Earnings Call: Q1 2020

Apr 17, 2020

Good morning, everyone, and welcome to the Citizens Financial Group mode. Following the presentation, we will conduct a brief question and answer session. As a reminder, this event is being recorded. Now I'll turn the call over to Ellen Taylor, Head of Investor Relations. Ellen, you may begin. Thank you so much. We seem to have lost the feed from the main room. Thank you so much, Ali. Good morning to all. Thanks for joining us at the end of a very long week. First this morning, our Chairman and CEO, Bruce Sanson and CFO, John Woods, will provide an overview of our results and our and we'll wrap up our presentation, which you can find at investor. Citizensbank.com. And then of course, we'll be happy to take questions. Brendan Coughlin, Head of Consumer Banking and Don McCree, Head of Commercial Banking are here also to provide additional color. And now for some quick housekeeping. Our comments today will include forward looking statements, which are subject to risks and uncertainties, And you should review the factors that may cause our results to differ materially from the expectations on Page 2 of the presentation in our 2019 Form 10 ks. We also utilize non GAAP financial measures, so it's important to review our GAAP results on Page 3 of the presentation and to utilize the information about these measures and a reconciliation to GAAP in the attendance. Finally, if you want to ask a question, And with that, I'll hand it over to Bruce. Thanks, Helen. Good morning, everyone, and thanks for joining our call. We're in the midst of unprecedented times with the coronavirus representing an unseen enemy that's wrecking havoc with people's lives and with our economy. As a large regional bank, we have an important role to play in supporting our customers through these challenges and in providing essential services to ensure smooth functioning of the economy. I am pleased with our performance to date. Citizens is rising to the occasion. We are working with borrowers on loan modifications and access to government programs to ensure they have the best possible chance to make it through the crisis. We have used our strong balance sheet to meet over $7,000,000,000 in commercial line draws. We have kept our branches open to serve individuals and small businesses. We have 2 thirds of our staff working remotely and we have taken precautions to protect those colleagues who must report to work and it provided them with additional compensation. And we have made $5,000,000 in France to small businesses and non profit partners to help our communities through these difficult times. In short, we are doing what a responsible corporate citizen should be doing. Our financial performance in Q1 was heading towards an excellent quarter prior to the disruption caused by COVID-nineteen in March. Nonetheless, we had a very good revenue and PPNR results faced by record mortgage revenue, strong loan growth and expanding NIM. You plug in charge offs as our credit cost in Q1, we would have had a $0.94 quarter. But of course, the new CECL Accounting standard requires a recalibration of lifetime losses on the loan portfolio given the significantly changed macro environment. This led to a $600,000,000 provision representing a $463,000,000 or $0.85 reserve build over charge offs. As such, our underlying EPS was $0.09 in the quarter. We had $0.06 of notable items tied to our top program and Franklin integration costs, So reported EPS was $0.03 Now this is more front loaded than many analysts have modeled. We've assumed a deep recession in Q2 followed by a V shaped recovery in our forecast, which if true would take us back to more normal provision levels over the balance of 2020. If the recovery is more U shaped, provisions will be higher. Safe to say, there's a great deal of uncertainty Over the economic outlook. We feel good that we have a strong balance sheet position with CET1 at 9.4%, Our LDR at 95% and a strong LDR with enormous contingent liquidity. Our tangible book value per share held steady at $32 and we are confident we'll sustain a strong level of PPNR over the balance of Our decision to suspend share repurchases for the balance of 2020 should maintain a strong CET1 ratio through varying economic scenarios, including a U shaped recovery. We have provided significant granular information on our credit portfolios in our investor deck. We believe we have maintained a highly prudent credit risk discipline. And as a reminder, our DFAS credit losses have consistently been better than the peer average. We have continued to make progress on all the strategic initiatives that we had teed up for 2020. Our colleagues have done a fantastic job of dealing with the COVID-nineteen related crisis, while also making sure we are hitting our key BAU deliverables. Current environment presents new risks and opportunities. We are looking for ways to