Q4 2021 Citizens Financial Group Inc Earnings Call
Okay.
Okay.
Thanks.
Yeah.
Okay.
Great.
Okay.
[music].
Okay.
[music].
Okay.
Yeah.
Yeah.
Good morning, everyone and welcome to the citizens financial group fourth quarter and full year 2021 earnings conference call. My name is Alan 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 of Investor Relations Kristin you may begin.
Thank you Alan.
Everyone and thank you for joining us. This morning are chairman and CEO , Bruce Van <unk> and CFO , John Woods will provide an overview of our fourth quarter results Brendan Coughlin head of consumer banking and Don Mccree head of commercial banking Earl stir here I will discuss some of the exciting strategic initiatives that we have underway, we will be referencing.
Our fourth quarter and full year earnings presentation, located on our Investor Relations website. After the presentation, we'll be happy to take questions. Our comments today will include forward looking statements, which are subject to risks and uncertainties that may cause our results to differ materially from expectations. These are outlined for your review on page two of the.
Asian, 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 in the appendix with that I'll hand over to you Bruce Thanks, Jason Good morning, everyone and thanks for joining our call.
We are pleased with the financial performance, we delivered for the fourth quarter on a full year and we feel well positioned to continue our momentum through 2022.
The investments that we've made to transform and reposition citizens since our IPO are really bearing fruit.
Customer centric approach backed by a full range of product offerings and strong digital data and technology capabilities has allowed us to gain market share deepen relationships with customers and develop sustainable growth opportunities, we've navigated the pandemic environment well shifting to offense over.
The course of 2021 to accelerate our strategy, including five acquisitions as we strive to build a unique and special top performing bank.
I'll comment briefly on a few of the financial headlines and let John take you through the details.
For the quarter, our underlying earnings per share was $1 26, and a return on tangible common equity was 14, 6%.
Sequential operating leverage was one 5% that's one 8% ex acquisition.
<unk> growth in P PNR.
Strong 6%.
Leading our performance was an unbelievably strong quarter in our capital markets business led by M&A and loan syndications, we've built a great business through hiring top talent in combination with several acquisitions and our approach to market is really clicking through.
For the quarter, we were number one in the league table for middle market sponsored transactions and number four for overall middle market.
We already had J M. P results for six weeks of the quarter, but we're very excited about how that will augment what we've already assembled.
Our highlights for the quarter include strong sequential loan growth of 4% on a spot basis, 5% ex PPP, while average growth was 2% and Thats, 3% X P. P. P <unk>.
Commercial growth at a pickup in line utilization were bright spots and we enter 2022 with a good jump off point.
We did a nice job on expenses pulling across our top efficiency saves to help offset higher incentive comp tied to revenues.
And credit remains pristine.
Good as it gets.
Our capital position remained strong with set one ratio of nine 9%, giving us a great deal of capital management flexibility in 2022.
We have the capital and liquidity to fund the attractive loan growth, we expect to see in 2022, while looking for selective acquisitions and ensuring strong returns of capital to shareholders.
With respect to our guidance for 2022, we assume solid economic growth of around 4% several fed rate hikes and improvement in loan demand.
Our top six and top seven programs should allow us to keep expense growth ex acquisitions below 3% and we're targeting 2% positive operating leverage including the bank deal scheduled to close soon and almost 5% ex PPP.
<unk>.
Credit is expected to continue to be highly favorable and I would expect our return on tangible common equity to move over 14% in the second half of the year potentially reaching 15% in Q4.
So all in all a very strong year of execution and delivery for all stakeholders by citizens in 2021, and we feel we are well positioned to do well in 2022 and continue our journey towards becoming a top performing bank.
I'd like to end my remarks by thanking our colleagues for rising to the occasion and delivering a great effort. In 2021, we know we can count on you again in the new year.
So with that I'll turn it over to John Thanks.
Thanks, Bruce and good morning, everyone first I'll start with the headlines for the quarter.
We reported underlying net income of $569 million and EPS of $1 26.
Our underlying royalty for the quarter was 14, 6%, which included the impact of a credit provision benefit.
Revenue of $1 7 billion, that's up 4% linked quarter given strong growth in fee income.
Average loans are up a solid 3% in the quarter before the impact of PPP forgiveness led by retail, which is up by 4% and 3% growth in commercial.
Overall spot loan growth of 5% for the quarter. Excluding PPP provides good underlying momentum for loan growth this year.
Linked quarter, <unk> growth was 16% or 10% before acquisition.
<unk> outstanding results in capital markets, driven by record M&A fees and loan syndications, as we executed well and gained market share.
And excluding the impact of the two commercial fee based acquisitions, we closed in the second half we delivered underlying positive sequential operating leverage of approximately 2% this quarter with well controlled expenses.
We recorded a credit provision benefit of 25 million, which reflects strong credit performance and the improving economy.
Our year end ACL ratio stands at $1 five 1% above our day, one seasonal level of 147%.
We continue to have a very strong capital position, except one at nine 9% after returning $360 million to shareholders in dividends and share repurchases during the quarter.
Next I'll provide some key takeaways for the fourth quarter, while referring to the presentation slides.
Net interest income on slide six was down 2% given lower net interest margin, partially offset by strong loan growth.
The net interest margin was 266% down six basis points, reflecting a reduced benefit from PGP forgiveness, and lower earning asset yields given changes in loan mix and spread compression.
Partially offset by the impact of lower cash balances as we redeploy some of our excess liquidity into loan growth.
We also made continued progress lowering our interest bearing deposit costs, which are down one basis point to 13 basis points.
