Q4 2023 Citizens Financial Group Inc Earnings Call
Yes.
Good morning, everyone and welcome to the citizens financial group fourth quarter and full year 2023 earnings Conference call My.
Kelly: My name is Kelly and I'll be your operator today.
Kelly: Currently all participants are in a listen only mode.
Kelly: During the presentation, we will conduct a brief question and answer session.
Speaker Change: Reminder, this event is being recorded.
Speaker Change: Now I'll turn the call over to Kristin Silberberg.
Kristin Silberberg: Executive Vice President Investor Relations Kristin you may begin.
Kristin Silberberg: Thank you Kelly good morning, everyone and thank you for joining us.
Kristin Silberberg: This morning, our chairman and CEO, Bruce backbone and CFO, John Woods will provide an overview of our fourth quarter and full year 2023 results Britain Cofflin head of consumer banking and Don Mccree head of commercial banking.
Kristin Silberberg: Additional color.
Kristin Silberberg: Referencing our fourth quarter and full year earnings presentation, located on our Investor Relations website. After the presentation, we will be happy to take questions.
Kristin Silberberg: Rents 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.
Kristin Silberberg: 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 and with that I will hand over to Bruce. Thanks, Kristen Good morning, everyone and thanks for joining our call today.
Bruce Winfield Van Saun: 2023 was an incredible year in many respects with the fed's aggressive moves to subdue inflation, a west coast Bank failures.
Bruce Winfield Van Saun: <unk> resilient economy, and several significant proposals from bank regulators it.
Bruce Winfield Van Saun: It was important to navigating this dynamic environment to focus first on playing strong defense, while continuing to play disciplined offence and take advantage of opportunities in the market.
Bruce Winfield Van Saun: Defense starts with the balance sheet and risk management and I feel really good about how we ended the year our capital position as one of the strongest among the large regionals with a CET one ratio of 10, 6% CET one adjusted for OCI of roughly 9%.
Bruce Winfield Van Saun: Tangible common equity ratio up six 7%.
Our liquidity position is at an all time best with a loan to deposit ratio of 82% pro forma category, one LCR of 117%.
Bruce Winfield Van Saun: 156% liquidity coverage of our uninsured deposits.
Bruce Winfield Van Saun: Our ACL ratio is at 159% compared to 130% pro forma Dave Mun seasonal.
Bruce Winfield Van Saun: General office reserves are at 10, 2%.
Bruce Winfield Van Saun: We continue to be very disciplined in terms of lending risk appetite and are focused on deep relationships, which deliver stronger relative returns.
Bruce Winfield Van Saun: Using a non core strategy runoff laws and free capital for better opportunities.
Bruce Winfield Van Saun: On offense, we have several important initiatives, we are driving such as our private bank build out the New York City Metro initiatives are focused on serving private capital and growing our payments business. These are all tracking well.
Bruce Winfield Van Saun: Particular, we are pleased to see the private bank team reached one 2 billion in deposits soon after our launch in late October.
Bruce Winfield Van Saun: Our financials over the course of the year came under some pressure primarily given higher funding costs.
Bruce Winfield Van Saun: Nonetheless, we delivered a 13, 5% underlying aro TCE for the full year with a 95% return of capital to shareholders through dividends and share repurchases.
Bruce Winfield Van Saun: In the fourth quarter, we continue to see smaller sequential declines in NII than in the prior quarter.
Bruce Winfield Van Saun: Fed last typed in July and the pressure on funding costs has lessened.
Bruce Winfield Van Saun: We saw a modest bounce back in fees, but are very encouraged by the tone of the markets in 2024 to date, hopefully we start to see our big capital markets pipelines begin to deliver.
Bruce Winfield Van Saun: We took some meaningful cost actions in Q4 to set the stage for a very modest expense growth in 2024.
Bruce Winfield Van Saun: We only had the private bank for two quarters. So if you normalize for that we're actually reducing the legacy expense base by one 4%.
Bruce Winfield Van Saun: I should reinforce though that we are doing this while protecting our critical initiatives.
Bruce Winfield Van Saun: Credit outlook continues to track expectations.
Bruce Winfield Van Saun: CRE General office is being carefully managed losses are being absorbed and net charge offs, it's relatively predictable with few surprises so far away.
Bruce Winfield Van Saun: Away from that credit quality is strong.
Bruce Winfield Van Saun: In Q4, we saw a dip in absolute criticized loans and in the ratio, which is a promising source.
Bruce Winfield Van Saun: On the capital front, we did not buy any stock in Q4, given the charges related to the FDIC special surcharge as well as associated with our cost initiatives, we expect to be back in the market in Q1 and for that to continue through 2024.
Bruce Winfield Van Saun: Turning to our outlook, we expect NII to continue with modest declines through mid year, and then start to tick up the exciting news on NIM Slash NII is that we protect meaningful benefits from swap of noncore runoff over 25% to 27, which will power higher E. P.
Bruce Winfield Van Saun: And returns we are poised for strong fee growth led by capital markets.
Bruce Winfield Van Saun: Charge offs will rise modestly, but we're likely to see ACL releases over the course of the year.
Bruce Winfield Van Saun: Our key priorities for 2024 will be to continue to operate with a strong defense slash prudent offense mindset, we have many exciting things on our technology, our digital data analytics and AI roadmap that we need to deliver on its an exciting time for citizens we feel.
We are well positioned for medium term outperformance.
Speaker Change: I'd like to end my remarks by thanking our colleagues for rising to the occasion and delivering great effort. In 2023, we know we can count on you again in the new year with that let me turn it over to John Thanks.
John F. Woods: Thanks, Bruce and good morning, everyone I.
John F. Woods: I'll start out with some commentary on 2023.
John F. Woods: We demonstrated excellent balance sheet strength, while delivering solid financial performance, we were resilient through a turbulent environment benefiting from near top of peer group capital levels and strong liquidity based on stable consumer insured deposits and diversified wholesale funding sources.
John F. Woods: This strength allowed us to execute well against our multi year strategic initiatives, while opportunistically building out the private bank.
John F. Woods: On slide six you can see that we delivered underlying EPS at $3 88, which included a 51% drag from noncore and an 11% investment in the private bank.
John F. Woods: Full year royalty was 13, 5% after incorporating these items.
John F. Woods: Before I discuss the details of the fourth quarter results here are some highlights referencing slides four five and seven.
John F. Woods: On slide you can see we generated underlying net income of $426 million for the fourth quarter and EPS of <unk> 85.
John F. Woods: This includes six cents for our continued investment in the startup of the private bank and a <unk> 15 negative impact from the noncore portfolio.
John F. Woods: We had a significant increase in the impact from notable items. This quarter included on slide four.
John F. Woods: The largest driver was the FDIC special assessment, followed by elevated top and severance related expenses attributable to meaningful head count reduction.
John F. Woods: Our underlying ROTC for the quarter was 11, 8%.
John F. Woods: Our legacy core bank delivered a solid underwriting ROTC 14, 8%.
John F. Woods: Currently the private banks startup investment is dilutive to your results, but relatively quickly this will become increasingly accretive.
John F. Woods: The private bank is off to a very good start raising about $1 $2 billion of deposits through the end of the year of which more than 30% of our noninterest bearing.
John F. Woods: While our noncore portfolio was currently a sizable drag to results. It continues to run off further bolstering our overall performance going forward.
John F. Woods: We ended the year with a very strong balance sheet position with set one of 10, 6% or 9% adjusted for the ASC I opt out removal and ACL coverage ratio of 159% up from 155% in third Q third quarter.
