Citizens Financial Group Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 19, 2023

There are 12 speakers on the call.

Operator

Morning, everyone, and welcome to the Citizens Financial Group Second Quarter 2023 Earnings Conference Call. My name is Alan, 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.

Operator

Now I'll turn the call over to Kristin Silberberg, Executive Vice President, Investor Relations. Kristen, you may begin.

Speaker 1

Thank you, Ellen. Good morning, everyone, and thank you for joining us. First, this morning, our Chairman and CEO, Bruce Van Son and CFO, John Woods will provide an overview of our 2nd quarter results. Brendan Coughlin, Head of Consumer Banking and Don McCree, Head of Commercial Banking are also here to We will be referencing our Q2 earnings presentation located on our Investor Relations website. After the presentation, we will be happy to take questions.

Speaker 1

Our comments today will include forward looking statements, which are subject to risks and uncertainties May cause our results to differ materially from expectations. These are outlined for your review on Page 2 of the presentation. We also reference non GAAP financial measures, so it's important to review our GAAP results on Page 3 of the presentation and the reconciliations in the appendix. And with that, I'll hand over to you, Bruce.

Speaker 2

Thanks, Kristen, and good morning, everyone. Thanks for joining our call today. The turbulent external environment continued in the Q2, but we continue to navigate well, and we delivered solid financial performance. In particular, we're pleased with the strong results we achieved around capital, liquidity and funding. Our CET1 ratio grew by 30 basis points to 10.3% in the quarter and we were able to repurchase in of $250,000,000 in stock.

Speaker 2

We grew spot deposits by 3% or $5,500,000,000 and our Spot loan to deposit ratio improved to 85%. Our Federal Home Loan Bank borrowings dropped by $7,000,000,000 to $5,000,000,000 And contingent liquidity grew by 20% to $79,000,000,000 For the quarter, we posted underlying earnings per share $1.04 and ROTCE of 13.9 percent. NII was down 3% reflecting higher funding costs in line with our expectations. Non interest income grew 4%, Slightly less than expected as capital markets saw a few deals pushed to the 3rd quarter. Expenses were broadly stable As expected, and credit costs continue to be manageable.

Speaker 2

One of the highlights of the second quarter was Private Bank and Wealth Management Business. While expense investments will lead revenues in 2023, we project the business to be accretive in 20 24 and significantly profitable in the medium term. In our presentation this morning, we will highlight this initiative in more detail. We'll also review several other compelling initiatives that we believe will lead to strong medium term outperformance. As a centerpiece of intensified balance sheet optimization efforts.

Speaker 2

We expect around $9,000,000,000 of loan runoff, largely in auto by the end of 2025. This capacity will be utilized to fund more strategic loan portfolios, to pay down high cost debt and to build cash and securities. In parallel, the private bank will grow loans over this period By $9,000,000,000 which will be funded by $11,000,000,000 of incremental deposits. The net benefit of all of this is a better deployment of capital along with positive impact on earnings per share, ROTCE and liquidity. We've also included more detail on our CRE loan portfolio.

Speaker 2

Our general office reserve is now at 8%. While we continue to see increases in criticized assets and charge offs in this particular portfolio, we believe losses are manageable and readily absorbed by reserves and our strong capital position. Looking forward, we anticipate that the environment while stabilizing will continue to be challenging. Our net interest margin will decline again in Q3 given higher funding costs. We expect our terminal beta to reach 49% to 50% at year end.

Speaker 2

Our fees should continue to grow sequentially, expenses will be well controlled and credit should be broadly stable. We will further build our CET1 ratio while continuing to repurchase shares. Overall, we're holding an okay on current period performance with mid teens ROTCE in 2023, while making the investments to deliver a stronger franchise, attractive growth and returns and a fortified balance sheet over the medium term. We continue to build a great bank and we remain very excited about our future. Our capital strength and our attractive franchise

Speaker 3

Turning to Slide 5. For the Q2, we generated underlying net income of $531,000,000 And EPS of $1.04 Our underlying ROCE for the quarter was 13.9%. Net interest income was down 3% linked quarter and our margin was 3.17%, down 13 basis points with funding costs outpacing the increase in asset yields. We delivered very strong deposit growth in the quarter reflecting the strength of the franchise With spot deposits up 3% or $5,500,000,000 Period end loans and average loans were down 2% quarter over quarter, Reflecting the impact of our balance sheet optimization efforts, including our ongoing runoff of auto. These dynamics improved our period end LDR to dollars to approximately $5,000,000,000 outstanding at quarter end and we increased our available liquidity by 19% to about Our credit mix and overall position remain solid.

Speaker 3

Total NCOs of 40 basis Points are up 6 basis points linked quarter as expected, primarily reflecting higher charge offs in Cree General Office. We recorded a provision for credit losses of $176,000,000 and a reserve build of $24,000,000 this quarter, Increasing our ACL coverage to 1.52%, up from 1.47% at the end of the first quarter With the increase directed to the general office portfolio, we repurchased $256,000,000 of common shares in the 2nd quarter and delivered a strong CET1 ratio of 10.3%, up from 10% in the first quarter. And our tangible book value per share is down 2% linked quarter reflecting AOCI impacts associated with higher rates. On the next few slides, I'll provide further details related to Q2 results. On Slide 6, net interest income was down 3%, Primarily reflecting a lower net interest margin, which was down 13 basis points to 3.17 percent with the increase in asset yields more than offset by higher funding costs given the competitive environment and migration from lower cost categories.

Speaker 3

With Fed funds increasing 500 basis points Since the end of 2021, our cumulative interest bearing deposit beta is 42% through the 2nd quarter, which has been rising in response to the rate and competitive environment and is generally in the pack with peers. Our asset sensitivity at the end of the second quarter is still approximately 1%, which is broadly stable with the prior quarter. Our received fixed cash flow swap position is similar to the prior quarter as we held off on adding further protection as rates continue to rise during the quarter. Moving on to Slide 7, we posted solid fee performance in a challenging market environment. Fees were a 4% linked quarter With card fees showing a seasonally strong increase from higher transaction volumes and increases in wealth and mortgage banking fees, FX and derivatives revenue was modestly lower.

Speaker 3

Capital market fees were stable with market volatility through the quarter continuing to impact underwriting fees, largely offset by increased syndications and M and A advisory fees despite a few deals being pushed into the 3rd quarter. We continue to see good strength in our deal pipelines and are hopeful that deal flow picks up in the second half. Mortgage fees were slightly higher as production These increased with market volumes, partially offset by lower margins and lower servicing fees. And finally, wealth fees were also up slightly, reflecting growth in AUM. On Slide 8, expenses were broadly stable linked quarter as Seasonally lower salaries and employee benefits were offset by higher equipment and software costs as well as higher advertising and deposit insurance costs.