On the bottom left side of the page you can see we remain highly asset sensitive at the end of the quarter with an overall sensitivity of 10, 1% to a gradual 200 basis point rise in rates.
After the end of the year about 60% of our sensitivity is geared towards the short end. So we are well positioned to benefit when the fed begin to tighten.
Referring to slide seven we delivered terrific results this quarter, demonstrating the strength and diversity of our businesses with outstanding results in capital markets, reflecting our long term investments in the business and solid performance across other fee categories.
We set a new record for quarterly capital markets with exceptional strength in M&A advisory and loan syndication fees amid a backdrop of good market activity.
We continue to gain market share and have nice momentum as we enter 2022.
We also delivered our best quarterly results of the year and FX in IRT, which are up 21% linked quarter, given an increase in currency transactions driven by robust M&A activity and an increase in client hedging given the outlook for rate rises.
Mortgage fees declined in the quarter against the backdrop of strong competition and excess industry capacity.
We saw ongoing pressure on gain on sale margins, particularly in third party channels and seasonally lower production volume.
Mortgage servicing income improved as our third party servicing book grew 3% linked quarter to $90 billion.
Card fees were stable as debit transactions and credit card spend continue to exceed pre pandemic levels. Whilst he has also remained strong.
Service charges and fees were modestly lower reflecting the impact of citizens peace of mind or new customer friendly deposit account feature.
We are seeing these changes drive clear benefits in customer experience as customer satisfaction is up and call center volume is down since we implemented the changes.
On slide eight expenses were well controlled excluding the impact of the fee based acquisitions that closed in the second half of the year non interest expense was stable.
And we drove the linked quarter operating leverage of about 2%.
These results reflect higher incentive compensation tied to strong capital markets revenue and strategic investments, which was balanced by strong expense discipline and the benefit of top efficiency initiatives.
Period end loans on slide nine were up 4% linked quarter or 5% excluding P. P T.
We were pleased to see strong commercial loan growth of more than 6% excluding PPP.
Retail loans are also growing up 4% average loans were up 2% and up more than 3% excluding TGT.
Retail strength was driven by mortgage and auto.
Commercial originations were very strong exceeding pre pandemic levels led by corporate banking subscription line financing supporting deal related activity and asset backed lending.
After line Utilizations levels levels ticked up last quarter, we saw a larger increase of about 270 basis points to 35% on a spot basis. This quarter, primarily driven by deal related financing activity.
We continue to expect a gradual recovery in utilization over the coming quarters as some of the issues holding back investments such as supply chain challenges and labor shortages resolve.
In addition, our period end commitments are up a very strong, 8%, which will benefit us as investment continues to pick up.
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 5% year over year with strong growth in demand deposits, which now make up 32% of total deposits up from 30% last year.
Interest bearing deposits were broadly stable as the continued runoff of higher costing time deposits was offset by growth in demand deposits and lower cost categories.
We continue to make good progress on deposit repricing with interest bearing deposit costs down one basis point to 13 basis points during the quarter.
Given the changing tone at the fed and the potential that they may begin to tighten earlier early this year, we thought it would be helpful to make a few points about how we see our deposit costs are behaving in the next rate cycle.
First we have made significant improvements through our deposit related capabilities since the IPO.
Our enhanced data analytics capabilities allow us to optimize the deposit base by attracting more stable deposits with targeted offers and by employing more dynamic pricing.
We also have the added lever our citizens access which has proven to be a very efficient deposit channel.
And we have strengthened our commercial offerings and invested in enhanced tools to drive higher operating deposits.
Secondly, our mix of lower cost deposits is much better with demand deposits now 32% of the book compared to 27% at the beginning of the last rate cycle.
And consumer Cds, which were at 14% of total deposits at the end of the last cycle are now down to 3%, which is below peer levels.
Also note that the HSBC branch acquisition will add almost $8 billion or 5% to our core deposits. When we closed this quarter.
Lastly, we have vastly improved our overall liquidity profile with a lower LDR and much lower deposit costs than when we entered the last up cycle.
When you add that all out we are confident that our deposit betas will be meaningful law meaningfully lower than the prior cycle.
Moving on to credit on Slide 11, we saw.
Excellent credit results again this quarter net charge offs were broadly stable at 14 basis points for the fourth quarter with good performance across the portfolio.
Nonperforming loans decreased 6% linked quarter with continued improvement in commercial.
Other credit metrics continued to improve as criticized loans were lower and internal ratings upgrades exceeded downgrades.
Moving to slide 12, we maintained excellent balance sheet strength are.
Set one ratio remains strong at nine 9% at the end of the fourth quarter after returning $360 million in capital to shareholders through dividends and share repurchases and closing the JMP acquisition.
On the bottom right of the page, we expect a 22 basis point impact of set one from the pending HSBC acquisition and the <unk> transaction will be effectively neutral given the stock to be issued in the deal.
Shifting gears towards business strategy that we thought it would be useful to have Brendan and John and discuss some of the exciting strategic initiatives that we have underway and how we are poised for strong and sustainable growth.
And over to you.
Thanks, John Good morning, everybody.
On Slide 13, you can see we've dramatically transform the consumer bank since the IPO and have a strong foundation to propel us into the future let.
Let me share a few highlights.
Brian customers at a pace that far exceeds the pace of household formation in the U S. Nearly doubling our customer base from approximately $3 million at the time of our IPO to $6 4 million today further our mobile engagement is up 15% year over year closing gaps to peers and allowing to thin our physical network by another 8% this year.
