Q3 2021 Citizens Financial Group Inc Earnings Call
Yes.
[music].
Good morning, everyone and welcome to the citizens financial groups third quarter 2021 earnings conference call.
My name is Ellen and I'll be your operator today.
Currently all participants are in a listen only mode. Following the presentation. We will conduct a brief question and answer session. As a reminder, this event is being recorded.
Now I'll turn the call over to Kristen Silverberg Executive Vice President Investor Relations Kristin you may begin.
Thank you Alan good morning, everyone and thank you for joining us for.
This morning, our chairman and CEO, Bruce Van <unk>, and CFO, John Woods will provide an overview of third quarter results referencing app presentation.
Once you can find on our Investor Relations website.
Inflation will be happy to take questions, Don Mccree head of commercial banking and Brendan Coughlin head of consumer banking are also here to provide additional color.
Our comments today will include forward looking statements, which are subject to risks and uncertainties that may cause.
As a result, if you can materially from expectations.
These are outlined for your overview on page two of the presentation. We also reference non-GAAP financial measures.
And important to review our GAAP results on page three of the presentation and the reconciliation in the appendix and with that I will hand over to Bruce Thanks Kristen.
Good morning, everyone. Thanks for joining our call today.
We had a successful and busy third quarter featuring continued strong execution of our strategic initiatives. Good financial performance with positive operating leverage and a 7% sequential <unk> growth and the.
The announcement of three acquisitions.
We are planning on.
Offense, and we feel that we are taking the steps to position us for solid growth in franchise value and earnings and returns.
Our financial performance in Q3 reflects strong revenue growth of 3% sequentially as both net interest income and fees grew nicely.
NII benefited from a pickup.
Pickup in spot loan growth with retail up 3% and commercial up 1%, excluding PPP impact from loan forgiveness.
The gradual improvement in loan volume. So we have expected is materializing belk held back a modest amount in Q3 by impacts from the Delta variant on the recovery as well as by supply.
Supply chain issues and labor shortages. These impacts should continue to abate going forward and we expect even faster loan growth in Q4.
Interestingly the amount of PPP forgiveness is roughly equivalent in the first and second halves of 2021, So Q3 saw a meaningful pull forward.
<unk>, which benefited Q3 at the expense of Q4.
Nonetheless, the faster loan growth, we expect in Q4 should largely offset the lower PPP impact on Q4 net interest income.
Strong sequential fee growth once again demonstrated the diversity of our business model.
Mortgage had a bounce.
Quarter, which helped offset some seasonality in capital markets fees, while wealth hit a new record in consumer fees continued their recovery towards pre pandemic levels.
We expect this diversification to play out again in Q4 with capital markets poised for a strong quarter, given exceptional pipelines and mortgage.
<unk> seasonally softer quarter.
We kept expenses under control given our efficiency initiatives, which led to positive sequential operating leverage of around two 5%.
And credit continues to be in great shape with Ncos are 14 basis points in the quarter well below our guidance range.
For the quarter of 20% to 25 basis points. These strong results across expenses and credit should continue into Q4.
The strategic initiatives, we're focused on across consumer and commercial continue to go well and theres more on that in the presentation. We feel we are focused on prioritizing the.
Surface, where we can differentiate ourselves and where we have a right to win.
The acquisitions, we've announced year to date are all attractive from a strategic and financial standpoint, and present only modest execution risk.
The investors of HSBC transactions give us a top 10 deposit market share.
<unk> Metro and over 1 million, new customers, who collectively we feel we can do more for.
We also gain a big augmentation to our digital bank customer base from Hsbc's online bank and we gain a thin branch network in Washington, D C and Miami.
Our integration efforts so far are progressing.
Dressing nicely.
Our JMP acquisition is also strategically compelling.
Upon closing the deal in mid Q4, we'll have a much broader and deeper corporate finance coverage and technology health care and financial services plus the gain in equities business that is very well run focus.
<unk> and highly regarded.
And as non bank lenders continue to take lending market share from banks and private equity ownership of companies continues to increase it's important that we broadened our capabilities to be able to compete successfully in this new landscape.
We will increasingly generate more fee revenue across our customer base.
Given these expanded capabilities.
Also worth noting is that the Willamette transaction dramatically expands our valuation services business with a prestigious outfit. This capability is highly synergistic with our M&A and broader capital markets effort.
So to sum up we're taking.
We just drive forward as an organization in 2021, and we feel very good about our positioning and our future outlook.
With that I'll turn it over to John.
Thanks, Bruce and good morning, everyone.
First I'll start with the headlines for the quarter.
We reported underlying net income of $546 million and Etfs.
The inclusion of $1 22.
Our underlying ROTC for the quarter was 14, 2%, which includes the impact of a modest credit provision benefit.
Revenue of $1 7 billion was up 3% linked quarter given growth in both fee income and net interest income.
Period end loans were up 1%.
This quarter with strong originations in retail and commercial.
Loans were up 2%, excluding PPP forgiveness, giving us good momentum heading into the fourth quarter.