John F. Woods: This includes a robust 10, 2% coverage for general office up from nine 5% in the prior quarter.
John F. Woods: We continued to build liquidity during the fourth quarter, achieving our planned liquidity profile, our pro forma category, one bank LCR rose to 117% from 109% in the prior quarter.
John F. Woods: We also reduced our period end flood borrowings by $3 3 billion quarter over quarter to $3 8 billion.
John F. Woods: Our period end LDR improved linked quarter to 82% from 84%.
John F. Woods: Regarding strategic initiatives as previously mentioned the private bank is off to a great start and top continues to contribute in addition, New York Metro is tracking well and we are poised to capitalize on the growing private capital opportunity.
John F. Woods: Next I will talk through the fourth quarter results in more detail turning to slide eight starting with net interest income.
John F. Woods: As expected NII is down 2% linked quarter, primarily reflecting a lower net interest margin, partially offset by a 2% increase in average interest earning assets.
As you can see from the NIM walk at the bottom of the slide the combined benefit of higher asset yields and noncore runoff were more than offset by higher funding costs and swaps the net impact of which reduced NIM by three basis points, 2% to 3% level.
The additional nine basis point decline to 291% was due to the impact of our liquidity build which was neutral to NII.
John F. Woods: Our cumulative interest bearing deposit beta increased a modest three basis points to 51%.
John F. Woods: The fed has paused and we see continued but slowing deposit migration.
John F. Woods: We expect this moderating trend to continue until the fed eventually cuts rates.
Overall, our deposit franchise has performed well with our beta generally in the pack with peers. This is a significant improvement compared to prior cycles. When our beta experience was at the higher end of peers.
John F. Woods: Moving to slide nine.
John F. Woods: <unk> were up 2% linked quarter, given improvement in capital markets and a record performance from wealth.
John F. Woods: These results were partially offset by lower mortgage banking fees.
John F. Woods: The improvement in capital markets reflects increased activity with the decline in long rates in November driving a nice pickup in bond underwriting.
John F. Woods: Equities improved strength in the back half of the quarter as the environment became more favorable.
John F. Woods: M&A advisory fees benefited from seasonality and an improvement in the environment, given the better macro and retail look although several transactions.
John F. Woods: Q1.
John F. Woods: We see capital markets momentum picking up in Q1 as markets are positive and our deal pipelines are strong.
John F. Woods: The wealth business delivered a record quarter with higher sales activity and good momentum and AUM growth.
John F. Woods: The decline in mortgage banking fees was driven by lower production fees as high mortgage rates continue to weigh on lock volumes.
John F. Woods: Servicing operating P&L improved modestly while the MSR valuation net of hedging was lower.
John F. Woods: On slide 10, we did well on expenses, which were down slightly linked quarter, even while including the impact of the continued private banks startup investment.
John F. Woods: Our reported expense at $1, six 1 billion increased $319 million, including notable items totaling $323 million, namely the industry wide FDIC special assessment of $225 million and the impact of taking cost reduction actions to adjust our expense base heading into <unk>.
John F. Woods: 24.
Speaker Change: I'll discuss that in more detail in a few minutes.
Speaker Change: On slide 11 average loans are down 2% in period end loans were down 3% linked quarter.
Speaker Change: This was driven by non core portfolio runoff and a decline in commercial loans, which were partly offset by some modest core growth in mortgage and home equity.
Speaker Change: Average core loans are down 1% largely driven by generally lower loan demand and commercial along with exits of lower returning relationships and our highly selective approach to new lending in this environment.
Speaker Change: Average commercial line utilization continued to decline this quarter as clients remain cautious and M&A activity muted in the face of an uncertain market environment.
Speaker Change: Next on slides 12, and 13, we continue to do well on deposits.
Speaker Change: Period end deposits were broadly stable linked quarter with an increase in consumer driven by the private bank offset by lower commercial.
Speaker Change: The decline in commercial deposits was driven by our proactive effort to optimize the liquidity value of deposits running off approximately $3 $5 billion of higher cost financial institution and municipal deposits during the fourth quarter.
Speaker Change: Absent this DSO effect deposits would have been up by about one 5% this quarter.
Speaker Change: Our interest bearing deposit costs were up 19 basis points, which translates to 51% cumulative beta.
Our deposit franchise is highly diversified across products product mix and channels with 67% of our deposits in consumer and about 71% and shorter secured I had this is allowed us to efficiently and cost effectively manage our deposits into higher rate environment.
Speaker Change: With the fed holding steady we saw continued migration of deposits to higher cost categories with noninterest bearing now representing about 21% of total deposits.
This is slightly below pre pandemic levels and we expect the pace of migration to continues to moderate from here. Although this will be dependent on the path of rates and customer behavior.
Speaker Change: Moving on to credit on slide 14.
Net charge offs were 46 basis points up six basis points linked quarter.
Speaker Change: We were pleased to see that commercial charge offs were stable linked quarter and we also saw a modest decline in criticized loans as we continued to work through the general office portfolio.
Speaker Change: We saw continued normalization of charge offs on the retail portfolio along with seasonal impacts.
Speaker Change: Turning to the allowance for credit losses on slide 15.
Speaker Change: Our overall coverage ratio stands at 159%, which is a four basis point increase from the third quarter, primarily reflecting the denominator effect of lower portfolio balances.
Speaker Change: We increased the reserve for the $3 6 billion dollar General office portfolio to $370 million, which represents a coverage of 10, 2% up from nine 5% in the third quarter as we made modest adjustments to modeled loss drivers.
Speaker Change: We have already taken $148 million in charge offs in this portfolio, which is about 4% of loans.
Speaker Change: On the bottom left side of the page you can see some of your key assumptions driving the general office reserve coverage level. We feel these assumptions represent an adverse scenario that is much worse than we've seen in historical downturns. So we feel the current coverage is very strong.
Speaker Change: Moving to slide 16, we have maintained excellent balance sheet strength are.
Speaker Change: Set one ratio increased to 10, 6% and if you were to adjust for the <unk> opt out removal under the current regulatory proposal are set one ratio would be about 9%.
Speaker Change: Also our tangible common equity ratio improved to six 7% at the end of the year.
Speaker Change: Both are set one TCE ratios have consistently been in the top quartile of our peers and you can see on slide 36 in the appendix, where we stand currency relative to peers in the third quarter.
Speaker Change: We returned a total of $198 million to shareholders through dividends in the fourth quarter.
Speaker Change: We paused our share repurchases in the fourth quarter in light of the FDIC Special assessment having.
Speaker Change: Having exceeded our target capital level for year end, we expect to resume repurchases in the first quarter.
Speaker Change: Nevertheless, we plan to maintain strong capital and liquidity levels that fortify our balance sheet against macro uncertainties and position us to quickly transition to any new regulatory rules that may impact banks of our size.
Speaker Change: On the next few pages I'll update you on a few of our key initiatives, we have underway across the bank, including our private bank and our ongoing balance sheet optimization program.
Speaker Change: First on slide 17, the Buildout of the private bank is going very well and clearly gathering momentum.
Speaker Change: Following our formal launch in the fourth quarter, our bankers have raised more than $1 $2 billion of attractive deposits with roughly 75% of that from commercial clients.
Speaker Change: This is a coast to coast team with a presence in some of our key markets like New York, Boston and places, where we'd like to do more like Florida and California.
Speaker Change: We have plans to open a few private banking centers in these geographies and we are opportunistically, adding talent to bolster our banking and wealth capabilities with our cloud felt wealth management business is the centerpiece of that effort.
