Q1 2023 Citizens Financial Group Inc Earnings Call

April 19, 2023

And an answer session. As a reminder, this event is being recorded.

Now I'll turn the call over to Kristen Silverberg exactly executive Vice President Investor Relations Christian you may begin.

Alan Good morning, everyone and thank you for joining us.

This morning, our chairman and CEO , Bruce Van <unk>, and CFO , John Woods will provide an overview of our first quarter results Brendan Coughlin head of consumer banking and Don Mccree head of commercial banking are also here to provide additional color we will be referencing our first 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 reconciliations in the appendix with that I will hand over to you Bruce Okay. Thanks, Chris and good morning, everyone. Thanks for joining our call today.

[music].

First quarter brought many unexpected challenges in the environment.

Global US we've proved resilient and adaptable and we delivered a solid quarter for our stakeholders.

We maintained a strong capital liquidity and funding position with our CET one ratio of 10% our TCE ratio at six 6%.

Solid deposit franchise that skews two thirds consumer.

We've seen the churn in the deposit market continued to diminished since the bank failures with our deposits broadly stable in the month of March.

Okay.

For the quarter, we posted underlying earnings per share of $1 10, and return on tangible equity of 15, 8%. Our NII was down 3%, reflecting day count impact slightly lower earning assets and a stable net interest margin of three 3%.

Yeah.

Okay.

Good morning, everyone and welcome to citizens financial group first quarter 'twenty twenty-three earnings conference call.

My name is Alan and I'll be your operator today currently.

Currently all participants are in a listen only mode.

Noninterest income and noninterest expense came in broadly as expected both impacted by seasonality.

Following the presentation, we will conduct a brief question and answer session.

Reminder, this event is being recorded.

Our credit metrics are also trending as expected and we built our ACL to loan ratio to 147%, which was up four basis points during the quarter and it's 70 basis points higher than our pro forma day, one seasonal ACL ratio.

Now I'll turn the call over to Kristen Silverberg exactly executive Vice President Investor Relations Christian you may begin.

Good morning, everyone and thank you for joining us.

This morning, our chairman and CEO , Bruce Van <unk>, and CFO , John Woods will provide an overview of our first quarter results Brendan Coughlin head of consumer banking and Don Mccree head of commercial banking are also here to provide additional color we will be referencing our third quarter earnings presentation located on our Investor Relations website.

We repurchased $400 million in shares during the quarter, which reduced our share count by one 7%.

In our slide deck, we tackle head on some of the industry issues that investors have been concerned about.

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 revert reference non-GAAP financial measures. So it's important to review.

I'll, let John run through the details, but the headline is that we have strong confidence in our capital liquidity and funding position.

We have been conservative and maintaining a capital ratio near the top of our peer group and.

And focusing on a stable consumer oriented and granular deposit base.

In establishing our prudent credit risk appetite and reserve level.

Our GAAP results on page three of the presentation and the reconciliation in the appendix with that I will hand over to you Bruce Hey, Thanks, Kristen and good morning, everyone. Thanks for joining our call today.

While we have some commercial real estate exposure, we feel good about our diversification.

The asset characteristics and the borrower quality.

The first quarter brought many unexpected challenges in the environment.

Criticized assets and workouts will increase during the cycle, but we currently expect losses to be manageable and we've already set aside meaningful reserves.

Nonetheless, we proved resilient and adaptable and we delivered a solid quarter for our stakeholders.

We maintained a strong capital liquidity and funding position with our CET one ratio at 10%, our TCE ratio at six 6% and a solid deposit franchise that skews two thirds consumer.

On the regulatory front. It is clear that some changes will occur. Our hope is that the response is thoughtful and appropriate leaving the bank landscape that has served our country, so well intact and even stronger than before.

We've seen the churn.

The deposit market continued to diminished since the bank failures with our deposits broadly stable in the month of March.

Any case, we anticipate any changes will follow will review and comment process with any revisions likely to be phased in gradually.

For the quarter, we posted underlying earnings per share of $1 10, and return on tangible equity of 15, 8%. Our NII was down 3%, reflecting day count impact slightly lower earnings assets and a stable net interest margin of three 3%.

While much of the past month has been focused on playing strong defense. We continue to play prudent offense by investing in and advancing our strategic initiatives.

Clearly prioritize deposits deepening and efficiency initiatives for the balance of 2023.

Noninterest income and noninterest expense came in broadly as expected both impacted by seasonality.

Our New York City Metro integration is progressing extremely well with a successful core conversion of investors bank in February and growth metrics that are well ahead of plan.

Our credit metrics are also trending as expected and we built our ACL to loan ratio to 124, 7%, which was up four basis points during the quarter and it's 70 basis points higher than our pro forma day, one seasonal ACL ratio.

Our outlook for 2023 still shows attractive ROTC for the full year, despite the challenging environment.

A great deal of uncertainty, which makes forecasting more difficult, but we remain confident in the strength of our franchise and the ability to weather the storm.

We repurchased $400 million in shares during the quarter, which reduced our share count by one 7%.

In our slide deck, we tackle head on some of the industry issues that investors have been concerned about.

We are building a great bank and we remain excited about our future our capital strength and attractive franchise should position us to be nimble and to take advantage of opportunities as they arise.

I'll, let John run through the details, but the headline is that we have strong confidence in our capital liquidity and funding position.

With that let me turn it over to John to take you through more of the financial details John Thanks.

We have been conservative and maintaining a capital ratio near the top of our peer group.

Thanks, Bruce and good morning, everyone. Let me start with the headlines for the financial results referencing slide five.

Focusing on a stable consumer oriented and granular deposit base, and then establishing a prudent credit risk appetite and reserve level.

Big picture first quarter results were solid against the backdrop of volatility in the macro environment.

While we have some commercial real estate exposure.

We continue to progress against our portfolio of strategic initiatives, including the well executed conversion of the investor platform in February .

About our diversification.

The asset characteristics and the borrower quality.

For the first quarter, we generated underlying net income of $560 million in Etfs of $1 10.

Criticized assets and workouts will increase starting to cycle, but we currently expect losses to be manageable and we have already set aside beating full reserves.

Our underlying <unk> for the quarter was 15, 8%.

Net interest income was down 3% linked quarter, given a lower day, count and lower interest earning assets.

On the regulatory front. It is clear that some changes will occur. Our hope is that the response was thoughtful and appropriate leaving the bank landscape that has served our country, so well intact and even stronger than before.

Margin was stable at three 3%.

Period end loans, and average loans were down slightly quarter over quarter, reflecting the impact of our balance sheet optimization efforts such as our ongoing runoff of auto.

Any case, we anticipate any changes will follow whatever view and comment process with any revisions likely to be phased in gradually.

Deposit levels declined in the quarter, primarily due to the impact of seasonal factors the compounding impact of the rate environment and particularly earlier this occurred in the quarter.

While much of the past month has been focused on playing strong defense. We continue to play prudent offense by investing in and advancing our strategic initiatives.

Importantly, our deposit levels were broadly stable during the market turbulence in March.

We will clearly prioritize deposits.

Our quarter end LDR is 89, 8% and our liquidity position remains very strong with current available liquidity as of today about $66 million.

Deepening and efficiency initiatives for the balance of 2023.

New York City Metro integration is progressing extremely well with a successful core conversion of investors back in February and growth metrics that are well ahead of plan.

Our credit metrics and overall position remains solid.

Net charge offs of 34 basis points or up 12 basis points linked quarter in line with ongoing normalization trends.

Our outlook for 2023 still shows attractive ROTC for the full year, despite the challenging environment.

We recorded a provision for credit losses of $168 million and a reserve build of $35 million this quarter, increasing our ACL coverage to 147% up from 143% at the end of the fourth quarter with most of the increase directly to the general office portfolio.

There is still a great deal of uncertainty, which makes forecasting more difficult, but we remain confident in the strength of our franchise and the ability to weather the storm.

We are building a great bank and we remain excited about our future.