The highlights include strong results in capital markets, notwithstanding seasonality, another strong quarter for wealth and a rebound in mortgage fees.
And we.
Sentiment is positive sequential operating leverage of over 2% this quarter with well controlled expenses.
We recorded a credit provision benefit of 33 million, which reflects strong credit performance with lower charge offs.
Our ACL ratio is now at $1 six 5%, excluding PPP loans.
We delivered a very strong capital position with set one of 10, 3% after returning $167 million to shareholders in dividends during the quarter.
And finally, we continue to grow our tangible book value per share, which was $34.44 at quarter end up 7% compared with a year ago.
We next I'll provide some key takeaways for the third quarter, while referring to the presentation slides.
Net interest income on slide six was up 2% linked quarter, given interest, earning asset growth stable net interest margin and higher day count.
The net interest margin was 272% flat sequentially.
Benefit of accelerated PPP forgiveness, and improved funding costs were offset by the impact of higher cash balances as well as lower earning asset yields given low rates.
Highlight is our continued progress on lowering interest bearing deposit costs, which were down two basis points to 14 basis points.
Our asset sensitivity decreased to about nine 8% from 10, 7% at the end of the second quarter.
The decrease primarily reflects loan and deposit exchanges and the addition of $2 5 billion and receive fixed swaps in the quarter.
We saw good entry points for the swaps given some steepening of Neocart.
So far.
Fourth quarter, we have added another $1 5 billion.
The hedging actions we've executed to date in 2021 are one of the levers we are pulling to address headwinds from spot runoff and other impacts of the low rate environment.
We expect to continue adding to the receive fixed swap portfolio and further moderate our asset sensitivity.
In the current season, while maintaining meaningful upside benefit into higher short term rates.
Referring to slide seven we delivered solid results this quarter, demonstrating the strength and diversity of our fee income with strong results in capital markets and wealth.
Mortgage fees rebounded in the quarter up 23 million.
Adler's as production benefited from lower agency fees, and we saw improvement in MSR hedge results.
Diving further into this performance production revenue was up 12 million linked quarter benefiting from a modest improvement in gain on sale margins across channels.
Improved agency pricing and favorable execution.
Execution.
This was partially offset by a decline in adjusted lock Hall down sequentially about 10%, which is broadly in line with industry level trends.
As expected, we continue to see a shift towards purchase originations, which increased from about 48% and tour of the total in second quarter to about 54%.
<unk> in the third quarter.
The contribution from servicing operations decreased 4 million linked quarter, reflecting higher MSR amortization.
Our third party servicing book grew to 87 billion up 3% linked quarter and 8% year over year.
Lastly, our MSR hedging results.
15 million linked quarter, given an unusually large negative results in Q2.
Capital markets were down a bit from records record levels, reflecting seasonality, particularly in syndication fees.
However, M&A advisory fees were higher in our pipeline heading into the fourth quarter is exceptionally strong.
Well.
Improves were up slightly continuing to build on record levels, reflecting an increase in assets under management from net inflows.
Moving onto other positive fee contributors, we saw improvements in service charges and fees and card fees, which benefited from the strengthening economy as debit transactions and credit card spend continued to exceed.
Wealth endemic levels.
On slide eight expenses were well control up 1% linked quarter as good expense discipline and the benefit of efficiency initiatives, largely offset higher operational and travel costs.
Period end loans on slide nine were up 1% linked quarter or 2%.
<unk> DPP.
Retail loans are growing up 3% and commercial loans were up 1%, excluding PPP in a tough operating environment.
Average loans were down, 1%, but still up 1% excluding PPP.
Starting with the drivers a bit more the diversity of our retail lending business produced.
Another quarter of record originations, but we continue to see high pay offs.
<unk> was noteworthy in mortgage auto and education.
Commercial is seeing strong underlying activity was spot loans up 1% in the quarter excluding P. P. P.
We had a very robust origination quarter led by commercial real estate asset backed lending.
<unk> and subscription line financing supporting deal related you have to deal related activity.
This was largely offset by continued elevated payoff activity, which in part reflects favorable conditions for commercial companies to access the debt capital markets.
Line utilization levels were up around 50 basis points still near historic.
Ending by close we foresee a gradual recovery in coming quarters as some of the issues holding back investment such as supply chain challenges and labor shortages resolve themselves.
In addition, our period end commitments are up around 2%, which will benefit us down the road once investment picks up.
Overall spot loan growth.
<unk> for the quarter X P. P. P provides good underlying momentum for loan growth in the fourth quarter.
On slide 10 deposit flows continue to be robust, especially in low cost categories and our liquidity ratios remained strong.
Average deposits were up 1% linked quarter and 7% year over year.
With strong demand and demand deposits, which now make up 32% of total deposits.
Interest bearing deposits were broadly stable as the decline in term deposits was offset by growth in demand deposits and low cost categories.
We continued to make good progress on deposit repricing with total deposit costs down.
Down two basis points to nine basis points.
Interest bearing deposit costs were down two basis points to 14 basis points during the quarter with opportunity to reduce further.