Speaker 3

On Slide 9, average and period end loans were both down 2% linked quarter, reflecting balance But this was offset by modest growth in mortgage and home equity. Commercial utilization was down a bit as clients look to deleverage given higher rates And we saw less M and A financing activity in the face of an uncertain economic environment. On Slide 10, Period end deposits were up $5,500,000,000 or 3% linked quarter with growth led by consumer up $3,000,000,000 and commercial up $2,000,000,000 Our interest bearing deposit costs were up 47 basis points, which translates to a 101% sequential beta at a 42% cumulative beta. Strong deposit flows and the very successful auto loan collateralized borrowing program Initiated during the quarter contributed to reducing flood levels by about $7,000,000,000 Given our BSO objectives, We grew deposits, which drove a favorable mix shift away from wholesale funding. As a result, our total cost of funds was relatively well behaved, up Next, I'll move to Slide 11 to highlight the strength of our deposit franchise.

Speaker 3

With 67% of our deposits skewed towards consumer and highly diversified across product mix and channels, We are able to efficiently and cost effectively manage our deposits in a rising rate environment. We increased the portion of our insured and deposits from 68% to 70% linked quarter and when combined with our available liquidity of $79,000,000,000 Our available liquidity as a percentage of uninsured deposits increased to about 150% from around 120% in the first quarter. As rates rose another 25 basis points in the 2nd quarter, we saw continued migration of lower cost deposits to higher yielding categories, Primarily in commercial with non interest bearing now representing about 23% of the book, this is back to pre pandemic levels and should stabilize Moving on to Slide 12, we saw good credit results in retail again this quarter and higher charge offs in commercial. Net charge offs were 40 basis points, up 6 basis points linked quarter, which reflects an increase in the general office segment of commercial real estate, partly offset by a slight improvement in retail, primarily due to the strength in used car values. Non performing loans are 79 basis points of total loans, Up 15 basis points from the Q1 reflecting an increase in general office which tends to be lumpy.

Speaker 3

It's also worth noting that overall delinquencies were lower sequentially with retail and commercial both improving slightly. Retail delinquencies continue to remain favorable to historical levels. Turning to Slide 13, I'll walk through the drivers of the allowance this quarter. We increased our allowance by $24,000,000 which includes a $41,000,000 increase in pre general office even after covering charge offs of $56,000,000 Our overall coverage ratio stands at 1.52%, which is a 5 basis point increase in the 2nd quarter. The runoff of the non core portfolio primarily auto facilitated the reallocation of reserves to free.

Speaker 3

The reserve coverage in general office was increased to a strong 8%. On Slide 14, you'll see some of As mentioned, we built our reserve for the general office portfolio to $313,000,000 this quarter, which represents coverage of 8%. In addition to running a number of stress scenarios across the general office portfolio, we continuously perform a detailed loan level analysis that takes into account property specific details such as location, building quality, operating performance and maturity. We have a very experienced CRE team who are focused on managing the portfolio on a loan by loan basis and engaging in ongoing discussions with sponsors to work through the property and borrower specific elements to de risk the portfolio and ultimately minimize losses. Our reserves reflect this detailed view of the portfolio as well as the key macro factors we set out on the page.

Speaker 3

The property value, default rate and loss severity assumptions we are using to set the reserve are adequate for the risks we currently see and are significantly more conservative than what we've seen in previous pre downturns. It's worth noting that the financial impact of any further On the following Slide 15, there are some additional disclosures we are providing this quarter to give more detail on the type and location of the general office portfolio. You can see out of the $3,900,000,000 general office portfolio, 94% is Class A or B with a majority in suburban areas, which seem to be performing better than central business districts. On the bottom left hand side of the page, it highlights that the Portfolio is quite diversified across geographies as well as the top 10 MSAs listed on the bottom right hand side. Broadly for New York MSA, we are starting to see return to office trends picking up and more than 80% of the portfolio is outside Manhattan where property dynamics tend to be more favorable.

Speaker 3

Washington D. C. Is 100% Class A and B and 95% Suburban. Moving to Slide 16, we maintain excellent balance sheet strength. Our CET1 ratio increased to 10.3% as we look to add capital given the uncertain macro and regulatory environment.

Speaker 3

We returned a total $461,000,000 to shareholders through share repurchases and dividends. Turning to Slide 17, you'll see Our CET1 ratio is among the highest in our regional bank peer group. This strong capital level reflects a relatively conservative approach since the IPO in maintaining robust capital levels. If you incorporate the removal of AOCI opt out, Our adjusted CET1 ratio would be 8.5% and we also expect that this would place us near the top of our peer group again this quarter. We expect to maintain very strong capital levels going forward with the ability to generate roughly 20 basis points of CET1 ratio post dividend each quarter in 2H23 before share buybacks.

Speaker 3

So as you see, we've been focused for a while on playing really strong defense with a focus on capital, liquidity, funding and maintaining a prudent credit risk appetite. And that's been job 1 even long before the turmoil we saw in the Q1. But we also recognize the need to continue to play offense. We need to be selective investing in initiatives that will grow the franchise where we have a right to win. Over the next few slides, I'll spotlight a few of the Exciting things we are doing to make sure that we can deliver growth and strong returns for our shareholders.

Speaker 3

1st, On Slides 1920, we were excited to announce a few weeks back that we have hired about 50 senior private bankers and 100 related support professionals We're with First Republic. As many of you know, for a number of years, we've had an interest in growing our Wealth business, both organically and inorganically. So we've made a number of investments on the organic side, hiring financial advisors and converting that business from a transactional business to a very customer centric financial planning approach. That's been a slow and steady build over the years and then we supplemented that with the Carfeld acquisition and that's gone incredibly well. So with our customer centric culture, our financial strength and the full range of products and services we offer, we were the perfect fit for these bankers.

Speaker 3

We really admire their approach to delivering the bank to their customers This is really a coast to coast team with a presence in some of our key markets like New York, Boston and places where we'd like to do more like Florida and California. In fact, we think the overlap with JMP and San Francisco is These bankers serve the types of customers we are seeking to attract to the bank, high and ultra high net worth individuals and families Often with strong connections to middle market companies with a particular focus on private equity and venture capital firms serving the innovation economy. We have a great deal of work ahead of us to integrate these teams and to ensure that they are positioned to deliver the bank to their clients. We plan to open a few private banking centers in key geographies and build appropriate scale in our wealth business with ClarkDodd as the centerpiece of that effort. We think this is going to be extremely attractive from a financial perspective.

Speaker 3

These teams and their staff about 150 people in total onboarded late in the Q2 with revenue beginning to ramp in the Q4. Financial impact for the second half will be $0.08 to $0.10 of EPS Plus an initial notable cost of about $0.03 for 2023. These bankers have hit the ground running and are out working to build their book of business and we expect the effort to breakeven around the middle of 2024. By 2025, we expect EPS accretion of roughly 5% With 2025 year end projections of about $9,000,000,000 in loans, dollars 11,000,000,000 of deposits and $10,000,000,000 of assets under management. So overall, a very exciting advance for us.

