Citizens Financial (CFG) - 2023 Q3 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The company reported underlying net income of $448 million and EPS of $0.89 for Q3 2023, which includes a $0.05 impact from the Private Bank start-up investment and a negative $0.14 from the non-core portfolio [27][34] - Total net interest income (NII) decreased by 4% linked quarter, with a net interest margin (NIM) of 3.03%, down 14 basis points [28][38] - The common equity tier 1 (CET1) ratio increased to 10.4%, up from 10.3% in the previous quarter [31][51] Business Line Data and Key Metrics Changes - The legacy core bank delivered a solid ROTCE of 15.3%, while the Private Bank is expected to turn positive by mid-2024 and contribute 5% to EPS by 2025 [26][34] - The non-core portfolio declined by $1.4 billion, ending the quarter at $12.3 billion, with a focus on reducing RWAs [35][36] - Average loans decreased by 2% and period-end loans were down 1% linked quarter, primarily due to non-core runoff [42] Market Data and Key Metrics Changes - Period-end deposits increased by $530 million linked quarter, with growth led by commercial and consumer deposits [43] - The interest-bearing deposit costs rose by 39 basis points, resulting in a cumulative beta of 48% [43] - The company has seen a migration of lower-cost deposits to higher-yielding categories, with noninterest-bearing deposits now representing about 22% of total deposits [44] Company Strategy and Development Direction - The company is focusing on building out its Private Bank and expanding its presence in key markets such as New York, Boston, Florida, and California [11][12] - A zero-based review of expenses has been initiated to keep 2024 underlying expenses flat, despite the anticipated costs associated with the Private Bank [14][26] - The capital recaptured through the reduction in non-core RWA will be reallocated to support the growth of the Private Bank, enhancing liquidity and capital [13] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in navigating the current challenging environment and emphasized the importance of maintaining a strong balance sheet [17][33] - The company anticipates that NII will decline but at a slower rate than in previous quarters, with expectations for stabilization in key trends [33][84] - Management highlighted that the rate environment is expected to become more constructive, which would benefit the company's performance [75][83] Other Important Information - The company recorded a provision for credit losses of $172 million, increasing its allowance for credit losses (ACL) coverage to 1.55% [36][47] - The company repurchased $250 million of common shares during the quarter [37][51] - The Private Bank's start-up investment is currently a drag on results but is expected to become accretive in the near future [34][61] Q&A Session Summary Question: Concerns over NII trajectory for 2024 - Management discussed the complexities of the NII trajectory in a higher for longer environment and expressed confidence in achieving a 3% NIM by Q4 2024 [2][84] Question: Credit exposure to Shared National Credits - Management clarified that they had more upgrades than downgrades in their Shared National Credit book and emphasized their rigorous credit analysis process [6] Question: Outlook for Private Bank expenses - Management confirmed that the underlying expenses for 2024 would be flat, including costs associated with the Private Bank [59][60] Question: Competitive factors for consumer deposits - Management acknowledged heavy competition for consumer deposits but expressed confidence in their ability to compete effectively [73][74] Question: LCR requirements and asset sensitivity - Management indicated that they are compliant with LCR requirements and discussed the implications of regulatory changes on asset sensitivity [77][79] Question: Impact of rate cuts versus higher for longer scenario - Management explained that both small increases in rates and rate cuts could have positive impacts on NII, emphasizing a neutral position overall [90][91]