Moving on to credit on Slide 11, and 12, we saw excellent credit results. This quarter net charge offs dropped from 25 basis points to 14 basis.
For the third quarter driven by improvements across the portfolio.
Non accrual loans decreased 4% linked quarter.
Given the improving outlook and strong performance of the portfolio, our reserves decreased ending the quarter at 165% ex PTT compared with 175% at the end of the second quarter.
Moving to slide 13, we maintained excellent balance sheet strength.
Our set one ratio remained stable at 10, 3% at the end of the third quarter after returning $167 million in capital to shareholders through dividends in the quarter.
This is at the top of our list of capital priorities on the slide.
We paused our stock.
Purchase program pending the investors' shareholder vote scheduled for November 19th.
After the vote, we had the opportunity to resume repurchases with $655 million of capacity remaining under our current board authorization.
The estimated impacts of our pending acquisitions are on the slide along with the targeted closing time.
Before I move on to our <unk> outlook, let me highlight some exciting things that are happening across the company on slide 14.
Our top six program is in its final stages everything is on track and we will achieve our targeted results were.
We are preparing for the launch of a top seven program with more details to follow later this year.
These top programs have been critical in the fund.
<unk> of our strategic initiatives and in driving positive operating leverage which are key to achieving our medium term financial targets.
On the ESG front I'm very excited to say that we've launched a new green deposits program to allow corporate clients to direct our cash reserves towards companies and projects that are expected to generate a positive environmental.
Impact by improving energy efficiency, promoting sustainability and reducing greenhouse gases.
An area of high focus for US has been moving more rapidly to digital channels, which we accelerated giving the behavioral changes we've seen coming out of the pandemic.
You can see some of the year over year stats on slide 15.
Digital book sales for example are up 24%.
Mobile active users are up 20% and the number of zelle transactions are up 34%.
We continued to enhance our digital capabilities and by the end of this year consumers will be able to perform about three quarters of all transactions directly through the mobile app and buy.
The end of 2022. This will include nearly all transactions. This provides us with strong leverage to continue repositioning our branches towards an advice based model.
Moving to slide 16, as part of our ongoing efforts to help customers better navigate their financial lives. We recently announced several initiatives designed to make banking more transparent.
Parents and accessible.
Putting a new way to avoid overdraft fees and a commitment to helping ensure that underserved communities have access to banking services.
We introduced citizens peace of mind, our new deposit feature providing customers with the ability to avoid the unnecessary overdraft fees.
This feature will come with new capabilities.
<unk> monitor and alert customers overdraft withdrawals and a grace period to fund their accounts.
The financial impact of our overdraft policy seems this will be to forego the return to historical overdraft fee levels.
You can expect 2022 service charges and fees to stabilize around 2021 year to date annualized levels.
Obama took these trains changes are shown on the right side of slide 16, we expect higher satisfaction, lower attrition and lower operational costs to offset the foregone overdraft revenues over time.
Lastly, we also announced a new commitment to serving underbanked communities, including the introduction of a new checking.
Account with no overdraft fees and features that will meet the bank on National account standards.
These are designed to ensure that everyone has access to a transparent and easy to use and affordable transactional accounts.
And now for some high level commentary on the outlook on slide 17, we expect NII to be broadly stable to down.
Slightly getting a lower benefit from PPP forgiveness due to the pull forward into the third quarter.
NII is expected to be up around 2% in the fourth quarter ex PPP impacts.
Most importantly, we are well positioned to see overall loan growth accelerated in the fourth quarter with average loans up one 5% to 2% or.
Or two 5% to 3% X P P P and spot loan growth up around 3% or around 4% ex PPD.
We expect continued strength in retail across mortgage education and auto.
And in commercial we expect to see growth led by subscription line financing supporting deal related activity and asset.
I sat back lending.
This loan growth positions us well for 2022 and helps offset the impact from PTT runoff.
Fee income is expected to be broadly stable as a seasonal decline in mortgage as well as some expected pressure on margins given excess industry capacity is expected to be offset.
Real strength in capital markets given exceptional pipelines.
Noninterest expense is expected to be broadly stable in the fourth quarter benefiting from our efficiency initiatives.
And we expect net charge offs will be broadly stable with the provision expense lower than net charge offs.
I should add that this guidance excludes.
Excluding the impact of the JMP acquisition, which we are targeting to close in the middle of the fourth quarter.
To wrap up on slide 18, this was a strong quarter for citizens with good momentum heading into the end of the year with that I'll hand, it back over to Bruce.
Alright, Thank you John Oh, let's open it up to Q&A. Please.
Thank you Mr Benson.
If you would if you'd like that we are now ready for the Q&A portion of the conference call.
I'd like to ask a question. Please press one then zero on your Touchtone phone, you'll hear an indication you've been placed into queue and you may remove yourself from the queue by repeating the one then joke man.
If you're on a speaker phone, we ask you to please pickup your handset and also to make certain that your phone is on mute it before at before asking any pardon me before pressing antibodies.
Well go to our first question that will be from the line of Scott <unk> with Piper Sandler. Please go ahead.
