Q2 2022 Citizens Financial Group Inc Earnings Call
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Good morning, everyone and welcome to the citizens financial group second quarter 2022 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 Silberberg Executive Vice President.
Investor Relations Christian you may begin.
Thank you Alan Good morning, everyone and thank you for joining US. This morning are chairman and CEO <unk> Sayin and.
And CFO , John Woods will provide an overview of our second quarter results Brendan Coughlin head of consumer banking and Don Mccree head of commercial banking are also going to provide additional color we will be referencing our second quarter earnings presentation located on our Investor Relations website. After the presentation, we will 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 overview on page two of the presentation. We also reference non-GAAP financial measures. So it's important to review our GAAP results on page three of the presentation and the reconciliation.
In the appendix with that I will hand over to Bruce Thanks, Kristen and good morning, everyone. Thanks for joining our call today.
There was a lot going on in Q2 with a focus on closing the investors acquisition and commencing our New York City Metro integration efforts.
Addition, the feds move to rein in inflation through higher short rates and quantitative tightening.
Bartlett on Adroit management of our capital liquidity and funding position.
As well as our interest rate management. The good news is that we've made strong progress on all fronts, while posting very good financial results our underlying EPS for the quarter was $1 14, that's up 7% from the first quarter and <unk> was 15, 5%.
Positive sequential operating leverage was 11, 7% on an underlying basis and six 3% excluding the impact of acquisitions, our PNR growth was 45%.
Driving these strong results was a significant sequential jump in net interest income of 31%.
Thats, 9% ex acquisitions.
Loan growth reached 19%, which is 4% ex acquisitions and our net interest margin jumped 29 basis points. We are seeing a strong pickup in line utilization in commercial which has afforded us the opportunity to be more selective in lower returning consumer portfolios like mortgage and.
Although our.
Our deposit performance was good as period end deposits ex acquisitions were up 1%.
Our fees were relatively resilient up 2% ex acquisitions, given the diversity of our fee revenue streams higher volatility kept capital markets and check, though it's benefited FX and derivative product revenue, which hit an all time high.
<unk> continued to grow nicely in the quarter, while mortgage revenue was up slightly.
We did our usual fine job on expenses and credit performance continues to be excellent.
We continue to see favorable trends in key credit metrics on both the commercial and consumer side at.
At this point, we feel the second half should hold up well with all of the gradual normalization of loss rates given the solid positioning of our customers today.
We currently expect our solid momentum to continue into the second half of 2022, we will continue to benefit from rate rises are fees should remain resilient and we will benefit on expenses from our acquisition synergies and the top seven program.
We project positive operating leverage in Q3, and Q4 with Aro TCE moving beyond our 2014% to 16% target range.
The market seems concerned about the rising possibility of a recession in 2023 and the potential for much higher credit costs. At this point, we see slower economic growth as the base assumption for 2023, and if there is a recession, we believe it should be shallow and short lived.
We are being highly selective on new loan originations and we moved several portfolios to held for sale largely from investors to optimize our balance sheet position.
We continue to believe our credit performance will be good on a relative basis showed a downturn com.
It's an exciting time for citizens, we have many promising initiatives in flight that we are managing well we are focusing on areas, where we can leverage our strengths and where we have a right to win the current environment gives us a great opportunity to prove our mettle and deliver prudent sustainable growth, we certainly feel up to the challenge.
With that let me turn it over to John to cover the financials in more detail John Thanks, Bruce Good morning, everyone first I'll start with our headlines for the quarter referencing slides four and five.
We reported underlying net income of 595 million and EPS of $1 14 SaaS.
Our underlying ROTC for the quarter was 15, 5%.
Net interest income was up 31% linked quarter, driven by a 29 basis point improvement in margin and strong loan growth, including the impact of the HSBC and <unk> transactions.
Period end loans were up 19% linked quarter, excluding loans added by the HSBC and <unk> transactions loan growth was a strong 4% led by commercial growth of 6%.
Average loans are up 19% linked quarter, excluding acquisitions average loans were up 3% and 5% growth in commercial.
Underlying fees were up 5% linked quarter or 2%, excluding HSBC SPC acquisition impacts, reflecting the diversity and resiliency of our fee businesses.
Our client hedging business had another exceptional quarter and we delivered record results in wealth and card.
Mortgage fees were up slightly and capital market fees were down a bit given continued market volatility.
We remain disciplined on expenses, which were up 1% linked quarter, excluding the HSBC and <unk> transactions.
Overall, we delivered underlying positive operating leverage of 11, 7% linked quarter.
And that was six 3%, excluding the HSBC and <unk> transactions.
Our underlying efficiency ratio improved to 58%.
We recorded an underlying provision for credit losses, excluding SBC of $71 million, which reflects continued strong credit performance across the retail and commercial portfolios.
The underlying credit provision for the quarter excludes $145 million for the double count of seasonal provision expense tied to the SPC transaction.
Our ACL ratio stands at 137% down from 143% at the end of the first quarter.
Our tangible book value per share was down 6% linked quarter, driven primarily by the impact of rising rates on securities and hedge valuations that impact the OCI.
We continue to have very strong capital position with set one at nine 6% and we have increased our common dividend by 8% to <unk> 42 a share.
On slide five we provided the HSBC SPC contributions to our second quarter results as well as the notable items for the quarter.
Also on slide 21 in the appendix provides a summary of the purchase accounting impacts associated with the IFC transaction.
Next I will provide some key takeaways for our second quarter results.
On slide six net interest income was up 31% given higher net interest margin and 17% growth in interest, earning assets, including the impact of the HSBC and <unk> transactions.
The net interest margin is 3.04% up 29 basis points, which as you can see on the NIM walk in the bottom left hand side of the slide shows the benefit of higher rates with a 24 basis point increase related to asset yields, reflecting the asset sensitivity of our balance sheet and improved securities reinvestment rates.
<unk>.
