Q4 2024 Citizens Financial Group Inc Earnings Call
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Ivy: Good morning, everyone and welcome to the citizens financial group fourth quarter and full year earnings Conference call. My name is Ivy and I'll be your operator today currently all participants are in a listen only mode. Following the presentation. We will conduct a brief question and answer session. As a reminder, this event is being recorded I will now turn the call over to 11, Thomas Senior Vice President.
Thomas: Investor Relations you may begin.
Thank you Ivy good morning, everyone and thank you for joining us I'm stepping in today for our Christian who is out sick.
Speaker Change: First this morning, our chairman and CEO, Bruce Van <unk>, and CFO, John Woods will provide an overview of our fourth quarter and full year results Brendan Coughlin head of consumer banking and Don Mccree head of commercial banking are also here to provide additional color.
Speaker Change: We will be referencing our fourth quarter and full year earnings presentation, located on our Investor Relations website.
Speaker Change: After the presentation, we will be happy to take questions.
Speaker Change: Comments today will include forward looking statements, which are subject to risks and uncertainties that may cause our results to differ materially from expectations.
Speaker Change: These are outlined for your review on page two of the presentation.
Speaker Change: We also reference non-GAAP financial measures. So it's important to review our GAAP results on page three of the presentation and the reconciliations in the appendix.
Speaker Change: And with that I will hand, it over to Bruce.
Bruce: Okay. Thanks Charles.
Bruce: Good morning, everyone and thanks for joining our call today.
Bruce: We were pleased to finish the year with a strong quarter as our financial results reflect good sequential revenue growth led by NIM expansion in capital markets fees, a positive operating leverage favorable credit trends and a robust balance sheet across capital liquidity and L. D. R.
Bruce: We are still seeing subdued loan demand, but we more than compensated for that with 10 basis points of NIM expansion that drove sequential NII growth up 3%.
Bruce: <unk> grew sequentially by 6% paced by capital markets and mortgage.
Bruce: Expense growth was 3.5% paced by hiring and private bank private wealth and commercial middle markets, We still delivered positive operating leverage of around 50 basis points.
Bruce: Our credit trends are looking favorable with N. P. A is down sequentially criticized assets trending down and no surprises and charge offs as we work through our CRE office portfolio.
Bruce: Given these trends and the contraction in loan balances, we added 162 million to our provision against the $189 million in charge offs and our ACL to loan ratio increased slightly to 1.62%.
Bruce: We currently expect that the credit trends should continue and that we should be able to see credit costs come down in 2025.
Bruce: We continued to repurchase shares in the quarter 225 million, bringing the full year total to 1.15 billion.
Bruce: We purchased 28 million shares in 2024 or 6% of the beginning of year balance.
Bruce: With respect to execution of our key initiatives. We made further progress across the private bank, Our New York City Metro strategy, serving private capital.
Bruce: And growing our payments business.
DSO efforts saw a reduction in noncore loans up $4 2 billion in 2024.
Bruce: The remaining balance of $6 9 billion.
Bruce: We are looking for opportunities to accelerate the rundown so stay tuned on that in.
Bruce: In addition, we made further progress in exiting low returning relationships and see it.
Bruce: And then reducing overall CRE loans.
Bruce: Our top nine program was executed well delivering 150 million in annualized Q4 run rate benefits and we've launched top 10 with a target benefit of $100 million.
Bruce: The private bank private wealth progress it's worth spotlighting.
Bruce: The business continues to ramp up nicely growing their customer base and hitting all financial targets. We reached <unk> 7 billion in deposits $3 1 billion in loans and $4 7 billion in AUR and we were profitable in the quarter.
Bruce: We are confident in our ability to meet or exceed our goal of having this business be 5% accretive to our bottom line in 2020 five.
Bruce: We added a banking team to southern California in Q4, and this morning, we announced an additional wealth team in South Florida.
For the full year 2024, we hit most line items in our beginning of year Guide that's shown on slide 34, with the exception of balance sheet volume.
Bruce: That said, we were able to repurchase more shares given the lack of loan demand.
Bruce: Turning to our 2025 outlook, we expect solid growth in NII, given further NIM expansion and the resumption of modest net loan growth.
Bruce: So you should grow nicely paced by capital markets and wealth.
Bruce: Confidence in this revenue outlook. So it will step up investments in Opex and Capex to support key growth initiatives.
Bruce: We anticipate attracted positive operating leverage for the full year of around one and a half per sub.
Credit costs are projected to improve year on year, and we expect to see reserve releases continue throughout the year.
Bruce: We will manage our set one ratio above the high end of our 10 to 10, 5% range given the ongoing uncertainty, but we expect to continue with regular share repurchases.
Bruce: We have included some slides on our medium term outlook and how the drag from our legacy swap portfolio will dissipate with time.
Bruce: We remain confident in our ability to achieve our medium term, 16% to 18% ROTC target.
Exciting time for citizens our strategy rests on a transformed consumer bank the best positioned superregional commercial bank and the aspiration to have the Premier Bank private bank.
Bruce: We've made steady progress and will continue to execute with the financial and operating discipline you have come to expect from us.
Bruce: I'd like to end my remarks by thanking our colleagues for rising to the occasion and delivering a great effort in 2024.
Bruce: We can count on you again this year, so with that let me turn it over to John.
John: Thanks, Bruce good morning, everyone.
John: As Bruce indicated we delivered results in 2024 that were broadly in line with our expectations at the beginning of the year.
<unk> was our trough quarter <unk> was a nice bounce back and we are well positioned for growth in 2025.
John: On slide six you can see that we delivered underlying EPS of $3.24 for 'twenty 'twenty, four which includes a 45 cent drag from non core and a net <unk> investment in the private bank.
John: Full year ROTC was 10, 5%, which was 12% excluding these items.
