Q1 2024 Citizens Financial Group Inc Earnings Call
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Speaker Change: Good morning, everyone and welcome to the citizens Financial Group first quarter earnings Conference call.
Ellen: My name is Ellen and I'll be your operator today.
Ellen: Currently all participants are in a listen only mode.
Ellen: Following the presentation, we will conduct a brief question and answer session.
Ellen: As a reminder, this event is being recorded.
Ellen: Now I'll turn the call over to Kristen Silverberg Executive Vice President Investor Relations Christian you may begin.
Kristin Silberberg: Thank you Ellen good morning, everyone and thank you for joining us.
Kristin Silberberg: This morning, our chairman and CEO, Bruce Van <unk>, and CFO, John Woods will provide an overview about first quarter results Brendan Coughlin head of consumer banking and Don Mccree head of commercial banking.
Kristin Silberberg: 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.
Kristin Silberberg: 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.
Kristin Silberberg: Our outline for Youll review on page two of the presentation. We also reference non-GAAP financial measures. So it's important to review our GAAP results on page three of the presentation and the reconciliation in the appendix with that I will hand over to you Bruce Thank.
Bruce Winfield Van Saun: Thank you Christian good morning, everyone. Thanks for joining our call today.
Bruce Winfield Van Saun: We were pleased to start the year with a solid quarter, we continue to place strong defense through an uncertain environment.
Bruce Winfield Van Saun: Q1 ratio of 10, 6% R. L. D are at 81% our allowance for loan loss ratio of 161% and General office reserves now at 10, 6%.
Bruce Winfield Van Saun: On the P&L, we are still seeing a modest decline in NII.
Bruce Winfield Van Saun: NIM was stable at $2 91 per cent piece.
Bruce Winfield Van Saun: So you just picked up by 3% sequential quarter led by capital markets and card.
Bruce Winfield Van Saun: <unk> expenses were flat.
Bruce Winfield Van Saun: Our credit trends are in line with expectations, we repurchased $300 million of shares during the quarter as we free up capital from our noncore rundown.
Bruce Winfield Van Saun: Our guide for Q2 and full year remain consistent with our expectations at the outset of the year.
Bruce Winfield Van Saun: Our strategic initiatives are making good progress the private bank is off to a good start reaching $2 4 billion in deposits at quarter end, we expect momentum to accelerate further over the course of the year.
Bruce Winfield Van Saun: We are also focused on building out private wealth management through further investment in clodfelter, plus several imminent team lift outs.
Bruce Winfield Van Saun: Our New York City Metro initiative continues to go well with the fastest growth of any of our regions and really strong net promoter scores.
Bruce Winfield Van Saun: Our focus in the commercial bank of serving the middle market private capital and key broke verticals has put us in great position to benefit from a pickup in deal activity, which we expect to build further over the course of the year.
Bruce Winfield Van Saun: And our top nine program is being executed well, allowing us to self fund our growth investments, while keeping overall expense growth rate muted.
Bruce Winfield Van Saun: While there are still many uncertainties in the external environment.
Bruce Winfield Van Saun: We are in good position to navigate the challenges that may arise and we maintain a positive outlook for citizens over the balance of the year as well as the medium term.
Over the past decade, we've undertaken a major transformation of citizens, our consumer and commercial banking segments are positioned for success and we are now looking to build the premier bank on private bank and wealth franchise, our balance sheet has been repositioned with an exceptionally strong capital liquidity and funding profile.
Bruce Winfield Van Saun: And we are deploying our long capital more selectively to achieve better risk adjusted returns our expense base has been tightly managed with AI offering the potential for further breakthroughs lots accomplished with more to do clearly exciting times for citizens with that let me turn it over to John.
Thanks, Bruce and good morning, everyone.
Ruth mentioned the year's off to a good start first quarter results were solid against the backdrop of a more constructive macro environment, which supported an improvement in capital markets stability in our margin and credit performance that continues to play out largely as expected.
Bruce Winfield Van Saun: We continue to maintain a strong balance sheet with capital levels near the top of our peer group.
Bruce Winfield Van Saun: Excellent liquidity and healthy credit reserve position.
Bruce Winfield Van Saun: Accordingly, this positions us to execute well against our multi year strategic initiatives, including the build out of our private bank.
Ruth: Let me start with some highlights of our first quarter financial results referencing slides three to six before I discuss the details.
Ruth: We generated underlying net income of 395 million for the first quarter and EPS of <unk> 79 tests.
This includes a negative <unk> <unk> impact from the private bank, which is a significant improvement from the 11 cent impact last quarter as we start to see revenues pick up and we progressed our expected breakeven to reach 24.
Ruth: It also includes the impact of the noncore portfolio, which contributed <unk> 13 negative impact.
Ruth: While our non core portfolio is currently a sizable drag to results. It is steadily running off creating a tailwind for performance going forward.
Our notable items this quarter were 14th which primarily consists of an adjustment to the FDIC special assessment and top and other efficiency related expenses.
Excluding these notable items our underlying ROTC for the quarter was 10, 6%.
Ruth: Playing defense remains at the top of our priority list and we ended the quarter with a very strong balance sheet position with step one of 10, 6% or eight 9% adjusted for the Aoc I opt out removal.
Ruth: We also continued to make meaningful improvements to our funding and liquidity profile in the first quarter.
Ruth: Our pro forma LTR strengthened to 120%, which is well in excess of the large bank category, one requirement at 100% and our period end LDR improved to 81% from 82% in the prior quarter.
Ruth: On the funding, Brian we've reduced our period end Shelby borrowings by about one $8 billion linked quarter due to a modest $2 billion.
Ruth: We also increased our structural funding base with a very successful $1 billion to $5 billion senior issuance and another $1 5 billion dollar auto collateralized instruments during the quarter.
Ruth: And we have another $1 billion of auto issuance expected to settle this week.
Ruth: This is our fourth issuance and it was executed at our tightest credit spreads to date.
In addition, we expect to be a more programmatic issuer, our senior unsecured debt going forward.
Credit trends have been performing in line with our expectations with Encino its coming in at 50 basis points for the first quarter.
Ruth: Our ACL coverage ratio of 161 per se, it's up two basis points from year end.
Ruth: This includes a 10, 6% coverage for general office up slightly from 10, 2% in the prior quarter.
Ruth: We are well positioned for the medium term with expected tailwind to NIM that support a range of three to five to three 4%.
Ruth: Regarding strategic initiatives. The private bank is doing very well, we continue to make inroads in the New York Metro and our latest top program is progressing nicely.
Ruth: In addition, we are poised to benefit from an improving capital markets environment with our investments in the business and synergies from our acquisitions positioning us to capitalize as activity levels continue to pick up.
Ruth: Next I'll talk to the first quarter results in more detail starting with net interest income on slide seven.
Ruth: As expected NII is down 3% linked quarter, reflecting a stable margin.
Ruth: 2% decrease in average interest, earning assets given lower loan balances and day count.
As you can see from the NIM walk at the bottom of the slide our margin was flat at $2 nine 1% as the combined benefit of higher asset yields and noncore runoff and day count were offset by higher funding costs and the impact of swaps.