Speaker 3

Now let's go to Slide 21 and I'll walk you through how we'll be managing our balance sheet over the next few years. Since the IPO, we've prudently grown our balance sheet while managing the mix of assets and funding with an eye towards maximizing returns. With the increase in rates since the end of 2021, plus the advent of quantitative tightening and more recently the heightened competition for deposits, We are entering the next stage of the journey with a plan to focus on attractive relationship lending, while lowering our LDR, which will improve our liquidity profile and benefit returns. In order to make this effort clear and show the benefits we expect, We've established a $14,000,000,000 non core portfolio, which is comprised of our $10,000,000,000 shorter duration indirect auto portfolio And lower relationship purchased customer loans consumer loans. This portfolio will run down fairly quickly with about $9,000,000,000 of runoff expected by the end of 2025.

Speaker 3

Moving to Slide 2223, You'll see that as the non core loan portfolio runs down, this allows us to pay down higher cost funding and redeploy capital into more strategic lending and our investment portfolio. We will also be growing relationship based lending through the private bank and raising deposits to self fund that growth. Despite the size of the runoff portfolio, we expect to see modest loan growth in 2024 picking up in 2025 driven by opportunities across retail and C and I as well as our private bank effort. The net result of these actions is an improved liquidity profile with a better loan and funding mix and higher returns. Next on Slide 24, a quick update on our entry into New York Metro where some really exciting things are happening.

Speaker 3

With the branch conversions behind us, we have full steam ahead working to serve our customers and capitalize on opportunities. We continue to be encouraged by our early success. We've seen strong sales in the branches as we leverage our full customer service capabilities to drive some of the highest customer acquisition and sales rates in our network. Most importantly, we've seen a steady improvement in our Net Promoter Scores. On the Commercial Banking side, we've got a strong new leadership team in place with local talent joining from larger firms And we are seeing some early success leveraging our new visibility to build pipelines with middle market firms.

Speaker 3

And we are looking forward to what we can do with our new private On Slide 25, we have a great opportunity to build on Citizens Access, our national digital platform that has been focused on deposits for the last few years. We've moved to a modern fully cloud based core platform and we plan to add checking capabilities later this year. Down the road, we plan to converge our legacy core system with this modern platform. We are confident that a single integrated platform will be more cost efficient and flexible in meeting our clients' needs. We aim for this to be a complete digital bank And on the right side is Citizens Pay, where we have been very innovative in creating distinctive ways to serve customers.

Speaker 3

Citizens Pay has been the top customer acquisition engine for the bank with very high promoter scores and this has been a great performer from a credit perspective. We have had some fantastic partners on the platform for a while Such as Apple, Microsoft, Best Buy, BJ's and Vivint. And we are always very excited to welcome new partners like Peloton, Shrek, The Tile Shop and WiseTech platform. On Slide 26, I'll highlight how we are positioned to support the significant growth in private capital. Over the last several years, private capital fundraising has led to record deal formation, M and A activity and substantial fees.

Speaker 3

Deal activity has been relatively muted recently and many sponsors have not deployed meaningful amounts of capital, so there is a tremendous amount of We have been executing a consistent strategy to serve the sponsor community with distinctive capabilities for the last 10 years and we've done a great job moving up to the top of the sponsor lead tables, particularly in the middle market. We have made significant investments in talent and capabilities, including 5 advisory acquisitions since 2017 And our new private bankers significantly expand our sponsor relationships and capabilities. Our success supporting private capital has been a large part of our strong capital markets performance over the last few years and we are poised Capitalize on the next wave of sponsor activity as the path of the economy becomes clearer. Let's move to Slide 27 for an update on our TOP program. Our latest TOP 8 program is well underway and progressing well.

Speaker 3

Given the external environment, we have decided to augment the program to protect returns as well as ensure that we can continue to make the important investments in our business to drive future performance. We have increased our targeted benefit by $15,000,000 to $115,000,000 by accelerating some of our efforts and to further rationalize our branch network and reduce procurement costs. We have also begun planning for our top nine program, looking for efficiency opportunities driven by further automation and use of AI to better serve our customers. We are also looking at ways to simplify our organization and find even more savings in procurement. Continuous improvement is part of our DNA I'm very confident that we'll continue to deliver these benefits to the bank.

Speaker 3

Moving to Slide 28, I'll walk through the outlook for the Q2 for Citizens, which excludes the impact of the Private Bank and I will also provide some comments for the full year. The outlook takes into account another rate increase followed by And on hold for the remainder of this year. For the Q3, we expect NII to decrease about 4%, Non interest income to be up by approximately 3%. Non interest expense should be broadly stable. Net charge offs are expected to be broadly stable to up slightly.

Speaker 3

Our CET1 is expected to rise modestly from 10.3% with additional share repurchase is planned, which will depend upon our ongoing assessment of the external environment. Relating to the full year, Our liquidity position is quite strong and given the BSO actions I discussed earlier, we will continue to build on this targeting an LDR of low to mid-80s by the end The year positioning us well for anticipated regulatory changes. Worth noting, we are already we already are fully LCR compliant with Based on the forward curve, we are expecting a terminal interest bearing deposit beta of 49% to 50%. Our net interest margin should begin to stabilize in Q4 as the Fed is expected to reach the end of the rate hike cycle. We are off to a great start of building up a private bank and we expect the EPS impact of this to be $0.06 in the 3rd quarter and $0.02 to $0.04 in the 4th quarter So we really think of this as a capital investment.

Speaker 3

To wrap up, our results were solid for the quarter as we continue to navigate a turbulent external environment. We are focused on positioning the company with a strong capital, liquidity and funding position, which will serve us well as we continue to navigate a challenging environment ahead. Our balance sheet strength also positions us very well to focus on our strategic priorities to continue to strengthen the franchise for the future and deliver attractive returns. With that, I'll hand back over to Bruce.

Speaker 2

Okay. Thanks, John. Alan, let's open it up for some Q and A.

Operator

Thank you, Mr. Van Son. We are now ready for the Q and A portion of You'll hear an indication you've been placed into queue and you may remove yourself from the queue by repeating the 1 then 0 command. Your first question will come from Scott Siefers with Piper Sandler. Go ahead.

Speaker 4

Good morning, everybody. Thank you for taking the question. I guess first question is just on the sort of accretion to the margin from the balance sheet Do you have a sense for what sort of a steady state margin from Citizens might look like after that is completed? I guess it doesn't necessarily have to be a specific number, but just in your view, How powerful is that accretion from these activities? And I appreciate that sort of the backdrop of the 4.2% yield versus the 5.5% funding costs.

