Joining us once again, we're excited to have Citizens. Citizens has done an outstanding job navigating a very challenging backdrop for regional banks, including seeing the largest relative improvement deposit costs versus last cycle. It's one of the first banks. It was the first bank to devise a balance sheet optimization strategy, and it's been highly opportunistic in acquiring talent during the recent downturn, particularly in the private banking space, which I'm sure Bruce will touch upon. Here to tell us more about the road ahead is Chairman and CEO, Bruce Van Saun. Bruce is going to walk us through some slides, and then, we will have a fireside chat. So with that, I'm going to hand it over to Bruce.
Okay, thanks, Ryan, and good to see everybody. There's our cautionary language, which you can read at your convenience. So let me start off with just an overview. We talk about this year, the need to play really strong defense first, and then play selective offense as well. You know, good sports teams win by playing both sides of the ball, so we're trying to do that. But when it comes to defense, it's really a focus on the balance sheet. We've maintained a super strong CET1 ratio. Our deposit base has really been transformed over time. It's high quality, mostly consumer, 67% consumer, 70% is insured, so we feel good about that. We've focused on balance sheet optimization.
That's been a process that's taken place for a number of years, but we've intensified that during this downturn. And, really, now that deposits are more dear and more expensive, you really have to look at where you're invested on the loan side of your balance sheet. And so we set up non-core to run down some thin relationships, lower returning consumer loans, mainly auto, and we're kind of driving that forward. And we're really thinking about where we lend. We want to have thick relationships where, you know, we can generate overall good relationship returns, whether it's in consumer or in commercial. We feel that our balance sheet also is well reserved.
We're 1.55 ACL compared to a 1.3 day one CECL, and the general office reserve is at 9.5%, which we think is plenty sufficient. When it comes to the offensive side of the ball, I'll walk through these initiatives, but clearly, the Private Bank is a big effort for us. The New York City metro play, which you'll see our branches around town here, another big initiative. We've been focused for a long time in serving Private Capital as PE owns more and more of Middle Market America. I'll talk about that. And just generally deepening, just making sure that we have primacy with our customers, and we have good solid, deep relationships. We're catering to as much of our client needs as possible.
We continue to do a good job on expense management. TOP 8 is hitting the mark, TOP 9 is launched, and we have a broad-based cost reduction program as well, that we're already acting on here in the fourth quarter. So let me just walk through a couple of slides to emphasize those points. This was in our third quarter earnings deck. I'm not sure if you focused on it, but I think it's quite important because we tried to break out what our legacy core business is delivering today. And then we're investing in the private bank, which in the outset is all expenses and limited revenues, which is going to flip around over time. And then non-core, which is in a runoff mode.
The core bank at $1.08 of EPS, 15.3% ROTCE. Then you have the private bank, that $0.05 negative becomes accretive in the second half of next year, 5% accretive to the bottom line in 2025. And we still are solidly supportive of the of that estimate. We are off to a good start, and so, that's still our call on 2025. And then non-core, that's running down about $1 billion a quarter. So after nine quarters, by the end of 2025, that number should be down about $4 billion-$5 billion, and then most of that drag will disappear. So you can see the overall numbers at $0.89 and 12.5% ROTCE.
Actually, over time, those are going to improve quite a bit. So just a capital chart, a visual is always helpful, but if you look at where we rank in the lineup versus peers, kind of number 3 on CET1, number 2 on AOCI-adjusted CET1. So again, have maintained that strong capital position. On deposits, top left of this slide, you can see consumer deposits much higher percentage than the peer average. Also, insured is higher than the peer average. If you go over to the top right and you look at... We picked this start date, 3/31/2022, because it keeps the numbers clean. That's when we closed on Investors, and that first came in our numbers.
But for the six quarters since then, we have one of the better performances in terms of deposit balances, excluding jumbo and brokered. So, feel, feel very good about that. And then bottom left, you know, we're doing that, not through rate. We're basically now at a point where our betas are back in the pack. So kind of a strong story there, that deposit volume is holding up nicely, and we're doing it at a controlled cost... and then if you look at the betas year to date, every quarter this year, our betas have been sequential betas have been lower than the peer average, so year to date, 85 versus 96. So that's been a overhang. People say, like, how good is your deposit franchise? We've worked on this for many years.
