John F. Woods
Vice Chairman and Chief Financial Officer at Citizens Financial Group
Thanks, Bruce, and good morning everyone. Big picture, 2022 was strong year for Citizens, with significant delivery of strategic initiatives against the backdrop of uncertainty and volatility in the macro environment. Most notably, we closed our acquisitions of HSBC and ISBC. We captured the benefit of higher rates, strong NII and NIM and our balance sheet and interest rate position were well-managed. While fee revenues were impacted by the environment, we are very well-positioned across our businesses to capitalize on the upside potential when markets normalize, particularly in capital markets.
Mortgage margins and volumes should recover overtime and we are excited for the growth prospects arising from our wealth investments. We are actively managing our loan portfolio, focusing on allocating capital, where we can drive deeper relationship business into 2023 and beyond. We continue to maintain good expense discipline, delivering in excess of $115 million of pretax run-rate benefit from TOP7, generating 4.7% underlying positive operating leverage for the year and 16.4% full year ROTCE.
Let me give you the headlines for the financial results referencing Slide 5. For the fourth quarter, we reported underlying net income of $685 million and EPS of $1.32. Our underlying royalty for the quarter was 19.4%. Net interest income was up 2% linked quarter with 5 basis points of margin expansion to 3.3%, and relatively stable loans given a planned reduction in our auto portfolio. Period end on average loans are broadly stable linked quarter, up 1% excluding auto runoff. We grew deposits of 1% linked quarter and our LDR are stable at 87%.
Fees showed some resilience amid a challenging environment down 1% linked quarter. We saw a modest improvement in capital markets fees driven by underwriting and M&A, but this was more than offset by a drop-in mortgage fees and a CVA/DVA impact in our FX and IRP business. Expenses were broadly stable linked quarter. Overall, we delivered underlying positive operating leverage of 1% linked quarter and our underlying efficiency ratio improved to 54.4%.
Our credit metrics were good with NCOs of 22 basis points, up 3 basis points linked-quarter. We recorded a provision for credit losses of $132 million and a reserve build of $44 million this quarter. Our ACL ratio stands at 1.43%, up from 1.41% at the end of the third quarter and approximately 13 basis points above our pro forma day-one CECL adoption coverage ratio. Our tangible book value per share is up 5% linked quarter.
Next, I'll provide further details related to the fourth quarter results. On Slide 6, net interest income was up 2%, given higher net interest margin. The net interest margin of 3.3% was up 5 basis points. As you can see on the NIM walk on the bottom left hand side of the slide, a healthy increase in asset yields continues to outpace funding costs reflecting the asset sensitivity of our balance sheet. With Fed funds, increasing 425 basis points since the end of 2021, our cumulative interest-bearing deposit beta has been well-controlled at 29% through the end of the fourth quarter.
Moving on to Slide 7, we posted solid fee results despite headwinds from continued market volatility and higher rates. These were fairly stable, down 1% linked quarter with lower mortgage and FX and derivatives fees, partly offset by an improvement in capital markets fees. Focusing on capital markets, market volatility continued through the quarter. However, underwriting and M&A advisory fees picked up. We continue to see good strength in our M&A pipelines, including several deals that were pushed into Q1. Mortgage fees were softer as the higher rate environment continues to weigh on production volumes. We are seeing pressure on volumes moderating and size of the industry reducing capacity, which should benefit margins overtime. Servicing operating fees were stable. Card and wealth fees posted solid results for the quarter.
On Slide 8, expenses were well-controlled, broadly stable linked quarter. Our TOP7 efficiency program delivered over $115 million of pre-tax run rate benefits by the end of the year. We are excited to announce the launch of our new TOP8 program and I'll cover that in a few slides. On Slide 9, average and period-end loans were broadly stable linked quarter but up 1% ex-auto runoff with 1% growth in commercial reflecting demand in asset-backed financing and growth in CRE, primarily reflecting line draws and slower paydowns.
We are seeing commercial utilization moderate a bit over the quarter as inflation and supply chain pressures continue easing and clients are adjusting inventories to reflect this, as well as lower capex in an anticipation of the softer economy. Average retail loans are down slightly, but up 1% ex planned runoff in auto, given growth in mortgage and home equity, which bring an opportunity for deeper relationships and better risk-adjusted returns.
