John F. Woods
Vice Chairman and Chief Financial Officer at Citizens Financial Group
Thanks, Bruce, and good morning, everyone.
Let me start with the headlines for the financial results.
Referencing Slide 5. Big picture, first quarter results were solid against the backdrop of volatility in the macro-environment. We continued to progress against our portfolio strategic initiatives including the well-executed conversion of the investor platform in February. For the first quarter, we generated underlying net income of $560 million and EPS of $1.10. Our underlying ROTCE for the quarter was 15.8%. Net interest income was down 3% linked quarter, given the lower day count and lower interest-earning assets. Our margin was stable at 3.3%. Period-end loans and average loans were down slightly quarter-over-quarter reflecting the impact of our balance sheet optimization efforts, such as our ongoing run off of auto. Deposit levels declined in the quarter, primarily due to the impact of seasonal factors, the compounding impact of the rate environment and particularly earlier, this occurred in the quarter. Importantly, our deposit levels were broadly stable during the market turbulence in March. Our quarter-end LDR is 89.8%, and our liquidity position remains very strong with current available liquidity as of today of about $66 billion. Our credit metrics and overall position remains solid. Total net charge-offs of 34 basis points are up 12 basis points linked quarter in line with ongoing normalization trends. We recorded a provision for credit losses of $168 million and a reserve build of $35 million this quarter, increasing our ACL coverage to 1.47%, up from 1.43% at the end of the fourth quarter, with most of the increase directed to the general office portfolio. Our current coverage ratio is about 17 basis points stronger than our pro forma day-1 CECL reserve of 1.3%. We repurchased $400 million of common shares in the first quarter and delivered a strong CET1 ratio at the top of our target range of 10%. And our tangible book value per share is up 6% linked quarter.
Before I walk through the details of results for the quarter, let me address some of the industry issues that are top of mind on Slide 6. First, we have a very strong capital base, which is one of the highest in our regional bank peer group, even if one were to include the rate-driven unrealized losses on all of our investment securities. We have a quality deposit franchise, which has performed very well since the turbulence, which began in early March. We continue to see the benefit from all of the investments we've made since the IPO with 67% of total deposits from consumer and a well-diversified commercial portfolio with about 66% of our clients using us as their primary bank. Finally, 68% of deposits are insured or secured. Our liquidity position is quite strong with a diverse funding base, ample available liquidity and strong risk management capabilities. In fact, our LCR level exceeds what would be required as a Category III bank at March 31st, 2023. Looking at credit, our metrics continue to look solid. Retail is normalizing, but it's still performing quite well as the employment picture remains strong. On the commercial side, our focus is on the CRE portfolio and on general office in particular, which is impacted by back-to-work trends and rising interest rates. We have a very strong reserve coverage of 6.7% on the general office portfolio, and I'll go through some of the details later.
And lastly, the market is concerned about how the regulators may respond to the disruption in March, which in our view was unique to the banks in question and not reflective of broader cash [Phonetic] and regulation or management lapses. We'll watch closely how things develop, but in any case, we think the process will be thoughtful and deliberate. Finally, we believe we are well positioned for any increase in regulatory requirements, given our diverse business model and current excess capital and liquidity regulatory ratios.
Let's drill into the details over the next few slides, starting with capital on Slide 7. We ended the quarter with one of the highest capital levels in our regional bank peer group with a CET1 ratio at the top of our target range of 10%. This strong capital level reflects our prudent approach to deploying capital as we prioritize driving improved returns over the medium term. If you include the rate-driven unrealized loss on debt securities in AOCI, our adjusted CET1 ratio would be 8.7%. If you remove the unrealized losses in HTM, our tangible common equity ratio would reduce by 20 basis points to 6.4%. All of these ratios are expected to be near the top of our peer group again in this quarter. We expect to maintain very strong capital levels going forward with the ability to generate roughly 25 basis points of capital post dividend each quarter and before share buybacks. We have $1.6 billion of repurchase capacity remaining under our current board authorization. Timing of repurchases will be dependent on our view of external conditions.
Next, I'll move to Slide 8 to discuss our deposit franchise. As you can see, our deposit franchise is skewed towards consumer and highly diversified across product mix and in terms of the various channels we can tap. About 67% of our total deposits are consumer, up from 60% at December 31st, which puts us in the top quartile of our peer group, and roughly 68% of our deposits are insured by the FDIC or secured, which is up from 60% at year-end. Demand deposits represent about 26% of the book down slightly from 27% at year-end as customers have naturally rotated towards higher-yielding alternatives.