<unk> about 20% since our IPO. This enables us to reinvest in growth strategies. We've built one of the most diversified consumer lending businesses in the U S, giving us a number of additional lever for revenue growth and customer deepening that many of our peer banks slack, we've transformed our deposit book repositioning our deposit mix quite significantly.
With strong DDA growth, which is really driven down our cost upon by about 75% compared with the time of our IPO. Finally, while we have more work to do our wealth business has been repositioned for growth in our AUM has more than three times the size at the time of the IPO.
So five years ago, we were very much a traditional regional only bank, we have strong momentum momentum in the business have broadly caught up with peers and in a number of places have built best in market capabilities that have lived to differentiated growth rates.
Moving on to slide 14, and looking forward, we prioritize several strategic initiatives that should help us deliver above trend revenue growth, adding about 1 billion.
By year five.
First we expect to leverage our acquisitions, and New York Metro market to grow share and deepen relationships, we will pick up almost 1 million new customers, who have been underserved given that their current banks don't have the breadth of product capabilities that we have there is strong upside if we can replicate in New York, what we have done in our core markets like Philadelphia and Boston.
The second area as well, where we have a great opportunity as well.
Really attracted a new and strong leadership team with a long track record of industry success, our regional footprint and our bank customer base is highly attractive and provides significant opportunity for sustained growth.
Third our citizens pay offering is unique amongst all the industry players in the fast growing buy now pay later space. We were early movers in this space starting with the Apple partnership in 2015, we built a very strong position now with 44 partners. We've added industry verticals and have remained focused on gaining mark key part.
<unk> is providing good momentum and we have a strong pipeline for 2022.
Lastly, our national push will be led by our digital capabilities and that includes our efforts to build on the citizens access launch in 2018, and the integration of our full range of products and services on a modern cloud based platform will continue to add products to the platform in 'twenty, two and we'll aim to drive improved customer depot.
We will also leverage the strategy to accelerate our technology transformation of our core bank as we ultimately aim to converge the operating platforms into one national digital first structure.
Now, let me pass it over to Don.
Okay. Good stuff Brendan let me shift to our commercial priorities, which are on slide 15.
We've added some great talent to the commercial bank on both the coverage side as well as the product side, and we're able to do more for our customers over their lifecycle than ever before.
We've been near the top of the Middle market League table, helping corporate clients and private equity sponsors access capital to private and public debt and equity markets and we've integrated our cash management in global market solutions, well with our coverage teams.
On the covered side, we've been expanding geographically and moving upmarket into the mid corporate space, where it is critical to deliver deep industry expertise.
While JMP acquisition, which closed late last year. It gives us a much broader and deeper corporate finance coverage and technology health care and financial services, plus we gained in equities business that is very well run focus and highly regarded and we're already seeing great cross sell dividends alphabet.
As non bank lenders continue to take lending market share from banks and private equity ownership of companies continued to increase we broadened our capabilities to bear.
Enter compete successfully in the new landscape.
We will increase.
Increasingly generate more fee revenue across our customer base given these expanded capabilities.
It's also worth noting that Willamette the transaction, we closed mid last year dramatically expands our valuation services business with a very prestigious outfit. This capability is highly synergistic with our M&A and broader capital markets effort and has annuity like qualities.
So you can see the success, we've had in building and scaling up our businesses to deliver more than just traditional banking products to our clients. We are highly confident this list will continue to drive sustainable and growing revenue streams.
Over to you Jack Thanks, Pat on Slide 16, you'll see some examples of the tremendous progress we've made against our key strategic initiatives that Brendan and Jon mentioned and other work, we're doing across the bank to better serve our customers and make citizens a great place to work. We are very excited to see how our digital first approach is increasing engagement with our customers.
And how this is all translating into a better experience and higher satisfaction.
Moving to slide 17, I'll touch on our top programs.
Even as we pivot to offense with our strategic initiatives and acquisitions. It is important to remember that a key to citizens success since our IPO has been our continuous effort to realize efficiencies and reinvest these savings back into our businesses. So we can serve customers better.
We have effectively wrapped up our top six program after achieving our targeted pre tax run rate benefits of approximately $425 million at the end of 2021.
Now we have launched top set for the goal of an exit run rate of about $100 million of pre tax benefits by the end of 2022.
We are really doubling back to mine areas, where we have already been successful for example, continuing our multiyear journey of digital transformation across consumer and commercial looking at further organizational streamlining accelerating and building on our next Gen Tech initiatives and doing more on the cloud.
We're going to focus on maturing our ash agile operating model and take another look at our vendor spend as well.
Based on the work we've done so far we feel confident that we can deliver on this new program.
Moving to slide 18, we made a lot of progress on the ESG front last year, and we will continue to make meaningful progress in 2022.
Few highlights for the launch of a new Green deposit program to allow corporate clients to direct our cash reserves towards companies and projects that are expected to create a positive environmental impact.
We adopted targets to meaningfully reduce our scope, one and scope two greenhouse gas emissions.
We have a strong commitment to social equity and our colleagues continue our tradition of being highly focused on voluntary and our communities.
To serve our clients better we introduced new deposit account features that help customers avoid unexpected overdraft fees and we immediately saw changes that indicate a meaningful improvement in customer experience.
This should help attract and keep more customers with the bank.
And now for some high level commentary on the outlook for full year 2022 on slide 19.
First let me be clear that this is a stand alone outlook that includes JMP and Atlanta, which closed late last year, but does not include any benefit from our pending acquisitions of HSBC and investors.