John: Despite loan borrowing volumes being lower than expected given market dynamics net interest income came in broadly in line with our expectations for the year down nine 7% as we delivered a full year margin of 225%.
John: Fees were up a strong 9% led by a pick up in capital markets card and wealth fees. While expenses were managed tightly up only one 5% notwithstanding meaningful investments to support the build out of the private bank and private wealth.
John: We also managed well through an uncertain credit environment, maintaining strong reserve coverage levels with credit losses coming right in line with our expectations at the start of the year.
John: The transformation of our deposit franchise since our IPO became clear in 2024, as we manage through a very competitive environment against the backdrop of rapidly rapidly rising rates.
John: Our deposit cost performance was better than the peer average a meaningful improvement compared with prior rate cycles and.
John: And with the latest fed rate cuts, we have aggressively lowered deposit costs and <unk>.
John: Importantly, our financial strength has allowed us to execute well against our strategic initiatives, providing momentum as we head into 2025.
John: We've opportunistically built out the private bank, which has raised $7 billion.
John: Deposits through the end of the year and as expected became profitable in the fourth quarter.
We also continue to make solid progress building out our New York City Metro franchise.
John: We are investing in our payments platform and we are solidifying our commercial middle market coverage with investments in key expansion markets that complement our private banks success.
John: I'll start with some of the highlights of our fourth quarter financial results referencing slides five and seven before we get into the details.
John: We generated underlying net income of $412 million EPS of <unk> 85 cents and Rossi of 10, 7%.
John: This includes a negative <unk> 10 impact from the noncore portfolio, which will continue to steadily runoff, creating a tailwind for overall performance going forward.
John: As I mentioned, the private bank contributed to earnings in the fourth quarter, adding about a penny to EPS.
John: Importantly, we've returned to positive sequential operating leverage in the fourth quarter with a nice lift in NII and fees, even as we made important investments in the private bank and private wealth and added commercial middle market bankers in key expansion markets.
John: We ended the year in a very strong balance sheet position with set one of 10, 8% or nine 1% adjusted for the ASC I opt out removal.
John: Pro forma category, one LCR of 119% and an ECL coverage ratio of 162% up from $1 six 1% in the prior quarter.
John: This includes a robust 12, 4% coverage for general office up from 12, 1% in the prior quarter.
John: We also executed $225 million in stock buybacks during the quarter.
John: Next I'll talk to the fourth quarter results in more detail starting with net interest income on slide eight.
John: NII was up three 1% linked quarter, reflecting a higher net interest margin and slightly lower interest earning assets.
John: As you can see from the NIM walk at the bottom of the slide our margin was up 10 basis points to 2.87%, reflecting the benefit of noncore run off fixed rate asset repricing and better deposit and loan betas, partially offset by our net asset sensitive position as rates declined.
John: With the fed cutting rates through the end of the year, we executed our downgrade playbook, reducing rates ahead of the cuts and bringing down higher cost deposit balances.
John: Our cumulative interest bearing deposit down beta was about 50% better than our initial expectation.
John: Moving to slide nine.
These were up five 6% linked quarter, primarily driven by an improvement in capital markets.
John: Capital markets saw strong loan syndication activity and a pick up in M&A, which benefited from seasonality and a general improvement in the environment.
John: Debt underwriting was lower coming off a strong third quarter.
John: Mortgage banking fees reflect higher MSR valuation with overall operating results remaining stable.
John: The wealth business delivered a solid quarter with good momentum and AUM growth from the private bank, but that was offset by lower transactional sales activity.
On slide 10 expenses were up three 5% linked quarter, primarily reflecting hiring for the private bank and private wealth Buildout and commercial middle market bankers to complement our private bank footprint in southern California, and Florida.
John: Our top nine program achieved a $150 million pre tax run rate benefit exiting the year, which is above our original target of $135 million.
John: And we have launched our top 10 program, which is targeting $100 million and run rate efficiencies by the end of 2025.
John: On slide 11 average loans were down slightly in period end loans were down one 7% linked quarter.
John: This reflects the noncore portfolio runoff of approximately $900 million decline in commercial loans, given paydowns in C&I and CRE against the backdrop of low client demand.
John: And lower line utilization.
John: The private bank continues to make nice progress with period end loans up about $1 1 billion to $3 1 billion at the end of the year.
John: Next on slides 12, and 13, we continue to do a good job on deposits in a very competitive and dynamic environment.
John: Period end deposits were broadly stable linked quarter with attractive growth in retail and the private bank offset by the continued pay down of higher concentration in commercial deposits.
John: This was primarily tied to noncore loan rundown and a proactive effort to optimize the liquidity value deposits.
John: The private bank continues to add customers and grow nicely with period end deposits up about $1 4 billion.
John: The $7 billion at the end of the year.
John: Our retail franchise did a nice job raising deposits this quarter and low cost categories and importantly, we've seen strong retention of the CD portfolio turns over at lower rates.
John: We also grew noninterest bearing deposits by about $940 million linked quarter, driven by the private bank and seasonal flows in commercial.
John: Combined our noninterest bearing and low cost deposits increased to 42% of total deposits in the fourth quarter.
John: Overall, our deposit franchise continues to perform well in a very competitive environment.
John: Our interest bearing deposit costs are down 31 basis points linked quarter, which translates to a 50% cumulative down data.
John: Moving to credit on slide 14.
John: As expected net charge offs were broadly stable at 53 basis points compared with 54 basis points in the prior quarter.
A decline in C&I charge offs was offset by an increase in commercial real estate, primarily coming from the general office portfolio retail charge offs were stable.
John: Of note nonaccrual loans were down slightly reflecting a decline in commercial given the resolution of a number of general office loans.
John: Criticized loans were meaningfully lower than the fourth quarter following relative stability over the past few quarters.