There is an 11 basis point benefit from HSBC SBC transactions, largely given the repositioning of the <unk> securities portfolio and the benefit of adding their loans.
With rising rates funding cost reduced the margin eight basis points, reflecting a well controlled deposit costs.
Earning asset yields are up 38 basis points linked quarter strongly outpacing our interest bearing deposit costs, which are up only eight basis points.
Moving to slide seven.
Given the Feds recent rate hikes in the current market expectations for the fed funds rate to end the year in the $3 50 to $3 75 basis points range.
We are confident that we will continue to realize meaningful benefits from rising rates as the forward curve plays out.
Our asset sensitivity has driven a significant improvement in NII in the first half of this year and those benefits will continue to accumulate in the second half of 2022 and compound into 2023.
Since the path of the rate cycle is uncertain on the top left side of this page. We've provided an estimate of our NII sensitivity to further changes in rates either up or down from the June 24th forward curve.
Our overall asset sensitivity stands at about two 5% at the end of the second quarter.
This is down from 7% for the first quarter, reflecting the incorporation of <unk> NII base and liability sensitive profile as well as hedging actions taken to stabilize the margin and protect against downside interest rate risks.
Our improved NII outlook as well as changes in the balance sheet also contribute to the reduction in asset sensitivity.
Essentially a 25 basis point instantaneous change in the forward curve is worth about $10 million to $15 million a quarter with that balance between the long and short parts of the curve.
We began the rate cycle with a strong liquidity profile deposit costs as low as they have ever been and our overall funding profile greatly improved including significant improvements to our deposit mix and capabilities.
We will continue to optimize our deposit base and to invest in our capabilities to attract durable customer deposits.
So far this cycle with fed funds, increasing 150 basis points since the fourth quarter of 'twenty one.
We are quite pleased with how our deposit franchises performing with a cumulative beta of about 6%.
On a sequential basis for the second quarter, our beta was 11%, which puts us on track for a 35% cumulative beta through the end of this rate cycle. If the forward curve plays out as expected.
Moving on to slide eight we posted solid results demonstrating the strength and diversity of our fee businesses.
Capital markets delivered solid results, despite continued market volatility impacting the bond and equity markets.
We saw M&A advisory and equity underwriting fees picking up a bit but these were more than offset by modestly lower loan syndication revenue.
We continue to see good strength in our pipelines and capital markets fees could rebound nicely in the second half of the year if market settle down and there is more certainty regarding the path of the economy.
We once again delivered a record performance in our client hedging business of $9 million linked quarter, driven primarily by FX as we help clients manage their currency exposures at the dollar strengthened during the quarter.
Our interest rate and commodities businesses also performed very well, but were down modestly from record levels in the first quarter.
Mortgage fees were up modestly linked quarter, given improved servicing income as higher mortgage rates resulted in slower amortization of the MSR.
Production <unk> remains under pressure, given lower industry origination volumes with rising rates and seasonal impacts.
Strong competition continues to pressure margins. However, there are clear signs that the industry is beginning to reduce capacity, which should benefit margins as we head into the second half of the year.
We delivered record wealth fees up 8% linked quarter as rising market interest rates supported customer flows into annuity products.
Card fees were also a record given seasonally higher transaction volumes.
On slide nine expenses were well controlled up 1% linked quarter, excluding HSBC and <unk>.
Our top seven efficiency program is continuing to make good progress on track to deliver $100 million of pre tax run rate benefits by the end of the year.
Period end loans on slide 10 were up 19% linked quarter, primarily driven by the impact of the <unk> transaction, which closed at the beginning of the quarter.
Excluding the impact of the HSBC SPC transactions loan growth was 4% with strong commercial loan growth again this quarter up 6% led by C&I as we emphasize strong relationships to optimize risk adjusted returns.
Retail loans were up 1% as we continue to be more selective in consumer lending.
Average loans were up 19% linked quarter or 3%, excluding the impact of the HSBC ni SPC transactions with 5% growth in commercial led by C&I and 1% growth in retail.
In commercial we continue to see strength in corporate banking originations across every region.
Line utilization continue to rebound with an increase of about 300 basis points to 39% on a spot basis, primarily driven by corporate banking with the largest quarterly increase in utilization we have seen some early in the pandemic.
Our clients are continuing to use their lines to build inventory to get ahead of supply chain issues and rising input prices and some are also looking to pro rata bank financing as an alternative to the volatile bond markets.
Concurrent with the <unk> acquisition, we identified certain non strategic loan portfolio totaling $2 $1 billion, which we're in the process of being marketed for sale.
These loans were classified as held for sale at quarter end.
This will free up capital and enable our relationship bankers to focus on more desirable commercial relationship business and New York Metro.
On slide 11, our period end deposits were up 13% linked quarter as we added $19 8 billion of deposits from the <unk> transaction.
Excluding SBC and HSBC period end deposits were up slightly while average deposits were down slightly reflecting seasonal run off on a decline in commercial surge deposits.
Moving on to Slide 12, we saw excellent credit results again, this quarter across our retail and commercial portfolios.
Net charge offs were at 13 basis points down six basis points linked quarter.
Nonperforming loans fell six basis points to 54 basis points of total loans linked quarter, driven by improvements in C&I and residential real estate and home equity.
Other credit metrics continued to look excellent across the retail and commercial portfolios and criticized loans as a percentage of the commercial portfolio are stable after incorporating the SPC, but down on a standalone basis.
On slide 13, I'll walk through the drivers of the allowance this quarter.
We continue to see excellent credit performance across our retail and commercial portfolios. We added to the reserve this quarter to take into account strong commercial loan growth as well as the addition of IFC.
While we aren't seeing any signs of early stress in the portfolio at this point our allowance takes into account the expectation of a more challenging macroeconomic outlook given the feds rate actions to competitive combat inflation.
Our overall coverage ratio was 137%, which is a modest decline from the first quarter, reflecting the strong performance of our retail portfolio and the addition of the ISP CRE portfolio, which includes a sizable multifamily component that component with lower reserve requirements that our legacy portfolios.