On Slide 10, average deposits were up $1.4 billion or 1% linked quarter, with growth primarily coming from term deposits, money market accounts and Citizens Access Savings. Overall, commercial banking deposits were up 2.4% and consumer banking deposits were broadly stable. We feel good about how we are optimizing deposit costs in this rate environment. Our interest-bearing deposit costs were up 67 basis points, which translate to a 29% cumulative beta broadly consistent with our expectations. We began the rate cycle with a strong liquidity and funding profile, including significant improvements through our deposit mix and capabilities.
We achieved overall deposit growth this quarter and will continue to optimize our deposit base and to invest in our capabilities to attract durable customer deposits. Overall, liquidity remained strong as we reduced our FHLB advances by $1.3 billion and increased our cash position at quarter end. Our period end LDR improved slightly to 86.7%.
Moving on to Slide 11, we saw good credit results again this quarter across the retail and commercial portfolios. Net charge-offs were 22 basis points, up 3 basis points linked quarter, which still low relative to historical levels. Non-performing loans are 60 basis points of total loans, up 5 basis points from the third quarter given an increase in commercial largely in CRE.
Retail delinquencies continue to remain favorable to historical levels, but we continue to closely monitor leading indicators to gauge how the consumers vary. Although, personal disposable income remains strong, debt service as a percentage of disposable income substantially -- has essentially returned to pre-pandemic levels, while consumer confidence has stabilized, as inflation has eased.
Turning to Slide 12, I'll walk through the drivers of the allowance this quarter. While our current credit metrics are good, we increased our allowance by $44 million, taking into account the growing risk of an economic slowdown. Our overall coverage ratio stands at 1.43%, which is a modest increase from the third quarter. The current reserve level contemplates a moderate recession and incorporates expectations of lower asset prices and the risk of added stress on certain portfolios, including those subject to higher risk from inflation, supply chain issues, higher interest rates and return to office trends.
Given these pressures, we are watching our loan portfolio very carefully for early signs of stress in particular, CRE office. Back on Slide 32 in the appendix, we have provided some additional information about the CRE portfolio. Our total CRE allowance coverage of 1.86% includes elevated coverage for the office portfolio, while the multi-family portfolio has a much lower reserve requirement. A $6.3 billion office portfolio includes $2.2 billion of credit tenant and life sciences properties, which are not as exposed to adverse back to office trends. The remaining $4 million relates to the general office segment for which we are holding a roughly 5% allowance coverage. About 95% of the general office portfolio is income producing and about 70% is located in suburban areas.
Moving to Slide 13, we maintained excellent balance sheet strength. Our CET1 ratio increased 10%, which is at the top end of our range. Tangible book value per share was up 5% in the quarter and the tangible common equity ratios improved to 6.3%. We returned a total of $350 million to shareholders through share repurchases and dividends. Our strong capital position, combined with our earnings outlook puts us in a position to continue to return capital to shareholders to additional share repurchases.
Shifting gears a bit, starting on Slide 14, we'll cover some of the unique opportunities we have to drive outperformance over the next few years. We tried to be very disciplined in prioritizing the areas that we think have the potential and where we have a right to win. So in consumer, we got four big opportunities. First is, our push into New York Metro, we are investing in brand marketing, doing well in the technology conversions and putting our best people against the market opportunity. We are encouraged by our early success with some recent client wins in commercial and the HSBC branches driving some of the highest customer acquisition and sales rates in our network.
Before ISBC conversion is just around the corner and presence weekend and we look forward to making further strides as we leverage the full power of our product lineup and customer-focused retail and small business model across the New York market. You will see more details on Slide 28 and 29 in the appendix. Importantly, we achieved about 70% in run rate of our planned, the $130 million of investors net expense synergies as of the end of the year. And we expect to capture the rest by the middle of the year. We also continue to expect that the integration costs will come in below our initial estimates.
Moving to wealth, we launched a number of exciting initiatives with Citizens Private Client and Citizens Plus as we orient the business towards financial planning-led advice. These should really help us penetrate the opportunity with our existing customer base.
On Slide 15, our national expansion is another area, where we have a great opportunity to build-on our digital platform that has been focused on deposits for the last few years. We've moved that to a cloud-based platform and we are adding our other product capabilities, so that we can offer a complete digital bank experience to serve customers nationwide with a focus on the young mass affluent market segment, where we might have only had a lending relation -- lending or deposit relationship for our vision is to build a national platform that allows us to serve customers in a comprehensive way. And we have also been very innovative in creating distinctive ways to serve customers.
Citizens Pay, for example, it's an area where we have significant running room. We've attracted many new partners, up about 150 versus a year ago, we should really ramp the business. And we've built an industry-leading home equity business powered by our innovative fast line process, which is enabled by advanced analytics and digital innovations that have drastically reduced originations time.
