the seasonal.
Sort of projection and.
So in some ways, we think that what's going on now.
And the decks are getting cleared out we.
Certainly had a cycle and we're going through one and so in terms of the resting 0.44 hour coverage ratios, it's unlikely to be higher than that and I think it would be in that neighborhood. There's there are some arguments that would suggest that maybe it could be a little lower but maybe maybe given mix and other things that could be a little higher but.
Think about all those things that we wouldn't expect it to be much higher than that and in terms of timing I mean, your guesses and spot possibly.
Possibly as good and mine, but we do think that things improve pretty significantly here in 2021, we're going to move.
Relatively.
Down pretty pretty significantly from our current levels, which are quite high.
As you get into the end of the year, we're going to be heading towards that level that I talked about.
The timing of that is really what it is given seasonal and happens pretty quickly I mean, if the economic environment continues to improve and when you think about and what we got and improved economic environment interest here in January and it wasn't even reflected in our and our results for the fourth quarter. If that trajectory continues and we can start heading towards that.
Level as you get towards the end of the year.
I'd just add to that though I think Gerard.
I have to look at this really over time and I think we'll get on our part of the way so that will be somewhere between where we are and that $1 40 fiber as John said, maybe slightly better 145 resting place.
A lot has to play out in terms of economic recovery and how much stimulus and all of that so I think we will make strides and certainly below 2% and on the way towards getting down there, but it'll be somewhere in the middle.
And we will have to see how things play out.
Very good.
And we like that trajectory for you and your peers and bigger picture question for you Bruce.
Your outlook is quite optimistic.
We concur with so we're with you on what we expect as well from you and your peers.
When you go down the elevator at night.
And what what's the risk that you worry about because there just seems to be so many positives over the next 12 months potentially.
Excuse me for all the banks, including your own and.
And who's worried about something on them left feels like obviously nobody knew the pandemic was going to be as bad as it was but what do you worry about when you go down the elevator at night.
I guess, we're getting increasing comfort.
And that with the vaccinations with the stimulus that the economic outlook.
Is improving and that we will have recovery next year. So I wouldn't that may have been a big worry and 2020 I think it's less worried today and drawn down and the elevated and I think you go back to managing other risks for example, and the whole <unk>.
Fiber and fraud risk.
That's that's out there.
Something that is top of mind and we all the banks are spending on a hell of a lot of time, making sure that on.
Our customer assets are safe and the way, we're running things data is safe.
Et cetera, so that is a I think a big focal point for us and other banks.
And I tend to keep at it.
Really the top of the list at this point.
And if anything else Brendan and I guess competition would be the next thing is that.
Certainly.
And we faced intense competition for since the IPO from all comers from.
On the Mega banks from from peers from smaller banks from non banks fin techs.
And so.
Continuing to really delight, our customers and do a great job from our customers. So they have no desire to switch given all the competition is out there. It's one of the reasons and that we've been really motivated to go out and invest in technology and invest and customer experience.
And invest and new capabilities. So we can do more for our customers really to cement those customer relationships and so if I had to pick a close second half would probably be the second thing on my list.
Anything else you day I, just think that you know the industry going through such a transformation accelerated by Covid with digital just the speed and pace of executing on.
A very substantial change agenda I feel exceptionally confident about where we're positioned in the market is moving fast and I think.
Yeah.
Banks that can execute the best on that will be and the winner circle at the end of the next two years' time, and we're making the right investments I think but it's a quite sizable changes change management and Thats, probably number three and setup I agree.
Thanks for the question. Thank you.
Yeah.
Your next question will come from the line of.
But balloon place.
Okay. Your next question will come from the line of Ken Houston with Jefferies. Your line is open.
Hi, everyone and Amanda Larsen on for Ken.
John can you talk about what's embedded in your NII guide for PPP income in 'twenty, one and how that compares to 20, maybe just touch on the income earned and <unk> and the amount of forgiveness and dollars and notional.
Sure, Yes, I mean, I think big picture 2021, and 2020 are pretty similar on the NII line.
And then Theres really based upon there might have been a little drop off coming from round, one had round to not come in but when just the way we our outlook for round, two which just started in earnest actually and is going quite well for us over the last 24 hours and Brendan may actually give us a few comments on that but in general.
And it's pretty similar pretty similar profile from 2021 compared to 2020.
Forgiveness.
And the way we account as you may know and round one.
We have been amortizing.
And over the two year period and round one the deferred fees and so the farther you get into this two year period, the less lowered the impact on forgiveness and so forgiveness is actually not a very big impact and <unk> and it won't either be.