If you recall when we adopt a seasonal at the beginning of 2020, our coverage ratio was 147%.
To put our current coverage ratio in context, we estimate our pro forma coverage ratio will be slightly lower than the $1, 37% level today, if we applied our current portfolio mix, incorporating <unk> to our <unk> T cell approach.
Importantly, our coverage of non accrual loans strengthened to 256% up from 238% in the first quarter.
We feel good about the improvements of the loan portfolio. We've made over the past few years and the overall positioning of our credit risk.
Moving to slide 14, we maintained excellent balance sheet strength are set one ratio remained strong at nine 6%.
Following the release of the Feds DFAST stress results last month, our board increased our common share repurchase authorization to $1 billion and today, we announced an 8% increase in our common dividend to <unk> 42, a share.
Our fundamental priorities for deploying capital has not changed and you can expect us to remain extremely disciplined in how we manage the company.
Shifting gears a bit on slide 15, Youll see some examples of progress we made against our key strategic initiatives and other work, we're doing across the bank to better serve our customers and make set us in a great place to work.
As you know we closed the acquisition of <unk> at the beginning of April and we are very focused on a successful integration.
I am proud of the work our teams have done related to the acquisition, we on boarded more than 600, new colleagues to our HR systems on day, one and in the second quarter, we began originating mortgages on our systems.
We have a number of conversions planned over the remainder of the year and we are on track to finish in the first quarter of 2023.
We have included a high level integration timeline in the appendix on slide 22.
Importantly, we are on target to achieve a $130 million and run rate net expense synergies by the end of 2023.
Which approximately 70% will be achieved by year end 2022.
Total represents about 30% of <unk> 2021 expense base.
Also I SPC integration costs to be incurred through 2023 are now expected to come in below the estimated level of deal at deal announcement.
We recently released our fifth annual corporate responsibility report, which highlights our progress on ESG initiatives.
Report highlights a number of significant milestones related to our sustainability efforts, including our progress towards targets to reduce greenhouse gas emissions.
We also announced that we joined the partnership for carbon accounting financials, which will accelerate our efforts to measure and disclose finance emissions.
Later this year, we'll release, our first TC FTE climate report, which will describe our climate strategy in more detail.
The report also describes our commitment to the communities we serve and there are a few recent examples here on the slide with some of the community partnerships, we are engaged with and Boston and most recently in China Town and Queens New York.
On the consumer side, we are excited about continuing our expansion in Florida with the opening of our latest wealth center enables we.
We recently released our mobile App version of citizens access, which we think will be very popular with our customers and we are very proud that our citizens pay point of sale offering was awarded best innovation by the banking Tech Awards.
Lastly, our relentless focus on customer service driving results as our ATM channel moved up eight places in the J D power rankings.
On the commercial side, we continue to perform well in the league tables consistently ranking in the top 10 is our middle market and sponsor Bookrunner.
Diversification in our business model is delivering results with record revenue in our client FX hedging business.
We also closed the th capital acquisition this quarter strengthened here are strengthening our capabilities in the Internet infrastructure software and next generation It services and communications sectors.
On the right side of the page. We've included some digital metrics mobile active users are up over 20% year over year digital deposits and zelle transactions are up over 30% and we are seeing great success with the customer uptake of automated client service through virtual chat sessions we.
We are very excited with 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 16, I'll walk through the outlook for the third quarter.
Essentially closed <unk> at the beginning of the second quarter, our third quarter outlook includes all our recent acquisitions.
We expect NII to be up five 5% to 7% driven by the benefit of higher rates and solid loan growth.
We are very focused on optimizing capital deployment.
In consumer we will reduce originations and mortgage auto and education refi, while seeking to grow in home equity Ensco education and citizens pay and card.
In commercial we expect to see further increases in line utilization.
But we'll be mindful of balancing growth and returns given current macro uncertainty.
These are expected to be broadly stable, though upside exists in capital markets stabilize.
Noninterest expense is expected to be up approximately 1%. We expect to continue strong sequential positive operating leverage in the third quarter and ROTC above our medium target range of 14% to 16%.
Net charge offs are expected to be approximately 20 basis points.
We expect our set one ratio to land around the midpoint of our operating range at 975%.
And our tax rate should come in a bit lower at approximately 22%.
With respect to full year results, we expect <unk> to be in line with our April guidance.
On a revenue standpoint, we are seeing higher NII, given net interest margin, reaching approximately 303, 5% in the fourth quarter, driven by higher rates and loan growth within our 20% to 22% guidance range.
This will be offset by lower fee revenue largely in the capital markets and mortgage.
Expenses will be well control, which will result in full year operating leverage of at least 400 basis points and our fourth quarter efficiency ratio of sub 65%.
We also expect the net charge off ratio to come in lower than we guided in April given continued favorable trends.
To sum up on slide 17. This was a very solid quarter and we are optimistic about the outlook for the rest of 2022 and beyond.
We are off to a running start in New York with the close of our two acquisitions, there and we expect significant benefits in our net interest income from the higher rate environment and strong commercial loan growth.
The strength and diversity of our business is driving solid results and our capital markets business in particular is well positioned for when markets stabilize given strong pipelines.
We will continue to focus on executing against our strategic priorities and building a top performing bank that delivers for all our stakeholders with that I will hand, it back over to Bruce.
Okay. Thank you John .
Operator, let's open it up for Q&A.
Thank you Mr. Byrd Zone, we are now ready for the Q&A portion of the call.
If you would 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 Q by repeating the one then zero command if youre using a speakerphone. We ask you to please pickup your handset and make certain your phone is on mute. It we're pressing any buttons.
Your first question will come from the line of John <unk> with Evercore go ahead. Please.
Good morning.
Hi, good morning.
Just on the loan front I guess it is also a credit question I know you indicated that you are being more selective in select areas of consumer lending can you maybe give some color. There in terms of what areas are you, becoming more selective what you're seeing that's making you become more selective or is it just actually a broader bag.