Morning, guys. Thanks for taking my.
Okay.
Let's see John maybe I was hoping you could provide a little more color on what's going on with the <unk>.
<unk> been adding to it was hoping specifically you could sort of talk about the balance between adding new slots in and maintaining your rate sensitivity and in particular I guess, what is your preferred sensitivity to higher rates in other.
Matt is there something specifically that we're targeting are or how should we be thinking about that.
Yeah, just kind of big picture here I mean, I think that we've as I've mentioned seen some good opportunities to start in this new sort of steepening cycle to start layering in swaps are broadly as as I may have mentioned to ours our asset sensitivity.
The words as it is down to about nine 8% or so at the end of the third quarter App.
As we migrate across the entire tightening cycle that may come.
We expect to try to migrate down to something that would be low single digits and and in order to get there that would require not only the hedging.
<unk> done to date, which would which would be about $12 million in the third sorry in 2021.
Through through October, but would require in all likelihood another 20 billion or so to get us to a low single digit asset sensitivity when when we get near the top of the of the tightening cycle.
The other thing I'll also offer up is that the the acquisitions.
SBC and HSBC will also add asset sensitivity and that will require another one or one $5 billion to $2 billion to offset so big picture. Our philosophy is to maintain good upside to short term rates, which we have in.
That we've already had our exposure is to short term rates.
As we continue to see attractive opportunities to.
Monetize that asset sensitivity as you know the silk yogurt Steepens will continue to dollar cost average into that over time.
Okay perfect. Thank you I appreciate that and then.
Switching gears, just a little I was hoping you could talk about any differences in deposit growth trends that you're seeing between your retail and your commercial customers.
Yeah, I mean, I think we're seeing good uptake and maybe we'll go ahead and like.
Uh huh.
Don and Brendan highlight but in the third quarter.
We had growth both an average and spot of 1%.
And I think that that.
That was driven primarily by commercial.
In the quarter, but we're seeing strong deposit flows on both sides.
Still seeing positive growth on both consumer and commercial and maybe I'll just offered up to dawn and Brendan to see if they want to add anything to add.
I think that's right on the commercial side, we're still seeing a lot of deposit flow notwithstanding the fact that we're trying to push pricing down. So so we still have a little bit of a surge deposits, but probably a $1 billion or two we see running off as we go into the into next year. So we think deposits continue to be strong well into 'twenty two.
Yes, similar trends on the consumer side.
The noninterest bearing deposits have been very sticky despite consumer activity and spending picking up the deposits have been hanging around and so there is still a bit elevated with.
With the surge deposits the second and third rounds of stimulus generally were not spent that they were more saved were used to pay down debt and we're seeing that with the.
The balance is hanging around the customers.
Pockets on the interest bearing side were seeing a rundown of Cds and it's generally replaced with low cost deposits.
Basic savings and some low interest bearing products like <unk>. So that's allowing the cost of funds to continue to gear down consumer cost of funds all in is sub six basis.
<unk> points now so we're kind of at basement levels and still seeing the deposits very very sticky and one thing I hasten to add that with.
With the surge deposits that we suspect most of that stays around and and deposit stayed relatively stable over time, given organic growth offsets any potential margin will run off of some of the COVID-19.
With related deposits.
The one last point to add it's Bruce would be the demand deposits now are about 32% of total deposits. So that's been an effort, where we really focused on trying to raise that as a.
<unk> of our total funding base and we've had some good success on the consumer side in mass affluent.
Growing the commercial side and so feel really good about where that sits.
Thank you.
Alright, Thank you very much.
We'll go next to Matt O'connor with Deutsche Bank go ahead. Please.
Good morning, I was wondering if you could talk a bit about loan pricing trends.
And I guess, especially in commercial where.
One of your peers yesterday talked about kind of continued pressure there.
Uh huh.
New loans have come on versus kind of what's going on from a pricing.
Yes, why don't I take that Matt has done.
It's it's it's holding up pretty well you know it depends on on.
Type of transaction, but we're seeing a little bit of deterioration, but not material. So you see it in our NIM, our NIM is holding up.
<unk>, we're trying to stay disciplined so where we see things we haven't changed our approach one bit. So we look at overall return on relationships of which loan spread is a piece of it so will compromise a little bit of a low spread.
But the other fee business attached to that so that loan, but if we don't see the fee business, we're not going to we're not going to chase yield just to just to book alone.
Yeah, similar discipline in consumer.
There is some some asset classes still are mildly elevated on what we would tend to see in this rate cycle like auto or the spreads.
<unk> expanded we've got front book back book challenges given the.
The state of the yield curve that our back book the runoff is at a higher yield than what we're putting on that front book returns are still very very strong I'd say theres, one or two spots, where we're seeing some intensity of competition on.
Returns, particularly where there's fintech involved whether it's.
Or a little bit of point of sale or a student lending in particular, but we're keeping our discipline and making sure were priced to adequate returns to support driving up our ROTC, So and we feel good about Italy get growth in that make that balance as you can see in our numbers.