On Slide 9, the headline is that our deposit performance since mid-year 2022 following the Investors acquisition and the commencement of [Indecipherable] has been in line with industry performance. We outgrew both the industry and peer average in the second half of 2022. We entered 2023, expecting that the normal seasonal deposit outflows in the first quarter would be somewhat exacerbated by the higher rate environment. And we saw a little more of that than we had forecast by about 1%, but most of that happened in January and February. Given our rundown in auto, we were willing to let some deposits run off early in the quarter, trying to hold the line on betas. In March, we saw some elevated inflows and outflows as customers across the industry can look to diversify their deposits in the wake of bank failures. But overall, our deposits were broadly stable during the month. This strong performance is attributable to investing heavily in our deposit offerings and capabilities since the IPO, and this will remain a focus as we continue to build a top-performing bank franchise.
On Slide 10, we highlight some of the things that we are doing to attract deposits and drive primacy with our customers. In Consumer, we've developed a compelling set of products and features that drive higher customer satisfaction and encourage them to do more with us. We have strong analytics capabilities and compelling offerings such as Citizens Plus in our Private Client Group as well as Citizens Access, our digital bank to leverage. And with the final conversion complete at Investors, we have a substantial opportunity to take deposit share in the New York Metro market. On the Commercial side, we have invested heavily in our treasury solutions capabilities with a state-of-the-art platform and strong talent to serve client needs. We continue to add better tools for our clients to manage their cash and drive higher operational deposits as well as innovative products and capabilities to attract deposits.
Moving to Slide 11. We are monitoring the commercial real estate portfolio closely given the softening macro-environment and the pressure of rising rates impacting refinance needs. The general office sector is a particular concern as tenants rethink their space needs given the remote work trends. Given these pressures, we are evaluating our loan portfolio very carefully for early signs of stress, in particular, CRE office. It's worth noting, however, that near 100% of our borrowers are current on their obligations with NPLs under 50 basis points. We are starting to see an increase in criticized assets and have added work-out resources, but given the diversity and quality of the portfolio, we feel the credit costs will be manageable. Our total CRE allowance coverage of 2% includes an elevated coverage for the general office portfolio of 6.7%.
On Slide 12, we drilled down a bit on the $6.3 billion office portfolio, which includes $2.2 billion of credit-tenant and life sciences properties, which are not as exposed to adverse back-to-office trends and are expected to perform quite well. The remaining $4.1 billion relates to the general office segment, which we feel is reasonably well positioned across type, geography and suburban areas and central business districts. About 90% of the general office portfolio is income producing and about 70% is located in suburban areas, and the majority is Class A.
Next, I'll provide further details related to first quarter results. On Slide 13, net interest income was down 3%, given lower day count, which was worth about $29 million, and slightly lower interest-earning assets. The net interest margin of 3.3% was stable with the increase in asset yields offset by higher funding costs. With debt funds increasing 475 basis points at the end of 2021, our cumulative interest-bearing deposit beta has been well controlled at 36% through the end of the quarter. We continue to dynamically adjust our hedge position so that we have down rate protection in the second half of 2023 and through 2026. As we approach the height of the rate cycle, we have managed our asset sensitivity down from roughly 3% at the end of last year to a more neutral 1.1% at the end of the first quarter.
Moving on to Slide 14. We posted solid fee results despite seasonality and headwinds from market volatility and higher rates. These showed some resilience amid a challenging environment, down 4% linked quarter with seasonal impacts in capital markets and service charges, partly offset by strength in FX and derivatives revenue and a modest improvement in mortgage banking fees. Focusing on capital markets, market volatility continued through the quarter and syndications and M&A advisory fees were seasonally lower. We continue to see good strength in our M&A pipelines and signs that deal flow should pick up as the year progresses. Mortgage fees were slightly better with higher production fees. We are seeing volumes rising and margins improving with the industry reducing capacity. This should continue to benefit margins over time. And finally, card and wealth fees posted solid results for the quarter.
On Slide 15, expenses came in better than expected, up only 2.8% linked quarter, given seasonally higher salaries and employee benefits as well as the impact of an industry-wide FDIC surcharge implemented at the beginning of the year.