Drop and what that could mean for for growth in the consumer portfolios.
Yes, well, let me start and then I'll go to Brendan and John I'm Sure you do.
But.
I think we've.
<unk> has the potential to continue to grow.
In consumer maybe at a faster pace than would be ideal in the current environment.
We're seeing a lot of growth right now on the commercial side line utilization picking up.
And I think in light of the environment that we're seeing out there in transitioning into investors balance sheet.
Just making sure we're focusing on allocation of capital to the highest and best uses and not putting a strain on deposit growth as we're going through this higher rate environment.
As is the game plan at this point.
So when we look into the consumer world.
Clearly mortgages and auto are areas, where we've seen a lot of growth over the past couple of years.
We're going to basically put mortgage more on a stable path and start to.
Reduce our originations in auto those are really return calls Thats a return on capital call.
Where we think we have opportunities to grow in areas that deliver better returns would be things like HELOC.
Like the in school student.
And then also part and citizens pay.
No.
I think overall, we'll still see some.
Some net modest growth but.
We're going to take some pluses and some minuses here and really be focused on capital allocation. So with that Brendan you want to add to that I guess, just strategically what I'd add is.
But I think this is a natural pivot point for the journey of our strategy.
Early stages of our IPO everything was accretive for.
For the most part and so we've really scaled up our business and I.
I believe we have one of the most well run in diversified consumer lending franchises amongst our peer set for sure.
And yes, if we enter this next phase of our journey capital allocation is king and we're making some strategic pivots also say this is not necessarily brand new news. If you recall prior to Covid. We had already started signaling we're going to start to.
Put auto as an example.
To reduce and get back into tier levels for concentration through Covid. We found some great vintages of returns and market disruption. So the benefit of the diversity of our business model allowed us to flex up through Covid and now we're sort of returning to our original glide path down of auto given that the auto business is naturally.
And sort of steady state a lower return unless relationship focus. So then led to Bruce's point on mortgage we've been outgrowing.
The citizens balance sheet on mortgage growth for quite some time and so we would like for that to grow faster than the rate of the bank just given where we're at right now on interest rates and the long duration nature of that business and so really making sure. We're protecting our balance sheet for long durations of real relationship focused lending and customers is key the other place we're.
Yeah, curtailing a bit as some fintech partnerships that we've had over the years, that's served us well and added operating leverage allowed us to invest back in the bank, but being much more relationship focused in our capital allocation is king, but we're very excited to responded about a couple of places of our franchise HELOC being one where we believe we're the number one originator in the U S for HELOC.
Originations credit quality is extremely good.
A super Prime as against 780, FICO 60 year last see Ltvs, and we're poised to capitalize on that and <unk>.
In school student product as Bruce pointed out is coming back strong as the effects of Covid, we're off a little bit on student enrollment and citizens pay we do have aspirations for medium term growth in that product. So I think we're wealth well position, we can flex up or not taking down muscle mass just making some capital allocation decisions as we optimize the <unk>.
<unk>.
Particularly set of luck John anything to add.
We're good.
Alright, Thank you for that and then just separately on credit again.
I know you had indicated your outlook do you expect some economic slowing as you look into the rest of this year and into 'twenty three.
But also that your reserve does consider a degree of that how do you think about you.
You could potentially see that begin to build the reserve more meaningfully here.
It does take hold where do you think the reserve could trajectory over time, what do you think it's a fair level given your economic outlook.
I'll kick off and hand, it quickly to John but.
One of the things we pointed out was.
We're about where the day one reserve.
Would have been had we.
Corporate at investors into those numbers. So there's $1 37 ratio, it's down from 147, but if you look at the shift in some of the asset composition.
About a day one.
And we have.
Incorporated a moody's scenarios that.
It does have a GDP slowdown in the higher recession risks into that scenario. So.
I would say absent.
A meaningful.
Change in outlook.
We could probably hang around this neighborhood.
For a while so anyway that would be my top of the house view, but John for more details. Please yeah sure I mean, I think that's right I mean, I think that our base scenario.
This quarter really relies predominantly on a mild mild recession.
Which which would.
Last one too.
I'm just sort of into next year. So I think we're covering that part of it we've even layered in.
In certain aspects of the portfolio of more more more severe recessions.
That's also built in to where we are and to Bruce's point.
The mix shift in our portfolio has been extremely positive over the last couple of years. So when you fast forward from the first quarter of 2020 or the beginning of 2022. The here in the second quarter of 2002, our mix profile is much better.
And so you can almost think about the fact that or we're sort of back to the beginning where we have some some uncertainty and some negative scenarios priced in and.
Without without a significant deterioration in the macro as Bruce indicated we.
We're lucky to be in this range.
Actually as you get into the end of the year and I think it makes sense. If you just step back and think about that.
The consumers in really good shape still has a lot of liquidity.
So refreshing their business models coming out of Covid, they're all in pretty good shape in contending with inflation and supply chain in China and maintaining our margins.
So historically if you have a good jump off point you go through a sell a shallow recession.
Bank charge off rates don't go up all that much.
I think you'd have to see a meaningful change in the outlook for us to come off that view.
Got it alright, thanks, Bruce Thanks, Sean.
Your next question will come from Scott Cyphers with Piper Sandler go ahead. Please.
Good morning, guys. Thank you for taking the question.
Maybe just some additional thoughts on how you see deposit cost pressures.
We can get a pretty good sense from slide seven how you'd see the full year.
Projecting and was glad to see you reiterate that 35% through the cycle beta expectation, but as we look through the remainder of the year, where specifically do you see the pressures that gets you to the 25% to 30% by year end and then maybe if you can flush out your thinking on deposit cost dynamics once the fed stops raising rates.
Yeah, I'll take that I mean I think.
The best way to describe that I articulated that our accumulative beta.
6% through the second quarter better than we expected. So we're feeling good about where we're starting off this rate cycle.