Our current coverage ratio, it's about 17 basis points stronger than our pro forma day, one <unk> reserve of one 3%.

Our capital strength and attractive franchise should position us to be nimble and to take advantage of opportunities as they arise.

We repurchased $400 million of common shares in the first quarter and delivered a strong set one ratio at the top of our target range of 10%.

With that let me turn it over to John to take you through more of the financial details John .

Thanks, Bruce and good morning, everyone.

Let me start with the headlines for the financial results referencing slide five.

And our tangible book value per share is up 6% linked quarter.

Big picture first quarter results were solid against the backdrop of volatility in the macro environment.

Before I walk through the detailed results for the quarter, Let me address some of the industry issues that are top of mind on slide six.

We continue to progress against our portfolio of strategic initiatives, including the well executed conversion of the investor platform in February .

We have a very strong capital base, which is one of the highest in our regional bank peer group. Even if one were to include the rate driven unrealized losses on all of our investment securities.

For the first quarter, we generated underlying net income of $560 million in.

And Etfs of $1 10.

We have a quality deposit franchise, which has performed very well since the turbulence, which began in early March.

Our underlying <unk> for the quarter was 15, 8%.

Net interest income was down 3% linked quarter, given a lower day, count and lower interest earning assets.

We continue to see the benefit from all of the investments we've made since the IPO with 67% of total deposits from consumer and a well diversified commercial portfolio with about 66% of our clients using us as their primary bank.

Our margin was stable at three 3%.

Period end loans, and average loans were down slightly quarter over quarter, reflecting the impact of our balance sheet optimization efforts such as our ongoing runoff of auto.

Finally, 68% of deposits are insured or secure.

Our liquidity position is quite strong with a diverse funding base ample available liquidity and strong risk management capabilities. In fact, our LCR level exceeds what would be required as a category three bank at March 31 2023.

Deposit levels declined in the quarter, primarily due to the impact of seasonal factors the compounding impact of the rate environment and particularly earlier this occurred in the quarter.

Importantly, our deposit levels were broadly stable during the market turbulence in March.

Our quarter end LDR is 89, 8% and our liquidity position remains very strong with current available liquidity as of today about $66 million.

Looking at credit metrics continue to look solid.

Retail is normalizing, but its still performing quite well as the employment picture remains strong.

On the commercial side, our focus is on the <unk> portfolio and on General office in particular, which is impacted by back to work trends in rising interest rates.

Our credit metrics and overall position remains solid.

Total net charge offs of 34 basis points or up 12 basis points linked quarter in line with ongoing normalization trends.

We had a very strong reserve coverage of six 7% when the general office portfolio and I'll go through some of the details later.

And lastly, the market is concerned about how the regulators may respond to the disruption in March which in our view was unique to the banks in question and not reflective of broader cast in regulation where management lapses.

Watch closely how things develop but in any case, we think the process will be thoughtful and deliberate.

Our current coverage ratio is about 17 basis points stronger than our pro forma day, one <unk> reserve of one 3%.

Finally, we believe we are well positioned for any increase in regulatory requirements, given our diverse business model and current excess capital and liquidity regulatory ratios.

We repurchased $400 million of common shares in the first quarter and delivered a strong set one ratio at the top of our target range of 10%.

Let's drill into the details on the next few slides starting with capital on slide seven.

And our tangible book value per share is up 6% linked quarter.

We ended the quarter with.

One of the highest capital levels and a regional bank peer group with a set one ratio at the top of our target range of 10%.

Before I walk through the details of the results for the quarter, Let me address some of the industry issues that are top of mind on slide six.

This strong capital level reflects our prudent approach to deploying capital as we prioritize driving improved returns over the medium term.

First we have a very strong capital base, which is one of the highest in our regional bank peer group.

If you include the brief driven unrealized loss on debt securities in OCI, our adjusted set one ratio would be eight 7%.

Even if one were to include the rate driven unrealized losses on all of our investment securities.

We have a quality deposit franchise, which has performed very well since the turbulence, which began in early March.

If you remove the unrealized losses in HTM, our tangible common equity ratio was reduced by 20 basis points to six 4%.

All of these ratios are expected to be at the top of our peer group again this quarter.

We expect to maintain very strong capital levels growing going forward with the ability to generate roughly 25 basis points of capital post dividend each quarter and before share buybacks.

Finally, 68% of deposits are insured or secured.

We have $1 6 billion of repurchase capacity remaining under our current board authorization.

Timing of repurchases will be dependent on our view of external conditions.

Next I'll move to slide eight to discuss our deposit franchise.

Looking at credit metrics continue to look solid.

As you can see our deposit franchise is skewed towards consumer and highly diversified across product mix and in terms of the various channels we can tap.

Retail is normalizing, but its still performing quite well as the employment picture remains strong.

On the commercial side, our focus is on the <unk> portfolio and general office in particular, which is impacted by back to work trends in rising interest rates.

About 67% of our total deposits are consumer up from 60% at December 31.

Which puts us in the top quartile of our peer group.

We have a very strong reserve coverage up six 7% on the general office portfolio and I'll go through some of the details later.

And roughly 68% of our deposits are insured by the FDIC or secured which is up from 60% at year end.

Demand deposits represent about 26% of the book down slightly from 27% at year end as customers have naturally rotated towards higher yielding alternatives.

On slide nine the headline is that our deposit performance since mid year 2022, following the investor's acquisition and the commencement of Q T has been in line with industry and industry performance.

Watch closely how things develop but in any case, we think the process will be thoughtful and deliberate.

Finally, we believe we are well positioned for any increase in regulatory requirements, given our diverse business model and current excess capital and liquidity regulatory ratios.

We outgrew both the industry and peer average in the second half of 2022.

Let's drill into the details on the next few slides starting with capital on slide seven.

We entered 2023 expecting that the normal seasonal deposit outflows in the first quarter would be somewhat exacerbated by the higher rate environment.

We ended the quarter.

One of the highest capital levels and our regional Bank peer group with the set one ratio at the top of our target range of 10%.

And we saw a little more of that than we had forecast by about 1%, but most of that happened in January and February .

This strong capital level reflects our prudent approach to deploying capital as we prioritize driving improved returns over the medium term.

Given a rundown in auto we were willing to let some deposits run off early in the quarter trying to hold the line on betas.

If you include the rate driven unrealized loss on debt securities and RCI, our adjusted set one ratio would be eight 7%.

In March we saw some elevated inflows and outflows as customers across the industry can look to diversify their deposits in the wake of bank failures, but overall our deposits were broadly stable during the month.

If you remove the unrealized losses in HTM, our tangible common equity ratio was reduced by 20 basis points to six 4%.

This strong performance is attributable to investing heavily in our deposit offerings and capabilities since the IPO and this will remain our focus as we continue to build a top performing bank franchise.

All of these ratios are expected to be near the top of our peer group again this quarter.

We expect to maintain very strong capital levels growing going forward with the ability to generate roughly 25 basis points of capital post dividend each quarter and before share buybacks.

On slide 10, we highlight some of the things that we're doing to attract deposits and drive privacy with our customers.

In consumer we have developed a compelling set of products and features that drive higher customer satisfaction and encourage them to do more with us.

We have $1 6 billion of repurchase capacity remaining under our current board authorization tied.

Timing of repurchases will be dependent on our view of external conditions.

We have strong analytics capabilities and compelling offerings, such as citizens plus in our private client group as well as citizens access our digital bank to leverage.

Next I'll move to slide eight to discuss our deposit franchise as you can see our deposit franchise is skewed towards consumer and highly diversified across product mix and in terms of the various channels we can tap.

And with the final conversion complete at investors, we have a substantial opportunity to take deposit share in the New York Metro market.

About 67% of our total deposits are consumer up from 60% at December 31.

On the commercial side, we have invested heavily in our treasury solutions capabilities with a state of the art platform and strong talent to serve client needs.

Which puts us in the top quartile of our peer group.