And <unk> as well as pretty stable and so that's basically it.
Best way to talk about that and I, just maybe we could pivot and Brendan you can just offer a.
Are you on.
On the latest PPP program, because we're up and running and accepting apps and we are off to a terrific start yesterday.
Absolutely and the latest round of PPP started yesterday as Bruce and John mentioned embedded on our outlook has.
Less than half of the originations that we saw on the first round.
The first day was exceptionally strong we executed incredibly well we ended overnight with a little bit shy of 14000 applications technology worked.
Really really well and pushed up a little bit over $1 billion and application dollar. So TBD on the funding, but that's heavily heavily driven by PPP.
PPP round, one borrowers and so we've got confidence that conversion rate will be pretty high existing customers of ours. So we're very very pleased by.
By our performance on day, one and we expect demand to be pretty strong over the next couple of a couple of weeks here. So we'll know more in the coming weeks on the size and if this pushes up higher than we thought TBD and it's hard to get a full gauge on the on the demand given the state of our small businesses, but all signs from day, one and are very positive.
Right.
Okay, Great and then from.
And my next question.
Yes, it seems to be a trend that most banks are guiding too caught higher than consensus expectations for 'twenty, one and largely driven by investments and would you characterize your investment spend as an acceleration or a pull forward of future strategic initiatives. As a result of the pandemic or something else or are do you believe the $125 million and strategic initiatives and the reason.
Total amount.
New spend for a typical year and I had a quick follow up after that if I can stand.
Yes.
I think we have worked really hard over the years to try to protect our investment spend and strategic initiatives. So top has been a big contributor of delivering positive operating leverage but it also allows us to self fund and the things that we need to keep positioning us for future growth.
<unk> and growth and our top line, so I think that 125.
Is it feels right and.
And I think the banks that are going to come out of the pandemic well are the ones that are continuing to look for opportunities to advantage their position and areas, where they see opportunity and where they have strength.
Okay that makes sense and then on.
Do you have an expectation and for non recurring expenses. Our target you may incur as a result on the Upsized top sex and 'twenty one.
Yes, John.
And why don't you take that reported versus underlying different yes, I mean, I think I think yes.
That is yes, but at a lesser pace and magnitude that you would've seen in 2020 and much of that would be likely.
Traded and the first half.
And I and tapering off so a lot of a lot of the day.
Costs associated with.
With our activity in 2021 and have actually been and.
Debt incurred in 2020, but again there'll be a little bit more on the first half, but tapering off throughout the year.
And at a lower magnitude year over year.
Okay. Thank you.
Okay.
Your next question will come from the line of Ken Zerbe with Morgan Stanley.
Your line is open.
Alright, great. Thanks.
Actually just staying on the.
Topic, if I got on the numbers right. It sounds like your full year NIM guidance is call. It roughly $2 eight first quarters 75, which means over the course of the year interest.
And actually pretty noticeably can you just talk about the drivers there is it either I mean and how much of the drivers there the lower cash balances and you expect versus.
The higher 10 year assumption thanks.
Yeah, I'll go on and take that I mean, I think we do expect that.
Net cash balances will dissipate throughout 2021, as we mentioned earlier, we are we are aggressively running down our term deposit levels and optimizing deposits and general so youre going to get.
A nice mix shifts and deposits that would drive some positive.
Contribution towards net interest margin and then just pricing.
Outside of Mexico, our interest bearing deposit costs, we expect.
Two fall, we're at 27 basis points and the fourth quarter, we expect to drive that into the low to mid teens by the end of the year and that'll happen again also gradually quarter by quarter as you go throughout the year and then the other.
And I might highlight is that.
And long and of the curve, we've got some steepening going on and maybe not as much as earlier in the month, but certainly still some steepening and that has occurred and more steepening that we think will likely occur over.
2021, so therefore that front book back book drag that's been happening starts to the magnitude of that starts to also moderate.
As we as we put more money to work through loan growth. So those are the those are the drivers that I would that I would highlight throughout today and if I can add to that too Ken and I mean, I think we're trying to show what the NIM is ex the excess cash and.
It's quite quite significant.
17 basis points higher.
And actually Q3 to Q4, and we were up a basis points.
<unk>.
I think that the analyst community has been very very very focused almost to the point of being obsessed with NIM.
The NIM number with these elevated cash becomes a little less clear.
And so trying to think about.
NII really is the beach and here, we're focused on managing NII and we're focused on.
Try and hold the underlying NIM and then when we have all this cash how do we put it to work smartly, how do we get loan growth.
Cautious on securities as we discussed earlier.
But really try to keep NII performing well.
And that's the shift I think that debt.