Speaker Change: Moving to slide 18, you are all well aware of our efforts in New York Metro that's going really well, we're hitting our targets there and on the commercial side as I mentioned before we are starting to see momentum building in capital markets.
Speaker Change: This should translate into a meaningful opportunity for us as a substantial capital backing private equity gets put to work.
Speaker Change: Next on slide 19, we continue to be disciplined on expenses.
Speaker Change: It's important to remember that a key to success since our IPO has been our continuous effort to find new efficiencies and then reinvest those benefits back into our businesses. So we can serve customers better.
Speaker Change: We've effectively executed our top eight program achieving a pre tax run rate benefit of about $115 million at the end of 2023.
Speaker Change: And we've launched top nine with the goal of an exit run rate of about $135 million of pre tax benefits by the end of 2024.
Speaker Change: The new top program is focused on efficiency opportunities from further automation and the use of AI to better serve our customers.
Speaker Change: We are executing on opportunities to simplify our organization and save more on third party spend as well.
Speaker Change: Last year, we exited the auto business and we also exited the wholesale mortgage business in the fourth quarter.
Speaker Change: We are also adjusting our expense base through further meaningful actions in the fourth quarter, we reduced our head count by about 650 or approximately three 5%.
Speaker Change: And we have also taken a hard look at our space needs and are rationalizing some of our corporate and back office facilities.
Speaker Change: Given all of this work we are targeting to limit our underlying expense growth in 2024 to roughly 1% to one 5% with a net decrease in legacy citizens expenses of one three to one 5% being offset by investments and the private bank.
Speaker Change: Playing prudent defense is at the top of our priority list given the challenging year, we saw with the turmoil that began back in March and the uncertain macro outlook. So we are reworking both sides of the balance sheet through our balance sheet optimization efforts.
Speaker Change: Slide 20 provides an update on our efforts to remix the loan portfolio through our non core strategy and optimization on the commercial side with a focus on relationship based lending and attractive risk adjusted returns.
Speaker Change: On the left side of the page Youll see the relatively rapid rundown of the remaining $11 billion noncore portfolio, which is comprised of our shorter duration indirect auto portfolio and purchased consumer loans.
This portfolio is expected to decline by about $6 $4 billion from where we were at the end of the year to about $4 7 billion at the end of 2025.
Speaker Change: And at this runs down we plan to redeploy the majority of remaining cash pay downs to a reduction in wholesale funding with the remainder used to support organic relationship based loan growth in the core portfolio.
Speaker Change: Our capital recaptured through reduction in noncore <unk> will be primarily reallocated to support attractive growth in retail and commercial lending through the private bank.
Speaker Change: And the broader consumer portfolio, we are targeting growth in the home equity card and mortgage which which offer the greatest relationship potential.
Speaker Change: Moving to the right side of the page. We are also working on the commercial portfolio exiting lower return credit only relationships and focusing on selective C&I lending with multi product relationship opportunities were.
Speaker Change: We are leading more deals in our front book improving spreads while also improving the overall return profile of the book.
Speaker Change: In the appendix we have included more information covering the broad contours of our BSO program, including how we are managing our high quality deposit book Remixing, our wholesale funding managing our securities portfolio and positioning our capital base against the backdrop of a changing macro and regulatory environment.
Speaker Change: Moving to slide 21, I will take you through our full year 2024 outlook, which contemplates the early January forward curve and.
Speaker Change: And fed funds rate of 425% by the end of the year.
Speaker Change: We expect NII to be down 6% to 9% with changes in our swaps, but contributing to about half of that decline in average loans down roughly 2% to 3%.
However, we expect spot loan growth of 3% to 5% with private bank growing over the course of the year and commercial activity picking up in the second half.
On the deposit side, we expect spot growth of one, 2% I'm, sorry, 1% to 2% and well controlled deposit costs with a terminal beta in the low fifties before rate cuts are anticipated to begin in may.
Speaker Change: We expect our net interest margin to trough around the middle of the year and average in the $2 eight to $2, 85% range for the full year and we expect to exit the year around 285%.
Speaker Change: We've included slide 23, which shows the expected swaps had noncore impact through 2027.
Speaker Change: In 2024, we expect higher swap expense to be partly offset by the NII benefit from the non core rundown.
Speaker Change: Youll find a summary of our summary of our hedge position in the appendix on slide 38, which demonstrates how the 2024 headwind which is incorporated in our 2020 for NII guide reverses to a substantial NII tailwind in 2025 and beyond as the current forward curve is realized.
Speaker Change: For example, there is an expected improvement in NII contribution from swaps in 2025 year over year of approximately $371 million with continued meaningful benefits in 2026 and 2027.
Speaker Change: Noninterest income is expected to be up in the 6% to 9% range, depending upon the market environment led by a nice rebound in capital markets.
Speaker Change: We expect expenses to be up about 1% to one 5% excluding the private bank. This would be about this would be down one 3% to one 5% we.
Speaker Change: We have provided a walk showing the components of our 2024 expense outlook on slide 22, slide 22 to provide more context.
And the units are expected to average about 50 basis points for the year as we continue to work through the general office portfolio and expect further normalization in retail.
Speaker Change: Given macro trends a remixing of the balance sheet through commercial DSO in the noncore strategy and expectations for modest portfolio growth. We will see you will like likely see ACI releases over the course of the year.
Speaker Change: We plan to resume share repurchases in the first quarter and the $300 million range with more over the course of the year, depending upon market conditions and loan growth.
Speaker Change: That into account, we still expect to end the year with a strong set one ratio of about 10, 5%, which is at the upper end of our target range.
Speaker Change: Putting it all together, we expect to return to sequential positive operating leverage in the second half of the year with <unk> in the second quarter 2024.
Moving to slides 24, and 25 as Bruce mentioned, we are well positioned to deliver attractive returns.
Speaker Change: As we look out over the medium term, we have a clear path to achieve at 16% to 18% ROTC.
Speaker Change: We expect to generate solid returns from our legacy core business with a substantial NII tailwind given swap portfolio runoff.
Speaker Change: We expect to deliver positive operating leverage with strong expense discipline, and we are well positioned to grow fees meaningfully given the investments we've made and our capabilities over the past few years.
Speaker Change: We also expect a meaningful contribution from the private bank as it matures and a tailwind from the runoff of the noncore portfolio as we redeploy that capital and liquidity.
Speaker Change: We will continue to operate with a prudent risk appetite and focus on returning a meaningful amount of capital to shareholders through our repurchase program and targeting a dividend payout of 35% to 40%.
Speaker Change: Over the medium term, we expect our set one ratio to remain within our target range of 10 to 10, 5% about 50 basis points higher than our prior target range given the continued uncertainty in the macro environment.
On slide 26, we provide the guidance for the first quarter note that the first quarter has seasonal impacts due to lower day count impact on revenue as well as taxes on compensation payouts impacting expenses.
Speaker Change: To wrap up we demonstrated the resilience of the franchise and maintain strong discipline in 2023, as we work to position the bank to continue to deliver attractive returns to shareholders over the medium term.
Speaker Change: We delivered solid results this quarter and we ended the year with a strong capital liquidity and funding position that puts us in an excellent position to drive forward with our strategic priorities and take advantage of opportunities that may arise.
We are continuing to optimize our balance sheet and we are focused on allocating capital, where we can drive deeper relationship business and improved performance over the medium term with that I'll hand, it back over to Bruce.
Bruce Winfield Van Saun: Okay. Thank you John.
Bruce Winfield Van Saun: Chile, let's open it up for Q&A.
Chile: Thank you Mr Byrd Sam.
Byrd Sam: We are now ready for the Q&A portion of the call.