incorporate these into our strategy with an eye towards coming out of the crisis stronger than our peers. We are not cutting back on investments designed to drive future customer acquisition and revenue growth. All in all, a challenging time. We are handling things well. I hope you and your families are healthy and safe. With that, let me offer a welcome to Brendan as our new Head of Consumer. And now I'll turn it over to John. Thanks, Bruce, and good morning, everyone. On Page 4, let's start with a brief overview of our headlines as we navigate this unprecedented environment. We enter this crisis from a position of balance sheet strength. For example, after the stress experienced in March, We ended the quarter with a CET1 ratio of 9.4 percent even after increasing our allowance for credit losses to $2,200,000,000 and funding approximately $7,000,000,000 of line draws. Our ABL to loans ratio of 1.73% compares well to stress loss scenarios as well as to peers and our tangible book value per share at quarter end was nearly $32 per share, which is stable versus Q4. Our liquidity ratios were stable with an LDR of approximately 96% and we've remained in compliance with the LCR. Earnings at the PPNR level proved to be resilient as we generated record revenues and fee income, while absorbing significant negative COVID-nineteen impacts in multiple key categories. As a result, we remain committed to investing in our strategic initiatives, including the top 6 transformation program and our portfolio of strategic revenue initiatives. Moving to Page 5, I'll cover some of the ways we are supporting our customers. Many of our customers have been directly impacted by the pandemic We have been swiftly moving to a system during this difficult time, while still taking appropriate steps to mitigate risk. So far, we've delayed payments on loans for about 70,000 retail customers and about 2,400 small businesses. A number of our commercial clients have taken a defensive position as they prepare to weather the storm. Through April 15, we funded about $7,000,000,000 of commercial line drills. After the initial rush to draw down on loans in March, we've seen the pace of line draws slow considerably. Finally, we have been literally working day and night to facilitate the SCA payroll protection program for smaller companies with less than 500 employees. As of April 15, we have received applications from over 35,000 companies that have approximately $4,000,000,000 in loans registered with the SBA. Let's move to Page 6 and cover CECL. We increased our allowance for credit losses by approximately $900,000,000 to $2,200,000,000 at March 31 from approximately $1,300,000,000 at year end. This was created in 2 steps. The first was the previously communicated day 1 impact of $451,000,000 effective January 1. The second was a reserve build of $436,000,000 recorded as part of the first quarter provision of $600,000,000 which included $137,000,000 of charge offs. At quarter end, the AC also loans ratio was 1.73%. Retail portfolios had an allowance to loans ratio of 2.31 percent, based by longer duration or unsecured loans, while commercial portfolios had an allowance to loans ratio of 1.2%. We have also summarized the key aspects of our macroeconomic scenario, which is a foundational element of the CECL reserve estimate. At quarter end, we elected to use the March 27 Moody's baseline, integrates COVID-nineteen effects as our base scenario. Given the uncertainty of the continued economic outlook, we also included an alternate movie pandemic scenario and an internally generated scenario. Further, we incorporated a loss and adjustment factor to fully account for the benefit of our expected customer assistance efforts and the impact of the various government support programs on our portfolio. In general, our economic scenario assumes a steep drop in GDP in 2Q followed by a V shaped recovery in the second half of the year. If this scenario plays out, Provision requirements over the balance of 2020 moves back to being tight for loan growth. If the pandemic impacts are deeper or it takes longer for the economy to recover and we are looking at a new or L shaped recovery or government programs are less effective, We could require meaningful additions to provisions. Now let me move to the highlights of our underlying results covered on Slide 78. Despite the backdrop of COVID-nineteen pandemic and CECL related reserve bill, our results highlight our operational discipline and the benefit of our diversified business model. We have record revenues and fee income and improved net interest margin and strong equity and funding metrics. For the quarter, we reported EPS of $0.09 which was down $0.84 year over year and down $0.90 linked quarter driven by the $0.85 impact of COVID-nineteen reserve bill of $463,000,000 PPNR of $678,000,000 was up 3% year over year and down only slightly linked quarter