And I guess taken together like as you think about growing loans it sounds like you're confident in that.
And the volume is enough to offset any margin or pricing pressure.
Going forward.
Yes on the consumer side I do I see us continuing to be able to sort of moderately accelerate our pace of loan growth.
And keep in mind that our growth levels now when you think about the last question around elevated deposit.
In an environment, where customers are also flushed with cash so as that starts to draw down we expect loan growth to pick up even more as consumers need more leverage where right now they are sitting on a lot of cash. So we feel really good about the medium term for our loan growth prospects and then why don't I add to that on the on the commercial side.
As John mentioned.
The highlight numbers are strong, but we're seeing our pipelines on the loan side not only on the capital market seven on the loan side.
15% quarter on quarter, and then another 10% to 15% as we as we go into the.
Into the fourth quarter, we've got we're adding new clients at a very good pace as we.
Positive benefit from our expansion markets in particular, and we're growing our commitment book faster than our loan book.
As utilization begins to pick up but it will be picking up off of a larger commitment book so that all feels it feels reasonably good as we sit here today.
Okay. Thank you very much.
We'll move.
Back to the line of Gerard Cassidy with RBC go ahead. Please.
Good morning, everyone.
John can we come back to the swap portfolio can you share with us.
What interest rate environment, you will benefit the most from with the book that you put on.
<unk> nothing rising short term rates by 100 basis points or AUM.
Long term rates going up by 50 basis points can you kind of worked through that and then second as part of that question. If you didn't put the swap book on what would have the asset sensitivity of your balance sheet today.
Yes.
I'll just hit that with.
I mean at high level, we are more exposed to the short end of the curve than the long end. So so.
Yeah.
The asset it's about 60 40 short to long.
And <unk>.
Rising frankly.
As we as we migrate through the cycle, so that the environment that will work.
Well for US is when the fed lift off begins.
That's an environment that will really drive.
Net interest margins and NII upward given the unhedged portion of our C&I book and other floating rate exposures that we have so that's still remains our most favorable sort of environment.
With that that would work well for us and if you can just give you a sense for how the math plays out on that.
Five basis point rise on the short end drives about $80 million or so of NII for us if that helps you kind of quantify what we're where the where the benefit comes from.
In terms of in terms of asset sensitivity, we would be in the low teens low to mid teens without without continuing to hedge and it's not really where our risk appetite.
As rates can go up and we hope they continue to do but continue to go up but they can't go down as well and so there is a risk profile there that over time, we're not only.
Attempting to.
Preserve our assets and asset sensitivity, but we're also cognizant.
That there is downside exposure that we're taking off the table when we dollar cost average and with the swap app.
Very good. Thank you and then as a follow up John.
You gave us some.
On slide 15 on your digital metrics and I'm just curious when you look at your mobile active users what percentage of the households are mobile active users and then second when you look at your digital book sales great growth year over year, what percentage of your sales are now coming through that digital channel.
Good data yeah, great question, it's Brendan.
We look at a lot of different metrics on digital I would say when we have the customers primary relationship.
The digital active users are incredibly high it's over 80% of our customer basis. So it is.
Digitally engaged so we feel good about that foundation.
Our efforts now are moving from just general.
Active to full service transactional banking done in a much more everyday way on mobile and so we've got a lot of efforts underway across the company, which are driving these metrics app, including in the branches and our call center efforts to communicate and nudge our customers.
Nation, we're engaged with digital it's hugely retentive for us with our customers, but also as you know if we can get them really engaged we can pivot the branches more to advice and Theres a cost dynamic here at play that we can then go back in and reinvest in the top of the funnel for customer acquisition growth. So we.
We feel we feel really good about the trends.
<unk> in mobile and I see a lot of upside here looking forward.
Okay. Thank you.
Hundreds of digital sales percentage I'm, sorry percentage of digital sales.
Yes, its rapidly growing and it's a very different category by category. So some of our lending businesses are principally digital first and you'll.
Youll see in things like student.
75% to 80% rate of digital, whereas something like DDA and deposits, it's more in the 25% to 30% range, but growing two years ago. It was in the 15% range. So we're seeing active upticks the branch channel for basic deposit products is still.
Still the largest source of customer acquisition, but theres some balance coming into play.
Very good thank you.
Our next question will go to the line of Ken Houston with Jefferies Go ahead. Please.
Hey, Thanks, good morning, guys.
And John on the other.
Other side of the rate sensitivity you had previously talked about wanting to keep the securities book around mid teens of earning assets and see that you've added some securities at period end versus average given what we're seeing in the environment. What's your appetite for continuing to move some of that excess cash into the book and any change thoughts we used to.
What you've already talked about on swaps.
In terms of what you want to do and where do you want the securities book to go. Thanks.
Yeah, Yeah I appreciate the question.
I think that you may see the securities book rise, but as it relates to a percentage of total interest earning assets were still in that mode of around mid teens or thereabouts. It could tick up a little bit, but there's not really any plans for a large change.
And the percentage of securities to.