Bottleneck corner of the page includes information that should help if you were trying to also layer in the expected contribution from these acquisitions in 2022.
For 2022, we expect NII to be up 3% to 5% driven primarily by mid single digit average loan growth excluding.
Excluding <unk>, we expect NII to grow high single digits, driven by high single digit average loan growth.
Average interest, earning assets are expected to be up slightly as excess liquidity is deployed into loan growth.
The rate scenario using our outlook is based on the forward curve as of January 5th and includes three implied fed rate hikes of 25 basis points. Each in April July and December .
On the long end, we are planning for the 10 year treasury to be about one 9% by the end of the year.
The rate curve benefit on net interest margin will allow us to be.
Given to allow us to contribute to more than offset the 2022 impacts from lower PTP forgiveness and swap revenue, while presenting meaningful upside to NIM in 2023 and beyond.
Fee income is expected to be up 4% to 7% given continued continued strength in capital markets and wealth following record performances in 2021.
Noninterest expense is expected to be up 5% to 6% given the full year effect of our commercial fee based acquisitions or up less than 3%, excluding the impact of these acquisitions.
We have included an expense walk on slide 24 that lays out the drivers.
Credit is expected to remain excellent with net charge offs broadly stable to down slightly and provision expense of less than net charge offs.
And we plan to continue operating with a set one ratio within our targeted range of 975% to 10%, which incorporates an anticipated increase in our dividend in the second half of the year.
On the lower left of the slide you'll see our expectations for the pro forma impact of HSBC and investors with EPS accretion of about 5% based on consensus at the time of announcing and approximately $475 million and additional <unk> to our 2022 results.
Importantly, importantly, we expect to deliver positive operating leverage of approximately 2% on an underlying basis.
For the year, including HSBC and investors. Thank you.
We set aside the impact of PPP that would be a very strong 5% operating.
Yeah.
Moving to slide 20, I'll cover the outlook for the first quarter.
We expect NII to be down about 1% despite solid loan growth given a $20 million a smaller contribution from PPP and an $18 million impact from lower day count.
Including the impact on HSBC NII will be broadly stable for the quarter.
Average volumes are expected to be up 2% to 3% with interest earning assets broadly stable.
Fees are expected to be down, 8% to 12%, reflecting seasonally lower capital market fees and the record we delivered last quarter as well as the other seasonal impacts.
Noninterest expense is expected to be up approximately 6% given seasonal compensation impacts and a full quarter impact of the JMP acquisition.
Net charge offs are expected to be broadly stable with provision less than net charge offs.
We expect our set one ratio to land at around nine 7% seven 5%.
Putting an impact of about 22 basis points from the HSBC transaction, which we expect to close in the quarter.
To sum up with slide 21, we feel that we finished 2021 with a great quarter and enter 2022 with strong momentum.
We have a winning strategy, we are building capabilities organic organically and through acquisitions that deliver value to our customers and growth for our shareholders.
Our strong leadership team will continue to focus on execution and building a top performing bank with that I'll hand, it back over to Bruce.
Okay. Thank you John operator, let's open it up for some Q&A.
Thank you Mr. Vince on we are now ready for the question and answer portion of the call.
If you'd like to ask a question press. One then zero on your Touchtone phone, you'll hear an indication you've been placed into the queue and you may remove yourself from the queue by repeating the one then zero command.
Should you be on the speaker phone, we ask you to please pickup your handset and to make certain your phone is on mute before pressing any buttons.
Again for questions, Chris One then zero.
Your first question will come from the line of Peter Winter with Wedbush Securities. Your line is open now.
Good morning.
Ed.
One thing I hear.
From investors is the potential for deal risks noise, just between the HSBC and investors Bancorp.
And then also the investors loan mix being heavy and commercial real estate. So the question is is there a need to remix the loan portfolio had investors and lead to some near term revenue headwinds.
Potential volatility closing both deals in the first half of the year.
So let me start and John you can jump in so it's Bruce Peter.
Peter.
I think we're working really well and hard to make sure that.
As deals come off very smoothly.
Customers have a data experience and.
We can introduce our approach to banking the right off the bat and take advantage of I think some really great synergy opportunity. So.
We've set up.
Separate integration office, we've had outside help helping us through and put dedicated teams to make sure that we get off to a good start so I don't really see any disruption from.
Smoothness of operations I think that will come off a very very well.
We are monitoring the performance of both businesses and they seem to be performing to our expectations. So that's also a good fact.
We will end up taking on more commercial real estate exposure.
When investors closes however, most of that is in multifamily.
The kind of risk of that.
Portfolio is relatively modest in terms on the spectrum of <unk>.
Commercial real estate risk so.
I think we will.
Look to grow our other loan categories faster over time, which will bring kind of that exposure back into more alignment of where a targeted balance sheet would be but we don't think there'll be any need to do any dramatic surgery or anything that would disrupt the momentum that we have in loan growth. So I'll stop there.
There and John if you want to add anything to that yes, I think that's well said I would just add that as it relates to the operational side of things. We've got a number of mock conversions and dress rehearsals that have gone extremely well a last one is I think next week and so we're right on schedule for HSBC for that close and conversion.
Middle of February so, that's really sort of well handled and we're deep into the planning on investors as well planning for legal day, one planning for customer day, one planning for conversion and those are those plans.
Are also well insight and appear well well be able to be executed on the on the balance sheet aspects that Bruce mentioned and just re emphasizing our front book originations will look different in the backlog the backlog.
Has the multifamily.