And roughly 68% of our deposits are insured by the FDIC or secured which is up from 60% at year end.

We continue to add better tools for our clients to manage their cash and drive higher operational deposits as well as innovative products and capabilities to attract deposits.

Demand deposits represented about 26% of the block down slightly from 27% at year end as customers have naturally rotated towards higher yielding alternatives.

Moving to slide 11, we are monitoring our commercial real estate portfolio closely given the softening macro environment and the pressure of rising rates impacting refinance needs the.

On slide nine the headline is that our deposit performance since mid year 2022, following the investor's acquisition and the commencement of GT has been in line with industry industry performance.

The General office sector is of particular concern has tended to rethink their space needs given the remote work trends.

Given these pressures we are evaluating our loan portfolio very carefully for early signs of stress and particular Cree office, it's worth, noting however that near 100% of our borrowers are current on their obligations with mpls under 50 basis points.

We outgrew both the industry and peer average in the second half of 2022.

We entered 2023 expecting that the normal seasonal deposit outflows in the first quarter would be somewhat exacerbated by the higher rate environment.

We are starting to see an increase in criticized assets and have added workout resources, but given the diversity and quality of the portfolio, we feel the credit costs will be manageable.

And we saw a little more of that than we had forecast by about 1%, but most of that happened in January and February .

Given a rundown in auto we were willing to let some deposits run off early in the quarter trying to hold the line on betas.

Our total free allowance coverage of 2% includes an elevated coverage for the general office portfolio of six 7%.

On slide 12, we drill down a bit on the $6 3 billion office portfolio, which includes $2 2 billion of credit tenant and life Sciences properties, which are not it's not as exposed to adverse back to office trends and are expected to perform quite well.

The remaining $4 1 billion relates to the General office segment, which we feel is reasonably well positioned across type geography, and suburban areas in central business districts.

On slide 10, we highlight some of the things that we're doing to attract deposits and drive privacy with our customers.

About 90% of the General office portfolio is income producing at about 70% is located in suburban areas and the majority is class a.

In consumer we have developed a compelling set of products and features that drive higher customer satisfaction and encourage them to do more with us.

Next I'll provide further details related to first quarter results on.

We have strong analytics capabilities and compelling offerings, such as citizens plus in our private client group as well as citizens access our digital bank to leverage.

On slide 13, net interest income was down 3%, given lower day, count, which was worth about $29 million and slightly lower interest earning assets.

And with the final conversion complete at investors, we have a substantial opportunity to take deposit share in the New York Metro market.

The net interest margin of three 3% stable with the increase in asset yields offset by higher funding costs.

On the commercial side, we have invested heavily in our treasury solutions capabilities with a state of the art platform and strong talent to serve client needs.

With fed funds, increasing 475 basis points at the end of 2021, our cumulative interest bearing deposit beta has been well controlled at 36% through the end of the quarter.

We continue to add better tools for our clients to manage their cash and drive higher operational deposits as well as innovative products and capabilities to attract deposits.

We continue to dynamically adjust our hedge positions. So that we have down rate protection in the second half of 2023 and through 2026.

Moving to slide 11, we are monitoring the commercial real estate portfolio closely given the softening macro environment and the pressure of rising rates impacting refinance needs the.

As we approach the height of the rate cycle, we have managed our asset sensitivity down from roughly 3% at the end of last year to a more neutral one 1% at the end of the first quarter.

The General office sector is of particular concern as tenants rethink their space needs given our remote work trends.

Moving on to slide 14, we posted solid fee results, despite seasonality and headwinds from market volatility and higher rates.

He showed some resilience amid a challenging environment down 4% linked quarter with seasonal impacts in capital markets and service charges.

Partly offset by strength in FX and derivatives revenue and a modest improvement in mortgage banking fees.

We are starting to see an increase in criticized assets and have added workout resources, but given the diversity and quality of the portfolio, we feel that credit costs will be manageable.

Focusing on capital markets market volatility continued through the quarter and syndications and M&A advisory fees were seasonally lower.

Our total free allowance coverage of 2% includes an elevated coverage for the general office portfolio of six 7%.

We continue to see good strength in our M&A pipelines and signs that deal flow should pick up as the year progresses.

Mortgage fees were slightly better with higher production fees as we are seeing volumes rising at margins improving with the industry reducing capacity.

This should continue to benefit margins over time.

And finally card and wealth fees posted solid results for the quarter.

The remaining $4 1 billion relates to the General office segment, which we feel is reasonably well positioned across tight geography and suburban areas in central business districts.

On slide 15 expenses came in better than expected up only two 8% linked quarter, given seasonally higher salaries and employee benefits as well as the impact of an industrywide FDIC surcharge implemented at the beginning of the year.

About 90% of the General office portfolio is income producing at about 70% is located in suburban areas and the majority is class a.

On slide 16 average loans were down slightly and period end loans down 1% linked quarter, including the impact of planned auto run off.

Next I'll provide further details related to first quarter results on.

On slide 13, net interest income was down 3%, given lower day, count, which was worth about $29 million and slightly lower interest earning assets.

We have seen commercial utilization decrease a bit over the quarter as inflation and supply chain pressures continue easing and clients are adjusting inventories to reflect this.

The net interest margin of three 3% was stable with the increase in asset yields offset by higher funding costs.

Well as lower Capex in anticipation of reduced economic activity.

Average retail loans were down slightly reflecting the planned runoff in auto which was largely offset by growth in mortgage and home equity.

With fed funds, increasing 475 basis points at the end of 2021, our cumulative interest bearing deposit beta has been well controlled at 36% through the end of the quarter.

On slide 17 average deposits were down $4 7 billion or two 6% linked quarter, driven by seasonal and rate related outflows.

We continue to dynamically adjust our hedge positions. So that we have downright protection in the second half of 2023 and through 2026.

As I mentioned earlier the majority of the deposit decrease occurred in January and February with balances broadly stable in March.

As we approach the height of the rate cycle, we have managed our asset sensitivity down from roughly 3% at the end of last year to a more neutral one 1% at the end of the first quarter.

Our interest bearing deposit costs were up 51 basis points, which translates to a 73% sequential data and a 36% cumulative beta.

Moving on to slide 14, we posted solid fee results, despite seasonality and headwinds from market volatility and higher rates.

Moving on to Slide 18, we saw good credit results again, this quarter across the retail and commercial portfolios.

<unk> showed some resilience amid a challenging environment down 4% linked quarter with seasonal impacts in capital markets and service charges.

Net charge offs were 34 basis points up 12 basis points linked quarter, which reflects continued normalization.

Hardly offset by strength in FX and derivatives revenue and a modest improvement in mortgage banking fees.

Nonperforming loans are 64 basis points of total loans up four basis points from the fourth quarter as an increase in commercial was all set by improvements in retail.

Focusing on capital markets market volatility continued through the quarter and syndications and M&A advisory fees were seasonally lower.

Retail delinquencies were broadly stable with the fourth quarter and continued to remain favorable to historical levels, but we continue to closely monitor leading indicators to gauge how the consumer is fairing.

We continue to see good strength in our M&A pipelines and signs that deal flow should pick up as the year progresses.

Mortgage fees were slightly better with higher production fees as we are seeing volumes rising at margins improving with the industry reducing capacity.

Turning to slide 19, I'll walk through the drivers of the allowance this quarter.

We increased our allowance by $35 million to take into account the growing risk of an economic slowdown and the outlook for losses in the commercial portfolio, particularly general office.

This should continue to benefit margins over time.

And finally card and wealth fees posted solid results for the quarter.

On slide 15 expenses came in better than expected up only two 8% linked quarter, given seasonally higher salaries and employee benefits as well as the impact of an industry wide FDIC surcharge implemented at the beginning of the year.

Our overall coverage ratio stands at one 4%, which is a four basis point increase from the fourth quarter.

The current reserve level calculation contemplates a moderate recession and incorporates expectations of lower asset prices and the risk of added stress on certain portfolios such as creative.