We continue to make consistent progress and working out the general office portfolio with limited new inflows into work out.
John: Turning to the allowance for credit losses on slide 15.
John: Our overall coverage ratio increased slightly linked quarter to 162%, primarily reflecting the denominator effect of lower portfolio balances.
John: While we maintained strong reserve coverage for certain portfolios such as General office. Our overall reserve declined slightly in light of a broadly stable macroeconomic outlook and improving our loan mix getting the run off of non core auto portfolio and originations than retail real estate secured and commercial categories that have a lower loss content profile.
John: The reserve for the $2 9 billion dollar General office portfolio is $364 million, which represents a coverage of 12, 4% up from 12, 1% in the third quarter as the portfolio continues to produce.
John: Note that the cumulative charge offs plus the current reserve translates to an expected loss rate of about 20% against the March 2023 loan balance when industry losses commence.
John: Moving to slide 16, we have maintained excellent balance sheet strength.
John: Set one ratio strengthened to 10, 8%, which compares with 10, 6% in the prior quarter.
John: Adjusting for the Aoc I opt out removal are set one ratio was relatively steady at nine 1%. Despite the impact of higher long term interest rates on the OCI in the quarter.
John: Given our strong capital position, we repurchased $225 million in common shares and including dividends. We returned a total of $413 million to shareholders in the fourth quarter.
John: Over the full year, we repurchased 1.05 billion common shares representing $28 1 million or about 6% of our beginning of your outstanding shares at an average price of $37.35 per share.
John: Turning to slide 17, we view our overall strategy in three parts I transform consumer bank, the best positioned commercial bank amongst our regional peers and our aspiration to build a premier bank on private banking private wealth franchise.
Slides 18 to 20 provide some updates on our positioning and progress, which you can read at your convenience.
John: Note on slide 20, we've updated our private bank targets for 2025, given the success we've had to date.
John: We bumped deposits from 11 billion to $12 billion and a U N N from 10 billion to $11 billion we.
John: We adjusted loans to $7 billion, given the impact of higher rates on borrowing demand.
John: We are tracking well to meet or exceed our 5% accretion estimate to citizens bottom line in 2025.
John: On slide 21, we provide an update on some of the tremendous progress in New York since we've made a play there about three years ago with Hsbc's East coast branches and investors Bank.
John: Moving to slide 22, I will take you through our full year 2025 outlook, which contemplates a forward curve with two fed cuts one in <unk> and the other in four Q and didn't a year, where the fed fund rate fed funds rate of 4% and a 10 year treasury rate of four five to $4 75 per cent.
John: We expect NII to be up 3% to 5% driven primarily by an increase in NIM to about 3% for the year.
John: We project spot loan growth in the low single digits overall and mid single digits, excluding noncore.
John: Loan growth will be impacted by noncore runoff paydowns and more selective originations in Cree.
John: And muted commercial loan demand early in 2025.
John: We expect C&I to pick up in the second half of the year as new money gets put to work.
John: Private bank should see consistent loan growth throughout the year.
John: We expect average loans will be down roughly 2% to 3% and overall, earning assets to be down about 1%, which reflects the extent that the two H 'twenty four drops and continuing noncore runoff.
John: Noninterest income is expected to be up in the 8% to 10% range led by capital markets and wealth.
John: We are projecting expenses to be up about 4% because we are confident in our revenue outlook and want to step up our investments in growth initiatives. After a constrained 2024.
John: Excluding the private bank and private wealth the increase in expenses would be about two 6% we.
John: We have provided a walk showing the key components of our 2025 expense outlook on slide 23.
John: When you put the revenue and expense outlook together, we expect to deliver positive operating leverage for 2025 of roughly 150 basis points.
John: Our outlook for net charge offs is to trend down to approximately $650 million to $700 million or.
John: Or high Forty's in basis point terms.
John: We will continue to work through the general office portfolio and given macro trends the remixing of the balance sheet and expectations for modest spot portfolio growth, we will likely see ACL releases over the course of the year.
John: And finally, we expect to end the year with a strong set one ratio in the 10 five to $10 75 per cent range, which is above our medium term operating range of 10 to 10, 5% given the continued uncertainty in the macro environment.
John: As we monitor the market environment and loan growth levels, we will opportunistically engage in share repurchases.
John: It's worth noting that loan growth was below expectations in 2024, and we were able to offset the impact from share repurchases and less pressure on deposit costs. We would use the same playbook in 2025 if needed.
John: On slide 25, we provide the guide for the first quarter.
John: Note that the first quarter has seasonal impacts on revenue, namely capital markets fees.
John: Day, count, reducing net interest income and taxes on FICA reset in compensation payouts impacting expenses.
John: Credit trends are expected to improve and we should end. The first quarter was set one in the range of 10, 5% to 10, 75% with a good amount of share repurchases.
John: Moving to slides 27 to 28.
John: As we look out over the medium term, we have a clear path to achieving our 16% to 18% ROTC target.
John: Expanding our net interest margin is an important part of improving our ROTC, which we project to be in the three to five to three 5% range in 2027.
John: However, given our balance sheet position positioning and our asset sensitivity if that maintains an elevated fed funds rate at or above 4%.
John: This will help to deliver our NIM level at the upper end of our range or higher.
John: On slide 28, we provide a walk to our target 16% to 18% ROTC.
John: We have significant NII tailwind driven by non rate dependent terminated swaps amortization and noncore runoff, which will generate about 300 to 400 basis points of ROTC through 2027.
John: We had roughly another 100 basis points with the net impact of other dynamics such as positive fixed asset repricing the run off of legacy active swaps and the offsetting impact of our naturally asset sensitive balance sheet.
John: That puts you into the 15% to 16% range.