Speaker 3

Yes, go ahead and start, Oscar. Thanks for the question. I mean, I think broadly, we're seeing the impact of the rate environment on our net Margin, we're managing it quite well as the Fed is continuing on its hiking cycle. And as you get into the end of the year, taking into consideration All of the balance sheet optimization activities, we see NIM flattening out and kind of holding in around 3% or so as you get to the end of the year. The tailwinds From balance sheet optimization are meaningful and we'll continue to build into 2024.

Speaker 3

And so those are the big drivers there. I think Also contributing to that NIM stability would be the fact that we think that balance sheet migration is starting to stabilize And also you can't ignore the fact that the private bank itself as you get out into 2024 will start to deliver accretive NIM. We're feeling good about the profile after we get through this last hike from the Fed here in July, watching that NIM start to stabilize as you get into the end of the year.

Speaker 4

Okay, perfect. Thank you. And then is it possible to put sort of a finer point on the, I guess, 0 point 0 $8 to 10 percent pardon me, 0 point 0 $0.08 to 0 point 0 $0.10 of Cumulative expected EPS drag from the private bank initiative, certainly appreciate the sort of the loan and deposit Assets under management outlooks, but maybe any broad sense for dollar value of expected revenues and expenses as we look into the second half?

Speaker 3

Yes. I mean, it's a little bit front end loaded as the expenses will come in and drive probably more The neighborhood of $0.06 of that $0.08 to $0.10 happening in the 3rd quarter with the $0.02 to $0.04 really into the 4th quarter. And it's primarily expenses in the neighborhood of $40,000,000 or so as you get into the 3Q and 4Q and you had But the loan book starts to build later this quarter and into 4Q. So that gives you the front landing of that 8 to 10 into 3Q. The one thing

Speaker 2

I would say to that Scott, it's Bruce, is this is a very sound approach to scaling up the wealth business. We've been looking for acquisition ideas and it's been very With very long tangible book value earn backs many times would be over 5 years, which is beyond our Appetite. So to actually do this in a kind of de novo buildup basis, you incur some capital expense in the short run, but it's almost the same as if you kind of equate it to an outlay that ultimately Starts to generate revenues and the nice thing about this is that it's accretive already in the 2nd year and kind of earn back on this thing is under 2 years. So we look at it really Les, as a driver of how does it affect the near term EPS, but look, there's a capital outlay, which we burned some expense dollars to get it off the ground and then all of a sudden it's making us money and it really ramps very nicely and can achieve something like a 5% Accretion in 2025, which is kind of within 2.5 years in the 2nd year of doing a deal. If you compare that to some of the other transactions that we've done, including the bank acquisitions, it's pretty darn powerful.

Speaker 2

So Very excited about this opportunity. Perfect.

Speaker 4

Okay, good. Thank you very much.

Operator

Your next question will come from the line of Erika Najarian with UBS. Go ahead.

Speaker 5

Hi, good morning. John, I was just wondering if you could help us with lots of the moving pieces That's sort of unfurling in front of us. So I guess the first question is you noted Stability in the 3% at the 3% level, does that mean that Q4 20 24 will be at about the 3rd quarter level. I'm just wondering sort of how those dynamics play out in terms of What you expect for the how the balance sheet trends for the rest of the year or will sort of be run off We continue to pressure it at that level. And what does that 4th quarter NII about look like from a range perspective?

Speaker 3

Yes. I mean, I think from a NIM standpoint, you're talking about 23, just confirming, Arafat.

Speaker 5

23. I'm building up to 24,

Speaker 3

Yes. I heard you referenced 24. But the answer is actually a little bit similar. But what we do see is after the Fed hikes here in July and that the impact of that Get burns in, in the Q3 that we do see NIM flattening out there between 3Q and 4Q having a More flat profile as you get into the end of the year around 3%. So maybe a touch higher in 3Q Net interest margin, but seeing that profile begin to flatten out.

Speaker 3

And I think the key drivers of that And the pieces and parts, as I mentioned, we're starting to see a deceleration in deposit migration, Negative deposit migration, so that's a good early green shoot. That's consistent with the fact that Our DDA levels are basically where we were back to pre pandemic. And so that ends up being an expected landing zone as you get into the end of the year. So we'll see that flattening out. You'll see the tailwinds from the runoff book Start to kick in the reallocation of that capital and liquidity into relationship lending and the ability Pay down some higher cost funding as you get into the end of the year and so that starts to bolster net interest margin, which we do think carries into 2024 And we think that there are a number of positive developments in 2024 that would allow us to hold that NIM out Even beyond

Speaker 2

the Q4. And I would comment, Erica, that this was a really important quarter for us to Kind of get the deposit level where we wanted to get the Federal Home Loan Bank borrowings lower and really take a big step in lowering the LDR. And so we paid up a little bit to achieve that. And the impact of that full quarter effect affects the 3rd quarter guide. But I think at this point, we feel that we don't need to continue to really aggressively grow deposits.

Speaker 2

We can Have a more stable deposit profile, as John indicated, less migration from non interest bearing to interest bearing. And so there won't be kind of a full quarter impact of an aggressive plan that affects Q4 from Q3 because We'll be kind of looking at a more stable profile in Q3.

Speaker 5

Got it. And so, thank you for that, Bruce. So as we I think about the Q4, is it fair then to say that your guidance implies NII of 1.52 $1,000,000,000 for the Q3. So do we assume that we're at or around that range for the Q4? And as we think about the puts and takes of 2024 and John, I have to bring this up because a few investors We're noting I think now it's Slide 31 where you have some swaps rolling off that have very heavy weighted average Fixed grade that you're receiving.

Speaker 5

So as I think about $1,520,000,000 perhaps as a starting point plus or minus, I assume that the your guide for down 100 basis points NII for full year down 1.2% It's still valid if we assume rate cuts next year and includes those swap roll offs. So that's sort of the first question. And the second is, How does balance sheet optimization impact that sensitivity? So I'm assuming that's extraordinarily static. So and I'm assuming that from both sides you're paying off more debt next year as you're waiting for these loans to come on And then you're as you wait for the influence, you're also putting it in higher yielding in cash.

Speaker 5

So if you could just help us to Think through the moving pieces as it relates to that original disclosure, because I think investors I was thinking about the potential for rate cuts next year.

Speaker 3

Maybe I'll just start

Speaker 2

off in a couple

Speaker 3

of areas. Just when you think about NII, Some of the numbers that you're throwing out there are probably a little lighter than where we would see them come out. I think our NII will be a little better than that. And into Q4, I think we have some opportunities to if interest earning assets are going to be stabilized as Bruce indicated And net interest margin stabilized, so we think the NII is also stabilized and at solid levels. So that was I think First question that you had, I mean, I think

Speaker 2

the Just to put a point on that too is that any swap impacts In our forward guides, Erica. So we've already contemplated that. So there's nothing and they didn't really move. We didn't do any adjustments in the second quarter.