On slide 16 average loans were down slightly and period end loans down 1% linked quarter, including the impact of the planned auto run off.

Moving to slide 20, we maintained excellent balance sheet strength.

Our set one ratio increased to 10%, which is at the top end of our target range.

We have seen commercial utilization decrease a bit over the quarter as inflation and supply chain pressures continue easing and clients are adjusting inventories to reflect this.

Tangible book value per share was up 6% in the quarter and the tangible common equity ratios improved to six 6%.

Well as lower Capex in anticipation of reduced economic activity.

We've returned a total of $605 million to shareholders through share repurchases and dividends.

Average retail loans were down slightly reflecting the planned runoff in auto which was largely offset by growth in mortgage and home equity.

Shifting gears a bit on slide 21, we continue to make good progress with our push into the New York Metro market.

On slide 17 average deposits were down $4 7 billion or two 6% linked quarter, driven by seasonal and rate related outflows.

We were very excited to complete the branch and systems conversion that investors in February which went very smoothly.

With that behind US we are full steam ahead working to serve our customers and capitalize on opportunities to capture market share.

As I mentioned earlier the majority of the deposit decrease occurred in January and February with balance was broadly stable in March.

We continue to be encouraged by the strong early momentum we are seeing in the branches where customer satisfaction has been improving significantly and we continue to see some of the highest customer acquisition and sales rates in our network across the legacy HSBC and investors branches.

Our interest bearing deposit costs were up 51 basis points, which translates to a 73% sequential data and a 36% cumulative beta.

Moving on to Slide 18, we saw good credit results again, this quarter across the retail and commercial portfolios.

We've also seen some good early client wins and a growing pipeline in commercial.

Net charge offs were 34 basis points up 12 basis points linked quarter. This reflects continued normalization.

We look forward to making further strides as we leverage the full power of our product lineup and customer focused retail and small business model across the New York market.

Nonperforming loans are 64 basis points of total loans up four basis points from the fourth quarter as an increase in commercial was all set by improvements in retail.

Moving to slide 22 for a quick update on our top eight program.

Our latest top program is well underway and progressing well.

Retail delinquencies were broadly stable with the fourth quarter and continue to remain favorable to historical levels, but we continue to closely monitor leading indicators to gauge how the consumer is fairing.

Given the external environment, we have begun to look for opportunities to augment our top eight program in order to protect returns as well as ensure that we can continue to make important investments in our business to drive future performance.

Turning to slide 19, I'll walk through the drivers of the allowance this quarter.

We will have more to say about this in the coming months.

We increased our allowance by $35 million to take into account the growing risk of an economic slowdown and the outlook for losses in the commercial portfolio, particularly general office.

Moving to slide 23, I'll walk through the outlook for the second quarter, and giving you an update on our outlook for the full year that takes into account a modest economic slowdown with the fed expected to raise rates by 25 basis points in May and then begin easing late in the year.

Our overall coverage ratio stands at one 4%, which is a four basis point increase from the fourth quarter.

The current reserve level calculation contemplates a moderate recession and incorporates expectations of lower asset prices and the risk of added stress on certain portfolios such as creative.

For the second quarter, we expect NII to decrease about 3%.

Noninterest income is up mid to high single digits.

Noninterest expense should be stable to down slightly.

Moving to slide 20, we maintained excellent balance sheet strength.

Net charge offs should remain in the mid <unk> basis points.

Our set one ratio increased to 10%, which is at the top end of our target range.

Our set one is expected to come in above 10% with some share repurchase planning, depending upon our view of the external environment.

Tangible book value per share was up 6% in the quarter and the tangible common equity ratios improved to six 6%.

Moving to slide 24, as we think about the full year, we remain focused on maintaining strong capital liquidity and funding position, while sustaining attractive returns.

We've returned a total of $605 million to shareholders through share repurchases and dividends.

Shifting gears a bit on slide 21, we continue to make good progress with our push into the New York Metro market.

Of course, there is a continued level of uncertainty in the current environment.

We were very excited to complete the branch and systems conversion net investors in February which went very smoothly.

For the full year 2023, we expect NII to be up 5% to 7%.

We are focused on initiatives that will stabilize and even grow our deposits modestly from first quarter levels over the remainder of the year.

With that behind US we are full steam ahead working to serve our customers and capitalize on opportunities to capture market share.

Noninterest income is expected to be up mid single digits.

Noninterest expense is expected to be up about 5%.

Net charge offs are expected to be in the mid to high 30 basis points are.

Our current reserve level contemplates a moderate recession in known risks and there should be less of a need for further reserve builds given anticipated spot loan decline for the year as auto runs down.

We've also seen some good early client wins and a growing pipeline in commercial.

We look forward to making further strides as we leverage the full power of our product lineup and customer focused retail and small business model across the New York market.

And our set one ratio is expected to be above the upper end of our nine 5% to 10% target range of $10 to $10, two 5% assuming stable market conditions, our share repurchases are expected to build over the course of the year.

Moving to slide 22 for a quick update on our top eight program.

Our latest top program is well underway and progressing well.

To sum up on slide 25, we delivered a solid quarter. Despite expected unexpected challenges and are ready for the uncertainty that lies ahead in 2023.

Our strong capital liquidity and funding position will serve us well to move forward with our strategic priorities and deliver attractive returns. This year as we balanced the need for strong defense with the imperative of continuing to play proven offense to strengthen the franchise for the future.

Moving to slide 23, I'll walk through the outlook for the second quarter, and giving you an update on our outlook for the full year that takes into account a modest economic slowdown.

Even as we navigate through the current challenging environment, we reaffirm our commitment to our medium term financial targets with that I'll hand back over to Bruce.

I'd expect it to raise rates by 25 basis points in May and then begin either late in the year.

For the second quarter, we expect NII to decrease about 3%.

Okay. Thank you John .

Noninterest income is up mid to high single digits.

Let's open it up for some Q&A.

Noninterest expense should be stable to down slightly.

Thank you Mr. Benson, we are now ready for the Q&A portion of the conference call.

Net charge offs should remain in the mid 30 basis points.

If you'd like to ask a question. Please press one then zero on your telephone keypad Youll hear an indication you've been placed into Q.

Our set one is expected to come in above 10% with some share repurchase planning, depending upon our view of the external environment.

And you may remove yourself from the queue by repeating the one zero command if youre using a speakerphone. Please pick up your handset and make certain that your phone is on mute it before pressing any buttons.

Moving to slide 24, as we think about the full year, we remain focused on maintaining strong capital liquidity and funding position, while sustaining attractive returns.

Again for questions press, one zero at this time.

Of course, there is a continued level of uncertainty in the current environment.

Your first question will come from the line of Erika Najarian with UBS go ahead. Please.

For the full year 2023, we expect NII to be up 5% to 7%.

Hi, good morning.

We are focused on initiatives that will stabilize and even grow our deposits modestly from first quarter levels or over the remainder of the year.

Okay.

As we contemplate your original net interest income guide.

Of 11% to 14% now up 57% could you walk us through what the major changes are an assumption and how much of it was cyclical such as deposit run off higher beta and how much of it could be a little bit more structural.

Noninterest income is expected to be up mid single digits non.

Noninterest expense is expected to be up about 5%.

Net charge offs are expected to be in the mid to high 30 basis points.

Do you anticipate different rules, such as carrying higher liquidity funded by wholesale funding.

Yeah, let me start.

Quickly flip it to Jon but.

I would say Erika that really were just recognizing what we've seen in the deposit market and the cost of deposits.

Is going up.

That was partly.

Response to the fed rapid rises in money funds, becoming alternatives. So there was I think a greater sensitivity around earning a return on cash.

Our strong capital liquidity and funding position will serve us well to move forward with our strategic priorities and deliver attractive returns. This year as we balance the need for strong defense with the imperative of continuing to play proven offense to strengthen the franchise for the future.

That kicked in and then that was I think further exacerbated by the bank failures in March.

So I think there was.