despite COVID-nineteen headwinds and the impact of seasonality. We saw strong balance sheet growth, including 2% average loan growth with spot growth of 7%, which benefited NII and helped offset the impacts of the more challenging rate environment. And record fees were driven by record results in mortgage banking and wealth. We also saw strong underlying performance in capital markets and FX and IRP before COVID-nineteen impacts. On Page 9, net interest income increased 1% linked quarter as the benefit of 1% interest earning asset growth and improved mix was partially offset by the impact of the more challenging rate environment and day count. Net interest margin increased 4 basis points in the quarter as loan yield benefited from widening LIBOR OIS spreads as well as mix. Our proactive pricing actions produced an 11 basis points decline in deposit costs, which helped mitigate yield curve headwinds as 1 month LIBOR drops 38 basis points. Moving to Page on Slide 10. Non interest income was up 16% year over year with relatively stable levels on a linked quarter basis. Record results in mortgage banking and trust and investment services were partially offset by the impact of COVID-nineteen that included a total of $36,000,000 of fair value markdowns on loan trading and customer derivative assets in the linked quarter as well as the impact of the shutdown in other categories. On a sequential basis, mortgage banking fees achieved another record by doubling to $159,000,000 which reflected strong refi lock volumes and improved day on sale ratings. Wealth Management posted another solid performance with trust and investment services fees up 2% sequentially The strong managed money sales offset the impact of market declines. Capital market gains of $43,000,000 decreased $23,000,000 from record 4th quarter driven by $21,000,000 in March on loan trading assets. Foreign exchange and interest rate product revenues decreased $25,000,000 record 4th quarter levels, including a $15,000,000 reduction from a net CBA adjustment given the falling rates and lower activity caused by reduced variable term lending volume. Turning to Basel West. Non interest expense increased $30,000,000 or 3% linked quarter, largely reflecting seasonality and higher revenue based compensation. Salaries and employee benefits were up 9% given the FICA tax and 401 match seasonal impacts along with higher compensation tied to strong mortgage aberrations in the quarter. Year over year, our non interest expense was up 5%, largely reflecting the impact of growth oriented investments, annual merit and revenue based compensation, which were partially offset by efficiencies generated from our CHOP programs. Let's now discuss the loan trends on Page 12. Average core loans were up 2% linked quarter and up 3% before the impact of loan sales activity tied to our balance sheet optimization initiatives. During the quarter, we sold an additional $500,000,000 in non relationship mortgages, which coupled with 4th quarter activity reduced average loans by almost $1,000,000,000 On a linked quarter basis, core commercial loans were up 3% driven by the impact of higher line drop and strength in CRE. Core retail loans were up 1% linked quarter and up 2% before the impact of the loan sales activity given growth in education and merchant financing partnerships. On a linked quarter basis, period end loan growth was 7%, driven by 15% increase in commercial given higher line of credit utilization and relatively stable retail loans. Moving to Page 13. We saw a nice average deposit growth of 1% linked quarter and 5% year over year as we benefited from investments we've made over the past several years to expand and enhance our capabilities. On our period end basis, deposits were up 7%, keeping pace with loan growth. We continue to manage down our deposit costs across all channels, reducing CD rates, retail money market, promo rates, taking down the savings rate in our digital deck and managing commercial deposits aggressively. As a result, our interest bearing deposit costs were down 15 basis points. Next, let's move to Page 14 and cover credit. We continue to assess the impact of the COVID-nineteen pandemic and instituted a variety of measures to identify and monitor areas of potential risk. Non performing loans increased 11% linked quarter, driven by a $69,000,000 increase in commercial, largely tied to a few non correlated loans and modestly higher retail. The NPL ratio of 61 basis points increased 2 basis points linked quarter and improved 2 basis points year over year. Net charge offs came in at 46 basis points in the quarter, up modestly linked quarter reflecting an increase in commercial, partially offset by a decrease in retail. The allowance for credit losses to non accrual loans ratio ended the quarter at 2 83% compared with 179% Q1 of 2019, up from 184% in the Q4 of 2019. Turning to Page 15. We