We actually think the quality of that, the results of that effort are shining through in this environment. Same thing on credit. I think folks said, "Well, you levered up when you came out of RBS ownership, you had to really grow your balance sheet. Did you maintain discipline on credit?" If you go back and look at the NCO rate since the IPO, we're right about at the peer average, so feel good about that. And if you break it down into retail and commercial, similarly, a little slightly higher on retail, but commercial, which includes CRE, spot on to where the peer average is. And I think what's driving that, we have some comments down below here.
We have a very experienced team, and we're focused on client selection on the commercial side. We've grown bigger-sized companies, which tend to be better credits, and we've kept leveraged loans as a relatively modest percentage of the portfolio, and the average loan hold size is very granular. And then the CRE portfolio is very diversified across type, geography, various criteria. And then the retail really is just a super prime and high prime portfolio, and it's performed quite well. Let's talk about some of the offensive initiatives. So, Private bank is really a big effort for us, and I think it's. We were looking for a way to really scale up in Wealth Management and kind of finally crack that nut and the opportunity to go along some really great talent.
As you know, First Republic failed and J.P. bought First Republic, folks were kind of looking for a platform that felt similar to kind of the, the business that they created at First Republic. And so I think they like our culture, focus on the customer. They came aboard in June, July. We had formal launches in each of the markets, three on the East Coast, Boston, New York, and Florida. And then we have three big teams in Northern California, so we have launched in every market, and we're off to a really good start. We're, they're bringing relationships over. I think we're gonna put up good numbers at the end of the year here, so stay tuned on that. How are we doing it?
You know, we have to certainly up our game on service delivery because really what was kind of extraordinary service was the calling card for the way those teams operated on the First Republic platform. And then we have to broaden some of our capabilities, things like Delaware Trust. But we're working really fast and really hard to get those things set up. And I do think that effort on better service, high-end service, will cascade to the whole franchise. So there'll be benefits that come to the rest of the franchise from these efforts.
We also, you know, I think, have guardrails in place to make sure that this is profitable growth and that, we've kind of run the business at a 2.0 level versus what it was at First Republic before, and that there's good funding quality, a lot of non-interest-bearing accounts, and that we have really strong risk, and control framework. If you look at... Some people have asked us, "Can you give us more color? You put out some big targets in the medium term for end of 2025, $11 billion deposits, $10 billion AUM, $9 billion of loans." There's a few tidbits here under each. So in the deposits, the vast majority of this is gonna be commercial deposits and a lot of operating accounts, and about a third of that's gonna be non-interest-bearing.
On the AUM, it's a high net worth profile, $10 million of net worth and an average account size of $3 million-$5 million. And then on the loan side, again, it'll be mostly commercial at the outset, so there's a lot of opportunity with the failure of Silicon Valley Bank and First Republic, capital call lines and lending to the innovation economy, will be a focus. But over time, I think, there'll be opportunities to also provide more retail credit in areas like mortgage, HELOC, and card. So there's a little color on that, but again, we're off to a good start. We're off to a great start here in New York.
So, the second initiative that is worth focusing on is: How are we doing in this market? And, we are ahead of our deal model on customer acquisition, customer deepening, deposit growth, just about all measures. So very pleased. If you compare some of the growth rates in deposits or, households or, going into our more affluent value propositions, this region is outperforming legacy Citizens. And I think part of that is just simply that the predecessor banks weren't serving the customers as well as we can. So there's great opportunity there that we're mining quite well. Net Promoter Scores are up, so, they've now almost reached the level of net promoter score that we have at Citizens, which is really solid. So, great to see all that.
We're stepping up. It's a tough market to do business in. You need to make sure your brand is out there. We're the official bank of the Giants. Sorry to say that, Ryan [crosstalk] . But anyway, the Giants, the New Jersey Devils, and now we sponsor the New York City Marathon. So I think the recognition of us in this market has been growing very nicely. The third area here is just around Private Capital. And this is something that we identified all the way back at the time of the IPO, that PE firms were gonna own an increasing percentage of middle market America over time. You can see some stats here, how much capital's been raised over the last five years.