As expected our cumulative interest bearing deposit beta remains in the low fifties at 52%.
Ruth: And although we continued to see deposit migration the rate of migration is slowing.
Ruth: Overall, our deposit franchises performed well with our beta generally in the pack with peers.
Ruth: Moving to slide eight our fees were up 3% linked quarter given a notable improvement in capital markets and good card results.
Ruth: The improvement in capital markets reflects a nice pickup in M&A activity and strong bond underwriting results.
Ruth: Our capital markets business consistently holds a top three middle market sponsor bookrunner position and this quarter, we achieved the number one spot.
Ruth: Our deal pipelines remain strong and we continue to see positive early momentum in capital markets. This quarter with strong refinancing activity continuing in the bond market.
Ruth: In card, we had a nice increase primarily driven by the benefit of our strategic conversion of our debit and credit cards to Mastercard.
Ruth: Our client hedging business was down a bit this quarter with lower activity in commodities and FX.
Ruth: The decline in mortgage banking fees was driven by a lower benefit from the MSR valuation net of hedging.
Ruth: This decline in servicing P&L, partially offset by higher production fees as margin improved while lock volumes were stable.
Ruth: On slide nine we did a nice job managing our underlying expenses, which were stable.
We will continue to execute on our top program, which gives us the capacity to self fund our growth initiatives.
Ruth: On slide 10 period end and average loans are down 2% linked quarter.
Ruth: This was driven by non core portfolio runoff and a decline in commercial loans, you have paydowns and generally lower client loan demand our highly selective approach to lending in this environment, along with exits of lower returning credit only relationships.
Ruth: Commercial line utilization continued to decline this quarter as client remains clients remain cautious and M&A activity was limited in the face of an uncertain market environment.
Ruth: Next on Slide 11, and 12, we continued to do well in deposits year on year period end deposits were up $4 $2 billion driven by growth in retail and the private bank.
Ruth: Period end deposits were down slightly linked quarter, given expected seasonal impacts in commercial largely offset by growth in the private bank and retail branch deposits.
Our interest bearing deposit costs were well controlled up six basis points, which translates to a 52% cumulative beta.
Ruth: Our deposit franchise is highly diversified across product mix and channels about 68% of our deposits are granular stable consumer deposits and approximately 70% of our overall deposits are insured or secured.
Ruth: This attractive deposit base has allowed us to efficiently and cost effectively manage our deposits into higher rate environment.
With the fed holding steady we saw the migration of deposits to higher cost categories continues to moderate.
Ruth: And with the contribution of attractive deposits from the private bank noninterest bearing deposits are holding steady at about 21% of total deposits.
Ruth: Moving on to credit on slide 13.
Ruth: Net charge offs were 50 basis points up four basis points linked quarter.
Ruth: This includes increased commercial charge offs related to pre general office, which were in line with our expectations and retail we saw a modest seasonal improvement.
Ruth: Non accrual loans increased 8% linked quarter, driven by Cree General office.
Ruth: Continued run off of the auto portfolio drove a modest decline in retail while other retail categories were stable.
Ruth: Turning to the allowance for credit losses on slide 14.
Ruth: Our overall coverage ratio stands at 161%, which is a two basis point increase from the fourth quarter, reflecting broadly stable reserves with lower loan balances given noncore runoff and commercial balance sheet optimization.
Ruth: The reserve for the $3 4 billion dollar General office portfolio represents 10, 6% coverage up slightly from 10, 2% in the fourth quarter.
Ruth: On the bottom left side of the page you can see some of the key assumptions driving the general office reserve covers level we.
Ruth: We feel these assumptions represent a severe scenario that is much worse than we've seen in historical downturn. So we feel the current coverage is very strong.
Ruth: Moving to slide 15, we have maintained excellent balance sheet strength are.
Ruth: <unk> ratio is a strong 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 eight 9%.
Ruth: Well Theyre set one in TCE ratios have consistently been among the top of our peers and you can see on slide 16, where we stand currently relative to peers in the fourth quarter.
Ruth: Given our strong capital position, we resumed common share repurchase purchases and including dividends. We returned a total of $497 million to shareholders in the first quarter.
Ruth: 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.
Ruth: First on slide 17, we have a strong transformed consumer bank with a robust and capable deposit franchise.
Ruth: Our lending business, where we are prioritizing relationship based lending.
Ruth: At a meaningful revenue opportunity as we scale our wealth business.
Ruth: Importantly, we continue to make great progress taking deposits here with retail deposits up 20% year on year as we continue building, our customer base and New York Metro.
On Slide 18, let me update you on our progress in building a premier private bank, taking the opportunity to fill the void left in the wake of the bank failures last year.
Ruth: Our buildout is going very well and gaining momentum we are growing our client base and now have about $2 $4 billion of attractive deposits with roughly 30% noninterest bearing.
Ruth: Also we are now at just over $1 billion of loans and half a billion dollars of investments and continuing to grow.
Ruth: We just opened our newest private banking office in Palm Beach, Florida, and we are opportunistically, adding talent to bolster our banking and wealth capabilities with our clock out wealth management business at the centerpiece of that effort.
Next on Slide 19, we have built a formidable full service commercial bank, which consistently punches above its weight.
Ruth: Our multiyear investments in talent capabilities and industry expertise put us in an enviable position to provide lifecycle services to middle market mid corporate and sponsor clients in high growth sectors of the U S economy.
Ruth: In particular, we are uniquely positioned to serve the private capital ecosystem.
Ruth: As evidenced by our consistent standing near the top of the sponsor League tables, we are well positioned to take advantage of a more constructive capital markets environment and we are excited to start seeing the synergies from our acquisitions coming through in our results this quarter.
Ruth: Moving to slide 20, we provide the guidance for the second quarter.
Ruth: We expect NII to decrease about 2%.
Ruth: Noninterest income should be up approximately three 4% we.
Ruth: We expect noninterest expense to be stable to down slightly.
Ruth: Net charge offs are expected to be about 50 basis points in the ACL should continue to benefit from the noncore runoff.
Our set one is expected to come in.
Ruth: 10, 5% with approximately $200 million of share repurchases currently planned.
Ruth: We are broadening reaffirming our full year 2024 guide, we expect NII to land within the range of down 6% to 9% consistent with our January guidance with margin coming in a little better than expected offsetting the impact of lower loan demand.
The other components of PPE and are also tracking to our January guidance.
In addition, and see how those are trending in line with our expectations of approximately 50 basis points for the year.
Ruth: Our target set one ratio for 2024 is approximately 10, 5%.
Ruth: And the level of share repurchases will be dependent on our view of the external environment and loan growth.
Ruth: Given the changing rate outlook I wanted to update you on how the swaps and our noncore portfolio are expected to impact NII and NIM as we look out further in 2024 and beyond.
Ruth: We've included slide 25 in the appendix, which shows the expected swaps at non core impact through 2027.
Ruth: <unk> 2024, we expect higher swap expense to be partly offset by the NII benefit from the non core rundown.
Ruth: Looking out further we expect a significant NII tailwind that NIM benefit from the impact of noncore and swaps over the medium term given run off and lower rates.