On Slide 16, average loans were down slightly and period-end loans down 1% linked quarter including the impact of planned auto run off. We have seen commercial utilization decrease 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 anticipation of reduced economic activity. Average retail loans are down slightly, reflecting the planned run off in auto, which was largely offset by growth in mortgage and home equity.
On Slide 17, average deposits were down $4.7 billion or 2.6% linked quarter, driven by seasonal and rate-related outflows. As I mentioned earlier, the majority of the deposit decrease occurred in January and February, with balances broadly stable in March. Our interest-bearing deposit costs were up 51 basis points, which translates to a 73% sequential beta and a 36% cumulative beta.
Moving on to Slide 18. We saw good credit results again this quarter across the retail and commercial portfolios. Net charge-offs were 34 basis points, up 12 basis points linked quarter, which reflects continued normalization. Nonperforming loans are 64 basis points of total loans, up 4 basis points from the fourth quarter as an increase in Commercial was offset by improvements in retail. Retail delinquencies were broadly stable with the fourth quarter and continue to remain favorable to historical levels, but we continue to closely monitor leading indicators to gauge how the Consumer is faring.
Turning to Slide 19, I'll walk through the drivers of the allowance this quarter. We increased our allowance by $35 million to take into account the growing risk of an economic slowdown and the outlook for losses in the Commercial portfolio, particularly general office. Our overall coverage ratio stands at 1.4%, which is a 4-basis-point increase from the fourth quarter. The current reserve level calculation contemplates a moderate recession and incorporates expectations of lower asset prices and the risk of added stress on certain portfolios such as CRE.
Moving to Slide 20. We maintained excellent balance sheet strength. Our CET1 ratio increased to 10%, which is at the top end of our target range. Tangible book value per share was up 6% in the quarter, and the tangible common equity ratio has improved to 6.6%. We returned a total of $605 million to shareholders through share repurchases and dividends.
Shifting gears a bit, on Slide 21, we continue to make good progress with our push into the New York Metro market. We were very excited to complete the branch and systems conversion at Investors in February, which went very smoothly. With that behind us, we are full steam ahead working to serve our customers and capitalize on opportunities to capture market share. We continue to be encouraged by the strong early momentum we are seeing in the branches where customer satisfaction has been improving significantly, and we continue to see some of the highest customer acquisition and sales rates in our network across the legacy HSBC and Investors branches. We've also seen some good early client wins and a growing pipeline in Commercial. 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.
Moving to Slide 22 for a quick update on our TOP8 program. Our latest TOP program is well underway and progressing well. Given the external environment, we have begun to look for opportunities to augment our TOP8 program in order to protect returns as well as ensure that we can continue to make the important investments in our business to drive future performance. We'll have more to say about this in the coming months.
Moving to Slide 23. I'll walk through the outlook for the second quarter and give you an update on our outlook for the full year that takes into account a modest economic slowdown with the Fed expected to raise rates by 25 basis points in May and then begin easing late in the year. For the second quarter, we expect NII to decrease about 3%. Noninterest income is up mid- to high-single digits. Noninterest expense should be stable to down slightly. Net charge-offs should remain in the mid-30s basis points. Our CET1 is expected to come in above 10% with some share repurchase planning depending upon our view of the external environment.
Moving to Slide 24. As we think about the full year, we remain focused on maintaining strong capital, liquidity and funding position while sustaining attractive returns. Of course, there is a continued level of uncertainty in the current environment. For the full year 2023, we expect NII to be up 5% to 7%. We are focused on initiatives that will stabilize and even grow our deposits modestly from first quarter levels over the remainder of the year. Noninterest income is expected to be up mid-single digits. Noninterest expense is expected to be up about 5%. Net charge-offs are expected to be in the mid- to high-30s basis points. Our current reserve level contemplates a moderate recession and known risks, and there should be less of a need for further reserve builds given anticipated spot loan decline for the year as auto runs down, and our CET1 ratio is expected to be above the upper end of our 9.5% to 10% target range. At 10% to 10.25%, assuming stable market conditions, our share repurchases are expected to build over the course of the year.
To sum up, on Slide 25, we delivered a solid quarter despite unexpected challenges and are ready for the uncertainty that lies ahead in 2023. Our strong capital, liquidity and funding position will serve us well to move forward with our strategic priorities and deliver attractive returns this year as we balance the need for strong defense with the imperative of continuing to play prudent offense to strengthen the franchise for the future. Even as we navigate through the current challenging environment, we reaffirm our commitment to our medium-term financial targets.
With that, I'll hand back over to Bruce.