They pay a lot of investment banking fees, loan syndication fees, M&A fees. We've built out the full capability to capture revenues in serving the PE space as owners. And it's been organic talent, it's been acquisitions of M&A boutique. But I think, you know, we do this as well as any super-regional bank, and currently, we're the number 2 sponsor middle-market book runner, so you know, really nice market share there. And you know, unfortunately, the markets with high rates have been subdued, but I think as rates start to come down, the conditions will be more favorable, and we'll start to see more deals and financings, et cetera. So I think we have a coiled spring here for this to lift off.
And then kind of bottom right panel, just, you know, we see the West Coast as a big opportunity. So whereas in New York, we have the full game, we have the ground game with the branches, our recognition is strong here, and we came over the top with a private banking team from First Republic. On the West Coast, we had bankers out there. We bought JMP, a prominent investment bank that serves the innovation economy, and now we have private banking teams to add to that. And so the West Coast market, we can kind of come in over the top without all the branch system, but I think we can be very effective in banking all the wealthy folks and the kind of innovation economy in general.
Just on enterprise-wide initiatives, I won't go deep on this, but we have some other great things happening. Our balance sheet optimization, which is gonna improve returns and our net funding position. Our top programs, TOP 8, has met the targets. TOP 9, I think, will be just as impactful, and we're supplementing that with broad expense management. So, we've already had a meaningful RIF here in the fourth quarter to try to make sure that we bring our expenses in line with kind of the revenue environment that we're operating in. We've got some great things happening in technology, migrating our applications to the cloud, you know, sunsetting older applications and introducing new modern applications. Feel good about that.
And then some really cool things in ESG, where we're viewing this as a real product opportunity to work with our commercial customers. This slide, I wanted to shed a little more light. I'm not sure everybody fully appreciated one of the slides we had in the third quarter earnings material. But there's questions about, you know, what's going on, what's the dynamic between your swap portfolio and your non-core rundown? And so we've just isolated that. This is the incremental change in the performance, the net of those two things over time, looking at kind of exit run rates in Q4 2024, 2025, 2026, and 2027, relative to kind of where we are today.
And so you can see the, the little key down here, in the, in the bottom left. There's terminated swaps in dark green, active swaps in light green, a non-core portfolio, impact in blue, and then the net of all that is the gray bar. So we've stacked them, in each year. And I think what you see, we've terminated a lot of swaps, and we're kind of looking at these impacts based on the forward curve, which sees a 4.5% rate at the end of 2024, migrating down in 2025 to, say, 3%, 3.5%, 3.75%.
And so based on that, you can see the modest headwind that we have on a year-over-year basis in 2024 from the swaps and the non-core flips to being a nice tailwind in 2025, and then really starts to explode in 2026 and 2027. And you know the good news, too, is that a lot of this is baked in. It's in the bank because we're amortizing the cost of the terminated swaps. That stops. And the active swaps we have, those will eventually half of those will terminate over this period. And then non-core, it's really about execution, and it's pretty low-risk execution in order to make that happen. And then if you look down at the bottom right, what does that mean for NIM?
Ultimately, as you swing from having it be a headwind to a big tailwind, that's 60 basis points in NIM, which is a really meaningful impact. So you put that all together, you've got the benefit of these initiatives, that'll be real positive in the medium term. Plus, you have this interest rate positioning, where we hedge to cover the downside. The downside, the Fed moved higher than people thought to crack inflation, and it's gonna move down slower, so there's a bit of a drag from some of that hedging. But once that kind of wears off, then we get back to a very, I think, strong level of NIM, and that certainly will benefit, earnings and ROTCE. So, just to wrap here, you know, again, I think we have a very strong capital, liquidity, and funding position.
We have unique initiatives relative to our peers that should lead to relative outperformance. I think we've done a strong job at execution throughout the IPO. We have a clear idea of where we're trying to take the company, and we're opportunistic when we see we can take advantage of situations like we did with the private bank. And we're still convinced that our medium-term ROTCE targets are achievable over this time frame. So anyway, I'll stop there, and I'll come over to Ryan, and we can talk.