Loan portfolio as Bruce indicated, but that front book is going to have a lot more C&I and a lot more consumer lending.
Forward, then investors have had in the past so with that I'll go ahead Sir.
Great. Thanks.
Very helpful and then if I could just ask.
John I'm wondering could you quantify the impact to net interest income for every 25 basis point rate hike.
And what you're assuming for deposit betas.
Yes, I'm going to talk about that I mean, I think we are where we are.
Really asset sensitive.
<unk>.
That's built into the guide for NII for 2022.
Based on the Gen five curve and as you know since then the curve has increased a fair bit.
As far as just looking at it where things ended up yesterday. So there's first mind theres more upside in 2022.
If the rate environment continues to unfold as we're seeing it in the last several days, but as it relates to the actual sensitivity the way that shakes out is that on the show were mostly.
Sensitive to the short end and that'll drive about $20 million. If there's if there's a if there is an extra 25 basis points on top of the forward curves as of January 5th will generate another $20 million per quarter.
On that on the short end and we'll get another 10 to 15 per quarter on the long end versus the January forward curve for an overall $30 million to $35 million per quarter of additional benefit. If you have 25 basis points as a fire loss.
Yeah on a parallel shift up from the Gen five curves.
As it relates to deposit betas I mean, this is a very exciting story I mean, we've completely transformed the deposit franchise since the IPO.
I would say that as I mentioned in my remarks, I think that our deposit betas are going to be meaningfully lower in this next cycle.
And that.
Of course, we should start off the cycle, it's all if theres, a lag and and we've got that lagged delta, but we also have some betas built in but I would say that they are.
2022 betas.
Beginning of this cycle are going to be much lower than than the betas that we experienced at the beginning of the rate rise cycle last time around given all the investments we've made in product capability and pricing and an approach and with the added lever our citizens access. So we're really excited about about being able to demonstrate the strength of the of the deposit franchise.
And this and this and this cycle going forward.
Just to quantify that a little bit.
If you look at the last move up 2% on fed funds.
And then your comparative if that happened today, we'd probably be a third less in terms of our deposit beta has been than we were last time around exactly.
Okay.
Thanks very much.
Okay.
Your next question will come from Ken <unk> with Jefferies Go ahead. Please.
Thanks, Good morning, guys.
Thank you for the detail on the merger updates on the timelines I was just wondering.
Can you just give us a sense of.
At what point do you expect to get both converted and do you have do you have an understanding of when do you think you'll get to kind of full run rate cost saves from the combination of HSBC and SBC.
Yes, I'll go ahead and start.
As it relates to.
We're targeting.
So at the end of 'twenty three when we will have substantially all of the synergies.
Done and as you as I mentioned, we're going to close and convert HSBC.
Here in February .
The expectation is our target is to close investors in early first quarter early April .
And I would say the way to think about conversion.
Yes.
I'm not going to be a big Bang approach, we're going to see that.
Conversions happened throughout on a staged and phased basis throughout 2022.
Assuming we close in early April you'll see a couple of platforms closed throughout 2022 and into the end of 2022 and there could be some stragglers into the early part of 2023.
But again, it's not going to be a big Bang, we're going to we're going to move we're going to move certain.
Platforms over as they become ready to go and I think as an example mortgage and wealth are two platforms that will go early in <unk>.
The overall core what happened later, so maybe I'll, just maybe turn it over to others, if they want to add any color to that.
I'll take those.
That's right John .
Okay, Great and then my second question is just I know you've said very clearly that you wouldn't expect to update capital targets and as such until you reach your medium term goals I'm. Just wondering so should we think how should we be thinking about share repurchase.
In terms of getting through closings in any anticipations you have about anticipating this year's CCAR process with you getting back into it in 2022.
And then I will just start off and as you as you as you May know I mean, we've talked about this before our capital priorities start off with with the dividend and supporting organic growth and and fee based bolt ons and so we want we want to put capital to work in that manner.
And to the extent that that that those opportunities.
Leasing capital around then we engage in buybacks, which we did this quarter.
This past quarter for <unk> as we articulated in our remarks, so I mean, I think we're coming into CCAR season, and we tend to on an annual basis take another look at capital targets and what the trajectory of capital return will be we also have the deals that are pending so I think you'll get.
We can be a little bit more.
Sort of given to give another update on that as you get into the first quarter call, Jeff and Ken.
Ken just from a technical standpoint, we had an authorization to buy back $750 million of our stock and we've used about 300 of that to date.
450.
Left for this year, which should give us plenty of running room, when we get through CCAR.
Might see us do an adjustment to that but anyway, that's a little bit of the framework that we're operating under.
Got it okay. Thanks, guys.
Okay.
Your next question will come from John <unk> with Evercore ISI. Your line is now open.
Good morning.
Good morning.
Just on the on the loan trends clearly you know the commercial trends came in very solid and better than.
I just wanted to see if you can give us a little more granularity on where you're really seeing that strength in the drivers I know you mentioned deal financing are you seeing capex plans start to drive some drawdowns there and then separately just in terms of the end of period loan balances. It looks like there are a few billion above the average balances and.
So therefore at the end of period balance is a good leading indicator into.
Our outlook as we as we model this out.
Maybe I'll just start off and I can weigh in here I mean, I think as I mentioned in corporate banking.
And subscription license or subscription line finance, an asset backed lending all contributed and it has been an excellent quarter and there is momentum with spot spot balances higher than average. So that's that's that's right John .
I'd say when you split it out we are seeing last quarter, we saw a tick up in utilization from our sort of bread and butter corporate banking clients. This quarter, we saw another tick up.