Even as we navigate through the current challenging environment, we reaffirm our commitment to our medium term financial targets with that I'll hand back over to Bruce.

Of heightened velocity of deposits moving around the system and so to retain those deposits.

Folks had to increase rate paid.

We feel that we did a pretty good job Peter we came into the year.

Okay. Thank you John Alan Let's open it up for some Q&A.

Expecting that there'd be some seasonal outflows in Q1.

Thank you Mr. Benson, we are now ready for the Q&A portion of the conference call.

And since we had built deposits in the second half of the year and then we had auto running down so much.

If you would like to ask a question. Please press one then zero on your telephone keypad, you'll hear an indication you've been placed in the queue.

Volume on the asset side.

We're prepared to let those run down.

You may remove yourself from the queue by repeating the one zero command.

About three 5% in the quarter.

If youre using a speakerphone please pick up your handset and make certain that your phone is on mute it before pressing any buttons.

Actually saw.

1% higher than that in the run off but.

Again for questions Press, one then zero at this time.

In any case we.

Tried to hold the line on data is and I think the betas that we posted our.

Your first question will come from the line of Erika Najarian with UBS go ahead. Please.

Slightly better than peers have reported at this point.

So, but if you if you can kind of play out the rest of the year, we're going to be paying more for our funding than we thought coming into the year and that's pretty much the big driver.

Hi, good morning.

Yes.

As we contemplate your original net interest income guide.

<unk> of 11% to 14% now up 57% could you walk us through what the major changes are in assumptions and how much of it was cyclical such as it did deposit run off higher beta and how much of it could be a little bit more structural as.

I would say.

There might be kind of a little more disciplined in terms of who we're extending credit to.

Kevin I think probably a higher likelihood that we could see a short and shallow recession.

So there might be a little.

Volume impact there from slightly lower earning assets.

You anticipate different rules carrying higher liquidity funded by wholesale funding.

Maybe there's a little mix, where we're holding a little precautionary cash, but if I had to kind of put it in order I would say number one is the cost of deposits and maybe slightly.

Yeah, let me start.

Flip it to Jon but.

I would say Erika that really were just recognizing what we've seen.

The volume.

On assets and then thirdly would be composition, so Jon I'll flip it to you, yes, recurrent Kevin deserved as are the right points of focus on I'd say I'd say, if you break it down Erika between rate and volume on the rate side as you heard from Bruce we have we have the migration from a deposit standpoint, youre going to see the full year effect of that.

And the deposit markets.

Cost of deposits.

<unk> is going up.

I think that was partly a response to kind of the feds rapid rises in money funds, becoming alternative. So there was I think a greater sensitivity around <unk>.

What's happened over the last quarter or two and the drivers of that are well documented we've got the cycle with higher rates and quantitative tightening going on.

Earning a return on cash.

Kicked in and then that was I think further exacerbated by the bank failures in March.

That's causing those those forces to.

So I think there was kind of heightened velocity of deposits moving around the system and so to retain those deposits.

Got it.

Hit Us I would also say that will be up.

A bit more than maybe we had planned given the outlook. So we were I think in the high Thirty's prior maybe we're in the low <unk>.

Folks had to increase rate paid.

We feel that we did a pretty good job Peter we came into the year.

Through the through the cycle. So we're building that in.

<unk> that there'd be some seasonal outflows in Q1.

You also mentioned that from.

And since we had built deposits in the second half of the year and then we had auto running down so much.

From a liquidity standpoint, I think we feel very good about that from a we're already compliant. If we had to if we were a category three bank, we're already compliant on the LCR.

Volume on the asset side.

But from that from a volume standpoint, we are in rundown in auto we're looking at some some balance sheet optimization initiatives in commercial and so youll see the LDR fall.

We're prepared to let those run down by about three 5% in the quarter.

We actually saw about a 1% higher than that in the run off but.

No.

Any case.

Throughout the rest of the year and then finally I would say that.

Tried to hold the line on betas I think the betas that we've posted.

The other thing as I look at on the positive side I mean, our loan betas are from a cumulative standpoint will still exceed cumulatively, where we're coming out on deposits. So youll see that mid to upper forty's on loans versus the low forty's on deposits.

Slightly better than peers that have reported at this point.

So, but if you if you kind of play out the rest of the year, we're going to be paying more for our funding than we thought coming into the year and that's pretty much the big driver.

I would say.

You've got front book back book when the fed finally kind of pauses in starts that starts to cut you'll see a lot of the balance sheet continue to contribute.

There might be kind of a little more disciplined in terms of who we are extending credit to.

Kevin I think probably a higher likelihood that we could see a short shallow recession.

Over the quarters post maybe a possible pause and cut that the fed may may kind of engaging so.

So there might be a little.

Volume impact there from slightly lower earning assets.

Lots and lots to do but I've had to John about the swaps that we continue to dynamically.

Okay.

Recalibrate the swaps to provide protection for the event that the fed will ultimately move slower yeah. I think it's a really good point I mean, when you think.

That we were just talking about is the 23.

Sort of story I mean, when you get into the end of 'twenty three into 'twenty for this cycle compared to last cycle. We have we have a lot more down rate protection in place for the second half of 'twenty three and into 24, then we might have had in prior cycles notice, which will help support a good.

<unk> for 'twenty.

Yep.

And I guess just to close this off Erika I would say if you look at the outlook for the year kind of a one thing that got marked down was really NII.

We still feel pretty good about the fee outlook, we're going to work a little harder on expenses and probably bring that in below where we thought coming into the year I'd say credit.

Provisioning should be about kind of where we thought coming into the year.

Still angling to repurchase shares over the course of the year. So our expectation is that we can continue to deliver.

Return on tangible equity in the kind of mid teen area.

And just just reflective that won't.

We won't make quite as much net interest income this year, but still investing in the things to position us to have a.

Good.

Kind of runway into 2024.

Thank you.

I'll, let one of my peers asked more detail on the slot Recalibration because I think that's important as we think about NII for 24.

Since we Havent I want I want to ask you about how youre thinking about these anticipated regulatory changes from regional banks.

Think that I'm glad that you said in the prepared remarks that it takes time right you have the MTR, which could come out ended the year or a year from now a year comment period.

So.

As we think about what the market is anticipating whether it's T lack or.

Getting rid of opt in opt out on them.

On LCI.

Of course, you said you're already LCR compliant.

How are you thinking about managing your capital relative to your stock's down a time right now.

And it seems like banks can ever buyback as much at the time when they should be buying back.

And the potential in 'twenty four for some non banks to be in bigger trouble and potentially taking market share, but balancing that with.

What's going to be potentially tighter requirements on capital and liquidity how much of your front loading that person is thinking about the opportunities that can come your way. If you remain as profitable as you say you are going to remain.

Yeah, Great question and I.

Yes.

To set the big picture Erika that I would say first off.

I don't believe that the answer to that.

The two bank failures is more regulation on regional banks I think those were.

Synchronic situations and there was sufficient regulation. So you basically had business models that were not well diversified and the banks grew too fast.

Stretched management capabilities to supervisors didn't really do their job and so I think there'll be a thoughtful review of what were the issues and then how to address them.

I think it is probable that there will be some tightening around liquidity and capital and probably.

Closer reviews of how banks are handling their asset liability management.

There may be other aspects of this in terms of.

The overnight repo facility and creating a kind of viable drain on.

Thanks deposits into money funds and should they changed that in deposit insurance and should they take a look at that so there's a bunch of things I think will come under review specifically with respect to US I think the good news is that we've managed our capital at the high end of.

Of our peer group and so we're already compliant with the if we ended up having the OCI filter removed we'd be.

In compliance today.

Same thing John pointed out the LCR, we've run that at a high level, we won very rigorous rigorous internal liquidity stress testing regiment that we had.

Already be in compliance with the category three bank as well.

So the fact that we have managed the balance sheet conservatively, we're already in compliance if they go kind of heavier regulation, if it ends up going down that path.