John: We expect to generate solid returns from our legacy core business plus the successful execution of the private bank and other key initiatives I talked about earlier, which should drive meaningful revenue growth generate positive annual operating leverage and improving our efficiency ratio, which will add another 200 to 300 basis points of raunchy.
John: We should see some benefit from credit, where we had been over providing today versus a more normal environment with charge offs improving to the low to mid 30 basis points reflective of the improved mix of the portfolio with less auto inquiry and more private bank loans and C&I.
Speaker Change: Hey, OCI impacts were providing our ROTC benefit today, which should normalize with time this impact will partially offset with share repurchases.
Speaker Change: In short, we feel very confident in our ability to achieve the 16% to 18% medium term target.
Speaker Change: To wrap up we delivered a solid performance in 'twenty 'twenty four broadly in line with expectations Importantly, we turned the corner on net interest margin delivered improving capital markets results and remain disciplined on expenses returning to positive operating leverage in the fourth quarter.
Speaker Change: We ended the year with a strong capital liquidity and credit position that puts us in an excellent position to drive forward with our strategic priorities.
Speaker Change: We are well positioned for 2025, and we remain confident in our ability to deliver our medium term, 16% to 18% return target with that I'll hand, it over the course.
Speaker Change: Thank you John Ivy, let's open it up for some Q&A.
Thank you Mr. Hanson, we're now ready for the question and answer portion of the call. At this time, if you would like to ask a question. Please UN mute your phone press star one and record your name clearly when prompted if you need to withdraw your question at any time you May Press Star two again that is star one to ask a question. Our first question will come from Scott <unk> from Piper Sandler. Please go.
Speaker Change: Ahead.
Scott <unk>: Good morning, guys. Thank you for taking the question.
Scott <unk>: Let's see John maybe one wanted to start on sort of the medium term margin outlook can you just sort of add some additional context on what gave you the confidence to bump up the top end of that medium term range to you you know basically the extra air between the $3 40, and $3 50 at the top end of the range. Please.
Scott <unk>: Yeah sure.
Scott <unk>: The main reason for that is just the outlook on rates I'd say that when you think about where are we where we were last quarter and in prior quarters. You know the fed was landing in a terminal.
Scott <unk>: Right that was well below 4% when you when we put this together previously now when you see the fed.
Scott <unk>: The bond market, just counting something closer to 4%, we basically widened the expectation of range that.
Scott <unk>: That you could see at the upper end, so 3% would be you know.
Scott <unk>: Sort of consistent with our floor of $3, two five but 4% given our asset sensitive balance sheet.
Scott <unk>: It would be more consistent with a higher number than the $3 40, we showed last quarter and.
Scott <unk>: You may recall last quarter, we said that hey, a $3 50 ish.
Scott <unk>: Or 375 fed would be consistent with with 340, but now the fed.
Scott <unk>: Could could land somewhere near four 4% and so that's that's the main reason why we well you know we raised that I think there are other reasons too I mean, just just getting you see the confidence we.
Scott <unk>: And we have growing confidence based on our performance in the fourth quarter with a very solid 10 10 basis point increase in NIM.
We've continued to Opportunistically.
Scott <unk>: Opportunistically hedge to reduce the impact of of rates falling into the future. So just just a number of.
Scott <unk>: Positive benefits that we were able to see that gave us the confidence to increase the upper end of $3 50.
Speaker Change: Gotcha perfect. Thank you for that and then separately was hoping you could help to put in a little bit more context are sort of the higher fourth quarter costs and investments I mean, certainly understand them in light of what you're building with the private bank, but just maybe curious about where you stand such that.
Speaker Change: You're confident that cost can hold you know more firm after that small additional lift that we would expect in the first quarter.
Speaker Change: Yeah, I mean, I'd say, we did we put something in our in the slide deck. There on slide 23 that you can take a look at I mean, I think in for Q4 for the full year, but in for Q.
Speaker Change: You know we've been investing in the private bank, all along and just given how well. That's performed you know that gave us the confidence to continuing to invest and maybe accelerate some investments in the private bank through team advisor and lift outs.
Speaker Change: And and and also in the commercial bank, where our where we where we're investing in our capabilities in southern California, and Florida. So a combination of those two things is what caused our expense number to it to be up a bit in <unk> and and.
Speaker Change: Maybe maybe I was wrong.
Speaker Change: Also just to add to that Scott you know for the full year, we were still on our guide.
Speaker Change: Guide range of one to one and a half and so what I would say is that a 'twenty 'twenty four given some of the built in revenue trajectory was a year where.
Speaker Change: Thank all banks, including ourselves had to be very very disciplined on expenses.
Speaker Change: And you start to see that revenue is improving the revenue outlook is improving which we saw that occurring in Q4, and we can see more visibility into revenue striked into next year than some of the things that you may be deferred that are really attractive investment cases, you start to lean in again a bit so we started.
Speaker Change: That process a bit in Q4.
Speaker Change: When you look at next year, we'll be guiding to about a 4%, but again, if you strip out the impact of private banking private wealth, which we want to continue to theres, a great opportunity there to fill that void in the market, we want to keep disciplined investing into that the rest of the bank is down at roughly two and a half per subs and so.
Speaker Change: The top program, usually provides about a 1% benefit.
Speaker Change: So we're leaning in a little bit across some attractive investment opportunities across the rest of the bank, but still the overall numbers are kind of in a position where we should have quite a bit of confidence we can deliver positive operating leverage in 'twenty 'twenty thoughts.
Speaker Change: Perfect Alright, thank you very much.
Speaker Change: Sure.
Speaker Change: Your next question comes from the line of Erika Najarian from UBS. Please go ahead.
Erika Najarian: Yes, hi.
Speaker Change: Morning.
Speaker Change: Just wanted to think about you know some.
Speaker Change: Some of the dynamics.
Speaker Change: That are more strategic than mechanical and then margin improvement John.