Ruth: This will be partially offset by the impact of the asset sensitive or balance sheet, resulting in a medium term NIM range of $3 two five to three 4%.
Ruth: To wrap up we delivered a solid quarter featuring stable NIM strong fee performance led by capital markets and card tight expense management and inline credit performance.
Ruth: We have a series of unique initiatives are progressing well our consumer bank has been transformed a commercial bank is exceptionally well positioned and we aim to build the premier bank and private bank and wealth franchise.
Ruth: We enjoy a strong capital liquidity and funding profile that allows us to support our customers, while continuing to invest in our strategic initiatives.
Ruth: Given several tailwind combined with continued strong execution, we are confident in our ability to hit our medium term, 16% to 18% return target with that I'll hand, it back over to Bruce.
Thank you John and Alan Let's open it up for Q&A.
Bruce Winfield Van Saun: Thank you Mr. Vance on we are now ready for the Q&A portion of the call if you'd like to ask a question. Please press. One then zero on your telephone keypad, you'll hear an indication you've been placed into Q and maybe remove yourself from Q by repeating the one zero command.
Bruce Winfield Van Saun: And if you're using a speaker phone we ask that you. Please pick up your handset and to make sure. Your phone is on mute it before pressing any buttons again for questions, perhaps one zero at this time.
Bruce Winfield Van Saun: Our first question will come from the line of Ryan Nash with Goldman Sachs. Your line is open.
Ryan Nash: Hey, good morning, Bruce Good morning, John.
Ryan Nash: Good morning.
Ryan Nash: Hum.
Ryan Nash: Maybe to start off with some of the guidance you know you broadly reiterated can you maybe just flesh out how some of the expectations have changed particularly around NII. John I think you noted you still expect to be in the range, but what are the main drivers to get you there and what would it take to be better than the low end and just as a follow up on the margin you held it flat and at.
Ryan Nash: Sounds like it could be a little bit better how have your expectations changed relative to the two weighted at 285 and the 285 you were expecting at the end of the year. Thank you.
John F. Woods: Yes, sure I'll go out and talk to that I'd say as you may have heard in some of the opening remarks, we do expect that.
Speaker Change: Net interest margin trends have been quite good.
And so we do expect net interest margin to come in a little better maybe at the high end of that range rather than.
Speaker Change: Where we were at the beginning of the year and a lot of the drivers of that net interest margin can be it can be turned on the investments we've made and the deposit franchise over the years that are really starting to come to fruition and when you look at it deposit levels or better in the first quarter than we expected and interest bearing deposit costs are a little bit.
Speaker Change: So just and funding the overall when you look at our borrowing mix has improved significantly. So that's underpinning a lot of the net interest margin and when you combine that with the other side of the balance sheet, where you see the front book back book dynamics, playing out it's very powerful and so we're feeling better about NIM trajectory.
Speaker Change: And I think thats, what youre seeing with respect to our confidence in hitting that.
Speaker Change: Net interest income range, given the confidence around net interest margin as you get towards the end of the year as I mentioned I think previously we said our average our guide would be around two eight to 285 in that range I'd say, we're probably going to come in at the upper end of that range.
Speaker Change: Now when we look out and maybe it is.
Speaker Change: But we'll see.
Speaker Change: It plays out and then and then we will see the loan just given where loan demand has.
Speaker Change: <unk> off the year, maybe average loans, maybe towards the lower end of that original range, but those that was there.
Speaker Change: It was offset.
Speaker Change: A couple of basis points of Nam equals about one percentage point on loans. So that math just works out to be right down the middle of the fairway in terms of our guide.
Speaker Change: What could cause it to come in a little better.
Speaker Change: Continued.
Speaker Change: Execution of our strategic initiatives.
Speaker Change: If we if we see our execution kind of accelerating.
Across the private bank and our other key initiatives on the deposit side and let's see how the second half commercial rebound plays.
Speaker Change: Plays out we are expecting working capital starting to pick up in the second half, we're expecting utilization levels to pick up.
Speaker Change: We're expecting activity in general even in the M&A front and M&A finance to be part of the story in the second half and so if that starts a little earlier or it comes in a little stronger you could see us coming in May.
Speaker Change: Be towards the lower end of that original NII guide.
Speaker Change: Just add one thing Ryan it's Bruce.
Bruce Winfield Van Saun: The fact that the loan demand is a little light.
Bruce Winfield Van Saun: I think okay, given theres, a kind of look to what we're doing on the deposit side. So.
Bruce Winfield Van Saun: We're not going to chase loan growth.
Bruce Winfield Van Saun: Therefore, there was a little shrinkage in the balance sheet.
Bruce Winfield Van Saun: Run off our higher cost source of.
Bruce Winfield Van Saun: Either FHL be funding or a broker deposit funding. So we're taking full advantage of that which is helping bolster the NIM.
Other thing is with less loan growth.
End up freeing more capital and so that gives us the wherewithal to step up and continue to repurchase stock.
Bruce Winfield Van Saun: I think our stock is great value here. So we're all in on that.
Got it and thanks for all the color and just maybe maybe as a follow up just any color in terms of what youre seeing on the credit side, which seems to be tracking in line with your expectations and maybe specific to office, where we saw a jump in the losses this quarter relative to the past few maybe just some color on what's driving that was that increased severity.
Bruce Winfield Van Saun: You're frontloading.
Speaker Change: Some losses and when inevitably do you think we could be the allowance in that portfolio peaked. Thank you. Let me, let me start and then flip to dawn.
Speaker Change: But.
Speaker Change: I would say.
There is no real surprises here Ryan So we can basically see all of the office maturities we've.
Speaker Change: Scott.
Dawn: Bespoke careful handling.
Dawn: All of the significant exposures that we have and we've been working with the borrowers.
Dawn: Just to make sure that we can have a win win situation. So we can come through getting the best return on our loans and the borrowers can stay.
Dawn: With their properties through a tough environment.
Dawn: That's all going well so if you have one quarter, where the charge offs pick up $20 million in the next quarter. They go down $15 million youre going to see some modest variation around that line, but basically.
Dawn: Here's a colloquialism the pig is going through the Python.
Dawn: And it's going to take a few more quarters for that to fully work its way through but we're not seeing any any surprises which is a good thing.
Dawn: About this so damn good that maybe you could pick up no I think I think that's exactly right. We've taken our general office from about $4 2 billion to $3 4 billion. So it's actually coming down nicely and the charge offs have actually been modest.
The most of the charge offs are what were selling out of a lot of properties and doing a daylong structures and basically deciding to move on we've had quite a few pay downs also so it's not all it's not all doom and gloom, but I'd go back to what Bruce said its name by name property by property. We've got our workout teams fully involved it's kind of playing out exactly as we.
Dawn: Specced at it to be if I, if I put myself back a year and a half ago and looked at the office portfolio. There was a lot of uncertainty I think there's a lot more uncertainty now so you'll remember I've got a huge amount of absorption capacity just in my P&L for any losses that are materializing and our reserve levels for the portfolio are well above where the severity of losses to date have been so we feel we feel.
Dawn: Like what kind of work through this as Bruce said over the next.