Our outlook indicates a deposit beta getting into the 25% to 30% range by the end of the year, which implies the <unk>.
Sequential betas in the second half in quarters being around mid thirties, so that.
So that math would play out so that's how that trajectory would work.
The drivers of that are predominantly on the commercial side of the business, but as expected.
Consumer.
In retail deposits are incredibly well performing and well behaved in terms of deposit betas and we expect that to continue throughout the rest of the year.
Half.
A little bit of room on the balance sheet for citizens access and all of that has been incorporated into our outlook for the 25% to 30% by the end of the year and for the approximate 35% through the whole cycle.
Deposit betas will continue to rise as you get into 'twenty, three and Thats. The difference between the approximate 35 on the 25% to 30 that were talking talking about.
And they tend to continue to rise when the fed stops assuming that the fed doesn't start easing immediately thereafter right. So the last cycle. We had the fed ended the cycle. The very next quarter, we were easing and so thats sort of clicked off the lag effect that you would typically see in deposits.
But if the fed stops and stays stands Pat Danny would see deposit costs continue to rise for another quarter or two after the last fed hike, but I should hasten to add that that there is the loan beta side of this equation and the loan beta side of it is loan betas basically are rising.
They will continue to rise into the fed tightening cycle and even after the fed stops and.
And our in particular, all the tailwind from some of the term fixed lending that often really gained steam when you get to the end of the fed tightening cycle. That's really what continues to drive net interest margin rising, which which we would say we continue to rise throughout 'twenty three even if the fed continues to rise given.
The fact that loan betas would exceed deposit betas.
Okay, perfect, that's great color and I guess, along those lines of sort of more of.
When it comes to rate sensitivity, so I guess youre little less asset sensitive now with <unk> in there.
Couple of moving parts with the hedging how would you say your overall rate sensitivity changes from here or is this.
Kind of at a good steady state for where we're at now.
Yeah, Let me, let me jump in it's Bruce and I will give it back to John but.
I think what we've tried to do Scott is find that sweet spot where we.
We still have asset sensitivity.
Sufficient to participate if the fed has to keep going beyond what's expected, but also we like these this level of NIM at this level of NII and so.
If in fact recession is in the offing and then rates turned down we've locked in a fair amount of that NII for a good period of time so.
Just trying to get that balance right, where we take away the downside and allow ourselves to continue to participate in the upside is where we tried to landed over the quarter John .
Yes, I agree with that and the I guess the point is that without management actions as you think about how the balance sheet unfolds from here a big a big decline in the quarter really was just pulling an ICC just the base NII alone reduces your your asset sensitivity. So you just have a bigger base on that from a percentage to be calculated but so.
That was the source of the decline is primarily and our management's actions. So if you don't if you takeaway management's actions looking forward actually our asset sensitivity with tend to begin to rise again as mentioned earlier the rotation out of consumer lending and so a lot of the consumer commercial lending.
And even within consumer lending. The fact that HELOC is a big driver, which is which is a floating rate product.
You really are as re establishing asset sensitivity as things as the balance sheet unfolds in the coming quarters. All of that is absent absent management actions right and so that's really going to tell the tale about where where we land things if we get towards the end of the year.
And if rates or inflation still remains.
Stubbornly high.
That will that will tell us where we take the balance sheet under that scenario. If it feels like June was peak inflation.
As you get to the end of the year, you would see us wanting to lock in a little bit more so we will just see how it plays out but naturally underpinning the balance sheet has some upward lift on asset sensitivity.
Yeah, Alright, perfect. Thank you guys very much.
Sure.
Your next question will come from Peter Winter with Wedbush Securities Go ahead.
Good morning.
I just wanted to follow up on Scott's question regarding the deposits but.
Can you just talk about how you're thinking about deposit growth in the second half of this year.
The second quarter.
You've got a big driver being commercial right.
And there is two drivers there one is the <unk>.
Fact that there was some surge in the commercial business that has been running off and frankly most of that run off by the end of end of June is down to a relatively smaller level now.
That was a driver also a driver is the natural seasonality of our deposit flows which tends to have <unk> as one of the lower points during the year. So when you think about through the rest of the year.
There'll be the of the broad continuing to execute against all of the investments we've made over multiple years in driving consumer deposits and also the natural uplift and frankly, driving commercial as well, but but the natural uplift that the second half tends to deliver in the commercial side of the business from <unk> from a seasonality stand.
Point and lower drag from from surge run off so that's why we see the second half playing out.
And how much is in yes.
Make that clear so the net would be we'd be expecting to resume growth in the second half.
And.
I think that would be less.
Led by commercial growth, but consumer also would expect to see some growth as well.
Got it.
And you gave some color on the loan.
Moving parts on loans in the third quarter, it's going to be led by commercial but I'm just wondering.
If you could just be a little bit more specific on the type of growth rates, you're expecting on commercial versus consumer and maybe line utilization.
In the third quarter.
Yes, well I mean I think the.
And the second quarter.
Talking about the jumbo off here may be may be helpful. Because in the second quarter, we had.
We had on the on the commercial side of the house, we had 5% average growth, but on a spot basis, we had 6% growth that you can see that what that implies is that youre likely to see commercial be a big driver in the second quarter. So Europe , you'll see in the third quarter.
In the third quarter, I'm, sorry, yeah, commercial being a big driver into the third quarter, I think youre going to see puts and takes in consumer.
You can see home equity and some of the other categories.
We'd like to see drive things in card.
And a little bit of mortgage driving it maybe being offset by a lot by by auto.
And and and students a little bit so so that's why what articulated at.
Utilization continues to increase but it's but it's been about 50, 50 utilization and other commercial growth and so I suspect that that will be the color into <unk> as well utilization driving about half of it and the other half coming from outside of utilization, but again I'd say at <unk>, driven primarily by commercial loans maybe.
Maybe maybe a similar amount of Av.
Loan growth percentage that you saw in two Jim.