In that sense, a lot of the increase was driven by deal financing, but we are seeing some underlying tick up maybe 50 basis points.
Last quarter, if its another 50 or so this quarter, maybe I'll just turn it over to Dan to add any.
I think thats right I think the the big macro is that our origination volumes are just huge record quarter on quarter on quarter and they've been offset by payoffs as people those people who go on to the capital markets or and in particular real estate a lot of properties are trading. So so we're being taken out of loans due to due to underlying property sales.
But we're really encouraged by what we're seeing on the origination side. The subscription line business that we have is really going quite well and it's growing quite quickly.
The deal financing that happened in the fourth quarter will be will be refinanced out in the capital markets, probably which is good for us. So we'll participate in that but we think the trend.
<unk> continues the other thing that we are seeing is a lot of activity in our real estate business on the origination side, we're seeing quite a bit of warehousing quite a bit of industrial quite a bit of life.
Life Sciences, and then increasingly build to suit office believe it or not so investment grade corporates building new office space to occupy post pandemic in terms of working capital and Capex and things like that it's really hard to kind of discern how quickly that's going to happen you've got the new supply chain challenges you've got some of the labor challenges you've got <unk>.
The international country shutting down so it's kind of fits and starts but we think we think it's it feels pretty good to us overall.
Okay, Great. Thanks, and then Bruce you know Joe.
No question higher level.
Certainly been acquisitive here in adding to your business both on the banking side as well as comp market.
Could you just talk about from a banking perspective, the need for scale and a whole debate that do you need scale to be able to compete effectively.
And more specifically do you think ultimately you need a national franchise.
Sure.
I like our size John So I think we have enough scale.
We can.
Compete against all Commerce, we have to be extremely disciplined we have to prioritize well we have to leverage external parties are principal core application vendors, we have a lot of partnerships with fintech.
We do a really good job there and we're moving the company to be a digital first bank.
And I like the progress there. So one of the advantages you have as youre not super big not in the <unk>.
Mega Bank weight classes.
Can be more nimble and you can move faster.
And you can stay focused on the things that really matter. So.
Scale scale does help to some degree so doing this new York Metro play in picking up another $30 billion of assets I think is a positive, but we don't feel compelled to have to run out and do more deals to stay competitive.
Was there a second part of your question John .
Well. It was just do you believe you need a national presence.
Yeah. So there I think we have a pretty unique opportunity because we have a deposit franchise, it's national with citizens access we do have consumer lending activities that are national.
We've basically gone to market.
And kind of a product siloed fashion.
A fully comprehensive platform that allows us to deliver a full range of products and services to customers. So that's been really our focus and they put it under the umbrella of national expansion.
We think there's a really good opportunity to migrate to a cloud based digital platform that delivers great customer experience and then.
Leverage that to target specific very highly specific customer segments, where we think we have a right to win.
And when we look at what we do really well in our regional core footprint, that's mass affluent customers, particularly young professionals, we have a great offering there it starts with our student loan refinance product and we dropped a bunch of things in around that so we think we can target that segment around the country. Once we.
Pull this all together.
Some real headway.
What dose would that is right now we're largely all digital would that national play.
We will pick up some branches in the Washington D. C area, when HSBC closes and some in South Florida that will give us an opportunity to go digital first into those markets combined with a light physical presence and do some test and learning because there may be other attractive cities around the country, where we.
Have a concentration of customers our colleague base. So they have more brand visibility wherever he might decide to open some branches and then see how that could augment our push to really attract those customers and gained prime to Super Bowl customers. So a lot to play out on this but it's very exciting I don't know Brendan if you want to add anything to that.
Well fed.
I guess I'd just the color is as that ties into scale.
For me is while we don't feel like we are required to get scale I think that digital first world is providing an opportunity to scale distinctively with revenue in my opening remarks as part of our.
Call script.
You see us going from 3 million customers to 6 million customers since our IPO I would argue that in.
A pretty digital world that was not possible without M&A activity and we've got a demonstrated track record of scaling our consumer business organically and so that's what you should.
Think about as we bring together all of our product capabilities nationally is how do we get scale and provide distinctive revenue revenue opportunity without necessarily needing to do a big M&A acquisition. We have confidence we can do that obviously, we're supplementing that with HSBC and investors, but it really we think we can get great customer growth and deepening organically.
Good question is.
Do you need physical presence over time, and what does that physical presence look like and can you run it with a thin network to Bruce's point around piloting in Washington D. C. In Florida, and then potentially other markets over time, but all paths lead to the next 18 months or so are really building on our exceptional mobile first digital platform nationally and then we.
Can start to think through our distribution opportunities overtime.
Okay. Okay, great. Thanks for taking my question.
Your next question will come from Gerard Cassidy with RBC go ahead. Please.
Good morning, John Good morning, Bruce Good morning nature.
Bruce can you I share your bullishness on the outlook for the industry and you folks as well when you presented it very well today.
But at the same time, we're always looking over our shoulders. So when you guys sitting around the conference table to talk about the outlook what are some of the risks that you have identified that maybe.
Kind of delay or interrupt this bullish outlook.
Yeah to me Gerard it's usually around the macro would be the principal risks.
So as the macro goes and certainly has a big impact.
Bank results.
It looks like the.
He kind of OMA crime wave is not as lethal as feared and it hasnt interrupted business.
Commerce and People's behavior as much as it could have as much as prior waves did so I put that as a check in the plus column although.
Never know what could happen later on over the course of the year.
I do think the fed has a fine balancing act to achieve here and bringing inflation under control inflation is that.