Dawn: Few quarters begin to pick out the loss levels.
Speaker Change: And maybe John you can add to this but.
John F. Woods: In terms of where do we go from here you can see that the coverage ratio on office remains high.
John F. Woods: <unk> gone from 10.2.
John F. Woods: Reserves to 10, six but that rate of increase is slowing.
Speaker Change: And so you know we've been taking the full charge offs through the P&L and holding the reserve at high levels at some point.
Speaker Change: I'll be able to start drawing down on that reserve. So I don't want to make the call on that but just take note that that build is starting to slow and so I don't know if its maybe later this year or beginning of next year, but we will eventually get to a point, where we can start drawing down on those reserves, which will which will be good for P&L, yes I agree.
Speaker Change: With all that I, just just to add a point or two so what's built into the 10 six.
Speaker Change: You see it in some of our slide materials is an expectation of about 71% decline in property values.
Speaker Change: And that's you know that's what drives this 10, 6%.
Speaker Change: A reserve for remaining losses, which is more severe than anything we've seen historically, including the great financial recession by a wide margin exactly and I think we should also mention that just given what we've put behind us implies another 6% of losses that we've put behind us. So we got $10 six in the reserve we've we've we've.
Speaker Change: Charged off about six so you're up over 16% in terms of coverage, we feel pretty good about it and that's where we think the losses are going to play out.
Speaker Change: As Bruce mentioned the charge offs themselves maybe they peak later this year early next but we think we've got the reserves covered yet.
Speaker Change: Thanks, so much I'll go over them.
Speaker Change: Very good [laughter], Okay next question.
Speaker Change: Your next question will come from the line of Scott Cyphers with Piper Sandler go ahead.
Unknown Executive: Good morning, everyone. Thanks for taking the question.
Unknown Executive: John maybe just a thought on how much longer negative deposit migration continues and I think the prevailing wisdom is that it's slowing but just curious to hear your updated thoughts on kind of when and why are we might trough.
Speaker Change: Yes, I mean, we've been saying for a while that debt.
Speaker Change: But that things had been decelerating and I'd say.
Speaker Change: Performance. This quarter has been has been excellent and in terms of <unk>.
Speaker Change: <unk>, what we were expecting coming into the year. So.
Speaker Change: So again deposit levels overall look good DDA flows and low cost high cost migration overall continuing to decelerate.
Speaker Change: And I think you can pull we can point to if you look at where we are we were at around 21% of DTA at the end of last year at 12, 31 and that flattened out we were at 21% at $3 31, So DDA for us as it is stabilizing.
Speaker Change: <unk>.
Speaker Change: However, the low cost the high cost again decelerating.
Speaker Change: And it will continue to decelerate and what we've been indicating insights.
Speaker Change: That's going to continue.
Speaker Change: Continue until you see the first cut out of the fed which is historically, what we would expect but it's getting to the point, where it's having a diminishing impact on net interest margin and so when you elevate overall the contribution that our deposit franchise.
Speaker Change: He is delivering for net interest margin trends is excellent and we're feeling very good about the trajectory of DDA stability throughout the rest of 'twenty, four and getting back to growth because when you think about where city using product to us and the strategic initiatives that we're launching the private bank noninterest bearing is.
Speaker Change: As accretive to the overall company, where it maybe around 30% or more and so that's dragging that number out. So I think we are.
Speaker Change: Yes.
Speaker Change: Metro offers another opportunity and New York Metro as well as really good point, so that the combination of those strategic initiatives. We have some expectation of DDA flattening out and growing as you get into the to the latter latter part of the year and that underpins. The net interest margin by nicely, maybe Brendan you can add some color sure.
Brendan Coughlin: We've been talking for a couple of years now around how yes, and so much of our deposit book comes through consumer that we believe that we've transformed the book to be pure like or better and I would just reiterate that that's what we're seeing.
Brendan Coughlin: Yeah, we were up modestly linked quarter on overall deposits in our consumer book with some benchmarking that we get from a variety of sources. We believe we were number one in our peer set linked quarter on DDA, so on a relative basis.
Still have a lot of confidence that we're outperforming peers and it's demonstrating the franchise quality that we built and you look at the customer level customer deposits have actually been quite stable around 31000 per customer and the remixing of our as John pointed out is pretty dramatically slowing and I think that's kind of indicating that the COVID-19 burned down.
Beginning to really run its course so.
Brendan Coughlin: There, maybe a little bit more but we feel pretty good that we're getting kind of the.
Brendan Coughlin: And of that behavioral cycle. When you look at overall deposits on an inflation adjusted basis Theyre back to basically pre COVID-19. So I think we're kind of nearing the operating floors here for consumer given given the strength of low cost deposits that we have had relative to peers. The other application is how we're managing interest bearing deposits I do believe.
Brendan Coughlin: That we've peaked in the consumer segment in Q1, and our cost of funds and why do I believe that.
Brendan Coughlin: We had $3 billion in CD rollover in March alone that were priced around 5%.
Brendan Coughlin: Retain 75% of those as they flipped over at materially lower prices between 3% and 4%. So you start to see the tailwind is building in that you can imagine the cost of funds in the consumer segment potentially beginning to reduce we'll see how it plays out and our rates are at but I do believe we've sort of peaked here in Q1, and it's really driven.
And by the strength of our low cost performance. So we don't need to chase high interest bearing cost as a result of that so I feel really good about where we're at.
Speaker Change: Okay perfect alright, good. Thank you very much for the color.
Speaker Change: Okay.
Speaker Change: Your next question will come from the line of John <unk> with Evercore. Your line is open.
John F. Woods: Good morning.
John F. Woods: Three of them wanted to think differently. So color on the on the loan growth commentary you had a group come in at the low end of your initial expectation.
John F. Woods: For the year and you started weaker line utilization at this point could you maybe elaborate a little bit where you see some weak.
John F. Woods: It's been what pockets and where do you see.
John F. Woods: Some ultimate.
John F. Woods: <unk> to be there in terms of timing and then separately, but similar question around your deposit growth expectation I think for the full year you had said the tablet.
John F. Woods: Up 1% to 2%.
John F. Woods: Additional color you can provide there and how you're feeling around that guidance at this point.
Speaker Change: Kevin I will just start off on loans.
Speaker Change: Others can add but I mean, what we're seeing is that utilization coming in a little lower in the first quarter in that than was originally expected, but nevertheless, we still see that in the second half.
Speaker Change: The interest around putting some working capital to work and commercial.
Speaker Change: Commercial activity starting to pick up.
Speaker Change: <unk> is really going to drive that reversal of that utilization trend as you get into the second half.
Speaker Change: On the retail side of things, we're still seeing good opportunities in relationship mortgage and HELOC.
Speaker Change: And in the private bank, where we have gotten a nice start in terms of which is mostly a commercial lending drill.
Speaker Change: Driven.
Speaker Change: The amount of activity in the subscription line space.
Speaker Change: And that we see that picking up so all in.
Speaker Change: One is playing out about as expected, meaning we may be just a little bit lighter on loans.
Speaker Change: But we would expect that that would be the case and then the.
Speaker Change: Hum.