Speaker Change: Give us a sense in terms of you know, how you're thinking about deposit growth and the mix of that deposit growth and also with the repricing keyed into looks like and you know given that the neutral rate seems to be settling around for you know just a pacing change is it is the beta fast person and slow.
Speaker Change: Down as loan growth comes back.
Speaker Change: Yeah, a couple of comments related to that I mean, I think strategic opportunities to grow deposits.
Speaker Change: You see what we've been able to do with the private bank and we've raised our target there.
Speaker Change: Our performance in the last rate tightening cycle has been better than average.
Speaker Change: And we've seen our opportunities to grow low cost actually be better than what we're seeing in a lot of our industry peers. So so the the core retail franchise is performing extremely well the idiosyncratic opportunities in New York Metro and private bank are adding on top of that.
Speaker Change: And our commercial business is driving a DDA growth as well so.
Speaker Change: From a strategic standpoint, the deposit franchise is in an incredibly solid foundation as we head into this there's potential easing cycle I mean, I think when you. When you look at betas, we did outperform our own expectations in the fourth quarter with betas around 50%. When we were originally thinking around 40.
Based on the rate outlook, we expect that betas continue to can continue to increase so should we we went you know the the earlier beta is we did get out of the gate pretty quickly and I think later you know our our our opportunity to grow data from here, we're going to end up.
Speaker Change: Seeing our betas get to low to mid fifties, maybe by the time you get to a terminal 4%. So that you can do the math there on what the sequential data look like but feeling incredibly confident and and and the underpinning of the NIM trajectory given the deposit franchise, but maybe as Brendan.
And a little bit about deposits.
Thanks for the question Erika.
Speaker Change: Point on private and I'll talk for a minute about core retail deposits on private or low cost deposits remain around 40%. So DDA plus C. We start despite the pretty pretty healthy growth the quality of the deposit book has been very consistent and very accretive to the overall mix to citizens and we expect that well that could pull back a little bit.
Speaker Change: We expect the accretion mix to still be very strong throughout 2025, so that growth will both be in quantity at quantity and quality for the overall franchise, which is great on the retail book you have mentioned this on most every call, but the full year.
Speaker Change: Performance for the retail portfolio was very very strong against peers with benchmarks that we look at we think we're somewhere in the range of 150 basis points better than peer average low cost deposits, which is again largely DDA and seaway, our DDA book the outflows sort of stopped around August September only been flattened flattened.
Speaker Change: We saw some very modest growth in the back half of <unk>.
Speaker Change: Q4, including a pretty sizeable tick up in <unk> in the back half of Q4. So the strength. There is still very good. We believe we are index, probably number one in the regional bank peer set in retail banking core DDA growth for the full year 2024, and there's nothing that I see that suggest that we won't continue to outperform.
Speaker Change: Peers on a relative low cost deposit performance. The other thing I would say is.
Speaker Change: We've been very very successful in our CD book, turning over at lower yields with high retention. So in Q4, we had about $5 5 billion in Cds in the retail book turnover with over 90% retention rate in those Cds are coming in at about 100 basis points, better and yield and so when I look at the first half of the year.
Speaker Change: Year, we've got a little bit north of 14 billion in Cds on the retail book that will also turnover so that should give us some dry powder to drive those yields lower and we expect to retain the vast majority of those balances largely in deposits with some trickling out into support for the wealth business and going into managed money and a U M, but that gives us a good amount of.
Speaker Change: As a dry powder for thinking about the first half of the year I, bringing deposit yields in the CD book that.
Speaker Change: Great.
Speaker Change: That's helpful and just secondly, just.
Speaker Change: Just a quick follow up and I just wanted to ask a bigger question of Bruce one John.
Speaker Change: All those elements and the fact that youre entering a tea Lady says it on.
For the year.
Speaker Change: And you have a 3% net interest margin guide for the full year does that mean, they exited somewhere between three to 310 am.
Speaker Change: And if so where is that piece you up for a very strong year, not just mechanically but strategically I think the question that I was getting this morning is where are we in terms of the investment horizon and with regard to the private bank.
Speaker Change: And the private wealth initiatives in other words, you're setting up for great NII grows.
Speaker Change: In 2026 and investors are wondering if you're going to continue to.
Frontload some of the investment spend.
Speaker Change: Wilson Private Bank initiative.
Speaker Change: Yeah. So just to your favorite question exit rate on NIM.
Speaker Change: I would bump that up a little bit and say probably more like 305 to three times.
Speaker Change: So that's not.
Speaker Change: Just in terms of how we think about the private bank.
Speaker Change: You know we've launched this back in the middle of 'twenty three.
Speaker Change: And you know.
It's been a tremendous effort to get folks in place and support them appropriately and have them transitioning customers and it's been a really a great success story is certainly not the finished article more to do to get to white glove service, but feeling good about the trajectory that we're on.
Speaker Change: But I wanted to just make it clear, though that we're very committed to delivering our financial commitments on this business. We want to demonstrate that it is a profitable business that can deliver attractive returns and were running it a bit differently than the way. It ran at first Republic. So we have some guardrails around that kind of.
Sure of the business, we want to take on and the spreads we hope to achieve et cetera et cetera.
Speaker Change: Over over.
Speaker Change: One thing that we wanted to deliver this year was to be profitable in the fourth quarter, we said we'd be profitable in the second half of the year, we got to that in August we had enough headroom that we felt confident that we could add another team in southern California. As you as you know Erika to when you bring in these private banks.
Speaker Change: <unk> teams they show up and they are all expenses initially and then over time, they transitioned and customers and then the lines cross and they become profitable. So are we still delivered a profitable fourth quarter about a penny of EPS and so when we look at next year.