One thing about commercial and maybe I could ask Don to comment on this is that.
When you kind of look at how companies are able to access new financing.
Right now the the.
Public markets are pretty still on the water so <unk>.
See kind of more opportunities for the institutional market as well so the bank syndicated lending market.
<unk> has seen an uptick which I think is likely to continue.
As we look out into the second half so.
Tom maybe you can give some color on that.
Yes, I think that's right and just to put a point on what John said, we've got utilization up by about another 200 basis points.
Across the C&I books in the global markets books in the third quarter. So that gives us a couple of billion dollars and potential outstandings.
To Bruce's point, we're really starting to see the acceleration of a trend of companies that might want to refinance in the bond market coming to the bank market instead.
The access on bank balance sheets, and so much more attractive and we're also seeing some transitory financing for M&A transactions and for maybe some buyouts more onto the bank bank balance sheets as opposed to some of the nonbank lenders. So I don't know what the exact mix will be but theres a lot of things that are beginning to materialize and it's not going to all go.
Because of that and we're going to take some other portfolios down to slow down some other things similar to what Brendan said, which we've been doing for two or three years now just to change the mix of what's on the books. So we get a little more selective in terms of both the terms of the capital we're deploying but also being very careful.
Credit risk and the like just in case, we go into a little bit deeper slide. So we're just being protective of the risk also.
Yes, one other thing maybe just.
Just to close out there a little bit is the is to broaden it out to the second half I think we mentioned that theres a lot of moving parts here and so we tried to really make it clear that our April guide had a 20% to 22% range of loan growth associated with it for the year and were basic all of these moving parts are going to fall into that range of 20%.
92% loan growth.
Increase in 2022 and.
Hopefully that's helpful in how it shakes out between <unk> and <unk>, there's a lot of there's a lot going on there, but but we're expecting to deliver as we indicated we would at our last guidance.
Got it thanks for all the color.
Your next question will be from Gerard Cassidy with RBC go ahead.
Good morning, Bruce Good morning, John Good morning, Hey, Gerard.
Bruce you guys have done a good job on credit and you've identified the outlook as being healthy strong through possibly the end of the year, but you know a little more cautious as we go into next year, which is completely understandable.
Can you share with US where you guys are thinking about not so much the traditional credit areas like consumer lending home equity or student loans, but more from a institutional market. If the fed pursues this quantitative tightening which they claim they will $95 billion of months, what kind of disruption are you guys kind of.
Looking at possibly that could happen separate from the traditional unemployment rates going up and all that stuff I think most of us kind of understand that but the new part is this quantitative tightening that we really have an experience. How are you guys kind of thinking about that going forward.
Well.
We're a bit in unchartered waters, because we haven't.
C quantitative easing to the extent, we have and now the amount of tightening that Theyre planning.
<unk> be interesting to watch I mean, if I step back and think about.
Where did a lot of that additional liquidity and up I think.
The biggest banks took on a lot of it the custody banks took on a lot of it.
And I think when we view our space the superregional space, maybe we had some benefit from it but.
A lot of it was just.
Working on our playbook to to deliver better for customers.
<unk> whole relationships, where.
We can capture the deposit opportunities that we were probably sub optimized on both on the consumer side and the commercial side.
So I think the.
Tightening process, you'd probably see it most impact of folks where the liquidity ended up which.
In my view would be the bigger banks in the custody banks.
Bank My Gosh, we still have a number of initiatives where I.
I think we're not fully optimized in terms of the deposits per our relationship base.
We're going to continue to go try to gain market share and grab that.
Very good and can you think about it also from the loan side do you think.
The Q T could have some type of impact obviously, its going to take liquidity out of the market, but I don't know how you guys thinking about it in terms of maybe some of the syndicated business that you've been doing quite successfully in the past.
Yeah, I guess I am not I don't necessarily think that it'll be a huge driver.
The loan volumes and I think the the level of GDP growth.
And.
The spurs activity in the animal spirits and people wanting to put money to work I think that's a bigger driver, but maybe on that I'll defer over to dawn. If you have any thoughts, yes, im not sure Gerard I'm not too worried about the loan syndication piece and again volumes are much lower than they were and I think bill there'll be it'll be.
Where the action is but.
The mega deals seem to be struggling a little bit. So if you think about the environment. We're in the biggest challenge we have on transactional execution is larger transaction and then clearing through the marketplace and so I think youll see a little bit of a dearth. There that's not really the business. We're in so I don't think it will affect our business and then the other thing as you think about whats the.
The price action that goes on in the securities market as the fed is a seller versus a buyer and I think one of the things that I'm looking at is the maturity ladder.
For corporate bonds, particularly high yield bonds is relatively light for the next couple of years, because everybody took advantage of the low interest rate environment of a couple of the last couple of years and refinance and push those maturities out. So I think we have some time for the market to adjust and particularly the public market to adjust to the acute EQT trend that way.
St.
Very good and then as a follow up question.
You guys put aside $2 $1 billion I think of loans from investors holding it for sale can.
Can you kind of give us a description of what types of loans and you also indicated that your criticized loans on a stand alone basis went down which is good of course, but they were stable. When you included the investors criticized loans or any of the criticized loans for investors in the $2 1 billion held for sale.
Yes.
Biggest driver of that of that book is in equipment Finance book, which is about half of it and there are some there are some non accruals set.
Non pass assets that go into that.
And to that portfolio, but but more importantly, we think that we think our underlying fundamentals with respect to the criticized being stable as well.
It's a very good outcome.
There are you've got some criticized coming out of <unk> with with not a lot of loss content and that's just.
Just a mechanism of of migrating from a state chartered approach to how you how you manage that kind of stuff to do on OCC managed approach. So that's that was the impact there but loss content quite low.
And on a on an ACL basis pound per pound.
The needs from an ACL perspective are actually lower on the <unk> side of things given given that profile that came over so we're feeling pretty good about that.
Great. Thank you Phil Thank you.
Sure.