Speaker Change: To pick up in the second half will be coming out of the commercial business and private bank, maybe any other color.
Speaker Change: That's well said thought any no I think it's across the board on the commercial side in.
Speaker Change: Part of it is due to the booming bond markets, we're seeing a lot of customers access the bond market as opposed to drawdown existing lines and then I think it is a positive to it also.
Speaker Change: Not for low levels, but customers are running with lower leverage levels, because they've been concerned about the economy, we're seeing a broad and more positive view of the overall economy across really a wide swath of our client base. So that would indicate that theyre going to get more active in things like plant construction working capital growth M&A and.
So that should drive some some bounce back in the back half of the year.
Speaker Change: Anything from you Brian the only thing I would add is maybe just strategically.
Brian: Strategically that theres, a lot of ins and outs under the covers so as we've run down auto by essentially $1 billion a quarter and other noncore, it's getting replaced with Fi relationship higher returning asset growth, whether it's on the HELOC side or the private bank. So but the headline numbers you can see around our loan growth what would you have to dig into is the transformative use of capital.
Brian: That we're doing around a handful of areas that have more durable sticky revenue sources that are going to create more cross sell around fees and other things over time so.
Brian: We're pleased with how that's going and then on the.
You had a question about deposits on the deposit side of things in the first quarter.
Brian: As I mentioned before we saw we saw DDA flatten out for the first time in many corners. So that is really really good to see we also saw low costs flatten out. So overall, we were at 42%.
Brian: Last quarter in LOE costs were at 42% this quarter and low cost plus DDA. So the deposit trends from a mix perspective.
Brian: It had been favorable and from a from a quantity level of deposits.
Brian: At the end of the quarter came in higher than expected.
Brian: And that's driven by just strong execution and our strategic initiatives contributing.
Brian: As we mentioned earlier, New York Metro and private bank, along with the blocking and tackling.
Brian: That Brendan and John had been at for a number of years to invest in the franchise and so all of those investments are paying off and we do expect to see.
Brian: Deposit growth supporting our loan growth in the second half of 'twenty four.
Speaker Change: Yeah, I would just I would highlight Jon thanks for that and then.
Speaker Change: Just just one last quick piece of color is that very pleased to see the private bank.
Speaker Change: Now that said, China, two quarters, with 1 billion plus of deposit growth and.
Speaker Change: And we certainly think that that's sustainable and could even accelerate so.
Speaker Change: The ship has landed.
Speaker Change: We're off to a great start and we would expect that to continue and even accelerate.
Speaker Change: Got it alright, Thanks, Bruce and then on the capital front I didn't see that.
Speaker Change: Lumpkin in buybacks of 300 billion in repurchases this quarter.
Speaker Change: I would say in Q1 here at around 10, six or eight 9% when you dial in D. C. I S.
Speaker Change: That scenario, how do you look at the likelihood of incremental buybacks from here in terms of a penny for buybacks do you think that it could be reasonable given where you're sitting right now on the CET one.
Yes, I think I think the capital position that we've generated and have maintained is really creating a lot of flexibility and when you think about our capital waterfall.
Speaker Change: Our top priority is to put capital to work that is.
Speaker Change: For to support customers and clients that is accretive to our cost of capital over time, and that's really what we want to do and that we're expecting to do.
That's the that's what capital allows us.
Speaker Change: That flexibility.
Speaker Change: It also cushions against uncertainties and so there have been a number.
Speaker Change: We look at the macro and being at a very strong capital level to.
Speaker Change: To be there for our clients, but also to to cushion the downside to the extent uncertainties manifest is another.
Speaker Change: Houston's of a strong capital position when you get down into.
Speaker Change: You know kind of other potential uses of the capital we support our dividend of course, that's top of the list and then if we if we're left with elevated capital levels and then we're able to get it back to shareholders, which we did in the first quarter. We're planning to do that here in the second quarter and and that that flexibility will continue into the second half so as.
Speaker Change: We monitor.
Speaker Change: Loan loan demand and the macro that'll that'll play into the trajectory of buybacks in the second half and I would I.
Speaker Change: I would also just go back to an earlier comment that we.
We have I'd say, a frontloaded plants this year, because there's less loan growth in fact, theres loan contraction earlier in the year that then turns around and we start to see loan growth in the second half of the year.
Speaker Change: By definition means we need capital to support the loan growth and there'll be less capacity for share repurchases, but.
Anyway, we gave to you saw the 300 number in the first quarter John mentioned 200 in the second quarter, and then we'll see where we get to.
Speaker Change: The second half if the loan growth fully doesn't materialize, we can actually just turnaround and keep repurchasing stock.
Speaker Change: Got it alright, thanks, Chris I appreciate it.
Speaker Change: Okay. Thanks.
Speaker Change: Your next question will come from the line of Peter Winter with D. A Davidson your line is now open.
Peter J. Winter: Thanks, Good morning.
Peter J. Winter: You kind of maintain the net charge off guidance for the year, but if we assume no rate cuts this year could it lead to.
Higher net charge offs been forecasting just given kind of no relief on debt service coverage ratios or loans coming up for renewal at higher rates.
Well, what I would say on that is.
Peter J. Winter: You know that the broad credit quality is still very good. So if you look at our C&I book.
Peter J. Winter: That's in really good shape.
Peter J. Winter: Whether the pandemic and leaned our business models locked in lower cost financing, they're doing more of that now early in the year. So we don't really see hotspots, even with kind of up higher for longer scenario in C&I.
Peter J. Winter: Similarly in consumer we're still.
In very good shape, the consumers are benefiting from.
Peter J. Winter: Still strong liquidity levels with strong labor markets and so we haven't seen any adverse migrations in delinquencies or npls or anything like that so.
Peter J. Winter: That's the bulk of the loan portfolio. If you then look at the commercial real estate and the general office in particular.
Peter J. Winter: That's.
Peter J. Winter: Relatively small as a percentage of the overall loan book and I think theres potentially.
Peter J. Winter: Some trends we are watching the reports that returned to office is picking up and so maybe theres a little counter trend in office that offsets the kind of additional burden of the hire of longer but I think at the margin, it's not going to change that charge off number materially.
Speaker Change: Got it and then.
Speaker Change: I'll just I'll just add from my side, we make no assumptions in our forecast that we will get a benefit from lower rates because we just didn't know if that's our credit policy. We don't we don't go out on the future curve. We we run all our scenarios based on where rates are today. So I think you've got you've got a peak ish kind of rate environment. If it lasts another couple of quarters or even another.
Speaker Change: I don't think it's going to make a material difference to the way we forecast charge offs. The only point I would add on consumers.
Speaker Change: Our delinquency levels are actually net down year over year Q1 over Q1 led mostly by rosy, but we're seeing really no signs of stress in the book as Bruce pointed out so I feel really good and even at a higher for longer that.
Speaker Change: Unless there's a big economic shock that we're in really good shape.
Speaker Change: And then just quickly just to follow up on an opposite I guess I believe that the more than half of the maturities on office happen. This year. So do you think.
Speaker Change: Net charge offs could peak towards the end of this year or maybe early next year and then start to trend lower.