Thanks for the presentation, Bruce. A lot of, a lot of good stuff in there. Maybe to kick off, you know, the odds of a soft landing appear like they're increasing, but there's clearly been a slowdown, and there's a lot of uncertainty. You know, when you talk to the client base, maybe just talk a little bit about what is the mood, what are they watching for, and how do you feel the bank is positioned to succeed into 2024?
Yeah. So, I'd say there's general caution on the part of our commercial customer base. So, I think they're all having reasonably good years, and they've become resilient, going through the pandemic and now going through kind of this inflation and higher rates. But, they're not really ready to, you know, go on offense and invest.
Mm-hmm.
And so we're seeing kind of a little bit of, you know, tepid use of lines and, you know, not investing for M&A or for big capital investments. So I think that slowdown that we're looking to see in the economy, you can kind of see it through the lens of what our clients are doing.
Mm-hmm.
I'd say, for the most part, consumers are still spending. They have the kind of confidence because of a tight job market-
Mm-hmm
... they can continue to spend and live their lives and, you know. So I'd, I'd say, we don't do a lot in the, in the lower, kind of mass market, but, there might be starting to be a little pinch there, but, not affecting us much. I think the broad consumer client base is still in good shape, and our credit there is, is in good shape.
Mm-hmm.
You know, when I, when I think about the transition, you know, where we came from in 2023, it's certainly not the year we signed up for. You know, with the high inflation and then the rate increase that was very rapid and dramatic, and having the West Coast bank failures, it's been a lot to contend with. And, I think the good news is that it appears the Fed is done, and that the Fed will be cutting, as we get into next year, which I think creates a decent backdrop for banks to stabilize here at kind of these earnings levels and then, start to lift higher and push higher, which is kind of part of my talk here-
Yep
... is that I think 2024 I view as a year to kind of get that stability and then start to position for the launch, 2025, 2026, 2027.
And we'll talk through some of the metrics shortly. You referenced in the slides, you know, the Private Bank build-out via the strategic hires. Maybe just talk about the strategy that you're putting in place. How are you progressing? You said that we'll be excited when we hear about it. And can you build this in a more profitable way than it was operated prior? And again, just any initial observations that you could share with us.
Yeah, look, it starts with great people, and we brought the A team over of the private bankers. And we've been adding additional complementary talent that's needed to actually control and manage the business. So, feel really good about where it is and the receptivity of clients to come to Citizens-
Mm-hmm
... and stay with their relationship bankers. These folks are hunter-gatherers, so they're gonna, you know, exploit opportunities within Citizens with our existing customers-
Mm-hmm
... and, in addition to the current Rolodexes that they have. So, highly motivated group. I think we have, as I said, good guardrails, in terms of the kind of business we want to do and the focus on deposits first and kind of not leading-
Mm-hmm
... with low-cost credit.
Mm-hmm.
And AUM deposits and, and investments is really the name of the game. We have a little work to do to scale up our private wealth capabilities. So, right now, we're using Clarfeld to, to kind of handle the business flow coming from the private bankers. We've added about a dozen people in the process, we're almost done with that, to have a couple of Clarfeld bankers in every market to go out and joint calls.
Mm-hmm
... with the, with the teams. But we'll also be doing lift outs and kind of engaging in a scaling up of that Private Wealth Platform over time. So, really excited about this. I think there's a void in the marketplace, and you know, not everybody can bank at J.P. Morgan.
Mm-hmm.
There's enough business to go around for really other great banks that focus on the customer and delivering exceptional service and advice, and we're gonna be there.
So, you know, in addition to the private bank, you outlined a lot of different initiatives at Citizens: Pay, Private Capital, Metro New York, and a bunch of others. I guess, given the environment, can you talk about, you know, where you're leaning in versus where you, where you're scaling back, and what are you—which one are you the most excited about here?