I think we're in good position. So I think we will have and the fact that these will be phased in over kind of I'd say two or three years gives us lots of capital flexibility to be buying back our stock or taking advantage of other situations where.

That could arise.

And if it's a strategically and financially compelling I think we have the capability to go on offense. So.

Anyway, that's kind of my.

My thoughts on that it was good to.

Kind of stay conservative even when we had lots of questions as to why aren't you leveraging your capital structure more why are you keeping your set one targets so high.

Guess what.

We keep it.

That way and we run conservative for precisely these air pockets that you are always going to experience turbulence.

Hi capital and high liquidity is your best friend in these circumstances.

Thank you.

Your next question will come from the line of Peter Winter with D. A Davidson.

Your line is open.

Good morning.

Wanted to just follow up on <unk> question on the NII Guide I was wondering could you be a little.

More specific on the outlook for margin and loan trends going forward.

Yes, I'll go ahead and get started on that so the.

So the guide.

Being up 5% to seven what we built into that as we mentioned is the fact that we're going to have some downward.

What kind of impact on margin coming from the.

The deposit migration as well as increased beta assumptions that we're building and so.

There's a lot of uncertainty here and a lot of things to play out but to try to frame. It a little bit go out to if you think about where we may.

<unk> 23 to where we may end of the year, we're starting it we're starting the year $3 30, we may in the year call. It in a wide range, maybe $3 10 to $3 20 and.

If things kind of if there is if there is good execution and some trends may be end up.

Going our way, we will end up at the high end of that range.

And vice versa on the lower end.

And then just so I would say that when you think about playing it out throughout the year there'll be a step down.

As you work through the year with maybe a little bit of waiting into the into <unk> end to end things basically flattening out into the second half of the year, but like I said theres a lot of uncertainty there.

And but that helps hopefully that will help give you a frame and then you've got as we mentioned on the on the volume side of things we do have.

The auto rundown, which we began last year that that will.

B is built into that guide as well as the ongoing work that we're doing in commercial on balance sheet optimization. So you put all that together then that gives you the NII guide.

Yeah, I would just add to that.

Good answer John .

But this is an opportunity we've always been on our balance sheet optimization path, but I think we are really intensifying our focus there so businesses like indirect auto wear.

It was a good place to park liquidity.

And we run the business well.

Service, it very well, but it's not really that strategically important to us it doesn't have direct customers that we cross sell to because those customers frankly are customers of the dealerships.

So looking hard at those business and say hey, if deposits are more gear, what do we have on the left side of our balance sheet, where we don't have deep relationships and we're not making the best risk adjusted returns.

So during this year I think we're going to really focus on making sure the right side of the balance sheet in terms of deposit quality is as strong as it possibly can be and that where we're lending money.

We're doing that to true customers that we have deep relationships, whether they're consumers small business or commercial.

And so we.

We will take the opportunity this year to potentially have a little bit of a reset and even intensify those efforts. So we will really look our balance sheet going into 2024.

Got it and if I could just ask about deposits the outlook.

I recognize deposits stabilized in March and you've done a lot of work to improve the deposit franchise, but.

It just seems like in this environment.

Deposits stable to growing deposits from here could be a little bit of a challenge.

Not only for you and I was wondering if you can just give some color on.

On some of the deposit opportunities.

Yes.

I would stop at the start at the top and then maybe I'll turn it to Brandon and Don to talk about what we're doing in consumer and commercial we did put a slide in there Peter about.

Some of those opportunities.

And so I think the.

Right now, we just need to kind of get through this earnings season, and see the cards turned over and continue the trend hopefully have less and less turbulence and getting back to.

<unk> com situations, so thats, where kind of stability comes in in <unk>.

By the way through halfway through April , we're still kind of trending stable to even slightly up.

But.

Then the initiatives that we have long invested in and the value propositions that we have both for consumer and some of the new innovation. We have on the commercial side, we think should start to play out and then we can start to build back deposits, but why don't I first turn it to Brendan to talk about consumer yeah. Thanks.

The consumer and the consumer business, you've got sort of three segments. The deposits the traditional retail wealth management in that small business.

It is.

Kind of progressing as expected as had been chatting amount over the last couple of quarters, where we certainly have customers coming into the cycle that have excess deposits and liquidity from pre COVID-19.

Seeing very very small earn down rates, but nothing that is unexpected and broadly right in line with trends from mid summer last year through through this quarter as John pointed out.

Through March on all three of those portfolios, we saw 60% to 75% increase in inflows, but the same sort of increase on outflows broadly just moving money around it. So we were very stable.

Net balances across those businesses through the month of March we feel really good about the underlying health.

Over the last eight years, we've invested a lot of time and energy in making our consumer deposit base much more granular our privacy rates.

Whether customers consider us a primary bank or not is up dramatically.

Dramatically to above peer levels. That's a good thing that means stability and low cost deposit twin payroll is coming in.

We've done things like added benefits like early pay for consumers, which is an encouragement to bring payroll direct deposit over that's going quite well adds more granularity and stability of the deposit base I mean, when I look at levers to continue to have strong deposit performance from the rest of the year. There's a couple of things in the consumer bank that were.

We're really really focused on one John mentioned, New York City, New Jersey household growth getting more customers.

That is going well, we're performing at the top end of our peer set in terms of net market share gains in household growth. We expect that to continue in all of our markets and supported by.

It really early momentum in New York City, and New Jersey that we expect to continue.

<unk> made a pretty.

Meaningful pivoted to customer relationship deepening so we've rolled out.

As Bruce mentioned citizens plus which.

The simple concept as you do more with US you get more really encouraging customers to bring more of their wallet to us we've seen very very strong take up on that 300% plus improvement in customers going into these relationship propositions encouraged by the breadth of the offering and bringing more to us in profitability of those customers almost doubled.

When they when they migrate up so we think that will give us a shot in the arm as customers look at us to consolidate relationships.

And then maybe maybe last would be citizens access so.

It gives us a great lever to raise deposits as we need it but it also gives us a great lever to cost contained interest bearing deposits in the consumer bank, which will allow us to have much more manageable betas in the core bank, where we can focus on relationship banking and deposit raising for the sake of deposit raising and where we need to contain deposit grew.

We can do it in a very targeted way through citizens access that's proven to be exceptionally affected for us and we've had a great quarter and growing citizens access here in Q1.

So on our side I think a lot of it surrounds the payments and Treasury services business.

You've heard us talk for the last couple of years about the investment, we're making that business.

It has not only been around the core operating services, but also a lot of work around deposit franchises and liquidity franchises frankly, one of the things. We haven't talked about is we have a liquidity advisory services liquidity portal, which goes beyond deposits, but allows us to capture customer funds, even if they are on balance sheet.

The deposit side over the last couple of years, we've introduced five or six new products, we talked about the green deposits talked about carbon offset deposits, we talked about escrow deposits. So the products since quite quite broad the other thing we saw during the during the disruptions as we added about 300, new deposit clients a lot of which interestingly came out of the JMP.

<unk> claim referred some of the technology customers onto our platform. Some of those are funded up some of those arent funded up but unlike brendan.

Core of our franchise is really.

The primary core relationships in the operating relationships and about 66% of our deposit base is really with core primary relationships and the last thing. We're doing is we've turned the deposit business into a primary cross sell so we were asking for capital markets business. When the capital markets brokers, who are now asking for deposits and where and when.

Framing the deposit raising the context of our overall relationship and have gotten a very good response from from a lot of our clients.

That's great.

Thank you <unk>.

Sure.

Okay.

Your next question will come from the line of Scott Cyphers with Piper Sandler Your line is open.

Good morning, everyone. Thanks for taking the question.

I was hoping you might be able to speak it's sort of a top level about how commercial customers are behaving now with their operational deposits like are they keeping less in operational deposits than they would have previously and then just spreading that money across several banks, which would imply maybe you lose lose some but gains in other words higher churn.

Maybe a thought but commercial account openings have looked like over the past month or so.