Speaker Change: It's really hard to forecast that I think they will be.
Speaker Change: The next year or late this year, probably but it depends how much we extend how the negotiations go how much capital was put into some of these transactions and working through the book.
Speaker Change: Loan by loan it's I don't have the Crystal ball say exactly when the peak is but I'll go back to what I said before is we're comfortable how it's progressing it's.
Speaker Change: That's progressing.
Speaker Change: According to our expectations.
Speaker Change: Got it thank you.
Speaker Change: Your next question will come from the line of Ken Houston with Jefferies. Your line is now open.
Ken Houston: Hi, good morning, guys.
Ken Houston: Just a question on the fee side, it's really nice to see the capital market's improvement as you had been thinking as we're seeing more broadly I'm just wondering.
Ken Houston: A couple of line items went well a couple of items kind of went backwards. Just wondering just how youre thinking about the fee progression the drivers and what's your pipeline look like relative to the the better start point here for the first quarter capital markets. Thanks.
Speaker Change: Yeah, I'll start off and then I'll just can drive jump in here, but I mean, the drivers I mean, you look at the big three for Us capital markets card fees and.
Speaker Change: In wealth Trust and investment services are all trending well and we expect to be significant contributors in 2024. So each of those businesses has had significant strategic investment.
Speaker Change: Over the years and even more recently, so it's really nice to see.
Speaker Change: The investments made in the in the capital markets business come to fruition, we had a good strong quarter in the first quarter number one in the league tables on the sponsor side.
Speaker Change: Big rebound from the fourth quarter and in early in the second quarter. The activity. The pace of activity has continued and we feel very good about how about the trends there not only for <unk>, but for the full year in the card business.
Speaker Change: We've made a strategic conversion to Mastercard and that's driving you.
Speaker Change: A number of.
Speaker Change: Positive developments, there and ended the wealth business as you know all of them.
Speaker Change: The adviser hires the quantified acquisition from a number of years ago are all coming together along with the private bank to drive those flows throughout 2024. So we're feeling quite good about about the trajectory for fees.
Speaker Change: Let's say you know to your point, Ken also that there were those three strong areas then.
Speaker Change: We had a little bit of weakness in some other areas service charges.
Speaker Change: Mortgage the global markets FX and interest rate lines were a little below our expectations. The good news there is theres nothing structural.
Speaker Change: We worry about I think we will see bounce backs over the rest of the year, which will add to our.
Speaker Change: Overall growth in our confidence that we will maintain strong fee performance for the year.
Speaker Change: Okay, Great and just one more follow up on the NII on the swaps I'm just looking at your pages 25, and 26 from the deck and it's pretty clear that you're saying the increases you've made to the swap book are all incorporated in the guidance. So.
Speaker Change: That first quarter to fourth quarter 35 million cumulative.
Speaker Change: Net interest income impact is that inclusive of everything that is both like active as of now and then we will prospectively still come on as the year progresses.
Speaker Change: Yes, it is and so what that what that is that that $35 million is made up of about $50 million, primarily driven from active swaps that are outstanding. So there's about $20 billion notional back with swaps outstanding.
Speaker Change: It grows to about $30 billion by <unk>, that's incorporated into that number but then it is offset by the positive benefit from noncore of about about call it $17 million or so or 15 to 15 to 20 million coming from from noncore and that gets you to the to the center.
Speaker Change: $35 million draw.
Speaker Change: Drag, but really when you play it out for the rest of the year again broadly net interest margin trends are coming in a little better incorporating all of our swap activity. What you see on page 25 is just the receive fixed swaps, we actually our pay fixed swaps in the securities portfolio that are offsetting this as well as of course everything thats happening in the core balance.
Speaker Change: She'd so you got to kind of think.
Speaker Change: At the at the broadest sense that NIM trends are actually coming in a little better.
Speaker Change: And then as you get out to later later years you start getting.
All of this tailwind is really baked in and you start seeing the fact that terminated swaps begin to contribute it gets to the point, where you get out into 2026 and 2027 that a majority of our Super majority. If you will of the of the tailwind or actually baked in and arent be rate dependent.
Speaker Change: But you have that right in terms of the <unk>.
Speaker Change: Components that incorporates everything on the receive fixed swap side plus noncore.
Yes.
Speaker Change: Good.
Speaker Change: Good color there Ken is I think coming into the year people were concerned about that step up that we had forward starting swaps in Q2, and then more in Q3.
Speaker Change: The guide that we're giving and our confidence in the NIM outlook incorporate that so we're able to absorb that.
Speaker Change: Cause you know higher for longer is better for the core balance sheet. We have some pay fixed swaps we did in the securities book.
So we're able to absorb.
Speaker Change: That step up in the swap book.
Speaker Change: <unk>.
Speaker Change: We continue to maintain our confidence in the NIM outlook for the year.
Speaker Change: Yes, that's a great Bruce and if I can just bring that all together so you're broadly affirm your broader guidance of down 6% down nine and we kind of know the first quarter and have the second quarter outlook. So what would be the biggest swing factors.
Speaker Change: Within that range.
Speaker Change: On all of these points that you're making about the NIM coming in better and now knowing more of this detail about how the swap to work.
Speaker Change: To me, it's really volume would be the keys to where we.
Speaker Change: Land in that range so.
Speaker Change: Do we actually see that strong growth in the private bank accelerating that could be strong for deposits and attractive deposit funding and then the <unk>.
Speaker Change: Spread that they're making on their loans is also very attractive so thats totally accretive to front book back book.
Speaker Change: Do we see the growth in commercial that we expect to come in and I think we do.
Speaker Change: Based on our pipeline and our conversations with our customers and also a feeling that.
Speaker Change: The sponsor community right now theres been a lot of pull forward in refinancing, but I think youre going to start to see some more new money deals in the second half of the year.
Speaker Change: So I think those volume factors will have a big impact, but the way, we kind of see it looking out the window today.
Speaker Change: Highly confident.
Speaker Change: You know that those things will materialize I don't know John if you want to add anything no I agree with all that I'd say I'd say that the even with a little bit of.
John F. Woods: Lighter loan demand, we still think that range is good you know maybe it becomes out of at the higher end versus lower end, but I mean, I think that's what that's the swing factor.
John F. Woods: All the other components of the balance sheet are playing out well our outlook for deposit mix and funding mix.
John F. Woods: This is underpinning the net interest margin I would hasten to add that those pay fixed swaps that we added last quarter.
John F. Woods: And <unk> and also in <unk>.
John F. Woods: I have really driven really nice uptake in the.
John F. Woods: The securities yields do you see the securities yields up almost 40 basis points in the first quarter and that's offsetting that is a huge.
John F. Woods: Our balance sheet.
John F. Woods: And that's that's that's a big driver and then I should.
John F. Woods: Also make clear that the core balance sheet.
John F. Woods: It's contributing as well, where we're seeing front book back book on the loan side that you know is in the range of 300 basis points in the first quarter and you're getting front book back on the Securities book of around 200 basis points. So.
There are good dynamics in the core balance sheet and all of the swaps are baked in.
Speaker Change: Okay. Thanks, Paul.