Byrd Sam: To ask a question. Please press one then zero on your Touchtone phone you will hear an acknowledgment that you've been placed into Q and you can't remove yourself from queue at any time by repeating the onesie all command.
Byrd Sam: But if you're using a speakerphone please pick up your handset before pressing the numbers.
Byrd Sam: Once again for any questions. Please press one zero at this time.
Byrd Sam: Your first question will come from the line of Peter Winter with D. A Davidson your line is now open.
Peter J. Winter: Good morning, Ken can you guys provide some color on the drivers to that spot loan growth, including some details about the.
Ken: The contribution from the private bank and what's your thinking in terms of commercial line utilization.
Speaker Change: Yeah, I'll, just start off and others can add but I mean I think those are the two drivers as you mentioned when we look out and primarily the second half of 2024, we are seeing.
Speaker Change: And expectation that commercial activity will pick up loan utilization is flattening out here. We expect early in the year and then so that'll be part of the driver. We also have had.
Speaker Change: Some DSO.
Speaker Change: Activity in late 'twenty three in early 'twenty four that we expect to moderate in the second half of the year as well so you're going to see a number of nice tailwind on the commercial side.
Speaker Change: And then on the.
Speaker Change: Consumer side of things, we are seeing opportunities with with good relationship business in the mortgage space and in HELOC, which has been.
Speaker Change: Very nice and consistent driver for us, but those are those are the main drivers and then of course broadly.
Speaker Change: The private bank, which has gotten off to a great start on the deposit side of things in late 'twenty three we're going to see some of that loan opportunities pick up in 24. So those are the big I would say components. So that's partly maybe Brendan you can talk a little bit about what you expect for private bank lending yes.
Sure well I would start by just quick comment on Q4 for the private bank, obviously strong deposit print and I think demonstrating that the strength of this strategy can.
Speaker Change: Can be a very diversified and led by wealth and deposits and not necessarily.
Speaker Change: Requiring low interest blending to dislodge the relationships. So we're really excited about the the.
The print and start by the team having said that we do expect lending to pick up steam in 2024, given the interest rate environment mortgages are obviously challenged on the retail side. So the lending has been more heavily led by commercial lending, which is skewed in the private equity and venture space, which we're really comfortable with the risk appetite in the profile.
Speaker Change: Of that that business and it's been critical to start to dislodge personal private banking relationships from the ecosystem of private equity and venture. So we're off to a really good start I suspect.
Speaker Change: The forward curve is that the first half of the year will continue to be led by commercial principally in private equity and venture lending over time, we expect the loan book could be much more balanced and have more retail lending home equity lending mortgage lending coming in at scale as the rate environment dictates opportunities. There. We also expect to.
Speaker Change: To lean into partner loan programs to help.
Speaker Change: Connect the corporate side of private equity venture with private banking and personal.
Speaker Change: Banking, so youll start to see an asset diversification over time, but the first half of the year, we would expect it to still be more heavily weighted on the on the corporate side, Okay, great Don anything to <unk>.
Donald H. McCree: Commercial side, Yes, I think if you look back in the fourth quarter, the things that dampened our loan growth a little bit where it's about 50% utilization, 50% BSO with a little bit of bond execution sprinkled in there. So people that were carrying slightly higher balances on the commercial side a lot of them went to the bond market when rates kind of backed off in the end.
Donald H. McCree: Last six weeks of the year and Thats continued into this year. So I think that that particular area that we're excited about as we get into the back end of 2024 is the private equity space.
That group of clients has been basically dormant for almost two years theres a lots of conversations going on we're hearing from most of those customers that they expect to get.
Donald H. McCree: A lot more active in that will drive utilization on a capital call lines, which is at an all time low right now so that's what the real driver of Spirit. Peter did you have another question.
Peter J. Winter: Yes, just a quick follow up that's helpful, but just the fee income.
Peter J. Winter: Talked about up 6% to 9% you did mentioned.
The pipeline is strong for the capital markets, but just if you could give some color on the puts and takes on the fee income side, yes.
Peter J. Winter: I'm just kind of the main drivers of that.
Peter J. Winter: Basically a continuation of some of the trends we're seeing in the fourth quarter of 2023.
<unk> capital markets is starting to pick up again pipelines are are incredibly strong.
Peter J. Winter: And I think the lead driver seems to be M&A advisory.
Peter J. Winter: That's.
Peter J. Winter: Picked up in <unk>, not only due to seasonal factors, but just in terms of a more constructive backdrop. We're also seeing as you get out into 'twenty four pick up and underwriting both on the bond side and on the equity side, and so and solid contributions from global markets as well, but so those are some of the drivers as we see them beginning in Q Q.
Peter J. Winter: For <unk>.
Continuing in Q1 with excellent pipelines and playing out over the rest of 'twenty. Four you might you might add something on wealth rather than I don't know if you want to but we would expect continued really strong growth wealth fees, we do and it's been a year of slow and steady progression continuing to get all time highs in the wealth management business, but.
Peter J. Winter: The private bank investment our.
Peter J. Winter: 2024 is going to be really important year, where the market looking to attract a lot of talent. We've made a number of key hires in Q4, both on the leadership side as well as at the adviser side and so getting the ecosystem of the bankers that we hired in the summer connected with top in market wealth managers is critical for US we're rebranding the <unk>.
Peter J. Winter: Platform to citizens private wealth management to connect the private banking and wealth side together hand in glove and so we do expect steady and significant growth out of wealth over time really connected into the private banking ecosystem. So.
Peter J. Winter: We're pleased with the momentum, but there's a lot more to come we hope if we execute well on the private banking initiative, okay very good.
Peter J. Winter: And just on mortgage banking.
Peter J. Winter: Yes.
Speaker Change: Yeah. So John hit some highlights on Q4 for mortgage production was down a bit our underlying servicing business was up modestly and then our hedge.
Speaker Change: <unk> was down over a big quarter in Q3, Q4, I think as we look the outlook going forward, we obviously announced the exit of the wholesale mortgage business. If you rewind the clock back to prior to the Franklin American acquisition, we were under scale in mortgage and really we're trying to diversify the business we've done that.
Speaker Change: Really successfully in hindsight it was an incredibly well timed acquisition and we performed exceptionally well through the Covid years.
Speaker Change: As we exit that period of time and look forward.
Speaker Change: Our MSR concentration as versus peers is really strong it's a little bit on the high side, we looked at our business model.
Speaker Change: Wholesale mortgage where one of the only lenders in there the margins were really challenged and the outlook for rates.
Speaker Change: Don't necessarily suggest a boomlet if refi activity in the medium term and so wholesale mortgage being a non relationship business.
Speaker Change: We decided that it was it was time to move on and we're.
Speaker Change: We're committed to correspondent, we're really committed to retail mortgage for relationship lending so.
Speaker Change: But despite rates coming down we do expect the mortgage market to be call. It a two trillion dollar origination platform in 2024, which is about a normalized mortgage market. So we should see some some modest uptick in originations.
Speaker Change: And with rates coming back down the servicing business might might see a little bit of offsetting pressure. So I think I think we feel like we're in the right zone in terms of mortgage performance with where we're at Q4 within.
Speaker Change: Within a range of.
Speaker Change: Normal volatility and we're going to make sure that we're executing on driving up returns higher and making sure. We're allocating balance sheet to deep relationship based customers, whether it's in the private banker in the core retail business.
To continue to offer that product.
Speaker Change: Our very best customers, yes to wrap it all that all that up it's.
Speaker Change: In 'twenty four we do expect volumes to improve.