Moving to the commercial bank on Slide 16 and 17, we filled in all the product gaps, acquisitions brought us M&A and other advisory capabilities and we've built our debt capital markets capabilities organically. We've hired some great coverage bankers and we are focused on high-growth regions around the country and the right industry verticals to serve larger companies. We also have a very strong sponsor coverage and are well-positioned to support private equity capital. Bottom line, we've aligned ourselves with the attractive opportunities with a full product set to drive significant market share and fee revenues.
Moving to Slide 18, we are excited to announce the launch of our latest TOP program. Even as we push forward on offense with our strategic initiatives and acquisitions, it is important to remember that a key to Citizens success since our IPO has been our continuous effort to find new revenue pools and realize efficiencies. And then reinvest those benefits back into our businesses, so we can serve customers better. We've effectively executed up our TOP7 program achieving a pre-tax run rate benefit of approximately $115 million at the end of 2022. And we launched TOP8, with a goal of an exit run rate of about $100 million of pre-tax benefits by the end of 2023 with that split about 80%, 20% between efficiency and revenue oriented initiatives.
Moving to Slide 19, I'll walk through the outlook for the full year, which should contemplates an economic slowdown and the end of December forward curve view of two 25 basis point Fed hikes, before an expected 25 basis point cut in the fourth quarter. We expect solid NII growth up 11% to 14% and we project our NIM to gradually rise towards approximately 3.4% for the fourth quarter of 2023.
Our overall hedge position is expected to provide a NIM floor of about 3.2% through the fourth quarter of 2024 and a gradual 200 basis point decline across the curve, commencing in Q4 2023. In the fourth quarter, we took actions to transition $3 billion of active swaps from 2023 to forward starting positions in 2024. And we've done even more so-far in January to rebalance the distribution of down rate protection. You'll find a summary of our hedge position in the appendix on Slide 30. We expect moderate loan growth with average loans up about 4% to 5%. We are targeting about $3 billion spot auto runoff as we shift the portfolio towards products with more attractive risk-adjusted returns. We expect total average earning assets to be up 3% to 4%.
On the deposit side, we see 3% average deposit growth and a 2% to 3% spot deposit decline with cumulative deposit betas at year end, reaching the high 30s. Fees are expected to be up 7% to 9% with a capital markets rebound building over the course of the year. Non-interest expense is expected to be up roughly 7% or about 3.5% to 4% if you adjust for the full year effect of the HSBC and Investors acquisitions and the FDIC premium increase. As the year unfolds as we expect, we should be able to drive about 400 to 500 basis points of positive operating leverage.
Given current macro trends in portfolio originations, we expect that our ACL ratio will rise to the 1.45% to 1.5% level, depending upon how the economy fares. We expect our CET1 ratio to land at the upper end of our target range of 9.5% to 10% even with our target payout ratio approaching 100%. All of this translates into our ROTCE in the high-teens for 2023.
On Slide 20, we provide the guide for Q1. Note that Q1 is seasonally weak for us with the day count impact and seasonality impacting revenues and taxes on compensation payouts impacting expenses.
Moving to Slide 21, as Bruce mentioned, we have completely transformed the franchise since the IPO, executing well against our priorities and achieving our desired performance targets and we are ready to raise the bar, lifting our ROTCE target to 16% to 18%. The key to the further ROTCE improvement is continuing to deliver positive operating leverage. As we look out over the medium-term, we should see a recovery in loan and deposit growth and we will continue to balance -- continue our balance sheet optimization efforts to focus on deep relationship lending to maximize risk-adjusted returns.
We are well-positioned to grow fees meaningfully and even if rates come down a bit, we expect NII to benefit from the protection we have put on through the swap portfolio. You should expect us to stay disciplined on expenses. Credit is projected to be stable as the economy strengthens and we continue to focus on returning a meaningful amount of capital to our shareholders through our repurchase program, and targeting a dividend payout of 35% to 40%. Over this timeframe, we would expect our CET1 ratio to remain within our target range of 9.5% to 10%.
To sum it up, Slide 22, we delivered a strong quarter against the backdrop of a dynamic environment and we have a positive outlook for 2023. We are ready for the uncertainty of an economic slowdown in 2023 with the strong capital liquidity and funding position. We've taken actions to protect our NIM, and we are being prudent with respect to our credit risk appetite and loan growth. At the same time, we are moving forward to executing against our strategy and making important investments in our business that we believe will deliver sustainable growth and outperformance over the medium-term.
With that, I'll hand it back over to Bruce.