Speaker Change: You said, we could come in at the higher end I think he meant the better and yes, sometimes too.
Speaker Change: Just for everybody's clarity at that point.
Speaker Change: Okay.
Speaker Change: Yeah.
Matt O'connor: Your next question will come from the line of Matt O'connor.
Matt O'connor: Pardon me I'm, having technical difficulties. Your next slide will come to your next question will come from the line of Matt O'connor with Deutsche Bank. Your line is now open.
Matt O'connor: Good morning, most of my questions have been answered, but I'm curious when you talk about.
Matt O'connor: Kind of a medium term net interest margin what are your thoughts on the size of the balance sheet and I guess, specifically like do you think the overall balance sheet will grow.
Matt O'connor: Or is there you know the remix thing clearly you're running off the non core book around the private bank.
Matt O'connor: But do you envision kind of net balance sheet growth as you look out the next few years. Thank you.
Speaker Change: Yeah, I'd say that we do expect the balance sheet to grow.
Speaker Change: I think we we do have a balance sheet optimization program, that's turning over a certain portion of the portfolio, but when you look at the Grand total.
Speaker Change: The initiatives that we're putting in place you can I think you see interest earning assets.
Speaker Change: We'll be growing in the second half of the year and as you get out over the medium term so.
Speaker Change: I think that we have the opportunity to optimize and grow.
Speaker Change: And.
Speaker Change: That's our expectation, yes, I would say they kind of flex point is kind of middle of the year. When we have done a lot of that heavy lifting on the repositioning and then we start to see the private bank growth in commercial banking as we discussed started to kick in so we should see net growth already in the second half of the year and then kind of looking out 'twenty.
Speaker Change: 5% to 27.
Speaker Change: We would expect.
Speaker Change: The strong economy that we could get back to reasonably strong growth rates again, being selective where we play focusing on primary relationships and privacy, but theres. No reason, we couldn't grow back at nominal GDP. The way we did for many years before we hit the pandemic.
Speaker Change: That plays into math.
Speaker Change: The delivery of positive operating leverage which is part of how you get your return on equity up and so that's our that's the model we'd like to get back to us.
Speaker Change: Got it thank you.
Speaker Change: Okay.
Speaker Change: Your next question will come from the line of Gerard Cassidy with RBC. Your line is now open.
Speaker Change: Hi, Good morning. This is Thomas <unk>, calling on behalf of Gerard.
Thomas: Circling back to capital deployment quickly you guys were pretty busy in 2023 in terms of strategic actions can you update us on how you're thinking about further investment opportunities for the franchise and how you guys prioritize organic growth versus team lift outs or even outright M&A.
Thomas: Yeah.
So I'd say that right now we have a very full plate in terms of the things that we're investing in the organic growth initiatives. We have so I would not we're not.
Thomas: Really looking much it inorganic.
Thomas: <unk> are opportunities and so I want to just stay focused on great execution, there's a big payoffs for forgetting these initiatives right and they're all kind of upon the trend line.
Thomas: I would say our team lift outs, you've mentioned is something that we are hinting at this point because.
Thomas: While we have the private bank in place and we have kind of Klarsfeld as part of our private wealth complex, we need to scale up our private wealth capabilities.
Thomas: And to a large extent.
And so we.
Thomas: We are having discussions with teams and.
Thomas: You can spend.
Thomas: Watch this space because I think you'll you'll start to see us build that part of the business out.
Thomas: But again it'll be prudent and we'll treat them like they're kind of M&A transactions that are accretive and they fit our strategy and they are good cultural fits.
Thomas: That's kind of the only thing I would say that we're looking kind of outside and to some extent that's organic you could argue whether that's organic or whether it's acquisition.
Thomas: Using the same acquisition lens on knees as if they were small deals or Brendan if you want to fit any color on that maybe two quick points. One is that I just said the interest and citizens from a wealth management perspective is at a high like we've never seen before so we're talking to some of the very best.
Thomas: Managers across all the big brands in the United States and so we're being we're going to be very selective but.
Thomas: The interest in what we're doing here is quite unique and distinctive so we expect to.
Thomas: Board, some top talent and really give a boost to our wealth strategy at the point around capital that you mentioned, though just to even though we're mentally potentially thinking about the return metrics like we would in M&A deal keep in mind that our.
Thomas: Lift out or what we do with the private bank really is a very de minimis impact on capital and so that's why when you look at when we talked about the breakeven of the private bank being second half of this year, it's really just eating through the expense guarantees and getting the revenue throughput. So it has a very de minimis impact on capital and the same will be true on wealth lift outs, where the team.
Thomas: So we bring on board it will be much more of a expense guarantee mindset and getting them through their revenue curve versus having any real material impact on our capital.
Thomas: Okay. Great. That's helpful color. Thank you and then just separately on loan growth C&I demand has obviously been pretty tepid.
You know pretty healthy growth in the economy as measured by real GDP do you think that lack of C&I loan demand is being driven by just general customer caution or are you guys seeing more competition from non bank players like the private credit market and others.
Thomas: Yeah, I think it's just a general caution about.
Thomas: What's going to happen in the economy.
Thomas: What's going to happen with rates.
Thomas: And I think most of our companies have had good years, but there are still expressing caution. So we're actually not losing business to private care of it. It's interesting we're actually it's coming the other way because there's been opportunities to.
Thomas: Take out.
Thomas: Loans that are out with private credit and move them over to the bank syndicated lending market.
Thomas: Refinance those.
Kind of locked in lower cost financing. So that's been a big part of the story here in the first quarter and it's continuing into the second quarter, but then again I think thats right I think the area that we see private credit most actavis in the leveraged buyout market, which we don't hold a lot of that on our balance sheet anyway. So they are a source of.
Thomas: <unk> for us so we've actually done a couple of deals in the first quarter, where we've distributed into the private credit market. So it doesn't have a balance sheet impact that helps drive some of our feedlots.
Speaker Change: Okay, great. Thank you for taking my questions.
Speaker Change: Okay.
Speaker Change: Your next question will come from Rod Pardon me in the line of Dave Rochester with Compass point. Your line is now open.
Dave Rochester: Hey, good morning, guys.
Dave Rochester: Earlier, you mentioned that.
Dave Rochester: Flows were a major driving swing factor of NII Guide I know you mentioned expecting a little less loan growth. This year, but you mentioned, possibly hitting the better end of that range. If for whatever reason net loan growth doesn't materialize in the back half in C&I growth only ends up filling in for the run off that you're expecting.
Dave Rochester: Can you still hit that in our guide for the year.
Dave Rochester: Yep.
Dave Rochester: I would say that we're still confident in the range and so.
Dave Rochester: If things break our way we could be at the better side of that range. If they don't we could be at the lower end of that range. So I'd still trying to use that as the guardrails you'd have to have a kind of.
Quite a bit of deviation from expectation to fall outside of that range, yes, great and just to reiterate just to reiterate that point, what we've been saying is that we have an expectation that will come in at the better end of the range for net interest margin base.
Dave Rochester: Based on the trends that we're seeing in our performance we were able to generate in the first quarter. So you would see us being at the upper end of that range, maybe a tad better.