Speaker 3

So Yes, there's a very limited adjustment. Things do roll off and come on, but broadly our asset sensitivity profile was pretty stable quarter over quarter, Meaning we were still asset sensitive. So a rate rise, which we're about to get from the Fed does actually contribute to NII and net interest margin for us. So from that perspective, all of that has been built into the commentary that we've been giving you In terms of swap roll off and our ongoing positive asset sensitivity, again, when you get when you think about net interest margin Over kind of the next several quarters, we have a number of tailwinds. You've got flattening out non interest bearing migration, So that's no longer expected to be a big headwind.

Speaker 3

You've got the runoff book that we talked about and that runoff book It's going to be rotated into relationship lending at higher yields. So the runoff Paying off high cost debt too. And paying down high cost funding, right? So that which where we have a negative kind of spread situation there. We already mentioned the fact that the private bank is going to start contributing to the balance sheet later this year and that the net interest margin on that is actually accretive To the overall legacy bank, the only thing I threw out there is that just the front book, back book dynamics where you basically have originations in the front book MX, where you basically have originations in the front book.

Speaker 3

Just in the securities portfolio alone, there's 300 basis points plus positive Front book, back book in terms of we're actually creating a bigger securities book, but we're doing it at the right time And where securities yields are actually historically quite favorable. And so we're putting a lot away from that standpoint. And we're seeing back into the loan book spreads on our front book originations higher than they were. And for example, in C and I, Spreads are up 50 basis points over the last year, year over year. So that's So a tailwind.

Speaker 3

And all those things are the things that are going to help us manage the fact that manage the rate environment And the other items that we have.

Speaker 2

So I think what John described, Erica, is a number of tailwinds that Should be positive. So if the Fed is cutting next year, that potentially is a negative, but we have these positive things to offset that, which gives us kind of that Stable view on the NIM into 24.

Speaker 5

Got it. And just to wrap it up, just because I got a few emails to clarify And I'll step aside. It sounds like your sensitivity hasn't changed. So whatever that 4th quarter Number is, which is stable to 3rd quarter, the down 1.2% on down 100% is still valid, But then the balance sheet optimization will get you closer to stable despite Fed cuts.

Speaker 3

Yes, I agree. So balance sheet optimization plus the fact that when if rates were rates begin to fall, if they do, we don't have that happening in the quarter by the way. We have that happening in 2024. We have the Fed on hold for the rest of the year and we have the Fed, just based on the forward curve, right, having Fed ending around 4% in 2024. So it's really not until 2024 where you see those down rate scenarios.

Speaker 3

And in the downgrade scenario, I That's where deposit betas start working for you rather than against you. And so then you start getting some of that coming in, as well as the fixed Loan portfolio that creates a buffer when rates start to fall. And so I would just add those two things to all the other tailwinds I already articulated as As to why we feel like we can hold a stake on NIM.

Speaker 2

Yes. I'd just Bose and you've got an extended period of time here, Eric, and we're very Then I admit, which I'm sure is on a lot of investors' minds. But kind of bigger picture is We're kind of transitioning the loan book to things that are more strategic and offer Better returns on capital and better opportunities for cross sell and deepening with customers. And so we're kind of working through a transition period This year and even into next year, it's a little hard to give you full guidance at this point given a lot of uncertainty still in the market. We're giving you our best Instincts at this point on that, but I feel quite confident that as we kind of emerge through 'twenty four and then even look out to 25 that kind of with the lift off of this private bank effort and the kind of rundown of these Less strategic portfolios that we're going to get a lot of benefit from this and we're really poised to do quite well I think looking out into At the back half of 'twenty four into 'twenty five.

Speaker 5

Yes. Bruce, that private bank lift out is a boss move. I think everybody Just wanted to figure out what that runway look like and I think this conversation we just had clarified that runway. So thank you.

Speaker 2

Sure.

Operator

Your next question will come from the line of Matt O'Connor with Deutsche Bank. Go ahead.

Speaker 6

Hi, good morning. This is Nate Stein on behalf of Matt O'Connor. Just one question for me. So the capital build was good this quarter with CET1 rising to 10.3% from 10% and guidance calls for this to increase again in 3Q. Just wanted to ask how high are you willing to let the ratio get to?

Speaker 2

I think it's Bruce. I think by The end of the year, we could see it getting to 10.5%, which is a bit above our Stated range had been 9.5% to 10%. I think given all the uncertainty that's out there in the economy Plus direction of travel from regulators that managing it up like that is sensible. Having said that, we're still generating quite good returns, which gives us the ability to kind of nudge that up from here in terms of the ratio, but also repurchase our stock, which we think is great value at the current pricing. So that's how we're looking at it.

Speaker 2

And then as we go through 2024 at this point, our early thoughts would be Kind of more of the same that we can at least hold that 10.5% and maybe build on it based on what we see from regulators, but We have the wherewithal to be in the market buying our stock on a consistent basis and folding or building that ratio further.

Speaker 6

Thank you.

Operator

Your next question will come from the line of Gerard Cassidy with RBC. Go ahead.

Speaker 7

Good morning, Bruce. Good morning, John.

Speaker 2

Good morning. Hi, Gerard.

Speaker 3

Bruce and John, can

Speaker 7

you guys share with us, obviously, Vice Chair Bar has come out with a speech last week talking about RWA increases that will lead to higher capital levels for All banks over $100,000,000,000 in assets. Have you guys given some thought on where this could be where you could be most impacted by the new Basel And then second, as part of this, this week Bloomberg reported That there may even be some RWA increases for residential mortgages, which really hasn't been discussed. And How are you guys approaching what could be coming possibly as soon as next week?

Speaker 2

Let me start. I'll quickly flip it to John. But Clearly, I would say there's mixed views on whether that's a sound proposal at this And I think the industry itself has acquitted itself very well through the pandemic, through this A period of turmoil in the first half of the year and I think many folks have commented that the industry has strong capital. And so in response to 3 idiosyncratic bank failures, Is it appropriate that the thing that needs to be fixed is more capital in the banking system? I don't know.

Speaker 2

I have to question whether that's appropriate and we'll see how it plays out. I think there'll be Lots of dialogue around that. I think from our standpoint by moving our capital position higher, We're anticipating any of what could come down the pike is something that we can absorb. We're in a very strong position relative To our SCB, which by the way, we're still have some questions about how it landed where it did, but nonetheless, we're well above that And we're well above if the AOCI filter goes away, we already have sufficient capital to meet our new proposed SCP. So we're in a position of strength, Gerard.

Speaker 2

I think we can still deliver the kind of returns we aspire to Over time as we get through this transition period and hit our medium term financial targets, but I would kind of at least comment that I'm not sure that that's the answer when we had a series of management supervisory failures And poor asset and liability management that really was the problem that caused this turmoil, not a lack of capital in the banking system. So I'll get off my soapbox and I'll pass it over to John.