have been highly disciplined on credit with prudent risk appetite. In consumer, we remain focused on super prime and prime borrowers. The weighted average FICO score across our portfolios is 760 and approximately 90% of the retail portfolio has a refreshed FICO of 6080 or better. Overall, our commercial portfolio is highly granular and diversified in terms of geography, industry and asset class. Roughly 60% of the portfolio is investment grade on a bond equivalent ratings basis and the risk ratings improved year over year. And we remain underweight peers in commercial real estate. We have been very disciplined around client selection and are focused on sponsors and developers we've seen perform well and responsibly in prior cycles. And on Slide 16, it's also important to note that our company run DFAST Yearly adverse scenario results performed in line or better than the peer average, which we believe indicates that we are relatively well positioned to manage through the current crisis. On Page 17, we highlight the granular and diversified nature of our commercial portfolio Along with the areas in commercial that have been most immediately impacted by the COVID-nineteen shutdown and low energy prices, We have done a deep dive across the majority of the commercial portfolio to identify cash flow and liquidity vulnerabilities with an eye towards helping our customers through these challenging times while taking additional steps to more tightly manage risk. Together, these sectors account for approximately 11% of total CFG loans. Overall, we think that the percentage of our portfolio concentrations to these areas of perceived risk are largely at or below peer median. We've highlighted on the slide some of the factors that we consider to be risk mitigates to these portfolios and we have individual care sheets in the appendix on each industry that provides more detail on the factors we are monitoring. Moving to Slide 18 on retail credit. Our fresh FICO scores on the consumer side of the house are around 760 and 70% of the portfolio is collateralized. So for some of the areas of potential concern, I would just highlight briefly, in education, we've got again very high FICO And in the in school book is 95% cosigned. In the education refinance portfolio, borrowers have been in the workforce for 6 years on average 55% of them have advanced degrees and about a third of the portfolio has been cosigned. The consumer unsecured book includes $2,500,000,000 of short duration merchant partnership loans, largely driven by the Apple platform, as well as loans through Vivint, ADT and Microsoft and Affirm for Peloton. It's important to note that the vast majority of this portfolio subject to loss sharing arrangements. And the remaining $1,500,000,000 is our unsecured installment portfolio, which has a very high FICO scores of 760 on average. As with commercial, we've included more details on these consumer portfolios in the appendix. On with strong capital and liquidity positions. The strong deposit growth kept pace with elevated loan growth, leaving our liquidity metrics steady. We have a diversified funding profile with a very strong base of core deposits and substantial capacity to do more for our clients since they manage the crisis. In March, we announced that we would see share repurchases and with the extent of the pandemic disruption becoming clearer, we have decided to extend that through the end of the year ensure the capital levels are strong to meet loan demand. We expect to remain well capitalized and intend to maintain the dividend at the current level. On Page 20, I want to tell you that there are few exciting things that are happening across the company. While we are 1st and foremost focusing on helping our clients, We have not stopped working to help build a better company. We are driving forward on our strategic initiatives so that we emerge well positioned for the future. We are continuing to execute on the transformational top program and we are also moving forward with our major strategic revenue initiatives, while considering new opportunities arising from the current environment in an effort to drive higher revenue growth coming out of the crisis. Moving to Page 21. Given the impact of the pandemic, it's challenging to predict an outlook for the future and we no longer affirm our full year 2020 guidance. Nonetheless, we do, however, want to offer some higher level commentary on key categories full year 2020 with a reminder that we currently expect to see more of a V shaped recovery start to play out in the back half of the year. We believe we can deliver modest growth in net interest income, which includes the benefit of the PPP program. We expect that strong loan growth will more than offset a meaningful decrease in NIM due to rates. And non interest income is now expected to be broadly stable As strength of mortgage is offset by COVID-nineteen