As I mentioned, we've opened about 300, new accounts over the last month, which has been.

Which has been encouraging.

I'd say at the top end of the client base, we've seen more diversification activity. So the public companies, which had excess deposits you can around the system some of which was surge deposits.

Some of those flowed out and went to other banks now the flip side some of them flowed into us.

Customers balance deposit accounts, so kind of net neutral on that and then and then the other thing we've seen frankly in this far before SCB and some of the disruption is clients are because the capital markets are kind of quiet in the lending market is it kind of flat and so using some of their cash to fund their operations and so on Capex. So we've seen a.

Little bit of a drift out.

In terms of just utilization of excess cash balances.

And then the I'd say the core operating deposits stayed pretty pretty flat I mean people are basically toggling between ECR in deposits or if theres, a toggle, but I'd say the.

The kind of core funding.

Bundling.

The operational activities is relatively flat.

Okay perfect. That's all right I'm, sorry, I missed that 300 accounts or the last month, but I appreciate all that color and then maybe separately.

Like you've had some fairly constructive comments about the possibility for investment banking to recover over the course of the year maybe in the second half just maybe at a little more color on how you are expecting things to traject from here. Please.

Yes, I think I think we'll see it's going to depend on what happens in the marketplace I will say that over the last couple of weeks, we've seen a pretty strong bid and a lot of different asset classes, particularly the syndicated loan underlying asset class. So theres some signs of life.

The market, whereas it was dead quiet at the beginning of the year, we're starting to see some transactions actually cleared the market some and kind of get restructured in ways that are.

I'd say not more aggressive but more regular way from very structured transactions that were happening over the last couple of months. So good signs of life I would say our pitch activity and our pipelines are extremely robust and I would come back to what I've said a couple of times is in things like our M&A business, where our middle market investment Bank.

And so we play in smaller sized transactions say $250 billion to $1 billion not the $5 to $10 billion transaction. So the financing dependency thats in a lot of our pipelines is not as difficult as it is for the Mega transactions. So we think as things begin to stabilize.

The cover in the rate cycle begins to come to an end.

We'll see activity in the second half of the year.

And we're seeing that in our pipelines and then remember we also have a very diverse set of capabilities now. So we're doing a lot around private equity, placing equity for clients into the into <unk>. For example, a family office or a lot of pitch activity around convertible bonds. So while some traditional.

Full market products might not be fully back yet we have a wide wide arsenal, we're actually deploying on behalf.

Let me just add to that as well and maybe flip it to Jon but.

Scott the fee guide.

Is supported I think broadly not reliant just on capital markets coming back so.

We have a positive outlook across.

Cards across wealth the.

The cash management business mortgage.

Market. So it's fairly broad yeah, let me let me just add one more thing Bruce So if the first quarter's.

Indication.

We were down about $14 million quarter on quarter in syndicated finance, we were up about $13 million and our.

Interest rate products and commodities hedging businesses. So diversification those fee streams to Bruce's point is quite important yes, yes, just picking up on that I mean, so whether it was going to make that exact point just in terms of the the bond and equity diversification, along with M&A and cap markets, but in terms of card I mean, we do see some some positive outlook in car.

As well primarily in the credit card space.

In mortgage production volumes and margin starting to recover a bit and that's that's really good to see after a quite a quite a few quarters with with <unk>.

Headwinds there and so and then on the wealth side of things that has just been steady for us and is continuing even in early April .

Activity has been quite strong and so we're feeling good in the wealth space. So it's sort of diversified across four five categories in terms of what we're seeing for the 2023 outlook.

Perfect Alright, thank you very much.

Your next question will come from the line of Gerard Cassidy with RBC. One moment. Please we're having a technical difficulty.

Yeah.

Mr. <unk>. Your line is open you May proceed.

Thank you Hi, Bruce Hi, John .

Hi.

John you talked about lowering the asset sensitivity of the balance sheet.

Can you share with us how quickly you could take can take that to neutral. If you want wanted to as the rate environment shifts, possibly towards the second half of the year and then also the cost of the strategies you would use to do that.

Yeah.

The way to think about that is we're pretty close to neutral now and when you when youre down around 1%. There are a number of assumptions that go into that calculation, including deposit migration et cetera. So if your models are off one way or the other you could easily be neutral and we think about that when when we consider the <unk>.

Fact that.

We have a view that the fed may rate hike, one more time and they may be on hold but but inflation if inflation is more persistent and stubborn.

Things could rise from.

From here so.

We nevertheless don't try to.

Over Cook things, one way or the other.

But gradually getting back to neutral has served us well.

And you also you have to think about that 1% split between whats typically hedgeable and what is a little less hedgeable and the short end is more hedgeable.

The <unk>.

Construct of what the short rate exposure is it's actually less than 100% to 100% I'm sorry, less than 1%. We're actually 60 40 skewed towards the short end so to close that down would not take very much at all would be typically a shift in balance sheet outlook and or additional receive fixed swaps.

But but more broadly.

Basically layered on.

A number of.

Transactions to basically get our coverage for the rest of 2003, we've got about $20 billion of coverage and receive fixed swaps for the rest of 'twenty three.

More like 26, or so 424, and so we were sort of thinking of ourselves around neutral with print with protection to the downside and I would offer up that that that will that will result, if in fact, the fed does at the lower rates by a lot. We have a few that will end up with a trough NIM that's well above.

What we saw in our last cycle, so a much more stable and a much more narrow corridor of net interest margin than you might have seen from us in the past.

Very good then Bruce I'd like the branding you're doing in New York with the Giants looking forward to the day that.

Citizens. He comes the bank of the Yankees.

Yes.

As a follow up on retail this is maybe for Brendan.

You guys give us really good detail on slide 31 on the FICO scores and.

There is a theory out there I don't know if it's true or not that the FICO scores have been inflated because of what we came through during the pandemic. Some people claim as much as 70 points do you guys buy into that theory and if so would you then expect maybe this.

The behaviors of your customers to be different than what the actual FICO scores are yeah, great great question.

There is a theory out there that FICO scores were inflated with all the stimulus and delinquency going down really really fast, but the good news is our credit underwriting is fairly sophisticated and while FICO as an input. It's it tends to be one of about 100 things that we'd look at including free cash flow and a whole bunch of other different metrics in all of our biz.

And so we've taken that into account in our underwriting.

The range of real FICO is versus actual Princeton FICO. During Covid was incorporated into all of our our credit metrics as we as we kind of made made new loans over the last three or four years. So we feel really good.

Good about that and I think the performance is showing that that we think so far at least we got that right and we've as John pointed out we are seeing the consumer book normalized but both delinquency.

And charge offs are still south of where they were pre COVID-19 and we're not seeing an unexpected acceleration of delinquency or charge offs, given the environment really across any of the asset classes. So.

Over the years, there's been questions about some of the businesses that were faster growing than consumer and unsecured like student and our citizens pay business.

As you are well under control despite the.

Great clubs surrounding us so we feel really good about where we stand right now for consumer credit and the health of the consumer and the quality of our underwriting standards and lastly.

We've tightened a bunch in the last six to nine months.

As a cautionary measure so as we're kind of tightening up on things like auto onto the size of the balance sheet around the fringes in almost every single one of our asset classes. We've made credit tightening not because we're seeing anything we don't like just in an abundance of caution to make sure that we don't have any tail risk on any of the portfolio. So.

Sure.

Everything we can see right now we feel pretty good.

Great I appreciate the color. Thank you.

Your next question will come from the line of John <unk> with Evercore. Your line is open go ahead.

Good morning.

On the on the expense side I think.

Bruce you alluded to potentially be able to come in.

Below the expense expectation to 5% expectation maybe for the year as you're focusing on that given the top line pressures can you maybe give us a little more color there what you're looking at and how material.

Potential benefit you could have on that front as you as you see the topline pressure building on the NII side.

I'll start and flip to John but.

We had coming into the year, we were going with a 7% guide.

Some of that was reflective of the HSBC and Isps see full year effects and then so most of the higher FDIC premiums.