Speaker 3

Yes. Agreed with all of that, Hendoy. And I think the issue is in credit RWA versus Operational risk RWA, Gerard. So I think there was a view that there would be some puts and takes on the credit risk RWA and maybe it wouldn't be Much of an increase expected at the regional bank level, but I did see we did see those reports on residential mortgages. We'll see how it all plays out.

Speaker 3

But on the operational risk side of things, with a complex Fee based sort of businesses are where a lot of that is directed and it's not just we don't have much of Exposure as much of exposure to that as maybe some other banks in the industry do. So broadly, we felt like That we would be impacted possibly a little less than most, and we're sitting with capital a little more than most. So from that perspective, we feel pretty well positioned for the uncertainty of the regulatory rulemaking process. And as you heard from Bruce, we're growing capital into the end of the year and I think a 10% something in the neighborhood of 10.5% CET1 It's a pretty strong, mitigant to anything that might come down the road from the Fed.

Operator

Great. Thank you, guys. Your next question will come from the line of Ken Usdin with Jefferies. Go ahead.

Speaker 8

Hey, thanks. Good morning. I just wanted to follow-up on the strategic remixing. I'm wondering, can you give us some color on the types of loans and deposits that you think We'll come over as part of that those new hires in the private bank. I mean, obviously, the First Republic mix had been Kind of low rate mortgages and high rate CDs, I would expect that's not the type of NIM you're looking to be adding.

Speaker 8

So just wondering just what those producers You're expecting to bring over and also kind of we could see it in your AUM expectation, but it Looks like it will be more NII delivering as opposed to fees?

Speaker 2

Just turn that over to Brendan. Yes. So Yes, we are really excited obviously about this initiative and it's a very strategic acceleration of our Wealth Management business, but to your point it does come with scaling up the bank as well. While we are Aiming to recreate a lot of the customer experience magic that existed in these private banking models. We are going to make some Structural changes to make sure that the profile of the business that we get is accretive at the top of the house.

Speaker 2

So what you can expect from us is Disciplined credit pricing that while we'll be competitive, we're not going to kind of lead with undercutting the market and pricing to make sure we have the right margin. We will have Incredibly disciplined credit appetite, we don't expect to take a step forward or a step in the wrong direction in terms of credit risk profile. In fact, we think this will Enhance the credit risk profile with very low risk loan generation. We are going to ensure that we're driving lendable deposits On the balance sheet that we put out relative to the private bank that we're getting core operating deposits, whether that's from individuals or from businesses, It's really important that we maintain a sound liquidity position in this growth. And lastly, from a compensation perspective, We're going to rationalize the compensation model best we can within the confines of a private bank to ensure that those the combination of those factors Certainly, we'll have a mix of cash management operating deposits as well as interest bearing, but we are going to tether all relationships Being primary banking, whether it's corporate or whether it's personal, so you can expect low cost DDA to be mixed in with interest bearing for a healthy Profile Primary Banking Relationships.

Speaker 2

On the asset side, I'd say we're expecting about a fifty-fifty mix of what I would call sort of Consumer Personal Retail Lending and Small Business and Corporate Lending. And on the personal lending side, really the large asset classes are Mortgage, home equity and eventually partner loan program where we're putting capital out to individuals to engage as a partner in a higher end consulting firm or private equity firm, very traditional low risk assets that dislodge the operating deposits and ultimately lead you to AUM. And on the business side, as was mentioned earlier, the profile of the team we got over does have a bent the innovation economy. So we're expecting capital call line lending to dislodge operating deposit relationships with Private Equity and Venture, and a small segment where it's appropriate relationship wise on Actually multifamily in a very high credit environment where we can also secure the personal wealth relationship. All of our balance sheet Usage will be oriented around full end to end customer relationships that include deposits and ultimately AUM growth.

Speaker 2

So it's a very integrated end to end business model and we feel like we've got the right recreation of the service strategy Married with the right corrections to the business model to ensure we get better profitability and also a stable business model that can withstand the test of time. And Yes, we think

Speaker 3

we can get really good growth around this, but we

Speaker 2

will control the growth with a guardrail of adequate

Speaker 8

Just one more question on the other side of the BSO. John, obviously talking a lot about the consumer side Of the non core portfolio here, can you just dig in and just let us know, you previously We had done a lot on the commercial portfolio. And I'm just wondering, have you done and you keep currently deep diving into the CRE book as you've talked about on the credit side. What might there still be to do on the commercial side of the portfolio in terms of BSO from that perspective? Thanks.

Speaker 2

Yes, I

Speaker 3

mean, I think and as you know in this portfolio that we set up that's it's entirely a retail portfolio in terms of that $14,000,000,000 but there are never The last in parallel BSO activity is continuing in the commercial side and let Don talk about that. Yes. So we've been at this for Probably 3 or 4 years now as we just pruned out relationships where we haven't been able to achieve the cross sell that we thought we were going to achieve when we were going into the credit several years ago. So It's really an ongoing effort. It's been running about $1,000,000,000 a year and we probably will be running about that same The good news is we've been able to replace some of that with growth in places like New York Metro where we see a good amount of opportunity on a full wallet basis, particularly in the middle market as we bring on these new hires.

Speaker 3

On the In the middle market as we bring on these new hires. On the CRE side, as everybody knows, there's not a lot of liquidity, but there is some liquidity And we're actually moving some of our exposures after the agencies and then do some private capital also. So we'll try to liquefy Multifamily over the next couple of quarters, couple of years to the best we can and bring those overall exposures down even though they're performing pretty well.

Speaker 8

Okay. Thank you very much.

Operator

Your next question will come from the line of John Pancari with Evercore. Go ahead.

Speaker 9

Good morning. Just on the capital side, I heard you in terms of The CET1 trajectory from here and that it does still allow for some repurchases, maybe could you help us Frame out what's a reasonable pace of buybacks we should assume, is it similar to the $250,000,000 that you did this quarter?

Speaker 2

Yes. I would say that is something we felt comfortable with in Q3. We were going through the Q2, we were going through the CCAR process at the time, but we saw the opportunity to build And I think we'll still be in that position. So we still have non core kind of rundown working for us, which is releasing RWAs. So you Should again have a chance to somewhat eat your have your cake and eat it too both in Q3 and Q4.

Speaker 9

Okay. Thank you, Bruce. And then on the non interest bearing mix stabilizing at the 20 Now what gives you confidence in the stabilization? I know you mentioned that you're not pushing as aggressively You don't see the need to now on competition on pricing. Is there anything though beyond that in terms of the positive behavior that you're beginning to see That gives you that confidence that this is where it's bottoming.