Speaker Change: Improve as well as margins. So that's another tailwind as we get into the into next year in terms of the production business. Okay. Thank you. Peter next question. Thanks, a lot.
Peter J. Winter: Next question will come from the line of Matt O'connor with Deutsche Bank. Your line is open.
Matt Burnell: Good morning can you guys elaborate a bit on your expense cuts that you did this quarter in terms of where theyre coming from.
Matt Burnell: Obviously youre leaning in on the private bank, but kind of how do you make sure you're not cutting too much given these initiatives and the ones that you've had in prior years.
Speaker Change: Yeah, I'll start off here, but.
I think we have been very very diligent and kind of looking at.
Speaker Change: Staffing levels across all the different activities in the bank.
Speaker Change: In seeking efficiencies Theres always the playbook, where if you kind of eliminate your bottom X percent of performers and redistribute some of the work that you can.
Speaker Change: Just kind of run a little leaner.
Speaker Change: And so we've gone through that exercise to make sure that.
Speaker Change: We won't be caught short in any areas we carved out.
Speaker Change: Areas like risk and audit and some of the control areas. So they were spared.
From taking reductions.
Speaker Change: And then we also carved out the areas that are important investment activities and so.
Speaker Change: The roll up of all of that math I'm just too.
Speaker Change: The relatively modest number 3% to 5% of total staff count.
Speaker Change: But I think we're kind of lean and mean and then good fighting shape as we enter into 2024.
Speaker Change: Okay. That's helpful. And then just separately the deposit growth that you've heard from our private bank have you disclosed what that rate is I think a third of them are noninterest bearing but what's the blended rate and I guess are you using promotions, whether it's right or other stuff to help grow those.
Speaker Change: Yes, we haven't really talked about that but I mean, I think we should look at it is that is that the this is.
Speaker Change: Accretive to the low cost profile top of the house when you look at DDA and operating accounts.
It's extremely attractive mix that we've seen come in early days. So we're extremely encouraged about our expectations for this to be a.
Speaker Change: You know a very.
Speaker Change: It's sort of solid franchise deposit fully funding our our loan growth that we expect on that side of.
Speaker Change: On the other side of the balance sheet. So yeah, I would say the mix is quite good and overall cost very attractive and accretive to top of the house yet.
Speaker Change: If theres a slide 11 met that lays out a pie chart of the character of the <unk>.
Speaker Change: Pauses, but.
Speaker Change: DDA and then checking with interests, which are very low costs, roughly 40% very little term.
Speaker Change: And most of that in kind of liquid savings and money market with no <unk>.
Speaker Change: Promotions that are outside the norm of what we're offering to the core franchise.
Speaker Change: Okay. Thank you.
Speaker Change: Your next question comes from the line of John <unk> with Evercore. Your line is now open.
Speaker Change: Yeah.
John F. Woods: Good morning.
John F. Woods: Just a couple of questions on the on the credit front charge offs came in at around 46 basis points in the fourth quarter. You expect an average of about 50 basis points. Overall in 2024 can you maybe talk to us about.
John F. Woods: There you expect losses to peak.
John F. Woods: That 50 bps for the full year and what gives you confidence that they can remain there and then similarly on the on the reserve front I know you.
John F. Woods: You added to reserves in the fourth quarter, but.
John F. Woods: You implied you could see releases in 2024, what do you need to see to drive the releases.
John F. Woods: Yeah.
Speaker Change: So I'll start and then John can then give some more color. So so I think that kind of push that we've seen higher over the course of 'twenty three that.
John F. Woods: Could continue a little bit higher into 24, so going from 46 eight or 50.
John F. Woods: It is kind of twofold for the most part one is the CRE General office as we're watching the maturity wall.
John F. Woods: On top of all these credits very carefully.
John F. Woods: And we're working them out.
John F. Woods: As I said.
In my opening remarks, a lot of this is fairly predictable.
John F. Woods: We can look ahead six months nine months speech and.
John F. Woods: Kind of anticipate where we might have to.
John F. Woods: Do some restructuring and some where we make take charge offs and so I think we have good visibility into that its a long process.
John F. Woods: Sorry General office I think this.
John F. Woods: This with us all through 'twenty, four and likely into 'twenty five as well, but again the important thing is I think we're well reserved for it and it's baked into that charge off run rate.
John F. Woods: Second area is really just continued normalization on the consumer side.
John F. Woods: Which has been extremely slow and gradual but theres still slightly better than where we were pre COVID-19. So.
John F. Woods: That'll just gently push up as we go forward and so that would be the other driver I would say the good news is that in C&I.
John F. Woods: We're not really seeing any.
John F. Woods: He kind of hotspots and so we feel that we have a pretty good outlook for broad C&I through 2024.
John F. Woods: On the question of the.
John F. Woods: ACL is.
John F. Woods: This year, we've been consistently building each quarter.
John F. Woods: And you know if you get to the scenario, where there is likely a soft landing or a very shallow recession.
John F. Woods: We've put away enough reserves that I think.
John F. Woods: We will be able to start to draw that down.
John F. Woods: And so time will tell on that but you can already see.
John F. Woods: We've been starting to kind of.
John F. Woods: Reduce the amount of kind of reserve build from absolute provision over charge offs in this quarter. It was flat. It was 171 over at $1 71, and so even if charge offs can pick up a little bit I think it's likely that you could see the need for provision building.
Speaker Change: Having provisions exceed charge offs reduce as we go through the year I don't know John if you want to add any color to that just a little bit I think that'll that'll make sense and I would say that.
John F. Woods: The drivers of where you want to be with your reserve as we have a relatively conservative economic environment predicted over the over the horizon, which is a mild to moderate adverse outcome. So that's that's built in.
John F. Woods: We think that we're seeing stabilization in terms of the performance on the back book and our loans and our loan books are we see visibility into the charge offs.
John F. Woods: Outlook and then the build which is the other could be the other driver of.
ACL when Youre building loans.
John F. Woods: What we're rotating away from and building into there is actually a net flat to improved profile in terms of the very high quality.
Origination front book and the private bank and commercial that we're putting on the portfolio in 24, while while other stuff with maybe a higher ACL load is running off in the back book. So those are the things I would just add to what Bruce said.
Speaker Change: Great Alright, Thank you for that and then separately on the capital Front unit you did you expect to resume buybacks in the first quarter of 'twenty four.
Speaker Change: And maybe if you can help us.
Speaker Change: Possibly quantify the pace of buybacks, it's fair to assume could you be back at that 200 million quarterly.
Speaker Change: Quarterly rate or how should we think about that thanks.
Speaker Change: Well at this point, we've given a kind of firm.
Speaker Change: For the first quarter of about $300 million. So we've.
Speaker Change: We probably with benefit of 2020 hindsight could've bought some in the fourth quarter, but water under the bridge for 10, six so we have a little above target capital to kind of play with if you will in the first quarter and then in the first half of the year, we're not going to have much net loan growth non core is going to be running.
Speaker Change: And we don't really see the flex in lending coming until the second half and the private bank and commercial as John indicated.
Speaker Change: So I think that the.
Speaker Change: Buybacks would tend to be.
Speaker Change: More first half oriented, but a lot can happen over the course of the year and so.
Speaker Change: Kind of differ.
Speaker Change: <unk> from giving.
It's kind of quarterly run rate just to say, we will have a <unk>.
Speaker Change: Solid print in the first quarter and likely more in the second quarter and then we'll see how the year plays out.
Speaker Change: And I, just would reiterate our capital priorities, our strong dividend and if we have opportunities to put capital to work.