driven weaknesses in other categories. The outlook for these will depend upon the pace and magnitude of our company for the second 2020. Non interest expense is expected to be up modestly given higher compensation tied to stronger mortgage production and impacts from COVID-nineteen, which includes government lending programs and customer relief efforts. Provision expense has the greatest potential for variability in 2020 and will depend on the depth of the recession and the pace of recovery. We expect to see strong loan growth driven by higher line draws in commercial, the impact of government programs like PPP as well as with increased demand in education and merchant financing. At the same time, we anticipate a strong increase in commercial and retail deposits, reflecting heightened liquidity given Fed actions and the low rate environment. Our regulatory capital ratios are expected to strengthened from current levels under the B recovery scenario as net income coupled with the suspension of buybacks through year end more than offset the impact of higher RWAs. Even in more severe economic scenarios, we expect our capital ratios to remain strong and above required minimums. Now let's move to Page 22 for some high level commentary on the Q2. We expect NII to be up low to mid single digits as strong loan growth more than offset the sizable decrease in NIM. Fee income is expected to be down in the low to mid single digit range, reflecting COVID-nineteen impacts on service charges, card and other fees. Non interest expense is expected to be up slightly given the COVID-nineteen impacts mentioned earlier. But net net, we would expect positive operating leverage in the quarter. For this expense, it will depend on the depth of recession and pace of recovery. Finally, we expect significant loan growth reflecting line draws in commercial, the impact of government programs and increased demand in education. Our capital, liquidity and funding positions are expected to remain strong. To sum up, on Page 23, we are on delivering well for our stakeholders in these challenging times. We have a strong balance sheet and leadership team and colleague base that give us confidence that we'll rise to the occasion. Now let me turn it back to Bruce. Okay. Thank you, John. And operator, let's open it up to Q and A, please. Thank you, Mr. Van Son. And now we are ready for the Q and A portion of the conference call. Our first question will come from the line of Erika Najarian. Go ahead please. Hi, good morning. Good morning. Good morning. Thank you so much for all the detail that you provided. I'm wondering as we think about a potential new or W shaped recovery. How does the economic parameters that are playing out during this pandemic compared to the DFAST scenarios that imply a cumulative loss rate of 4.1% over 9 quarters? Yes. So I'll go ahead and start off with that, Erica. I mean, I think the way that we look at this, just big picture, And is how when you look at our reserve total loans ratio, the $2,200,000,000 that we have and that 1.73 percent. That really positions us well when you go back and look at the 2018 cycle, which is the last time we went through the Fed process. And it also positions us well for the 2020 cycle for based upon our internal estimates of how much coverage we're creating. So just to cover a few numbers on that front. If you go back to the Fed scenarios and look at the adverse scenario, and there's been a fair amount of analysis that illustrates that the rate environments and other aspects of the adverse are pretty similar to what we're going through today. And our $2,200,000,000 would represent 86% of coverage on those losses in the adverse scenario in terms of our internal estimates. The Fed numbers would be around 55%. If you we think we'll do better than the Fed. We've had remapping issues that have gone in our favor and we've consistently estimated losses that would be lower than the Fed models would indicate. But even if you were to look at the Fed models, we have 55% coverage of the adverse scenario from back then. Fast forward to even if there was a severely adverse scenario, Similar to what the Fed scenario would indicate in 2020, our coverage would be around 45%, we believe is maybe better than maybe some peers given the comments made earlier about we think our loss ratios are going to come out. So we think that positions us very well and maybe I'll stop there and see if that's responsive. Got it. And my follow-up question is, I'm wondering if you could help quantify the magnitude of net interest margin decline in the 2nd quarter. And of that magnitude, how much would be attributed to the payment protection program? And if we assume that those loans pay off by Q3, does that mean that NIM could be at a higher starting point in Q3 versus 2Q? Yes, that's a good question. So the way I look through it is, you start off with