And we're feeling here inside citizens.
And.
On a completely makes sense and just.
And to separate follow up question your NCO guidance, if you're already at 61 basis points.
And excuse me and your.
Your guidance is for that sort of 50 to 65.
How do you see that playing out I mean is should I mean should charge offs stay relatively stable sort of over the course of the year or do you expect.
Any particular quarter like two quarters second quarter third quarter to be a little more elevated assortments.
From a hill's shape versus a steady state charge offs well yeah.
It's a little bit.
Volatile on the commercial side as we saw back in Q3, So you can.
Get hit with a tall tree and the.
Numbers can move around a little bit, but generally speaking right now we've got really great trends and all the credit metrics on the commercial side. So I think the first half of the year looks it looks really good where you have the most visibility I think going out into the second half of the year you've got to see.
What's how fast do we get to life as we knew it.
From a vaccinations and then how does that positively benefit commercial real estate. If it goes well then you could continue to see subdued levels. If you see some issues come to the surface.
Because things go a little less wells and I think thats a room for potential increase but still I think within under control and the realm of being under control.
And then on the consumer side.
We have kind of all time, great metrics in terms of delinquencies and performance.
And we have had folks come out of forbearance and interestingly, 94% of those people coming out of forbearance or current.
And so we've been able to cross that bridge and and not disturb the kind of really good credit metrics we have.
And there are certainly now with the additional stimulus and being targeted for the industries and the people working and those industries most affected by Covid, there's more hope.
And ability for those folks to get back on their feet. So you could see we I think we're thinking net.
Pre this last round of stimulus and talk about more stimulus that we could see an uptick in the second half of the year, but I think.
It's less clear that we're actually going to see that and that can continue to kick out into the future and maybe just go away. So.
I'd say, we're pretty sanguine at this point, but you.
Do you have to expect the unexpected so that's why we have the range that we do.
Alright, great. Thank you.
Your next question will come from the line of solid Martinez with UBS. Your line is open.
Hey, good morning, just wanted to sharpen the pencil a little bit on and earlier response to Amanda's question, but what specifically are you assuming for PPP forgiveness on round one.
And new origination on round, two and your mid to high single digit op.
Loan growth and it because it would seem like even the net number.
And is something of a headwind in 2021. So if you could just help us filling the gaps there.
Yes got it and then just talk to that I mean, I think as I mentioned year over year.
Contribution to NII in 2020 from the PTT round one.
And I will be similar to the contribution we expect in 2021 from round, one and round two together on the NII line and.
And the forgiveness piece, which was this was potentially quite significant and 'twenty and 'twenty is now on to the longer so because we recognize a portion of all of those deferred fees.
Every quarter as you click through every quarter that goes by we've been recognizing and NII a portion of what one might accelerate upon forgiveness, such that as you get up and do the first quarter.
The numbers are not that great.
Okay.
And so from that perspective forgiveness is not a big story anymore with respect to at least the way we account for things and we.
Hi is this stuff pretty ratably over the two year period, so the contributions.
Stable year over year and I would.
I would just put a little color on that is that the.
First program.
And kind of stays level with the second half and in the first half of next year and then it's the it's the second new PPP program that kind of prevents a falloff in the second half of the year. So if you want to think about it that way.
Relatively stable revenue levels on the existing programs through the first half of the year, we would've had a falloff, but now that we have grown and P. P. P. We try to avoid having that fall off and one other Brian and I guess, Mike if I could just if I could just interject a little bit here, because we're and we're kind of running out of time.
But I guess my question. That's helpful. Color. My question was on loan growth, though not NII the mid to high single digits. It does it would presumably that has some forgiveness on the $4 5 billion and and accelerated run off of that which is a headwind.
But you also have some new origination on round two and.
And I guess my question is net net how much is how much of a headwind is that in <unk>.
Bedded into your mid to high single digit on loan growth.
And just just real quick in terms of dollars it's Bruce.
Brendan mentioned earlier, its less than half of our originations on the front and so when you think about.
Our average.
Spot loan balances are about $4 billion at the end of 2020 on this program that falls to something in the neighborhood of two to two to $2 5 billion by the end of 2021. So you can basically get a sense for the fact that we're making up for that.
With the other other categories.
And so there's no real headwind essentially okay.
Well there is a headwind we are overcoming it with other categories outside of PPD.
There is a there's a shrinkage and loan growth year over year.
And that we have to overcome with other cash so theres about it yeah. So theres about a one that may have the $2 billion headwind net.
Forgiveness, how much is being how much of the round one is coming down versus how much new origination on round two yes. So net net that is a headwind, but net net net.