Speaker Change: Serving clients and driving really strong risk adjusted returns, that's our preference and when and when that moderates a bit that's when you see us give it give it back in the form of buybacks and so where we're at.
Speaker Change: And a extremely strong position to be able to to have the opportunity to trade and so on.
Speaker Change: One last add on point to your add on point is I would say I'm really happy to be buying my stock at these levels because we think it has great value.
Speaker Change: Well said.
Speaker Change: Okay, great. Thank you.
Speaker Change: We'll go next to the line of Abraham Pune Waller with Bank of America. Your line is open.
Speaker Change: Hey, good morning.
Speaker Change: Just maybe one question for you Bruce as you think about capital deployment.
Bruce Winfield Van Saun: You've been pretty busy last year in terms of the strategic actions.
Speaker Change: I'm, just wondering where do you see like if you look at investment opportunities So I'll defer.
Speaker Change: Are you done.
Gunn for now in terms of putting the big pieces in place or how you're thinking about new things and new investments.
Speaker Change: You could see on an organic basis.
Speaker Change: Lift outs or just outright M&A.
Speaker Change: Yeah. Good question I would say that.
Speaker Change: Orientation right now is for backing our organic initiatives. So.
We've mentioned.
Speaker Change: The private banks and we need to continue to invest there to get that off the ground and make it a big success.
Speaker Change: Been investing in the New York marketplace.
Speaker Change: Certainly to get your brand awareness up is expensive proposition, but we're doing that and that is.
Speaker Change: It's showing very good results.
Speaker Change: There are certain businesses like payments that are.
Speaker Change: I think going through a lot of change and that change always presents opportunities and so making sure that we're investing to position ourselves to deliver for our clients.
Speaker Change: Continue to gain share and grow that business. Those are the things kind of come top of mind that we are very focused on I think in terms of acquisitions in our fee based capabilities. We've made significant investments over time in commercial and so our M&A side.
Speaker Change: And scale is.
Speaker Change: Quite a good level so we.
Speaker Change: We could be selective there.
Speaker Change: Don't.
Speaker Change: See anything imminent, but there's possibilities that if theres a industry vertical.
Speaker Change: Vertical that makes sense, maybe maybe we could do something there.
Speaker Change: And then wealth we've been looking at.
Speaker Change: Trying to buy some things we bought <unk>, which has turned out to be a fantastic acquisition, but I think the orientation of the rest of this year is to really go to lift out route and to bring teams onto the platform and so we're hard at work on that to try to scale up citizens private wealth. So I would say the free.
Speaker Change: <unk> is in good shape, there's a lot of.
Speaker Change: Initiatives in place that will kind of I think have us outperform from a growth standpoint relative to our peers. So I think we can sit back and be selective in terms of deploying capital Inorganically.
Speaker Change: That is helpful and I guess, just one follow up in terms of.
Speaker Change: Whatever it is and when you look at your NII and fee revenue guide in particular.
Speaker Change: Maybe talk to us around expand flicks, if some of these things don't play out as expected.
Speaker Change: We anticipate some level of expense offset or are you kind of pretty tight given just everything you've done on the cost side.
Speaker Change: Yes.
Speaker Change: There's always opportunities to look to flex your expense base down I think we've been pretty hard at it here to get to this level.
Speaker Change: And I'd say the strategic initiatives offer you some flexibility, but again, if you're looking at the medium term and the longer term to try to scrape to come up with a three to five or something of that magnitude if that puts at jeopardy, you're kind of trajectory on things like private.
Speaker Change: Bank.
Speaker Change: It would appear to be.
Speaker Change: Really.
Speaker Change: Advisable decision to take so so.
Speaker Change: So we will always look at that you know you can trust us to do that but at this point.
Speaker Change: We're trying to manage for both near term delivery, but also with an eye towards the medium term and really scared getting that ROTC back into the targeted range.
Speaker Change: Thank you.
Speaker Change: Thank you and your next question will come from the line of Scott <unk> with Piper Sandler Your line is open.
Scott: Thanks, Good morning, everybody.
Scott: Jonathan I think you've got five great touch built into the guidance just maybe.
Scott: Broad thought on.
Scott: Sort of where the balance sheet is geared now in other areas.
Scott: I guess more specifically how would more fewer cuts.
Scott: Impacts the NII outlook.
Speaker Change: Yes, I would.
Speaker Change: Say that we're very close to neutral one way or the other really up or down.
And but I would say that I think what's important to the outlook as we have.
Speaker Change: Deposit migration continuing to moderate every quarter and it continued this quarter. We expect to continue next quarter, but you know as our outlook is until you get that first cut it still doesn't completely go away. So we have an expectation in the first cut comes in the second quarter.
Speaker Change: And we get down to around 425, I think that's still holding around where you know looking out the window today and in the neighborhood of what the forward curve might indicate.
Speaker Change: Say that if there is a slight bias.
If the cuts came in a little fewer this year that it would probably be okay.
Speaker Change: But nevertheless that first kind of ski and general.
Speaker Change: Normalization in an orderly fashion over time is what we think is very good for our balance sheet again, staying around neutral with maybe a slight benefit if rates come in a tiny bit higher.
Speaker Change: In 2020 other the other aspect to that too is just we've had an inverted curve for a long time so when.
Speaker Change: When do you think about the medium term, presumably we'd get back to a point, where theres a normal yield curve, which also benefits.
Speaker Change: Yes.
Speaker Change: Perfect. Thank you and then also John for you. So the liquidity the pardon me the liquidity building efforts.
We have introduced some noise into the margin rate, even if they've been NII neutral I guess, just looking at the guidance, presumably that's going to be less of a factor going forward, but just maybe a thought on sort of where we are in that journey.
Speaker Change: Yeah, I'd say, we're basically we've achieved all of our objectives with respect to our liquidity build is the headline there.
Speaker Change: We believe a very strong position being around 117% of the requirements for category one banks.
Speaker Change: I think that that matches, our our hour.
Speaker Change: <unk> and therefore going forward you will not see.
Speaker Change: Liquidity being a being a.
Speaker Change: A headwind to net interest there I think.
Speaker Change: That was it.
Speaker Change: Something we were talking about in the back half of the year. It affected us in Q3 it affected us in Q4, if you actually look at.
Speaker Change: I think none of the dialogues on these calls that way back or are we going to exit the year close to 3% underlying.
Speaker Change: Well, we actually did do that in the underlying performance on our NIM was quite good it only dropped three basis points, which is showing up well relative to everybody who's reported so far.
Speaker Change: But that liquidity build which is neutral to NII took us down another mine. So we ended up exiting closer to 290, then to the three but that liquidity build is done.
Speaker Change: Got it.
Speaker Change: So we can just focus on.
Speaker Change: Not having that exercising that from the conversation and just focusing on what the underlying drivers are from here on out.
Speaker Change: Okay perfect. Thank you very much.
Speaker Change: Your next question comes from the line of Ken <unk> with Jefferies. Your line is now open.
Hey, Thanks, good morning, guys.
Ken: One follow up you mentioned the P. PNR bottoming in the second quarter I'm. Just wondering do you expect NII to bottom coincident with that or would there be a slight timing disconnect based on how the swaps work through.
Speaker Change: Yes, I mean, I think that that is the that is the driver basically that we are we are looking at NII.
Being at 75% of our revenues so yeah that the NII is going to bottom in that quarter as well, but in Q3 can then you'd have other things kicking in like fee growth strong.
Growth starting to kick in.
Speaker Change: And so even though that the swap.
Speaker Change: The incremental forward starting swaps that I think you'd have to look at the whole dynamic around what we expect to see in the business performance that would allow us to absorb that inventory.