Really something to be feared and the fed is going to aggressively combat that.
Hopefully they.
Fly the medicine in a at a good pace with good trend.
Kind of for warning in the market adjusts to that and it doesn't.
The snuff out.
The signs of a good recovery, we think that GDP could grow at 4%, but what.
What could happen if if if the market doesn't respond well to those rate increases or if the equity market falls a bit because of that so.
That's another thing I think that the fiscal situation.
Seems stable at this point.
It's gonna be hard I think to pass more legislative initiatives that increased physical spend and I think the spend that we have.
Built up from prior rounds of fiscal stimulus is sufficient to carry us through so.
Anyway, those are some of the things that we watch.
I still feel that.
The fundamental underpinning is very good and the credit outlook is very good. So I think there's a strong probability that this turns out to be a good year, but theres always that tail risks that stuff could happen and that's that's the thing that we watch carefully.
Very good thank you for those insights.
Just a follow up John on the guidance of the noninterest income I think you highlighted that you expect the mortgage fees in 2022 to be weaker.
And then 2021 correct me, if I'm wrong, there, but more than offset by the strength in capital markets. What's your outlook because the capital markets number as you guys pointed out was extraordinary in the quarter.
I assume youre not expecting that to be a run rate, but can you give us some color on what you're looking for in the capital markets mines in 2022 versus 2021 and also the mortgage banking fees.
I'll start off.
And turn it over to Don and Bryan anything want to add any further color, but I mean, I think if we had an extraordinary quarter in the fourth quarter taking share and.
It's kind of.
Climbing the league tables.
A result of multi year.
Kind of a meticulous investments organically with some fee based bolt ons that are coming together and frankly haven't really fully achieved as potential in some respects in terms of synergies from the deals that we've done et cetera that are that are going to contribute in 2022.
So I'd say that the momentum in the backdrop is still strong Bruce mentioned that the macro is one of the areas as long as that keeps going we do see some very solid momentum in the cap markets business M&A and loan syndications, we're the leader in <unk> and and the pipelines look very good and into early 'twenty two in terms of what we can see there.
I'll make a comment on mortgage and then.
And then maybe just see if Don and Brad I want to add but I mean on mortgage I would say the way to think about that is.
Yes, it'll be down.
But I still think that given the investments we've made and the share that we've been able to take what will be will be above pre pandemic levels. So the 2019 base here I think 2022, you can think of that as being a year, where we will solidify normalize a bit in terms of volumes.
And I'd say that maybe the market is down 30%, but our volumes will be down less than that.
Margins are still a bit under pressure in particular in the third party space and production, but thats that is meaningfully offset by what's going on in the servicing side of the business, where you see continued increase in <unk> for us and and as the rate rise is starting to take off here a little bit you'll see lower amortization. So you put all that to.
Gather and youre going to have a.
Continued contributions from mortgage that will be greater than pre pandemic. So maybe I'll just turn it to Don if he has anything else to add yeah. So.
My perspective is assuming the market stays strong and we expect them to stay strong so think of that relatively low interest rates lots of liquidity and a reasonable economy. That's a great backdrop for continued deals we saw a lot of things to try to run to the finish line in the fourth quarter due to potential changes in tax laws, but I have to say our pipelines are as high as that.
They've ever been as we roll into the first quarter and we expect those to continue to build the other thing I'd just give you a perspective on is we've got a diversification of revenue streams down our capital markets business.
Is furthered by JMP, which moves us into the equity business as an industry industry interesting industry verticals.
And then we have DH capital, which should close sometime in the first quarter, maybe early second quarter, which will give us incremental opportunities and that is only just beginning to be realized and the thing that's really driving the fee lines is we're playing multiple roles on every transit lots of transactions out so not only are we advising but we're also financing and we're capturing the wealth.
<unk> and Theres a lot of inquiry.
Very good cross sell and a lot of value add for our clients. So it feels very strong I think we've got a increasingly strong reputation with the private equity community, particularly in the middle market space as we show them as interesting opportunities and we execute well for them. So it feels very good what the exact number is going to be is very hard to tell but sitting here in the second.
Week of January .
Pretty optimistic about what the year is going to look like.
On mortgage I'd, just add that obviously pulling up at a high level.
As you all know mortgage is a natural hedge against the.
The interest rate environment for us and while in many ways. The cycle was a lot like other cycles. The differences that was exacerbated significantly so you've got a much bigger pop just given how quickly, but then came at us and Covid and he had a steeper decline having said that John's point, we feel much better positioned than pre COVID-19 levels.
In 2019, and I think youll see in our results in <unk>.
2022, despite us projecting the NBA and projected market down 30%, we should outpace our performance in 19 and Thats with the backdrop of margins at historically low levels. So.
I think the question for US is so much better than we'd be over time that our 2019 pre COVID-19 run rates and a lot of that will have to do with how quickly margins re normalizes capacity leaves the system and we're starting to see that now as rates ticked up lenders are starting to shed capacity, we have not yet seen margins stabilize or certainly turned.
A round, but we expect that to happen at some point question does that happened in the first half of this year second half of this year, we will see but we feel very good that the underlying strength of the business is significantly better than 2019 levels. Let me just close and give everybody a shot here.
So your question Gerard but.
If you just think about the long term.
Amplifying Dons comments about where we're positioned to commercial banking and capital markets in particular feel really really good about what we've built out and the secular trends.
Okay.
<unk> equity pools of capital, they're increasing their ownership of U S companies and we're very well positioned to cover those companies who provide services to them.