the rate environment itself. And Given the LIBOR OAS spread winding out in the Q1, we really haven't felt all of the impact of the rate cuts from 1Q and there's an expectation that that will narrow in the second quarter. And so LIBOR and rates in general, we have Expectations will be down, call it, 70 basis points or so across the curve, both in the short end and the long end. In the past, we've indicated that for every 25 basis points, you would see about $15,000,000 of NII impact with respect to NIM. And so that will help you triangulate for that 15,000,000 is typically in the neighborhood of 3.5 basis points. So if you triangulate all of that, that will give you a sense for maybe low teens impact due to rates. The other aspects we have to look at in 2Q is mix, as you mentioned. How large will the PPP program be that isn't dilutive? What is our mix in the rest of the loan portfolio? We're seeing a lease weighted loan demand underlying the PPP and other line draws. So that's still in our education portfolios and merchant finance that we indicated earlier that actually provides a benefit. So but when you look at all of those things, we still think that there'll be There will be a meaningful and significant decline in net interest margin given rates in the second quarter. The third your question about Q3, based on how we're planning to account for PPP, which at the moment looks like we'll all flow through the NII line. And if you think about the forgiveness cycle, if we're going to amortize the fees that we expect to earn on the PPP program over the contractual life of the loans up through the forgiveness days. So if you expect maybe 8 to 10 weeks after funding that there could be some forgiveness, a majority of loans being forgiven, given that this is intended to be a grant program, you would see all that come into NII in the 3rd quarter, all driving net interest margin and that would reset net margin higher in the Q3. And I would just add Eric, also that you commented on NIM, but don't lose sight of the fact we're calling NII to be up in Q2 because the volume effects should offset the NIM contraction. Got it. Thank you for taking my questions. Your next question will come from the line of Ken Zerbe. One moment please. Your line is open. Go ahead. Great, thanks. I really appreciate the guidance that you gave on Slide 6 about CECL, I think it helps out tremendously. The question I have, just your first bullet there, you talked about you're using Moody's baseline, but you're also saying you're using your own internal Can you just talk a little bit more about your own internal assumptions? Are they more severe or less severe than Moody's? And how much weight did you put on your own assumptions versus the Moody's assumptions? Thanks. Yes. A couple of thoughts on that. I think our baseline scenario that has that's overweight is the movie 327. The internal scenario, I would say, is maybe equal to slightly more cumulative than that scenario. We have another Moody scenario. At the time that we were closing our books, I think the 327 was baseline was really one of the most punitive Moody scenarios that was out there. So we had another that was slightly less negative than that coming but still pandemic driven. So we used 3 in general, But the majority was really focused on this Moody's baseline. The other scenario had a variety of other Lenses associated with it. I mean, we have this 18% down with GDP and the 9% on unemployment. But as an example, our internal scenario would have gotten unemployment up to 11%. So just to give you a sense for how We missed and matched here. There's a significant amount of uncertainty, which is why we're using multiple scenarios and we think that helps inform The ultimate outcome. I would add, Ken, too, that we were Trying to be as conservative as we could. I think by taking that very late forecast into account, we've Certainly been watching where has the Moody's scenario model moved, and I'd say it's moved a little more Conservatively, it's hard to say what exactly how that translates into impact on our reserving at this point. I think we just have to see more data play out before we can look at that. So if the recession is either deeper, which currently looks like that could be the case. And then the recovery ends out Extending a little bit, which I'm not sure necessarily is the case. We just have to see. I mean, there's certainly a big groundswell for starting to reopen the economy given the pain that everybody is suffering. So we'll just have to watch those two factors and then go back and update things as we get to the end of the Q2. Okay, great. And then just one other question. On the same slide, you mentioned that if there is a U shape recovery, for example, you could have meaningfully higher provisions. Like I understand the concept, but I guess my question really is, like it seems that your the assumptions