Speaker Change: Depending on how fast that business is growing if we're hitting our targets there maybe opportunities to add additional teams, while still delivering the profitability of the 5% accretive to the to the bottom line and by the way that translates that we're starting to get up towards that 20% of our O G. C E target.
Speaker Change: For the business already by the end of next year. So we're keeping those guardrails in place as we grow the business, but you know, it's if there's such a big opportunity. There. There's some great people out there who want to join the platform that we have to be thinking about kind of how to fill the void in the market and really built a great franchise.
Speaker Change: I think we have that balance.
Speaker Change: Right and you can expect us to be disciplined in how we approach that and I'd like to see if we're running faster than projected that we're gonna be leaning in and adding some additional teams. The wealth teams typically are accretive right from the get go. So those we can keep doing throughout the year, it's more out of it.
Speaker Change: Private banking locations P B o's and additional teams, but we just need to fit into the overall financial but not dynamic that we're trying to deliver.
Speaker Change: Very helpful. Thank you.
Speaker Change: Your next question comes from the line of Matt O'connor from Deutsche Bank. Please go ahead.
Matt O'connor: Good morning, just on the timing of the <unk>.
Matt O'connor: ROTC targets that you laid out medium term is that imply for 2027 or just other quantity on that.
Matt O'connor: And the witch, which targets E M T O the Oh, sorry, Eric.
Eric: That's right the 16% to 18% medium term.
Matt O'connor: Another way to frame the timing.
Matt O'connor: Yep.
Matt O'connor: I think we've the medium term to US is by 2027, and you know will be on an arc upwards arc through 25, and 26 in order to get to that destination. So.
Matt O'connor: I don't necessarily want to put a pin in it as to whether we could get there in 'twenty six there's there's possible.
Matt O'connor: Oh scenarios that could happen, but certainly by 27, we feel quite confident that we'll be thereabout.
Speaker Change: Okay, and then you laid out the waterfall in terms of how you get there and.
Speaker Change: But just to clarify the operating leverage.
Speaker Change: A one 5% this year, obviously there is a nice improvement in that in the next.
Speaker Change: A couple of years to support back watching level right.
Speaker Change: Yeah.
Speaker Change: Yes, I think clearly.
Speaker Change: As we continue to see the benefit of the fed of swap runoff and noncore runoff and the NIM lift that really juices your positive operating leverage and that's a there's a big there's some.
Speaker Change: Contribution from that in 'twenty, five, but it actually accelerates in 'twenty six and so we would expect positive operating leverage to be even more in 2026.
Okay. Thank you.
Speaker Change: Okay.
Speaker Change: And then again for those on the phone if you would like to ask a question. Please use star. One. Your next question comes from Gerard Cassidy from RBC capital markets. Please go ahead.
Speaker Change: Hey, Bruce and John how are you.
Speaker Change: Sure.
Speaker Change: Bruce can we take a step back for a moment I'm honestly, we have a new administration coming in and we're going to get a number of new heads of the different regulatory agencies, maybe the most important change coming from device to your safety and soundness of deferred with bar stepping down about two weeks ago.
Speaker Change: When you look at it.
Speaker Change: How you kind of thinking about what can change to their benefit and for not just citizens for the banking industry. What are you looking are hoping for that these new leaders can come in.
Speaker Change: And really enables the banking industry and to the Treasury Secretary nominee in his testimony get the banks more involved in the U S economy.
Speaker Change: Yep.
Speaker Change: Well I think we've started to make some headway already on that this year Gerard as some of the proposals that were a response to what happened in 2023 seem to be overdone.
Speaker Change: Overdone over Cook in terms of capital.
Speaker Change: Changes to capital liquidity.
And funding frameworks.
Speaker Change: But I think the industry pushed back and thought that.
Speaker Change: But they needed to be dialed back and we were starting to make progress on that in any event. So so I do think like putting that to bed.
Speaker Change: And coming up with what are the final Basel III capital rules, what are we going to do with liquidity what are we going to do with funding and making sure that our.
Speaker Change: Tailoring.
Speaker Change: Central to how the framework is set.
Speaker Change: That's kind of job one oh, the Prudential side.
Speaker Change: I would say the other benefits.
Speaker Change: Benefits could be just a refreshed look at supervision, there's a lot of folks who work really hard and we get really good advice and input from the supervisors, but sometimes.
Speaker Change: Things got overcooked, a bit and you lose the forest for the trees. So just kind of making sure that that is focused at the at the right level and frees us up to.
Speaker Change: Have a little more flexibility in how we operate that could be positive as well.
Speaker Change: And you know I'd say some of the pressure on fees that we've seen come out of the CFPB are they're not always.
Speaker Change: Our net beneficial they may make good headlines, but squeezing a alone.
Speaker Change: Uh huh.
Speaker Change: It closed down this and then the banks have to make a return so they have to charge somewhere else and so just having a kind of a more insightful view as to how to allow banks to.
Speaker Change: Try to operate with well disclosed fees that actually benefit their customers as opposed to constantly pushing on that.
Speaker Change: That would also be helpful.
Speaker Change: I'd say last thing there is theres, probably a need for more consolidation in the industry, particularly at the smaller end of the spectrum.
Speaker Change: So.
Speaker Change: Kind of taking the sand out of the gears on that and allowing that to take.
Speaker Change: Take place with more certainty I think that would also benefit the industry. So I think a number of all that should allow banks to continue to have the capital to lean in to support economic growth I think we've done a good job of that and we want to continue to be able to do that.
Speaker Change: Just quickly on what you just said Bruce consolidation at the smaller end of the spectrum. How do you do find smaller than 10 billion dollar unless asset size banks or or something small yeah, I don't I don't know where to draw that line, but certainly you.
Speaker Change: You know I'd say banks that are even in the 25 to 50 category just have a lot of investing to do to keep up with technology changes our business model going digital cyber defense is a lot of regulation and so so I just think there's a there's a lot of great banks in that.