Speaker Change: Sure.
Speaker Change: Oh quarter later, but people are trying to Charleston to Kip <unk>.
Speaker Change: I'm sorry, John can you just clarify that again I don't want to speak over and I think we were mentioning that the that the NIM trough is <unk>, but the let the NII, but the T. PNR NII trough is in <unk>.
Speaker Change: Okay got it and then just looking at the longer term guidance. You gave just talking about the $3 25 to $3 40 medium term NIM range.
Speaker Change: It seems like that most of that can be gotten from the three buckets that you show.
Speaker Change: Just getting curing from the fourth quarter level.
Speaker Change: I see that you've put in a three to five and a 25%.
Speaker Change: Fed funds rate. So I'm just wondering how you expect deposit costs and just beta should traject in I know theres a lot of moving parts in there too because of the growth that youre expecting as well and mix changes, but just can you maybe just start by just talking about if youre getting to the low $50 on the way up to just to have that expects to act and influencers that medium term.
Speaker Change: NIM range. Thanks.
Yes.
Speaker Change: It's a big driver I mean, I think the big.
Speaker Change: Big puts and takes there I mean, you've got the swap portfolio, which is a big tailwind as we've talked to talked about.
Speaker Change: But if you if you go over to the deposit side of things. We are looking at deposit migration stabilizing around mid 24. After that first cut in May do you see it.
Speaker Change: Deposit migration stabilizing and that is cuts continue we start flipping to down data.
Speaker Change: Type of expectations versus the update and we look at at the early two thousands as being instructive for a lot of that's where that tightening that loosening cycle of rate cutting cycle. When it would imply a 35% to 40% down data for the first call. It 100 to 150 basis points and so on.
Speaker Change: That's a good I think.
Speaker Change: You know good yardstick to think through our expectation that in the early part of the cycle.
Speaker Change: Down data will be less than the full update us or fill up betas low fifty's, but nevertheless, we're going to get big contributions from down data and that will grow over time getting close to where the where the update I ended up.
Speaker Change: Got it okay. Thank you.
Speaker Change: And your next question will come from the line of Erika Najarian with UBS. Your line is open.
Erika Najarian: Hi, Good morning, I just had one follow up question.
Erika Najarian: Putting all your answers together.
Erika Najarian: John and Bruce about the outlook for 2024.
Erika Najarian: The underlying dynamics as net interest income it seems to me that if we put together what you adjust that to Ken about deposit betas and slide 23 that despite the exit rate of your net interest margin forecasted to beat.
Erika Najarian: Five.
Erika Najarian: In the fourth quarter based on everything that you've told us it seems like you'll see.
Erika Najarian: A three handle in terms of that underlying NIM that Bruce discussed.
Erika Najarian: In 2025 is that yeah, it's a good bridge to thinking about.
Erika Najarian: Where you're exiting in 'twenty four and then that medium term range that you gave us.
Erika Najarian: So I would say well, we're exiting 'twenty four or $2 85. So we've indicated that we're in the fourth quarter of 'twenty three is going to the fourth quarter of 24 will be and.
Erika Najarian: So thats headed to the to the $3 25 to $3 40 range and so you would see us crossing that 3% level in 2025, sometimes on the way to 325.
Speaker Change: Perfect. Thank you.
Speaker Change: Yep.
Speaker Change: Thank you and your next question comes from the line of Gerard Cassidy with RBC. Your line is open.
Gerard Cassidy: Hi, Bruce.
Gerard Cassidy: Sure.
Gerard Cassidy: Bruce you you guys have done.
Gerard Cassidy: Job from when you went public to where you are today in transforming this company.
Gerard Cassidy: I'm curious on your <unk>.
Gerard Cassidy: Medium term outlook for Aro TCE on the improvement you highlight that the private bank.
Gerard Cassidy: Targeting a 20% to 24% ROE TCE can you share with us.
Gerard Cassidy: The mix of how you get there, meaning what percentage of revenue do you think you need to reach from fees versus net interest income and then also what kind of pre tax margin do you think you'll need to get to get to that 20% to 24% target.
Speaker Change: Yes, maybe I'll just I'll just start off with that Gerard It's Sean I mean I think.
Sean: Our fee fees to total revenues are in the neighborhood of 25% I would say over the medium term you're going to see that migrate closer to 30.
Sean: That would be consistent with a.
Sean: Balance sheet optimization efforts, where all of the capital we're putting to work on the front book.
Sean: You'd have relationship opportunities with attractive deposit and fee based opportunities associated with it at a much greater.
Sean: Right then what we're seeing running off in the back book and so that's going to drive that fee.
Sean: The percentage up closer to 30%.
Sean: And you know and I think that the returns that we that we expect from a call it.
Sean: The Rockies the ROTC return that Youre seeing in the medium term is consistent with a return on tangible assets. That's north of one 1%. So you can see that getting closer to 125 basis points.
Speaker Change: As a way to think about what the returns are on the asset side, John you're you're answering it the chunk Prehensile company Ah Ahmet MTO page I think Gerard is focus more specifically on the private bank mix, but.
Speaker Change: Sure.
John F. Woods: I would say.
John F. Woods: Yes.
It will build over time the fee percentage as we kind of get the wealth cross sell but.
John F. Woods: We should at least be at kind of where we are today at $75 25, and then I think there's kind of upside from that over time.
John F. Woods: And I do think the spread on the private bank assets is very significant today, given the high percentage of low cost deposits in there we haven't really seen the loans come on in size, yet, but generally capital call lines tend to be priced with a nice return and.
John F. Woods: I think some of the other business lending and he locks and things that were maintaining our price discipline and achieved a good spread there as well. So I think if you. If you looked at kind of mature private banking models to have a 20% to 25%.
John F. Woods: Return on equity is is realistic I don't know Brendan if you want to add to that at all I think it's well said so I'll repeat it I just would reiterate that I think the performance in Q4 is in line with what we would have hoped for in terms of the financial profile to drive.
John F. Woods: That type of return over time.
John F. Woods: More loan growth on the com.
John F. Woods: And a lot of it will come down to our ability to drive wealth at scale and recall are targets and of 2025, our 11 billion and deposits 9 billion in loans and 10 billion in AUM. So if we deliver that profile and kind of the expense composition and the profitability profile. We're seeing so far is aligned with that that return.
Speaker Change: So yes.
Speaker Change: We're going to work hard to deliver it in.
Speaker Change: Hopefully our performance from Q4 sustained in the first half.
Speaker Change: Very good and then following up on Bruce maybe some thoughts on them from your.
Speaker Change: Prospective on what we might see and Theres Basel III end game, obviously theres a lot of talk about scaling it back and maybe it's going to be a delayed implementation because of all the changes there is a big focus as you know as we all know on the operating risk in the capital markets businesses, but for the regional banks it seems.
Speaker Change: It's more the numerator, including no unrealized bond losses in the available for sale portfolio.
Speaker Change: Any thoughts from you.
Speaker Change: Citizens, how you might benefit from a scale back of what was initially proposed and what will be the final proposal.
Speaker Change: Yeah, I would I would say that for <unk>.
Speaker Change: Banks of our size the things that we focus the most on have been <unk>.
Speaker Change: <unk> increases to certain.
Speaker Change: Lending activities that.
Speaker Change: Would potentially.
<unk> to supply the appetite to lend in those areas because it wouldn't it would erode the economics, so things like.
Speaker Change: Mortgage lending to lower income people or a credit card lines, attracting capital and small business lending attracting more capital I think those flaws in the proposal had been well chronicled.