Dave Rochester: Net interest margin, that's I'll say, the fact that theres. Some lighter loan demands that we're also seeing that you put those together and we're right down the middle there in terms of that range and we have got.
Dave Rochester: Back to the point, Bruce just made and that's our base case now that we're updating and there could be puts and takes to that depending upon the volume point that Bruce made earlier.
Bruce Winfield Van Saun: Perfect Alright, Thanks, Scott.
Bruce Winfield Van Saun: Okay.
Bruce Winfield Van Saun: Your next question comes from the line of David Conrad with K B W. Your line is now open.
David Conrad: Hey, good morning, sorry, if I missed this earlier, but just kind of drilling down on the NIM discussion just looking at this quarter I was curious on C&I yields dropped around 36 bps quarter over quarter I didn't think this was a heavy swap.
David Conrad: Onboarding this quarter, but just curious where we're looking at that maybe in the next quarters before those swaps come on in the third quarter.
Speaker Change: Yeah, I mean didn't really what's going on as you you you you hit it I would say just broadly I would try to make the point that all the swaps are incorporated into the NIM guide.
Speaker Change: And when you look at the underlying fundamentals of the loan book.
Speaker Change: Front book back book is driving an increase in loan yields ex swaps. So that's the first point as it relates to when you pull the swaps together from an accounting standpoint.
Speaker Change: Why there is a negative impact from our swap standpoint is that there was a mix shift we had the swap swap notional didn't change much but we had some maturities at higher receipts being replaced by some forward starters coming in at lower overseas and that overall that that net receive rate fell.
Speaker Change: Fell in the quarter and that's why you ended up with with that negative impact just on that line itself, but again.
Speaker Change: Net interest margin was flat for the quarter and when you put it all together with all the components.
Speaker Change: We had quite a strong net interest margin.
Speaker Change: Performance, even incorporating that swap drag.
Speaker Change: Yeah, I agree and then you talked about the Securities book.
Speaker Change: So at the front book back book, and then the pay floaters come.
Speaker Change: Coming out, but just curious your outlook for the growth of the Securities book.
Speaker Change: Going forward.
Yeah, I mean, I think we've gotten to the point, where we had.
Speaker Change: The liquidity build late last year and Thats Thats basically.
Speaker Change: Largely done and so where you see the securities book right now as a percentage of overall interest, earning assets is about where it will be over time.
Speaker Change: As we grow loans will probably grow securities and cash.
Speaker Change: On a similar mix basis from a volume standpoint.
Speaker Change: <unk> of cash and securities to overall interest, earning assets as at the end of the first quarter is about where it will be for the rest of the year and I would I would hasten to add that.
Speaker Change: When you look at that that's reflective of our deposit franchise and being being primarily consumer and having a much higher proportion of insured secured.
Speaker Change: Insurance secured.
Speaker Change: Deposits than most peers and and then you if you if you crank it all through the way the fed looks at standardized category, one banks, our LCR incorporating all of that at 331 was 120%.
Speaker Change: She is incredibly strong from a liquidity standpoint and.
Speaker Change: And Thats plays through based upon the balance sheet mix overall, including cash and securities.
Speaker Change: Perfect. Thank you.
Speaker Change: Yes.
Speaker Change: Your next question comes from the line of Martin Ghazaliyah.
Ebrahim Huseini Poonawala: With Morgan Stanley go ahead.
Ebrahim Huseini Poonawala: Maybe as a follow up to the last question is there any change in how you're thinking through positioning in the medium term with the expectation for two rate cuts coming through.
Ebrahim Huseini Poonawala: So.
Ebrahim Huseini Poonawala: So with loan growth being a little bit weaker right now deposit growth being pretty solid as you noted.
Ebrahim Huseini Poonawala: Are you willing to put on a little bit more duration on the security side and separately has it got cheaper, but but in some downside protection on NIM as you look into 2025 and 2026 and is that something you are considering right now.
Speaker Change: Yeah, I would say.
Speaker Change: On the security side, I'd say, there's a couple of objectives being addressed.
Speaker Change: And it's the interplay between capital and liquidity and interest rate risk management. So what we did over the last couple of quarters as well.
Speaker Change: It's $7 billion of pay fixed swaps, that's paid off quite nicely because of our view that rates were likely not to be down.
Speaker Change: Or whatever however, many cuts we thought they were at the beginning of the year 567 cuts. We thought that was probably a little overcooked and so we put on those pay fixed swaps in part related to that but in part related to the multi year.
<unk> objective to reduce the duration of the securities book, given how it will likely be treated from a capital standpoint, and so both of those objectives.
Speaker Change: Came into play when we shortened the duration of the Securities book, which right now is about three eight years, we're likely to continue to shorten the duration book of that Securities book over time.
Speaker Change: And I would get down to something closer to three or thereabouts.
Speaker Change: And so that's really the driver there but.
Speaker Change: But you've got to look at the overall balance sheet and from an overall balance sheet standpoint, it made sense to add a little asset sensitivity.
Speaker Change: In the fourth quarter, and the first quarter, and we had $3 31, and we remain an asset sensitive balance sheet.
Speaker Change: When it comes to adding downside protection in the out years, we do note that we have a significant drop off.
Speaker Change: Receive fixed swaps when you get out into 2026 and 27.
Speaker Change: And I.
Speaker Change: I think entry points matter. So if rates continue to stay elevated and we think theres value. There you know we want to be careful that we don't give up our upside that the C&I loan book provides us.
Speaker Change: And we'll do that when the entry points are attractive in terms of that trade and locking it in in and in general that would be consistent with something that would be north of 4% of a receive rate.
Speaker Change: Out into 'twenty six 'twenty seven and we'll you know we'll be opportunistic as the rate environment plays out in terms of how we continue to protect the balance sheet over the medium term.
Speaker Change: Got it very helpful.
Speaker Change: And then.
Speaker Change: This morning, one of your peers suggested that they're seeing.
Speaker Change: Corporate behavior shifting from an IV to I b.
Are you seeing some of your corporate clients stake take another look at optimizing their niv balances in the higher for longer rate environment.
Speaker Change: I think it's pretty much run its course at this point, we've had we've had a little bit of a shift in the book, but it's really slowed down I think I think that the.
Speaker Change: Clients have been.
Speaker Change: Pretty opportunistic in terms of taking advantage of higher rates. So I'd say, our book and our mixes it's pretty stable right now and we expect it to stay here.
Speaker Change: Yes, I'd say overall, you saw our D D. A stable at 21% at the end of <unk>, 21% at the end of <unk>.
Speaker Change: That's important because that's the first time this has happened in a while and so that stability. We expect to continue as you get throughout the rest of the year and actually see growth as we mentioned earlier based on other strategic initiatives that in the private bank contributed.
Speaker Change: Great. Thank you.
Speaker Change: Okay.
Speaker Change: Alright, there are no.
Speaker Change: Yeah.
Mr. Van: There are no further questions in the queue and with that I'll turn it back over to Mr. Van <unk> for closing remarks.
Van: Okay, well, thanks, everyone for dialing in today.
Van: I appreciate your interest and support for citizens have a great day.
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Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: Yeah.
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