Mark that down to 5% so clear.

Clearly in recognition that will.

Some compression in the net interest income.

We're going to work really hard to try to protect the bottom line and so.

That's.

We've circled at this point clearly.

Top remains an open program and we have lots of ideas in terms of are there other things that we can kind of get working on and actually have a benefit. This year. Some of them may actually have a benefit for next year, but.

Certainly.

Our folks taking a hard look at what else we can do on the.

The expense side, but at the same time, we're trying to make sure that we protect all of the investments in our future the important strategic initiatives across consumer and commercial across.

And we're not seeing an unexpected acceleration of delinquency or charge offs, given the environment really across any of the asset classes. So.

Cross technology, and our overall client experience organization.

Over and over the years, there's been questions about some of the businesses that we are faster growing than consumer and unsecured like student and our citizens pay business.

So that when the storm clouds pass.

Growing faster than peers.

Well under control despite the.

We're in good position.

Great clubs surrounding us so we feel really good about where we stand right now for consumer credit given the health of the consumer and the quality of our underwriting standards and lastly.

To grow both the customer base as well as our revenues so.

That's the balancing act as to keep looking for efficiencies, while making sure that we.

We've tightened a bunch in the last six to nine months just as.

We are prioritizing the things that really are important to us.

Future positioning John Yes, I think Thats well said.

As a cautionary measure so as we're kind of tightening up on things like auto onto the size of the balance sheet around the fringes in almost every single one of our asset classes.

To add that.

We try to calibrate.

Our expense base, along with the revenue base.

Aid credit tightenings, not because we're seeing anything we don't like just in an abundance of caution to make sure that we don't have any tail risk on any of the portfolio. So.

Being.

Projected here and so I think.

You could very well see an upsize and top aide in the coming months, we're working on that.

As everything we can see right now we feel pretty good.

A couple of areas that we're thinking about.

Great I appreciate the color. Thank you.

Expanding on is the further simplification of our operating models.

All of our <unk> taken a look at a harder look at all of our third party spend.

Your next question will come from the line of John <unk> with Evercore. Your line is open go ahead.

<unk>, how we operate from an automation perspective is something that's structurally we've been making investments in and we can we can double down on that going forward and just making sure everything we're doing is absolutely focused on our core objectives of growing a top performing bank generating low.

Good morning.

On the on the expense side I think.

Bruce you had alluded to potentially being able to come in.

Below the expense expectation to 5% expectation might be for the year as you're focusing on that given the top line pressures can you maybe give us a little more color there what you're looking at and how material.

Moderate cost deposits and investing in our customers and clients and so when you when you put a sharp eye on all of that you are you often come up with opportunities to basically create additional efficiencies and we've demonstrated that over the years and and then we're going to intensify those efforts here in the coming months.

Potential benefit you could have on that front as you as you see the topline pressure building on the NII side.

Yeah, I'll start and flip to John but we.

We had coming into the year, we were going with a 7% guide.

Got it okay, great. Thank you and then just secondly on the commercial real estate front can you give us a couple.

Some of that was reflective of the HSBC in ISP see full year effects, and then almost a higher FDIC premiums.

That's my two.

You may have on that in terms of as you're looking at refreshing.

Reappraising some of the properties in office can you give us what you're seeing in terms of some of the value declines we had a peer of yours indicated 15% to 20% value declines in some of the office re appraisals and then separately I know you indicated that you are seeing some pressure you expect pressure on commercial real estate criticized.

Mark that down to 5% so a clear.

Clearly and recognition that will have some compression in the net interest income.

We're going to work really hard to try to protect the bottom line and so I.

I think that's what.

We've circled at this point clearly.

Do you have what.

Top remains an open program and we have lots of ideas in terms of are there other things that we can kind of get working on and actually have a benefit this year some of them. They actually have a benefit for next year, but.

The percentage increase was in commercial real estate criticized and look at the ratio.

But general General criticized is running at about 24% for the office space.

I don't have it for the for the overall real estate bucket.

Certainly we've got our folks taking a hard look at what else. We can do on the expense side, but at the same time.

At the time, but office is what we're very focused on we haven't seen a lot of appraisals, yet because we're not really in the restructuring mode. The ones. We've seen have actually been modestly better than we expected I don't I don't have the exact downdraft, but our entry ltvs are around 60%. So theres a lot of cushion in our underwriting.

We're trying to make sure that we protect all of the investments in our future the important strategic initiatives across consumer and commercial.

Cross technology, and our overall client experience organization.

Commercial real estate.

So that when the storm clouds pass.

As Bruce and John said, we've really staffed up our workout teams and we're really putting each individual property each interval at each individual MSA under the microscope. We're focused on maturities in the office book, we have about 60% of the book maturing by the end of 2024, so it's not a huge a huge amount and we have.

We're growing faster than peers.

We're in good position.

To grow both the customer base as well as our revenues. So that's the balancing act as to keep looking for efficiencies, while making sure that we.

We are prioritizing the things that really are important to the future positioning John Yes, I think thats well said.

The majority of the of the risk in the book are swapped effects in terms of of interest rate protection. So while we are beginning to engage client by client remember the way. We're very we're very kind of focused on who we're doing business with so client selection is very important MSA is very important suburban versus urban is very important.

Just to add that.

We try to calibrate.

Our expense base, along with our revenue base.

Being.

Projected here and so.

I think you could very well see an upsize and top aide in the coming months, we're working on that.

And so we think well have some trouble in the book and we're going to have to restructure a lot of the transactions, it's going to be very manageable in terms of the overall loss content.

A lot of areas that we're thinking about.

Expanding on further simplification of our operating models.

Very helpful. Thank you.

All of our <unk> taken a look at a harder look at all of our third party spend.

Due to time constraints, we will now turn the call back over to Mr. Van song.

Okay.

Again, thanks, everybody for dialing in today.

We appreciate your interest and your support have a great day.

Thank you.

Ladies and gentlemen that will conclude your conference call for today. Thank you for your participation and for using AT&T teleconference Service you may now disconnect.

Moderate cost deposits and investing in our customers and clients and so when you when you put out a sharp eye on all of that you often come up with opportunities to basically create additional efficiencies and we've demonstrated that over the years and and then we're going to intensify those efforts here in the coming months.

Got it okay, great. Thank you and then just secondly on the commercial real estate front can you give us a couple.

Stats that Mike.

May have on that in terms of as you're looking at refreshing.

Reappraising some of the properties in office can you give us what you're seeing in terms of some of the value declines we had a peer of yours in the 15% to 20% value declines in some of the office re appraisals and then separately I know you indicated that you are seeing some pressure you expect pressure on commercial real estate criticized.

Do you have what.

The percentage increase was in commercial real estate criticized and what's the ratio.

But general General criticized is running at about 24% for the office space.

I don't have it for the for the overall real estate bucket.

Our entry Ltvs are around 60%, so theres a lot of cushion in our underwriting.

Marshall real estate.

Bruce and John said, we've really staffed up our workout teams and we're really putting each individual property each interval at each individual MSA under the microscope, we're focused on maturities.

The office book, we have about 60% of the book maturing by the end of 2024, so it's not a huge a huge amount and we have a majority of the of the risk in the book are swapped effects in terms of interest rate protection. So while we are beginning to engage client by client remember the way, we're very we're very kind of.

Focused on who we're doing business with so client selection is very important MSA is very important suburban versus urban is very important and so we think we'll have some trouble in the book and we're going to have to restructure a lot of the transactions, it's going to be very manageable in terms of the overall loss content.

Very helpful. Thank you.

Due to time constraints, we will now turn the call back over to Mr. Vance on.

Okay. So again, thanks, everybody for dialing in today.

We appreciate your interest and your support have a great day. Thank you.

Ladies and gentlemen that will conclude your conference call for today. Thank you for your participation and for using AT&T teleconference Service you may now disconnect.

Q1 2023 Citizens Financial Group Inc Earnings Call

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