Speaker 3

Yes. I think there's 2 items that we look at. 1 It's just the as we are getting back to the historical place that the platform generated, Non interest bearing pre pandemic. And so that's been a sort of a foundational Spot that we think creates some solidification of the operating accounts in both retail and consumer. So that's one really important spot.

Speaker 3

So around that 23% level is about how we see it. And then the second item is that in the second quarter, We started to see some deceleration for the first time in several quarters. We started to see the turn and deposits kind of migration decelerating. And then we have And that we're seeing some really positive uptick on in retail in particular. And so I don't know

Speaker 2

if you want to ask, Brendan, to pick Yes,

Speaker 3

a couple of quick points. Just a quick recall, as we've talked over

Speaker 2

the last whole bunch of quarters, The consumer portfolio has been under a 5, 6 year transformation for quite some time and is in a very, very different starting point through the beginning of the cycle than ever before for this franchise With significant improvements in things like customer primary, privacy growth and households, our mass affluent mix has improved and low cost So coming into the cycle, we were very confident that we'd be more peer like or maybe outperform and Data that we're seeing with benchmarking suggests that in the consumer bank, we are indeed better than average versus peers right now on all dimensions, interest bearing cost, Beta as well as low cost control. So we feel pretty good how we're performing against peers. It is starting to stabilize. So the excess Surge deposits have burned down maybe by about 60%. So there's still a little bit out there, but a lot of those are starting to be sticky and turn into wealth creation.

Speaker 2

If you dissect the various different segments, the wealthier segment is still having some modest outflows and rotation into interest bearing as well as rotation outside of the banking industry, so year over year, the wealthier segment is down about 10%. We're seeing

Speaker 3

the Mass Effluent segment in deposits on

Speaker 2

a per customer basis about flat. And the mass market portfolio has actually increased in net deposits and that's a function of a lot of our strategies that we've put in place really drive primacy and activity and engagement. And so we've seen a bit of a bottoming at the lower end in terms of DDA balances. What we have done to drive that is a lot of product innovation. So and we did things like get your paycheck 2 days early.

Speaker 2

It doesn't seem like a big deal. It's actually an Incredibly big deal that's driving a lot of primary banking behavior. We've got technology we put in place that when you open a new DDA, you're automatically porting over your direct deposit. It's very operationally oriented, but it actually is a dramatic improvement to things like primary banking behavior, which drives low cost deposits. We've made overdraft perform through our Peace of Mind 24 hour grace program and a variety of other things, which has also driven a lot of primacy and we're starting to really rev up the engines on household growth Overall, all of those things contribute to some controllable.

Speaker 2

So I think we're outperforming peers on the market Given our starting point in the cycle and we're continuing to invest to try to further outperform through all of these different initiatives and strategies, It is not the long game. These are driving primacy and low cost deposits. It takes a while to build up scale, but I

Speaker 3

feel like we've got a lot of

Speaker 2

the right things in place In addition to outperforming on our back book to win the game on controllables where we're at right now. So while you're Two thirds of the deposit base and have all these great strategies. You mean Don, you've also been investing in payments capabilities and Some new products like sustainable deposits, maybe you could just offer a brief comment. Yes, that's right.

Speaker 3

I mean we've been broadening out our deposit base quite nicely. And as Bruce said, it's Combination of just the growth in the cash management business overall and bringing on more clients on the cash management side. As I said, in New York Metro, The things that we're adding are really full wallet, full cash management relationships, so those bring really nice deposits. And then on the product We've done a lot around green deposits and carbon offset deposits and our ESG strategy that was approved to be quite profitable. We've built out escrow Products and bankruptcy products.

Speaker 3

So there's a variety of product development things which are attracting nice operating deposits with some nice breadth to them. Okay. Thank you.

Speaker 9

Okay, great. Thanks.

Operator

Your next question will come from the line of Manan Gosalia with Morgan Stanley.

Speaker 10

Hey, good morning. I appreciate all the detail on the office book. It looks like you have a pretty conservative assumption baked into your CRE office reserve levels of 8%. I guess the question is what would you need to see to take that up even more? Or over the next few quarters as some of your office portfolio Should we expect the reserve levels go down as you have more normalized NCOs in that portfolio?

Speaker 2

Let me start and John or Don can add. But we feel quite good about, A, the overall nature of what we have and B, then so there There's good diversification, good quality characteristics. We have some really good people that are really focused hard on this and they're Monitoring this loan by loan, they see the upcoming maturities, they get way in front of those. So we're having good dialogue with borrowers. And I'd say We did a good job, relatively good job in the first half of absorbing some of the maturities and probably about 30 loans I think came up For maturity, which is about the number that we're going to have in the second half and it's about the number that we're going to have in the first half of next year.

Speaker 2

It's about the number that we're going to have in Q4 of next year. And if you look at the net result of that, while we have an increase in criticized, we have an increase This quarter was a little lumpy in NPAs in this sector and that probably levels off. I'd say, we were able to build our reserve and absorb charge offs. So we took $56,000,000 in charge offs. So that's another kind of 1.5 percent loss content, if you look at the 8%, it's effectively higher by what we just absorbed.

Speaker 2

And so could we go for another few quarters With absorbing charge offs kind of on a pay as you go basis with what we're providing and hold the reserve flat, Yes, possibly that could happen. And then at some point does that tip over and then you don't need as much reserve because you burned Some of those losses through your charge off line. So anyway, that's just a little color about how we think about it. John, I don't know if you want to add anything or go direct

Speaker 3

Yes. Just to reiterate the fact that, as you mentioned, we took $56,000,000 that's 1.5%, So that we've got 8% set aside, so that implies a 9.5% coverage for the losses through the cycle. And we think that's Pretty darn adequate, as a matter of fact, very strong. And so, I think that you also mentioned NPLs flattening out and charge offs kind of Getting into run rate rather than step change from here, which I think is important to reemphasize and maybe just turn it over to Don. No, I think you guys have said it was 26 loans, so you're pretty close to 30.

Speaker 3

It's pretty good that you know that. But I think the thing I'd emphasize is we've literally gone through every single loan 1 by 1 Everyone is different. It's property specific. It's MSA specific. It's rent roll specific.

Speaker 3

It's sponsor specific. And we're just seeing we're starting to see outcomes. And outcomes are a property gets extended and renegotiated with the sponsor. You might have a little bit of equity injected to improve interest carry and you might charge it off. And I think that we have a pretty good eye to the path of the book as we look forward.

Speaker 3

And things could always change, but I think we feel pretty comfortable that we've been very conservative based What we see and I will emphasize, I mean, we're not originating anything really of any scale and origination. So our whole origination team In addition to our credit team, in addition to our work out team is focused on working with our sponsors to basically In the office sector. In the office sector. And the rest by the way, the rest of the real estate, both multifamily, industrial data centers, I think, looks like it's holding up Extremely well. We're really not seeing any weakness that concerns us at all in the rest of the real estate part.