Speaker Change: Even though they don't result in a meaningful or WH inflation for us I mean.
Speaker Change: Stewards of the U S economy, and we'd like to see those things but.
Speaker Change: Just it.
Speaker Change: Thats been for kind of banks our size I think the main thing at top of the list I think the answer.
Speaker Change: Operational risk.
Speaker Change: The kind of increases effect, the bigger banks more but.
Speaker Change: Nonetheless, they seem to have a fairly big thumb on the scale and so that likely I think we will have a rethinking maybe those come down to some extent that would benefit everybody, but probably the big banks more than things like ourselves.
Speaker Change: Maybe just to add just a quick add to that is is that even if it had gone even if the Basel III and gain had gone through as initially proposed a very modest impact from a <unk> standpoint on us and as it relates to Aoc I as we mentioned earlier.
Speaker Change: Are you expecting that likely survive, but in our case, we are we're at 9% by deducting the Aoc I opt in and that's and that's an incredibly strong number. So we sort of think about what's going on there is really behind us and really in the run rate. If you will when it comes to that I think that's a good point that John just raised.
Speaker Change: Gerard is that given.
Speaker Change: Given the strength of our capital position, both pre and post a OCI, we can absorb any of these regulatory capital impacts it but.
Speaker Change: Really not worried about them many of our peer banks are still kind of catching up and getting in position and having to kind of hold back on capital distribution, which is really not something that we're worried about given our capital strength. So.
Speaker Change: We're more able to trying to play offense and not have to play catch up which is a good position to be in.
Speaker Change: Absolutely in fact, Bruce do you bring up a good point in your <unk>.
Speaker Change: Guidance on the medium term for the total company legacy core.
Speaker Change: You see a 15% to 17% you guys pointed out significant share repurchases should we interpret that to be a.
Speaker Change: Combined dividend payout and buyback ratio of a 100% of earnings and then once we get the final rules and we're all set to go is that a fair number to put for you guys. Because you are well capitalized you. That's right. If you go back to the time of the IPO.
Speaker Change: Number has been over 100 and under 100 and all over the place, but if you just looked at like a 10 year average almost 10 years, it's about 75% and so having a.
Speaker Change: <unk> capital to actually grow your business.
Speaker Change: Lend to customers do you have to.
Speaker Change: Certainly work that into the equation, but.
Speaker Change: To the extent.
Speaker Change: John stated priorities dividends number one using capital to support organic growth principally in the loan book and then repurchasing shares I think if we get our returns into that level will be returning.
High levels of our earnings back to shareholders, both through the dividend and through consistent share repurchases and we shouldn't you shouldn't be viewed as a capital return story.
Speaker Change: We had a 95% capital return.
Speaker Change: Performance in 'twenty three so it's in that in that 75 to 100 range over time.
Thank you I appreciate the color.
Yep.
Speaker Change: And your next question comes from the line of Milan <unk> with Morgan Stanley. Your line is now open.
Speaker Change: Yeah.
Milan: Hi, good morning.
Milan: Just a follow up to that.
Down beta question on deposits.
Milan: <unk> talked about how commercial deposit rates are coming down or would come down quickly but.
Milan: There's likely to be some more pressure on the consumer side continuing from here.
Milan: They've talked about basically consumers still moving towards high rate of gowns and given that you do have a big core consumer deposit franchise.
Milan: Wondering what you are seeing right now and what do we expectations are on consumer behavior.
Milan: Rates come down.
Milan: Brendan you want to take that yeah sure I'll take that.
Milan: <unk>.
Brendan: Let me start Big picture, and then give you a little color in Q4 and expectations. So.
Brendan: Yeah, we've been talking for years that the investments we've made in transforming the consumer deposit base have truly been.
Brendan: Transformational for our performance and I think that's what we're seeing here now that our consumer book is performing.
Brendan: <unk>.
Brendan: At a worst case peer like but certainly there are signs that we may be outperforming peers. When we look at benchmarking our DDA balances were almost 300 basis points better than peer average this year or last year, rather in 2023, and our net deposit growth was.
Brendan: Actually a couple of hundred basis points better than peers as well, while our betas have been modestly better. So you look at that equation better deposit growth better beta.
Brendan: Really grounded with an outperformance in DDA, that's a good place to be and I expect regardless of what consumer behavior conditions, we face in 2024 for our relative outperformance to sustain and we're seeing those signs.
Brendan: Already having said that on an absolute basis, what we saw in Q4 was a slowdown in consumer's deterioration in excess stimulus that's still.
Brendan: Going on a path of normalizing so we're still seeing.
Brendan: That continue but the pace of normalization has begun to slow and I think we should see that sustained in the first half of the year as rates start to tick down on the interest bearing side.
Brendan: Imperative dynamics haven't really shifted yet that's still fairly aggressive out there on Cds and money markets, but we believe we've got more levers than most with citizens access as a platform, where we can contain interest bearing growth on the higher cost side not sort of put.
Brendan: Contagion, so to speak into the full retail back to reprice all of our interest bearing deposits gives us a real competitive advantage and we're thinking about the private bank in some ways in a similar.
Brendan: Similar way so we've got all the tools to compete we do expect.
Brendan: <unk> curve follows as projected interest bearing deposits on the consumer side, we will start to come down as well and we're starting to think about mix.
Brendan: Mix of balances, we've got a lot of Cds that potentially can rollover here in the first part of the year that we'll be looking to have more balance and put some of those balances into liquid savings to give us more levers to manage down betas over the course of year. So all of that is to say I feel pretty good about how we are situated we're starting to see good dynamics with the.
Brendan: <unk> is expected to continue and I've got a lot of confidence that we will outperform our peers in whatever environment comes our way.
Brendan: Great.
Great. Thank you and then just to follow up on credit.
Brendan: Given the move lower in long end rates can you talk about anything you are seeing in the non office CRE portfolio like maybe in multifamily.
Brendan: How do things like the debt service coverage ratios look today versus a couple of months ago, and how do you expect that to trend given where the forward curve is right now.
Speaker Change: Yeah, I would just answer broadly that.
Speaker Change: We feel good about the multifamily portfolio its characteristics, it's relatively small loan sizes.
Speaker Change: A lot of fixed term loans good diversification geographically.
Speaker Change:
Speaker Change: So we.
Speaker Change: I think felt that loss content, there was going to be quite low, but now obviously with rates ticking down.
Speaker Change: It provides more kind of error.
Speaker Change: In terms of the distance between the debt service coverage ratio and kind of cash flows and so so we feel that.
Speaker Change: It is helpful, but we werent worried all that much previously so.
Speaker Change: Anyway.
Speaker Change: Yeah, and I would just say just tastes and add that that that is very different than general office I mean, the capital markets are still active in the context of buying and selling multifamily properties and that will just provide further tailwind of that activity is a lot of liquidity. There is liquidity there with buyers and sellers are still transacting. So it's just a very different night and day situation compare.
Speaker Change: And the general office and certainly raise.
Speaker Change: Reis, which won't have much of an impact maybe on the general office will have very much have a positive impact on the multifamily construct that was already okay to begin with okay very good. Thank you.
Speaker Change: Yeah.
Speaker Change: And there are no further questions in queue and with that I'll turn it over to Mr. Van <unk> for closing remarks, Okay. Great. Kelly. Thanks again, everyone for dialing in today. We appreciate your interest and support have a great rest of the week. Thank you.
Speaker Change: Yes.
That concludes today's conference call. Thank you for your participation and you may now disconnect.
Speaker Change: We're sorry your conferences.
Speaker Change: Ending now please hang up.