Yeah. I'd say, you know, the ones that I've highlighted, the private bank, the New York Metro, and then Private Capital go to the top of the list. I think, in some of the other things, like Citizens Access has been great for us, and it's been another source of deposits. We're about to launch checking, so that'll help kind of lower the overall cost of funding that's coming from Citizens Access. We were gonna launch kind of nationally, more of the lending side of that, but in the current environment, we're kind of not leaning in on that. We're kind of delaying that and lagging that, which I think makes sense.
Mm-hmm.
So really just keep that focused on deposits and find new ways to maybe moderate the cost a little bit. And Citizens Pay, similarly, we were signing up a lot of merchants. I think now we're gonna focus on the merchants that we have in the barn and actually really drive volumes with those merchants. So again, things that are on the lending side, we're being a little more cautious, but when it comes to opportunities to raise funding, and particularly lower cost sticky funding, we're gonna really lean in on that.
I made reference in my introduction that you guys had the most significant improvement in your funding costs of any bank that we cover. Can you maybe just talk about, you know, what were some of the changes that you made? And maybe just talk a little bit about what you're seeing in both deposit pricing and deposit activity in the market as we stand here.
Yeah. So I'd say, you know, it's not anything that's rocket science, but, if you, if you want to have a really strong, viable deposit base, you need to focus on primacy. So we want households to view us as kind of their bank, and do as much business, with us, as we can get them to do. So, ultimately, having value propositions, if you, if you do more with us, you get more in terms of, the value proposition has been, I think, a really strong suit of ours. And, so we've backed away from leading with price, which I think the old legacy Citizens, being a former amalgamation of thrift-like-
Mm-hmm
franchises, was more focused on pricing. And so now we're focused more on providing service, advice, and value, and that's made a huge difference. Similarly, on the corporate side, it's really building out our cash management capabilities and associated products around working capital management to just get a bigger share of deposits from our clients than we were getting before, and that's sticky operating account-like business. And so, so that's really been the name of the game. And, you know, what I would say is, you know, we, we feel good that at the end of the third quarter this year, we had the same deposit balance that we had at the end of the third quarter last year, so flat year-over-year.
I think the deposit levels are holding up well here through the fourth quarter.
When I look at slide 12, and you put together a lot of the moving pieces for net interest income over a medium-term time frame. Obviously, as we sit here today, we'll get formal guidance in January. Just maybe talk about how you're feeling about the, you know, the next couple of quarters. And, you know, the market seemed to be gravitating more towards Fed cutting, as you alluded to in your presentation. Maybe just talk about the drivers of NII and how you're feeling about it under the most likely outcomes of either a Fed easing or a higher for longer scenario.
Yeah. So I, you know, I'd say the baseline scenario for planning when we go through 2024 is usually just follow the forward curve. And so, I think there was worries maybe a couple of months ago, we might be in higher-
Mm-hmm
... for longer, and, you know, what does that do to continued deposit migration? What does that do to our forward-starting swap cost? So, I think that scenario was not the preferred scenario.
Mm-hmm.
So actually seeing the forward curve have a series of, you know, gentle cuts going out through time, probably works best for us. And I think it alleviates the pressure on deposit migration, sets you up to start to downprice your deposits. It reduces the drag from the swap position. So yeah, that's, that's what we're using as the outlook.
Maybe let's switch and talk a little bit about expenses. So successful execution of TOP 8. You talked about embarking on TOP 9, mentioned that there was some downsizing of the employee base over the fourth quarter. And I think, I believe you're targeting flat underlying costs for 2024. Maybe just talk about some of the underlying drivers. How much of this is business exits? Is there any deferment of investment? And how are you thinking broadly about positive operating leverage over both 2024 and the intermediate time frame?
Yeah. So, you know, I think what's important to say is that we're very disciplined on expenses, but I think over time, we've been good at finding efficiencies and then reinvesting those efficiencies in initiatives to make the bank stronger and grow our franchise. And so, even though there's been pressure on funding costs, you want to bring your expenses down, but you don't want to kind of go too far-
Mm-hmm
... and cut into muscle. So I think we're kind of working through that. And you know, the RIF that we just are in the process of completing is over 3% of the headcount, which generally, in my historical career, numbers like that, there's you know, bottom performers, there's ways to restructure and reorganize, that you can you can do that without cutting into muscle-
Mm-hmm
... and without hurting how you're running the bank. So, so that's now on the table, and we're acting on that. We have some more business exits, so we exited the auto business last year. We announced... that we're exiting wholesale mortgage. So things that really kind of don't fit the future, now's the time to kind of rip the band-aids off and make those hard calls. And so it's a combination of those things.