To interest, earning assets and I think the reason for that is twofold. One is that given our loan growth opportunities really that's our preference is that we would prefer to deploy our excess liquidity into our loan opportunities which when.
In our consumer lending, which is the diversity of that and seen commercial starting to really lift off a bit that's where we want to put that cash and so that's what the plan would be in the near term for that to head in that direction I think the other aspect of it is is that we just have the view that that the rate risk hedging, which the with the securities books.
When you look so do double duty on we think it's a bit more efficient to do that off balance sheet with swaps and so that's still the plan is to dollar cost average over time in that space.
Got it and John on NII in the slide deck, you talked about PPP being a seven basis point increase sequentially can you just level set us on how much PPP.
Can also the NII and just what do you expect to drill that out.
The program runs down thanks.
Yeah, I mean big picture, you've got I mean, I think the way I would talk about that is that all.
All throughout the year, we've had a sense that PPP was going to be about the same first half and second half and that's playing out.
There.
He was in a $15 million increase in the third quarter versus the second quarter and PPP contribution to NII that $15 million really is coming from the fourth quarter. So really that's really.
How it's all going to play out is that $15 million increase in PPP from <unk> to <unk> and then because.
Has the board from <unk> of $30 million decrease from <unk> on PPP, but I would hasten to add that X P. P. P. In this in the third quarter and the fourth quarter, we will see we're seeing NII growth ex PPP and that's that's that's really good to see and I think we mentioned that we're up about 2%.
The pull in terms of fourth <unk> NII ex PPP, so a lot of that GBP.
<unk> is getting offset given the fact that our guide is really stable to down only slightly.
I would just add.
Ken I would just add that you know this.
This has been an issue.
Create interest for analysts and investor.
Buster's like what's been the impact of PPP, we always view it as something that was transitory that eventually.
These were nice, earning earning asset.
For us for 2021, but.
They would that they would very quickly start to reduce.
And then they would fall.
Off and not have much of an impact on 'twenty. Two so the real key was can we develop enough loan growth to basically substitute core consumer loans in particular for the PPP loans that are running off and we think with the spot loan growth. We had in Q3 and what we're expecting in Q4 mission accomplished that will be good.
Positioned to offset any future impacts as it relates to the first half and all of 'twenty two.
Absolutely and then just one quick one and how much John John and Bruce is still running off from the other retail because that I know you have the citizens paye, presumably growing in there, but what's what's weighing against that thanks, Scott Yeah.
Against that is <unk>.
Personal unsecured portfolio.
Ran up about two years ago, and then decided it's best when Covid hit.
I've run that back down and stopped new originations. So that's been a little bit of it that way.
Unsecured era.
Which masks a little bit the nice growth we've had in citizens pay and some of the reef rebounding that we're seeing in card.
And you may have the exact numbers of what's left of that at this point.
Yes.
A little shy of $900 million left on the personal loan book and its about 150.
Million ish.
Drag quarter on quarter to loan growth.
As one of the other book Thats been run download versus Marine RV.
Well, that's much smaller over in Europe, so here under the others.
So longer duration and built on our right. The biggest drag is really the first of all the books, so $900 million of Sofia.
Okay. Thanks very much.
Yeah.
We will go next to John <unk> with Evercore go ahead. Please.
Good morning.
Good morning also on the loan front.
I know on the.
Line utilization you indicated that 50.
This increase in the gradual recovery.
Expected can you just maybe elaborate a little bit more on the areas of expected strength as you see that rebound in line utilization taken hold I know you mentioned the success subscription finance M&A and ABL is that the areas, where you continue to expect that momentum to build or do you expect that to broaden and if you could.
Comment on what areas. Thanks.
I'll make a few comments and Don will elaborate on that I mean, I think the areas that where we're seeing looking forward into commercial.
We've seen strength in asset backed securitization that will that we see that continuing subscription line finance as I mentioned in my remarks in part due to M&A activity isn't.
An area of continued growth.
Cree.
This is a place where we're seeing some good uptake maybe in the office space with Delta suit and in the industrial space as well. So that's starting to contribute now as well and then to your point about C&I utilization I mean, I think two points related to it so.
Commitments rising app.
And even if utilization doesn't really left off I still provide some.
Loan growth, even if utilization levels are up just a very tiny bit of overall commitments are up and the next still creates it creates a positive contribution.
Theres a handful sectors that are that are driving that.
You've got construction energy manufacturing or a couple of the areas and its somewhat broad based it is.
Small increase but somewhat broad based.
A number of sectors, where we're seeing.
Small increases in utilization and maybe just turn it over to Don for any.
You kind of covered okay.
We're seeing the good news John is that is that we are seeing in our core middle market C&I book, the beginnings of a little bit of daylight in terms of utilization.
John said in the opening remarks, clearly the supply chain and the labor issue is restraining the performance of some companies. So they are going up but it would be performing better than they even.
Our analysis didn't have some of their supply chain problems, but we in the last couple of months, we're beginning to see some core C&I utilization.
The financials, the financial capital markets oriented, which is where subscription lines and ABS and the stuff sits up have been really strong all year and we expect them to continue to be strong as we get into the fourth quarter and into next.