you've made went from, let's say, a good period, right, before the pandemic to something really bad, including the deep recession. Can you just help us understand if there is a U shaped recovery and it takes another quarter for things to get better, Why does provision why would provision be meaningfully higher to next step? I mean, maybe not higher than Q1, but why would it be as fairly large given the vast majority of your assumptions you've already made sort of the vast majority of the negative revisions, so to speak, if that makes sense to your economic models? Yes. Maybe I'll answer it this way, Ken. I mean, I think One thing, as Bruce mentioned, we did look and notice that since March 27, Moody's has updated, I think it was on April it was earlier this week, April 13 earlier this week. And we're seeing some eye popping GDP numbers that out instead of 18, it's 30, etcetera. I think the depth is one thing, but the length of The downturn in terms of whether it's you is another. At a very big picture, I think one way to think about this is if something like that were to occur, I would basically I think we're positioned in a way that our capital ratios, which are around 9.4% at the end of the quarter would remain broadly stable to up slightly even if we were to directionally consume another scenario that would have certain the aspects of Moody's update that would have taken GDP down to 30%. And I think that that's what this is about, is articulating capital strength and our allowance to loan Coverage would, of course, increase. It would get to something with a 2 handle on it as opposed to 173. And but nevertheless, our capital ratios would be broadly stable to up potentially even up slightly under one of those scenarios. And I would just add to your Specific question as to why Ken, I'd say if it takes longer to get back to an operating economy, Clearly, there's more stress on companies that can't open and start collecting revenues and serving customers. And then clearly individuals don't get back to work as quickly. So there's more stress on individuals. So you would just have to do the recalibration on that and see where that puts you. So I think it's possible. I think we put A good number on the board here in the Q1 and we'll have to wait and see how much adjustment we'd have to make based on further input. But In any case, I think John did underscore the big point, which is our capital ratio is strong and can absorb that. And so we feel good that we can both meet the loan demand coming in from our customers, put away what we need to if we need more reserves and still maintain a very strong capital position. All right. Thank you very much. Your next question will come from the line of Terry McEvoy with Stephens. Go ahead. Hi, thanks. Good morning. Maybe starting with fee income, I was hoping you could expand a bit on your second quarter outlook. I know you mentioned service charges and cards, but Any insight and thoughts into say mortgage and capital markets? Yes, I'll go ahead and start off. I mean, I think that We've seen another record quarter in mortgage and record in wealth. On the capital markets front, frankly, before the loan trading mark that we took, which had an impact of $21,000,000 in the quarter. We were having an exceptional quarter on top of exceptional quarter In 4Q. So mortgage outlook is still quite strong. We had an excellent quarter in 1Q. I think our early expectations are that we'll have a similar performance in 2Q. I mean, it's early days and things can move quickly. But from what we've seen in April, although maybe lot volumes may not be quite as strong as they were in the 1st quarter margins have really frankly increased to levels that we've never seen before, given all of the operational capacity issues across the industry and we've been a source of financial strength and execution certainty and that has driven our margins up in mortgage. And allowed us to gain market share as well. Absolutely. And we're taking share across all our channels, which is really excellent to see. It's positioned us extremely well. And in the wealth space, we've been able to have frankly managed money sales, really nice uptake there that's been offsetting our market declines. And so we've had good momentum on that front. And then in Capital Markets, it's really market So, those are some Why don't we let Brendan offer any further perspective on consumer? And then Don, you could offer a comment on Commercial? Yes, well said. I think, John, on mortgage, the non banks are having some challenges as well. So we're slipping in to take And supporting your comments around margins widening out, we expect that to broadly continue. Our pipeline is extremely full. We're growing our LOs mildly through Q1 and into Q2. So we expect mortgage to continue to be extremely strong through the quarter. On the service charge line, our debit transactional