With the big Middle market and mid corporate space that we have we have an opportunity to connect the intermediation of capital from private equity to <unk>.
Corporate America.
And that's a trend that I think is going to stay in place for a long time, and we're extremely well positioned to capture that and drive revenue growth. So we like what we put together and I think we're still scratching the surface of the potential of really gaining the synergies that come from from what we've assembled.
And then to follow up on Brandon's point. It was always important for us so really get a profitable and highly respected and good mortgage business in place because if we want to be in our consumer bank a trusted advisor on somebody's life journey.
The mortgage is incredibly important product to individuals and so we've now accomplished that so.
So feel good about what we've done under capital market space.
And what we've done on the mortgage space, it's been a combination of organic investments as well as inorganic acquisitions.
One place that we're still kind of short of the Mark that we havent moved so to speak to the other side of the river and get where we want to get too as well.
And it's not for lack of trying and so we've made significant organic investments. There. We've had one successful acquisition with car films advisers, which has gone very very well and we're still in the hump to see if we can take more together there to get us where we need to get to.
Great I appreciate all the insights thank you.
Okay.
Your next question will come from Terry Mcevoy with Stephens go ahead. Please.
A question for John could you just update us on the size of citizens access and maybe how do you best use that product in a in a rising interest rate environment.
And then the HSBC online platform will the conversion there occur on the same pace and same timeline is.
As the bank itself.
Yeah.
So right.
With respect to the first question on citizens access yeah, we're in that kind of $455 billion range most of that is <unk>.
Had some runoff in terms of the CD book.
Confessional, yes intentionally yeah I mean, so when we went out with that that was a balanced approach in terms of savings and CD offer and that was extremely successful in the third quarter of 18 and has really served us well and where we're building on that platform that platform. We've launched a national storefront on the back of that platform, where we've added.
The ability to start bundling mortgage and and and education loans and that storefront when you log on to citizens access and and so over time that will be.
Again, a big driver of how we we are distinctive with with our deposit offerings and being able to broaden out that product set and then the second half of the question was on HSBC coming across and timing and so that timing is mid February we feel really good about that.
<unk>.
Doug.
Almost $8 billion of deposits in middle of February .
And so that's going to add a lot of cash to right to where we are at the end of the first quarter.
And Thats really should be thought of though in the context of the investors acquisition, where we looked at those deals as one.
Sort of entry into the New York Metro not just strategically, but also financially because when you put those two things together, that's around 80% or so LDR combined profile. So those those deposits are there too.
To be thought of in the context of the overall investors in HSBC acquisition, Brendan maybe you could just.
Trying to carve out the online aspect of HSBC because that was another thing that really was intriguing.
We had the opportunity to buy that business yeah, absolutely. It does help us further accelerate our national scale with with our online deposit platform.
And to the question the timing on the online integration will be the same exact timing is core branch network acquisition in mid third that will happen here. There's a few small differences with the HSBC online platform from our citizens access one is that the interest rates are actually a lot lower there at 15 basis points versus our citizens access is at <unk>.
30 basis points and one of the reasons why they are a little bit lower is that a handful of those customers have some.
Minor connectivity to their physical channels, and so we're maintaining that and making sure the customers have access to our new distribution footprint, where they happen to be in our in our franchise. So you can start to see the the physical and digital worlds coming together in this strategy, but we view this as a significant accelerator to our national expansion plans and provides a.
Great pool of customers for us to ultimately deepen with as we to John's point, we've we've expanded the storefront with mortgage and student loan refinancing as I mentioned in my opening remarks, we're going to add more products over the course of 2022. So this is fertile ground for revenue growth that we did not put into our deal model.
Thank you and then just a quick follow up can you just remind us the impact on service charges and fees in 2022 expected from the rollout of of the peace of mind product the citizens peace of mind.
Yeah, I can take that so.
The way to the way to really think about this as opportunity cost.
<unk> not re inflating and so.
The peace of mind program. It really is a 24 hour Grace is the third or fourth move we made in addition to a handful of other moves including our student account that.
It is completely protected from overdraft, we've got $5 overdraft past, we've got a once a year oops.
<unk> forgiveness for customers in certain products and now we've introduced peace of mind, which is essentially a 24 hour grace period, and a great customer experience for all of our customers to empower them to avoid unnecessary piece and we think the payback on this is quite strong.
At year, three where we break even and turn the corner for the revenue benefits to offset the fee shortfall that we're giving up but really we expect the overdraft line to be flattish going forward.
But it would have cost we would have been able to get a pop of call it $8 million to $10 million a quarter at a normalized market where stimulus benefits burned down, but we think it's the right. It's the right thing to do the amount of $40 million up it took about a $40 million opportunity costs annually, but that more than offsets overtime with <unk>.
Revenue benefits.
To John's comment we've already seen a significant early indicators of positivity coming from our customer base call Center in complaint volumes are down about 40% in this category and our NPS score, particularly with under 40, aged customers has really started to increase right away and we just rolled this out in October . So we're very very pleased about it.
About the early early behavioral impacts from our customer base.
Great. Thanks, everyone.
Sure.
Okay, Yeah. It looks like that's the end of the queue here for Q&A I know, it's a busy day with other banks reporting, but once again I want to thank everybody for dialing in today. We appreciate your interest and your support.
Have a great day and everybody stay well thank you.
And that will conclude your teleconference call for today. Thank you for your participation and for using AT&T event Teleconferencing you may now disconnect.
Yeah.
Okay.
We're sorry your conferences ending now please hang up.