Sure so kind of combination.
I wouldn't say that it's probably also you hit on the point the middle market is where youre seeing that take up on line utilization that bigger companies.
Yeah, a lot of companies that don't have access to capital markets. So the challenge that we've had a loan growth is predominantly pay downs because people go into the capital market bigger.
Given that you have given the strength of the capital markets of the middle market guys are beginning to see some light at the end of the cable part of it is just CEO confidence frankly.
Really really really squeezed.
Squeeze down on on their companies and as they begin to see Cowen Covid really begin to wane, but we're getting to.
Grow their companies a little bit a little bit quicker with the margin.
Got it okay. Thanks, and then separately on the capital markets business I know you mentioned a few times, a very very solid deal pipeline there.
Can you maybe talk to us about how you're thinking about that that line. When you look at 2022 was your how's your budgeting.
And then also can you remind us how much we should assume that falls to the bottomline in that business, particularly as the top line momentum really builds.
I think I think we continue to.
Get more and more optimistic about 'twenty two I wish I was sitting here, maybe midyear, saying Wow plenty one is.
Really a banner year, there's a lot of this that maybe keying off potential tax changes.
On the M&A side and on the capital market side.
But our pipelines continue to build and we think it's going to be very very strong as we go into next year I think by my General view is is you've got an environment, where you're going to have a relatively.
<unk> strong economy, you're going to have relatively low interest rates and you're going to have very high liquidity and that's a very very strong backdrop for a for a 22 one of the things that we've got our eye on and we just don't know yet is how much it's going to get pulled into 'twenty. One. So we're going to have to rebuilding pipeline maybe in the first quarter.
So you may see a fourth quarter first quarter kind of swings, but we'll have to wait until the balance of the year or two.
To see that and I don't really I would say.
I don't know what the marginal contribution is actually lower than the lending business because the comp payouts are higher but I don't have that number.
At the tip of my fingers and remember we.
We pay a lot of different people, we pay bankers, we pay corporate finance people, we pay M&A people, we'd pay capital markets people. So it all blends together and the way I look at it as our overall efficiency ratio was actually pretty good.
30%, yes, so sort of a 40% efficiency ratio.
It out to the Bottomline.
I would just add to that.
We see these secular trends we see.
Private equity pools of capital growing and looking to put money to work.
Opportunity to gain some very attractive leverage levels.
<unk> costs are loans, so those trends will continue and one of the reasons why we are.
Hell bent on assembling broader capabilities, including.
What we've done with some of the M&A boutique acquisitions and JMP is we want to be an intermediary in those flows are putting money to work.
Middle market companies want to sell themselves, we can take them to market and get a good price. So we've got the customer.
Customer base, we increasingly have the product capabilities and so that's reason for optimism in and of itself I think will continue to gain a lot of synergies as we look out into 'twenty. Two yes. There was the only thing I'd add to that Bruce is with JMP coming on board. It's the last piece of the puzzle really so not only do we have a full service capabilities.
To help our clients do whatever they need to do we've got a nice diversity in terms of product sets. So it'll let us kind of benefit.
Benefit when markets are good and the equities or debt markets and vice versa.
Got it alright, thanks for taking my questions.
Is there any additional questions. Please take this.
Attunity now depress one then zero on your Touchtone phone.
We'll go next to Ebrahim pulling Waller with bank of America.
Even home we seem to have lost your line. If you took yourself out of queue. There would go one moment.
Your line is open go ahead please.
Hey, good morning.
Hi.
Just a couple of quick follow ups, one I think.
And as we look to them. The closings are one I guess, if you're still on track for a <unk> closing for HSBC and investors.
Any risk of a delay there and remind us as you close those transactions.
Are there any aspects of those balance sheets, where you could see any runoff that may impact results and he'll look pro forma for the deal.
Okay. Okay, I can start agreements trying it so your expectation.
And the expectation for HSBC used to close mid first quarter and that's that's very much on track with deep into.
Sort of preparations for that it's supposed to close and conversion on those names.
Regulatory approval in hand, and we have them exactly we have regulatory approvals in hand on that on that transaction. So that one is looking just exactly as we expected.
And I think the other larger transaction.
So I think it's easy to overall, one big strategic allocation.
Allocation of capital, but IFC sees a separate legal entity that or where.
We've got the shareholder vote is scheduled for November 19th and the.
Regulatory approvals are pending on that the expectation.
And target for that is that we received.
Approvals in and sometime you know in early 'twenty, two and we have an opportunity to close that in Q2, but nevertheless, that's pending and we'll keep monitoring it as it relates to runoff, where we're not expecting to have run off where I think the way. We've described it as is that we will continue those businesses, but.
But the front book.
Sort of activities would have a different profile than the back book in particular with investors because of all the capabilities that we're bringing to the table and so we're not expecting to have us have any meaningful run off but we are expecting the loan book to have a different profile.
A year or two down the line given more C&I more consumer lending that we'll be able to generate off that platform. As you look ahead.
Just I would just add a.