Bruce, before we talk about credit, you know, you've given a handful of items for 4Q, and NII down a little, down 2%. Fees were market-dependent, stable costs, credit. Maybe, you know, two months into the quarter, maybe just talk a little bit how the quarter is progressing, what you're seeing out there.
Yeah, I think we're comfortable with the guide, broadly. So, you know, that's good to be able to say that. You know, I'd say the kind of deposit I mentioned, that the deposit migration is behaved, so that means the NIM is behaving about as expected.
Yep.
We're still watching loan demand. I also mentioned that it's a little tepid in terms of use of lines and so, you know, but that's overall seems pretty much holding in fees. I feel good that the market's opened up a little bit here with rates coming down, so you're seeing more issuance in Investment Grade and non-Investment Grade. And the middle market deal space where we operate seems to be folks are getting stuff done, so we'll see what closes. But that feels good. So I'd say broadly, fees feel good about the up guide on that. And then expenses, I mentioned, we're already-
Mm-hmm
... working on expenses to get a benefit for run rate going into 2024, and that'll create a little bit of benefit here in the year. And then, you know, credit, credit is behaving as expected.
You talked about the credit performance in the slides since the IPO, and, you know, obviously, office has been an area of focus. Consumer continues to normalize. As you look ahead to 2024, you know, what are you most focused on in the portfolio? Where are you expecting further normalization? And outside of office, you know, what are you seeing in areas such as multifamily?
Yeah. Well, kind of the name of the game this year has been that consumer is migrating back to pre-pandemic levels in an orderly way without any unusual blips and delinquencies. And I think that will continue to be the case as we look out into 2024. And C&I has been relatively clean.
Mm-hmm.
And so, we also don't see any hotspots around the C&I portfolio. And, you know, occasionally, you'll get hit with something, but, we don't see any buildup, really there. So it really boils down to CRE, and so a big part of the charge-off dollars have come from, CRE office. As I think that will continue, to absorb, you know, the charge-off capacity, through 2024. I think the kind of workout in the office space is kind of a multi-year, 2023, 2024, into 2025. Depends a little bit on how hard rates come down and the return to office trends, but, we're prepared for this to be extended. The good news is that we've gotten a lot of the. We're ripping the band-aid off. We're dealing with it. It's manageable. It's in our run rate.
We're well reserved for it. So it's not something that, that we lose a lot of sleep over. And then multifamily, I think, you know, there we have really good diversification. We don't have a big book of rent controlled or stabilized. And so, you know, we have probably a lot of fixed rate and a lot of longer maturities in the Multifamily. A lot of that came over from Investors. The credit performance historically on that has been really good. So, don't see—We might see some criticized as kind of rates go up and operating flows get pinched a little bit, but I don't think there's a lot of lost content there in Multifamily.
Maybe, Bruce, just to close on capital. You have- you showed among the strongest capital ratios in the industry. You're one of the few banks that's actually buying back stock. Maybe just talk about capital allocation into 2024. How do you see your priority shifting, and what is the right level to run over this intermediate timeframe?
Yeah. Well, we're- we said we're targeting to be at 10.5 at the end of this year. It was unclear to us what the FDIC was gonna do, in terms of whether they would phase the capital charge in over 8 quarters-
Mm-hmm
... or take it upfront right away. So, we will absorb that and still try to hit 10.5, but we'll likely buy very little stock or none this quarter and then resume next year. But again, sustaining the dividend is always number one, supporting growth in the business, which, because of non-core rundown, will be building in commercial and in the private bank, but we won't see a lot of net growth-
Mm-hmm
... in 2024. So I think we'll still have strong levels of capital available to potentially be back in the market buying stock again in 2024.
Great. Well, please join me in thanking Bruce.