Speaker 10

That's very helpful. Thanks for the full sum answer. Just to move on to capital, is there any color you can share on what Drove the increase in the stress capital buffer this year. I know the mortgage was something that was a little bit of A headwind for the whole group, but any other information you gleaned from your conversations with the Fed And then maybe what you need to do to bring that down in future years?

Speaker 2

Yes. I we haven't really had Full debrief, so we are getting that set up, so we can go through and kind of understand their models better. I think that's been One of the concerns of the industry that it's not that transparent to us, but kind of when we look at the results, There's a couple of things that could have been a factor. So one is the build of the allowance When we took relatively high charge offs, we had a significant build was built into their models, which we didn't have in our models and that A loan probably cost us 30 basis points of a 60 basis points or something like that. So that's one thing that we'll want to talk about and And then questions about we did a deal and did the one time expenses get incorporated or We've done a lot of hedging in the falling rate scenario or our hedges getting full benefits.

Speaker 2

So we just have some questions that we want to poke at. But In any case, I think the bigger point here is that we can roll with this 8.5% and we have plenty of And we have an appreciable buffer versus that capital. So it really doesn't affect kind of our capital management strategies. But We would like to see it get kind of back into line. We think it's a bit elevated relative where it should be and we'll be having those conversations with the Fed in the coming weeks.

Speaker 3

Yes. And I think that as you get past this year where we have those integration There's a hypothesis that, that will roll off as you get into next year. And we'll have another bite of the apple next year given the fact that We're going to be doing this again. And in the end, the SCB is not our constraint. Our Our own view of what capital we need to be prudent to support our business and frankly where the Fed and The regulators are headed with required kind of levels outside of the SCB is going to be our constraint.

Speaker 3

So we're going to be, As Bruce mentioned earlier, about 200 basis points over the SED by the end of the year and probably heading towards earlier compliance with whatever Fed comes out with it most. So we're feeling pretty darn good about the capital position notwithstanding the SEB.

Speaker 10

Got it. And the BSO should have a positive impact in your risk weighted assets. Should that also have a positive impact on the SEB?

Speaker 3

Well, it might. I mean, I think more importantly, it gives us the ability to rotate RWA Capital into relationship lending and return that capital To the extent that those front book opportunities are not there, we probably had the opportunity to do both, where we rotate that capital into relationship lending And provide an ability to buy back, doesn't have a direct impact on the SEB. Great. Thank you.

Operator

And your next question will come from the line of Vivek Juneja. Go ahead.

Speaker 11

Hi, thank you. Just a follow-up on the First Republic Banker question. Bruce, Brandon, what requirements do you have what are your pricing assumptions? You said you're trying to bring the pricing to yours, but then what are the assumptions for what the bankers need to deliver To be able to recoup that or earn that guarantees. And secondly, given that this was a white glove service, which is obviously very expensive, What changes are you planning to make to that to be able to get to your hurdle profitability

Speaker 2

Yes. Thanks for the question. We already prior to the lift out of the private bankers had Relationship based pricing in play in all of our asset classes including mortgage. So when you bring heavy levels of And AUM, we price down modestly for that. So we don't have any intention of changing what we already do.

Speaker 2

And so our new private bankers will have access to the same relationship pricing grids that we've had in play for a while. So as you think about Pricing and yields of things like mortgages or even some small business commercial lending, we're not expecting a dramatic different Profile in terms of profitability or yields from legacy Citizens and how we operate the business to make sure that we're considering the full relationship and that we're really And that we're really competitive in pricing, but we're not undercutting the market by a material amount that will deteriorate either lending And I think the corollary to that is that the teams that came over understand that. And so I'd say the one thing that they won't have in their arsenal is deeply discounted mortgages. But I think they come in with their eyes wide open on that. And quite honestly, the deeply discounted mortgages are probably now the back on your balance Because people aren't refinancing those at a good clip.

Speaker 2

So they'll probably Sit there for a long time. But anyway, we will kind of do business in a commercial way. And Again, the bigger the relationship, the better the pricing generally. And so I think the team coming over is very comfortable with that. And another question around expenses It implied in the comments that John and Bruce both made around breakevens inside of 2024 is the team's production covering Kind of talking our keys to come over.

Speaker 2

So we've been really thoughtful about how we do that. But obviously, we've got the way these folks It's on

Speaker 3

a book of business model and they're going to go out and develop a lot of business and we're going to give them the runway to

Speaker 2

do that. We had a lot of debate with them on the appropriate timing to make that happen And I make sure the operations excellence is available here at Citizens. The cost of that is considered in all of our Guidance and commentary we made about the profitability of the business and we're already well underway on tinkering with the way the bank To make sure we're creating the conditions for them. Yes. And I'd say there, we probably had the brakes on a little bit to make sure that we get it to Level because you kind of get one shot with some of these customers.

Speaker 2

And so we've got a full effort on making sure that we get To the standards that we need, I would say one other silver lining from that also is that that will help us Our game and customer experience more broadly, the kind of initiatives that we're taking to make sure that we make this a great experience. There'll be Some things that spin off from that that we can move to other parts of the bank without question.

Speaker 11

Thank you. And a follow-up for just Don. Don, what are you seeing on the whole Sponsor side, given with high rates in the market, when what level do you expect it Come back to even in 'twenty four, say, just given if rates stay high, yes, some cuts, but I don't think anybody is expecting it to go back to where we were A year and a half ago. So any thoughts on what level of activity do you think we get back to?

Speaker 3

Yes, we'll see. High level pipelines are about Certainly engaging in conversations whether they can get to actual transactions or not, although there have been some. There was a Worldpay transaction And I've said this a couple of quarters is we tend to play at smaller deals, right. So we're $100,000,000 to $750,000,000 to $1,000,000,000 in terms of Deal size, whether it be advisory or financing, we were number 1 in the middle market leverage financial eCables in the last quarter. Volumes were down, but we were the number one institution playing.

Speaker 3

So we're gaining share for what's available. So do I think we're going to be back to 2021 levels? No. But I think if you get stability in rates, it's the beginning of deal formation will happen and it will And on valuation dynamics between sponsors and sellers and there's just a lot of Companies in our portfolio that just need to sell, they want to sell for generational reasons. So there are things that are available.

Speaker 3

Deals may get over equitized just Keep the interest burden down if value doesn't come down, but we're starting to see a lot of conversations going. So I don't think We're going to be off to the races, but I think it's going to continually build and I think 2024 could be a pretty good year.

Speaker 11

Thank you.

Operator

There are no further questions in queue. And with that, I'll turn it back over to Mr. Van Son for closing remarks.

Speaker 2

Thanks, Alan. And thanks again everyone for dialing in today. We certainly appreciate your interest and support. Have a great day.

Operator

Ladies and gentlemen, that will conclude your conference call for today. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
Citizens Financial Group Q2 2023
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