A couple of points there John first off on.
HSBC the prices tied to what comes over so there if there is any run off we would.
Type of shock absorber.
In terms of what the ultimate premium is that we pay.
And secondly, just when it comes to JMP, we're working very diligently.
Gently to try to get that closed mid fourth quarter here. So we should have a four to six weeks say in the results here in Q4, which would be accretive.
Over there.
That's helpful. And then just one separate question you'll spend a lot of time on the payments with citizen B what.
What you're doing in buy now pay later than you think about zelle and you put us at about 34% growth in jail.
Is there more that you think can I understand.
You don't call the shorts.
Of course, but do you see you do things that should be doing more than domes off enabling banks such as yourself to compete with some of the peers in the business in terms of install payments et cetera.
Yeah, It's Brendan I think I think zelle, the rails that have been built for zelle are adequate and I.
And got the industry, including citizens needs are trying to take control of the UI layer that sits above the rails and innovate on their own around the customer experience.
Other its peer to peer payments that's facilities.
Or whether it's a.
Purchasing something direct with a merchant which would be more citizens play pay platform. So we're making.
I think investments in both of those.
Environment. So you can see a world where those capabilities converge a little bit.
It's a similar experience, whether you're buying something from a merchant or whether you are sending money to a friend I think that's possible but.
I think the rails are adequate I don't necessarily think zelle and particular needs.
King.
Do anything dramatic to say and I mean, I think it's more around what we can do in the UI layer to make things easier for customers to increase engagement as you can see our numbers that's happening and we continue to want to scale that up further and get more customers deeper engaged.
It's just it's really focusing on the use cases and.
Can differentiate ourselves and so we've got you.
A central effort.
<unk> payments capability, that's really coordinating between commercial and consumer to drive our decision, making there and make sure that we're investing in things that will really drive future growth.
Thanks for taking my questions.
Where we are.
And for our next question, we will go to the line of Vivek <unk> of July.
Asia go ahead please.
Hi.
Thanks for taking my questions just a clarification.
The P. P P since you've not given numbers and maybe that.
Make it easier.
But if I look at the seven basis points that seems to equate to about 30 million.
In terms of the change from <unk> to <unk>.
I heard you mentioned 15, some trying to understand what am I missing there when we do that.
That makes it easier to just.
My number is what it wasn't doing even trickier yeah. We did we did give the number but it is a 15 delta.
And the reason that it shows a seven seven basis points on that is there's a numerator effect in the denominator effects vivek. So you have loans running off which.
Affects the denominator so it really doubles the impact you would probably have about three basis points from the NII pick up and then you get three to four for having the loan balances run down and be forgiven.
Got it that's helpful.
Bruce and the roll on roll off on the securities yields are you.
How does that Glen can you give us some color where that stands and how much further.
Yeah sure I mean, so we've had several quarters.
Back for awhile narrow width with securities yield.
Falling and I think the dynamic there and not only that.
Pure front book back book, which has been negative.
By about 40 basis.
So, but also you've got Oh, you've got premium amortization.
Amortization, which has been has been a drag and I think our outlook. However for for is that for that to stabilize and frankly start to turnaround in the fourth quarter I think in large degree.
We will see the.
The pure front book back book start to narrow call. It it'll fall to something in the neighborhood of 30 basis points, but at the same time, we're also seeing where as rates rise premium amortization will will also slow and that'll provide some.
A net positive to securities yields and <unk>.
So yeah, it's really we're at about an inflection point there vivek so.
With that the steeper curve as John indicated front book back book, when you factor in reduced amortization.
Now going to see that turned to be a tailwind from being a headwind for the first three quarters of the year.
Yes.
If I may one more.
The other retail you've been talking about citizens pay you've signed up a lot of our.
Partners Hot to see although because it's overcast by the run off portfolio.
What are you seeing in those.
Loans in terms of growth.
The citizens paid related is there some.
Some numbers that you can give us because the combined number doesn't look so great, but I recognize that's about it.
Yeah.
The growth in citizens day, it's been a pretty substantial so all things kind of buy now pay later it's up.
And 40% year over year.
With balances and we continue to see that accelerate we've got we've got a lot of activity in the back half of this year on bringing on new clients and it takes a while for these things to ramp they've got a.
Pilot them they come online we work with the merchants to bring them to life to market them to.
So it's a bit of a ramp up period and so although all the leading activities that need to happen to continue to have confidence that this can scale through 2022 and beyond are there. So we feel pretty good that it's headed in the right direction. We're building a lot of new technical capabilities, that's broadening out our value proposition within citizens pay.
There as well so so underlying very very good healthy growth it sounds like.
Person that we could probably shed some light and do a little more transparent in that unsecured area for future.
Presentation.
Conference or in our regenerative releases.
Thanks for the question.
If there are any additional questions. Please take this opportunity now to press one than zero and you touched on Paul.
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So now I'll turn it over back to Mr. <unk>. Please go ahead alright. Thank you very much. So thanks folks for dialing in today, we always appreciate your interest and support.
Have a great day, everybody stay well thanks.
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