Your next question will come from Erika Najarian with UBS go ahead.
Hi, good morning.
Just taking a step back you guys have gotten a great job.
Given that you know exquisite detail in terms of what you're expecting underneath that.
NII outlook I'm, just wondering if you could talk about it more strategically given how much the bank has changed.
A lot of interesting Michael.
Bruce and the last interest rate in April you took advantage of.
Putting forth great offers through citizens access and I'm wondering.
And do you think about the composition of your balance sheet now, especially after investors.
How should investors think about this go forward citizens deposit gathering strategy.
How aggressive are you going to be in terms of competing in right and is there room to lower rates in the acquired portfolio from investors on deposit side that would allow you to be maybe slightly more aggressive on the rate side on the citizen box that's fine.
Yeah.
Let me start and then I'll pass the Baton here too, maybe Brendan and John but.
I'd say, we feel really good about the progress we've made in.
Just be formulating.
The deposit base.
In consumer and in commercial so.
And consumer taking.
More relationship oriented station.
Not having that kind of thrift like.
Lead with rate orientation that we kind of inherited when we got here.
And so you can just see the results of that in terms of the noninterest bearing growth affluent household growth the stickiness of the deposits and the size per household going up so all those trends are terrific and I think they continue so.
Thats the cornerstone of the deposit strategy going forward I think we have been.
Yes.
Astute and setting up citizens access and.
And giving ourselves a kind of narrow swim lane to go after interest sensitive deposits and compete for those I don't think that's ever going to really become outsized relative to the overall mix I think it's good to have.
And it's when we need incremental deposits, we can play with the rate we can bring them in.
But it serves its purpose ulta.
Ultimately, if we get the national bank to where we want to get it maybe.
Maybe some of those deposits will be a little raised sensitive as we tried to get full wallet relationships with some of the national customer base and then on commercial again I think we werent.
As aggressive in seeking the operating accounts.
We've been over the last few years.
<unk> certainly seen a lot of growth there and then we didn't have the full range of capabilities.
Things like escrow services and other services that different segments of the customer base need we werent competitive they werent built out and so we've now built those out.
And so I think our whole speed in deposit growth going forward can continue to be reasonably strong and hopefully we'd like to get it growing faster than kind of.
The peers.
<unk> gives us a lot of flexibility in terms of the amount of loan growth that we can fund while maintaining an LDR in China the mid to upper 80. So.
It's a little bit top of the house thought process around that but maybe you could add some color on the consumer side on the consumer side I'd say the last upcycle for rates was a bit of a perfect storm for us for higher betas, we had a business model as Bruce pointed out those more thrift oriented had higher promotional balances.
We are growing loans materially faster than peer so we had to fund the loan growth with on a base that was a little bit less healthy than peers and then we did we havent fully built out all of our capabilities and the banks so as I stare at consumer right now I look at all of those dynamics the underpinning health of the portfolio has remixed materially to low cost.
Deposits and Thats based on just increased primacy and engagement with customers that long term value creation and that continues to improve quarter over quarter quarter over quarter.
That's allowed us to bring our elastic deposits down so last up cycle, we had something like 17% to $18 billion in promotional price elastic deposits. That's now in the mid single digits in the core bank, putting aside our citizens access so the portfolio's mix from the mid <unk> percentage percentages on low cost too into the sixties.
That's a big buffer for for better Beta performance, we still believe the consumer segment will have a 25% to 30% net improvement rate cycle of a rate cycle in betas the other.
Things. We've done is we've built a lot of tools and capabilities. So citizens access is now something we're very good at but that's not it we built a dramatically different product composition in the core bank, we built higher.
Highly sophisticated analytic capabilities with better targeting so we do think we can go in and very targeted Reyes.
<unk> in the core bank, but with much more precision than we did in the past, which will really mute.
The beta impact in consumer and allow us where we need to to get deposit growth. We can contain it in citizens access last point I'd make is.
Inside of citizens access we are starting to see some green shoots of of deeper relationships beginning to form. So it's not just this contain deposit.
Raising mechanism on the side.
It's been a benefit both betas, but also.
And so we're doing some tests to drive citizens access deposit raising across our national mortgage customers International student loan customers early results have been quite positive as we start to raise rates and that's going to make it much more affordable for us to drive those deposits on the on the expense side not just the beta side. So a lot of improvements in the health of the Frac.
I would suggest the consumer bank is.
In a dramatically different position right now than we were $5 seven years ago, Great answer Brendan Tom do you want to add anything.
Yes, I'd say I'd similar to Brendan I mean, we basically did not have a liquidity and deposit group seven years ago. When we started our journey here and our payments business was fundamentally subscale and sub par. So we're getting a good lift on the payments sales and the core operating business, but as we you said Bruce which is bring.
Some deposits with it and our just our analytics and our capabilities not not to mention the product suite that we've begun to develop it's just in a completely different place. So it's a much stronger relationship with the client base is the client base grows there's more opportunity to bring in deposits. So we we feel very confident in terms of the deposit franchise at the moment.
Yes got it.
Team here Eric.
Good question, obviously, but just to your other point on an investor side I'd say that.
Given our history, I think we're particularly well placed to two.
Embark upon that migration of that deposit base as well and.
We're beginning that process, we closed this quarter and we've already begun to.
One our playbook through this rising rate cycle, where we are lagging right.
On that platform, which otherwise might not have been lagged and et cetera, et cetera, and so we're making the investments necessary. So we're we're optimistic that we'll begin to see some benefits coming out of that which was also part of your question.
Great. Thank you so much.
We will next go to Ken Houston with Jefferies Go ahead.
Hey, Thanks, guys. Good morning, just if I can back stock on a couple of things when you referred to the April full year guidance. So I think the output was plus or minus three 4 billion ish for the year is that still the zone that we're talking about as you reiterate at this.
This quarter with a different mix.
Well I mean, I think what we're reiterating is that keep you in or implied by that guidance and so yeah.