And that's one of the reasons that we're guiding to the high spot loan growth, but the average loan growth is less.
That's one of the reason right.
Okay, Okay, because it would seem that you know.
If I think about one Q youre not going to it doesn't seem like there would be much growth and it would be fairly minimal and the first half of the year, which would imply.
Second half.
And the acceleration that on the surface seems extremely rapid and the third and fourth quarter with annualized loan growth.
Being I don't know the exact number but being very very rapid and you know it.
Just it seems I mean.
And here everything you say, but it does seem like you really giving.
Yourselves and the banks a lot of the benefit of the doubt debt.
On the economic recovery will be will translate into very very rapid loan growth. So I'm. Just curious if you how strong would you disagree with that logic.
Well, we are standing by the guidance, we're giving and and I think you have to recall, we went through each of the portfolios earlier and the call and we have probably more sales and out in terms of and ability to capture loan growth and our peers and we've demonstrated that consistently since the IPO.
I would I'd, just say on the consumer side.
While and economic recovery as expected and will will help.
The originations that we've embedded and our guidance.
We're ramping them up right now and today alright economic upside.
I don't know that.
Betting on a massive upswing thats fully dependent on our loan growth I think we can deliver and we're gonna start delivering it right now.
Thank you Okay, alright, thank you very much.
And due to time.
Time constraints, we have time for one more question, which will come from the line of Bill car cash with Wolfe Research. Your line is open.
Thank you good morning, I had a question on your capital targets.
And Matthew or stress capital buffer was up around 376 basis points and the December stress test of about 40 basis points from the June stress test and.
That suggests required capital of around each quarter, and less which is a fair amount below your target range. So my question is could we see your target range come down over time I believe you mentioned John that FCB is not your constraint, but rather youre operating levels could you expand on that.
Yeah, I'll just start off.
Bruce Mad and here, but yeah, I mean, I think our current target is 975% to 10% and the implied.
Implied levels from FCB would be well below that.
From the middle part of the year from the June task, we had on SCB and three 4% you add that to the required minimum of four 5% and you get a seven 9%. That's the that's the official FCB unless and until the fed.
Decides to change it and they have up until March 31st if I could.
And just interject, we think thats too high because theyre not modeling people cannot correct correct.
You'd lower than that even at seven.
Does come back to prudent so and conservatism. So yes, I mean, I think target levels from where we want to see our rating shake out what we what we view and <unk>.
Terms of managing the risks and the platform would be well north of the seven 9%. So it just doesn't come into play.
A lot of ways, even though we do think it's July so yes, I mean, I think the other point I would make we said over the years that we don't think our platform is any riskier than our peers sets and us.
And if that if the if the economic environment and the group believes.
Capital levels decline over time, as we cleared the decks post pandemic.
Wouldn't see our capital levels needing to be higher than the average of our peers and so who knows we'll see but right now.
Our board and management and Bruce.
And have worked on this target range, which and which are typically to serve as well.
And allowing us and navigate through the pandemic and provide some visibility and good times and bad and that's a good way to describe it yes.
Got it.
Thanks, if I can squeeze and one last one I wanted to follow up on your comments around the securities portfolio can.
Can you discuss what kind of reinvestment rates youre seeing relative to the 195 that we saw this quarter and I was hoping you could discuss.
Curve Steepening, we would need to see for the downward pressure from reinvestment rates to be particularly since it looks like some of the dynamics from QE and let agency MBS spreads to turn negative and you guys have a pretty sizable portion of your investment portfolio.
And the asset class.
Yes, I mean reinvestment yields are and the call. It the $1 20 to $1 30 range.
And.
And that's creating a call. It 50 to 60 basis point and front book back book dragging on and whats running off the backlog runoff is and all the 180 185 range. So and that's been a phenomenon that's been occurring over the last couple of quarters.
We are watching Oas's Les's words were positive.
Last quarter, even though yields are up all assets have tightened a little bit this quarter.
And as I also mentioned earlier, we get about $800 million of cash flow a month and from time to time, we will we'll invest cash flows and advance of coming months and we get a little bit of that in June, but we're not going to put a lot of cash to work and this kind of rate environment, unless and until our yields begin to rise a bit more on how we assets.
And more favorable so we're doing a little bit of investing there.
Debt to get ahead of some things, but not a lot. Okay. Great. Thank you. Thank you.
Thank you guys for squeezing me on.
Sure.
Okay.
Is that is that all at this point there are no further questions in queue.
Okay, great. So thanks, everyone for dialing in today and we certainly appreciate your interest and support.
Great day stay well everyone.
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