Speaker Change: Size category, but ultimately I think there'll be some who feel that they can gain some benefits from scale and so so I think if the framework, we're more certain that you'd start to see consolidation all the way through from the very smallest banks may be up to those smaller regionals great.
Speaker Change: Great and then as a follow up question can you guys. You you gave us very good detail on your commercial real estate portfolio and how you're working through the.
Speaker Change: The issues that the industry confronts on commercial real estate office in particular kidney give us an update on India and using the baseball vernacular what inning do you think we're in and getting through this kind of a pig in a python situation in commercial real estate and specifically office.
Don: Yeah, I'm going to start and turn it over to Don but.
Don: I'd say when when we we.
Don: We saw this happening are it kind of kicked off in the early part of 'twenty three and.
Don: And we said this is a multiyear process to kind of work this out just.
Don: Just based on the nature of the terms of the leases.
Don: It kind of returned to office dynamics et cetera that this was going to take a while to play out.
Don: And so we've seen that consistently through the rest of 23 through 24, I think looking into 'twenty five we'll still be in workout mode, but but I think we're probably past the midpoint at this point, so maybe middle innings of the game.
Speaker Change: And hopefully you know, we see that start to really drop off as we exit 'twenty five but I'll leave it over to Bob Yeah. Gerard I think that's I think that's right I'll Chair my pop yoga and sensor memorialize again, and your Internet Analogize think baseball, but I think the good news on the real estate side as Bruce said, we still have kind of 25 to walk through.
Speaker Change: We are seeing almost no incremental deterioration based on the entirety of the portfolio over the last year or so so everything like we've identified as problematic E. Needing goes through the workout cycle estimation of losses, it's pretty much playing out as we expected and we are.
Speaker Change: Getting towards the backend as Bruce said in and 25, the good news across the board in the real estate complex is liquidity is really coming back and we're seeing you know not.
Speaker Change: Not necessarily in the office portfolio, but in the rest of the real estate portfolio and that can that can with all over as we get into <unk>.
Speaker Change: Later later portions of 25, so we're seeing now the C. N P. S market very active we're seeing life companies very active we're getting taken out of criticized assets at par.
Speaker Change: And in the non office space, but in the multifamily space. So there are a lot of kind of encouraging signs that we're seeing across the board and I think as John said in his remarks, we're seeing no new migration into our workout team. So theres a lot a lot to be a little bit more optimistic about we've got a ways to go to work out and and interestingly a.
Speaker Change: A lot of the sponsors I think that there's some.
Speaker Change: Brightness at the end of the tunnel, so they're dribbling in cash to keep the properties alive because they they think there might be an opportunity down the road. So it's it's a long game, they workout cycle, a little bit more than in past cycles, but but I think we feel like we have a really good handle on it and it's trending reasonably consistent.
And John you have a stat. So the overall criticized assets came down sharply in the fourth.
Speaker Change: Fourth quarter led by the drop in.
Speaker Change: CRE exactly you Havent criticized levels down significantly and you know.
Speaker Change: Overall actually overall criticized was down 17%.
Speaker Change: Led by our production and in General office. So that's that's great news that was in the order of like 30%, Yeah, Yeah exactly exactly so.
Speaker Change: And the.
Speaker Change: And Don mentioned inflows to outflows have really flipped it flipped around rather than inflows exceeding outflows that flipped around in the fourth quarter significantly so inflows slowed to a trickle.
Speaker Change: And then upgrades.
Speaker Change: Outpaced all of that in the fourth quarter, so turning the corner in the game back to the imagery.
Speaker Change: It was nice to see in full kit.
Speaker Change: I appreciate all the color. Thank you.
Speaker Change: Sure.
Speaker Change: Thank you and our final question comes from <unk> from Morgan Stanley. Please go ahead.
Speaker Change: Hi, good morning.
Speaker Change: I wanted to ask about the belly of the curve how much of an impact does that have on both the asset and the liability side of the balance sheet. So yeah, I'm thinking if I'm in a from an asset side. It gives you some more benefits from fixed asset repricing.
Speaker Change: But on the liability side, maybe it makes it a little bit harder to drop those CD rates further.
Speaker Change: Is that is that something you guys.
Speaker Change: Our our focusing on you know does it.
Speaker Change: Is there a risk that if the belly of the curve keeps moving higher.
Speaker Change: Could that weigh on some of the those deposit betas from here.
Speaker Change: Okay I got you I appreciate the question I'll comment on that I mean broadly I would just make the point that we're asset sensitive and we're basically asset sensitive across all of the rate.
Speaker Change: Key rates across the curve for the most part.
Speaker Change: When you look at the belly of the curve, that's actually driving our fixed asset repricing and when when you see our net interest margin progression through time that is consistently positive and so on a net basis at the belly of the curve is rising where net beneficiaries of that.
Speaker Change: On the funding side, when you think about C DS.
Speaker Change: Out of the gate, that's typically less than a one year.
Speaker Change: Term Ah that can turnover, but net net our our asset repricing would overcome even if the belly of the curve with consistently higher.
Speaker Change: That would be a net positive for us through time and you can see that in our net interest margin.
Speaker Change: We've built in the curve that we see are basically out the window through the medium term progression and the fixed rate asset repricing is 15 to 20 basis points.
Speaker Change: By the time, you get to 2027, and that's consistently building through twenty-five into 'twenty six 'twenty seven so.
Speaker Change: That's a net positive I think the only place that our funding comes into play in the belly is maybe in the senior debt space and and we're really well positioned there were north of 4% of our WMA and so that's not a huge driver for us, but again the asset sensitivity higher rates basically as a net positive.
Speaker Change: Russ.
Russ: Yeah, I mean, I'm just thinking with you.