Yeah, I mean, I think when you see and we talked about the puts and takes on that doing seeing NII coming in a little better and with the with some some offsets in fees and expenses, well controlled and well disciplined on that and credit looking looking very positive and better than we expected as well.
Okay.
Question can you give us SBC as in the full quarter or any update on the magnitude and expected timing and run reading of the original $130 million of cost saves you expected.
Yeah, I'd say the best way to think about that is by the end of the year Youll see a run rate of about 70% of that 130.
And then and then the full amount of the 130 coming in next year.
Okay.
You know what quarter do you expect that to be kind of fully captured.
Yes.
Well next year.
Yeah, we haven't talked about I mean, I think the big driver of it is getting the closed down in the first quarter. So it'll it'll.
Substantially all of that will be done by mid year and there'll be some trickling in benefits in the second half, but most of that will be getting there by the middle part of 'twenty three.
Got it and last quick one there was an increase in short term borrowed funds in <unk> and I was just wondering you had the ones that were at <unk>. I know you had previously talked about getting rid of those through merger accounting. So I'm. Just wondering did that chunk that came over from <unk> get taken out.
Or is this are we now seeing the ads and are there extra adds on top of it kind of if you could just talk through those two buckets of short term borrowed funds in the <unk> relative to what might have come from my SPC or what's just new adds because of your funding mix. Thanks, Yes, we had a carryover of about $5 billion from FCC.
And.
And then the rest of the balance sheet flows on our end in terms of loan growth and.
And the securities growth drove the rest of the rest of the changes in the quarter.
Yes, and I would say on that that ultimately.
Some of Thats timing, Ken is that the.
The FHA b borrowings from investors will roll off and we have cash coming in from some of the portfolios that we placed.
Placed for sale. So we would expect this is kind of the high watermark on the FHL fee, all things equal and that we would bring that down by year end.
Got it thank you.
Your next question will come from Vivek Jain from Jpmorgan go ahead.
Thank you.
Couple of questions.
The.
Mentioned regarding the PNR guide well controlled expenses.
Our expenses this quarter I think I've come in at the high end of the range you gave for last quarter, including HSBC SBC.
When you mentioned well controlled expenses portfolio 22 can you give a little more color on what.
Little higher than where you were previously expecting.
<unk> unchanged and any color on that.
Yes, I think we're I think we're seeing some positive.
Benefits coming out of expenses.
So when we say well controlled I think we have some optimism that thats going to be.
No greater than and possibly a little less than we expected.
Okay.
Even though second quarter was at the high end are you seeing some of the.
Uh huh.
If we set up 1% to 2% given higher revenue based compensation expense was the guide and they came in up 1%. So im not sure where that's at the high end of the range. Okay. Okay. Because I'm just looking at the reported Bruce and it's the U F 16 to 18 and came in at 18 underpinning.
Underlying because that's that's really the integration costs that tick that up so.
If you look at our underlying we actually thought we did a really good job to keep them virtually flat.
And then we would expect that strong performance to continue into Q3.
And we called out and I think maybe 4% for the whole year, roughly where we are so and just on the integration costs. The fact, we did see more integration costs this quarter, but that's not signaling higher integration costs. Just the opposite we are pulling some into this quarter, we're expecting integration costs overall to be lower than we announced.
I was just a pull forward into Q2.
Okay. That's helpful completely different question early delinquencies can you give us some numbers by loan category for second quarter 'twenty two.
30 to 89 day delinquencies.
Overall in the consumer side delinquencies have been flat to even some signals of being very modestly down actually we are seeing.
And no portfolio that we're looking at do we see any signs of re inflation. Both at the 30 day level all the way through 90 day so with.
With 120 day cycle to get to a net charge offs.
It would take a whole heck of a lot of what you would need to believe to see.
Net charge offs in the consumer segment go up materially between now and the end of the year, obviously the place we're watching on the on the net charge off line is.
Things like used car values and recoveries on the resi portfolio, but those have been very stable and very high and very positive. We don't expect that to move very much either so.
Just the message overall in the consumer segment side as everything remains in great shape and without really any signs of a pickup in the fundamentals remain strong to consumers still have.
25%, 30% more in.
Liquidity and deposits than pre Covid.
And.
Customer pay rates on credit card pay in full still are in the low 40 percentile that was in the low thirty's before COVID-19. So to believe that you would start to see delinquencies ticking up you'd first probably see deposits start to burn down and you'd start to see customers re levering, we're not seeing that now we're a little bit a little bit unique from some peers that are.
Customer base skews much more mass affluent and affluent but even when you said segment credit score was Super Prime and Super Prime lender right, where you see some market commentary on early signs of credit it tends to be in the subprime space and we don't have any of those businesses.
We don't see any signs of credit stress in any portfolio really across any of the segments that we're in.
Okay and not even in the.
Retail partnerships you have put on the point of sale.
Seeing any stretching by consumers in terms of levering up more no I wouldn't I would I would direct you to.
A month or two ago, John and I went to the Morgan Stanley Conference and we shared some credit strap portfolio by portfolio. The citizens PE portfolio is performing exceptionally well and is in fact multiples below our prime credit card portfolio and so not only is it super prime but it's performing.
456 times better than even even a credit card portfolio. So we feel very good about the facility.
Because we draw a tight credit box in terms of what we are willing to take on exactly where you start to you know we've been very.
Ambitious and our desire to grow that business, but we've been disciplined on credit and we're not going to we're not going to be on disciplined on credit in that business to drive growth and so we're we've just been slower to see gross growth manifest in citizens pay it's because we're not willing to.
Not willing to jeopardize our credit discipline and I don't see equally any signs of stress whatsoever on the citizens state portfolio remains in great shape.
Great. Thank you sure.
Okay. There are no further questions in queue and with that I'll turn it back over to Mr. Van <unk> for closing remarks, alright, well. Thanks, Thanks again for dialing in today, we appreciate.
Everyone's interest and support have a great day. Thank you.
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