Russ: You guys were actually ahead of when the when the fed was cutting rats.
Russ: You were able to drop those deposit rates sooner. So I'm just thinking now that there's not as many rate cuts and the forward curve and the belly of the curve is higher whether that's weighing on deposit costs at all.
Russ: Yeah, no I as I can.
Russ: Mentioned I will be able to get them, we'll be able to get deposit betas up to the low to mid fifties from where we are today at around 50%.
Russ: And.
Russ: And that's based on the curve that where we have a cut in the second quarter and a cut in the fourth quarter.
Russ: However, there are no cuts in 2025, our deposit betas would flatten out, but that's a net positive for us because of what of our net floating position and loan yields with more than make up for the fact that deposit betas might not be quite as high because we're asset sensitive and I should mention that.
Our asset sensitivity actually grows in 25 and 'twenty six 'twenty seven.
So on a all in basis, our net interest margin is is it beneficiary of rates being higher because loan yields more than offset what the impact on deposit betas might be because were overall asset sensitive.
Russ: Got it.
Thank you and if I can just ask a follow up on loan growth.
Speaker Change: Yeah, you were looking for mid single digit spot loan growth, excluding noncore loans.
Russ: Can you talk about the catalyst there.
Russ: I'd also like where do you see loan growth coming from is it a sponsor is it traditional middle market as adults.
Russ: Yeah, I'll start and then John can give you more details, but I think the.
Russ: You know we have we have been quite disciplined in making sure that we're putting out loan capital that we're getting good returns and so we haven't really.
Russ: Sought to force the action in fact, we've through balance sheet optimization.
Russ: Actually exited a number of relationships and commercial we're certainly trying to run down the CRE book, a little bit and then we have noncore set up to run down assets I think the catalysts that we're looking for it to actually get.
Russ: I'll get back to loan growth, which is certainly desired and desirable.
Russ: The main building blocks here are the private bank is a I think likely to put on about $1 billion a quarter.
Russ: Trying to get to the targets at the end of the year. So that's a pretty idiosyncratic to us in kind of having a startup business that's growing.
Russ: We can count on for for that kind of growth in not only involves but also in deposits. So you.
Russ: If you if you if you take out that growth.
Russ: The spot loan growth drops John from mid single digits down to low single digits or something like that so I think where we're not really.
Russ: Calling for any aggressive resumption and loan growth were anticipating that things.
Russ: Things will be a relatively subdued continuing into the first half of the year and then start to pick up in the second half of the year and commercial so we saw a line utilization go down quite a bit.
Russ: And.
Russ: Q4, particularly subscription line, so that new money deal machine private equity putting money to work waiting for godot or that that didn't happen in Q4, we don't expect it just because the calendar flip the page to pick up right away in a in 2025, but.
Russ: I think that will begin to happen and we'll see all the benefits of that higher capital markets fees loan growth that comes along with that but we're being cautious in terms of how much of that we put in to the forward forecast and then on consumer we just have a few of the areas that have consistently been able to grow mortgage HELOC.
Russ: Our card business no no great shakes there either just some moderate level of growth. So when you look across that we've got some things running down we have private bank steady as she goes we have a resumption in the second half of commercial and a little lower level of steady as she goes in consumer.
Russ: So John I don't know if you got another color to that no I just had another point or two to emphasize I agree with that and we said mid single digits ex noncore. If you think about a three legs of the stool you had all three but if you private bank on its trajectory really is a huge driver and is the largest driver getting us to that mid single digits, but if you if you'd look at it excluding the private.
Speaker Change: Bank and excluding non core we would be in a low single low single digits trajectory as Bruce mentioned and when you.
Speaker Change: The consumer legacy is is after that and the other half of it is in commercial.
Speaker Change: Consumer legacy you mentioned, Bruce and in commercial subscription.
Speaker Change: Subscription and M&A activities likely to pick up in your expansion markets in middle market.
Exactly so.
Speaker Change: We've got expansion markets contributing as.
Speaker Change: As we see in 2025 are the other important part as you know subscription line utilization was about as low as we've ever seen and its in the low forties typically in the mid fifties and so we see some of that partially you see some of that coming back not all the way back fun finance.
Speaker Change: That we've been successful at in the past will contribute as well as asset backed and then you know I mean, I would just say that.
Speaker Change: Yeah, you know.
Speaker Change: All of that put together keeps us in a good spot and as we mentioned earlier to the extent that this doesn't happen as we mentioned earlier, we've been able to navigate a a lower loan growth environment in 'twenty four quite well, we would run that playbook back and you'd see more buybacks out of us and with our stock price that's attractive.
Speaker Change: We see it below intrinsic value and we are at the margin are.
Speaker Change: Likely deliver even better deposit performance, if if that were to be the case. So I think we've got some nice optionality in 2025 to keep to stay on our trajectory I would I would I would just say one final thing is that.
Speaker Change: Really the NII guide is as it was as you saw in the fourth quarter.
Speaker Change: It's really driven by the NIM expansion.
Speaker Change: And so it's not as dependent on volume growth in order to deliver that and then as John said, if you have if you don't see the volume growth you have other levers such as you can repurchase your shares something you won't push on.
Speaker Change: Deposits as much and so you can be a little more disciplined on your deposit pricing.
Speaker Change: So I'd say, we feel quite confident overall in our NII guide for next year.
Speaker Change: That's really helpful. I appreciate the detailed answer here. Thank you.
Speaker Change: Okay.
Speaker Change: Got it I guess, that's it for the questions you've got a lot of banks reporting today, So I hope everybody.
Speaker Change: Got a good night's sleep last night and it makes it through the day. So thanks again for dialing in today. We appreciate your interest and support have a great day.
Speaker Change: Take care.
Speaker Change: That concludes today's conference call. Thank you for your participation you may now disconnect.