volume was down at the end of March, 35% to 40%. That's driving the pullback in Q2 both on debit fees, but also less transactions leads to less overdraft occurrences. So we do expect that to recover towards the back half of Q2 broadly aligned with our guidance And V shaped recovery through Q3 and Q4, but that's putting some strain on Q2 for service charges. And so I think John covered the wealth story really well. So I won't add anything to that. Yes. On capital markets, I think in general, deal will be low because of the uncertainty in the environment, but there are a couple of encouraging signs we're beginning to see. I mean, there was huge inflows into the high yield funds Over the last couple of days, we're actually seeing more high yield issuance as companies try to garner more liquidity and buffer their liquidity position. So we're benefiting a little bit from that now. And you'll remember that we also bought another boutique M and A firm this quarter and they happen to be Very focused on restaurant restructuring businesses. So we're beginning to see some opportunistic flow there. And I'll just I'll also mention that we're actually seeing some quite Strong activity in our IRP businesses right now as companies actually are garnering liquidity by restructuring existing swaps and putting some swaps on the books to take advantage of the current position in. And on the market John talked about, we've actually seen about 30 that reverse already as we're seeing rallies in both the leveraged loan market and the high yield market. So some of that's come back to us already. So we're cautious, but we're seeing a few signs of life out there. Good. Thank you. We'll go next to the line of Matt O'Connor with Deutsche Bank. Go ahead. Good morning. Good morning. So there's been some ongoing in the market that you take more credit risk. And I think some of the details that you provide today should alleviate those concerns. But here we are entering a growth cycle, and I think this is a chance to show that your credit is not worse than others. Obviously, your estimates internally are better than peers. But as we think out over the next several quarters, couple of years, What are the metrics that we should be looking at to evaluate your credit performance versus others? And it sounds like an obvious But obviously, there's all these payment deferrals going on. So it may not be as straightforward as kind of look at the traditional trends, But wondering how you would think about and frame that? Yes. Let me start and then John you could pick up. But It's almost I remember when we did have that perception out there that we had grown fast and It won't end well. And so I had people inside the shop say, so you just wait till we get a recession and then we can prove it. I really almost wish for a recession. So be careful what you wish for, because I'd be happy to just pick on many, many quarters and years without experiencing a recession. But Here we are. So I think we feel really, really good first off on the consumer side of the house that Each of those portfolios that we have, we've stayed with a very conservative risk appetite, super prime, high prime. We've moved into spaces where we think we can get good risk adjusted returns even with that conservative risk profile. And so You saw us grow, explore and pioneer the growth of the education refinance market, which we think is one such place. And then also in our merchant financing unsecured business where we have lots sharing arrangements with very strong credit counterparties that also I think gives us a very good risk adjusted rate of return in those portfolios. And So some of the Fed modeling doesn't pick that up and we obviously have the ability to understand that and pick that up. So I do think we'll end up performing well on the consumer side better than expectations and I think better than peers. And so that would be of the bedrock that you should be watching that. And I think hopefully you'll see us deliver on that. And then similarly on commercial, We have as we've grown the book, we've actually grown faster with bigger companies, bigger customers in the mid corporate space and those customers tend to be more highly rated than the middle market companies. And so there again that should benefit us when we go through this period. And I think we've also been very disciplined in terms of the industries that we're banking trying to be stay well diversified, trying to make sure our hold positions are granular. And so I think that should also provide a benefit in the areas of commercial real estate or sponsors. We've also kept a list of counterparties that we want to deal with tight quite tight folks that we know with we know and have done business with for a long time. We think they're good operators. We think they treat the banks well. So I think that should also work in our favor. And then I guess you'd look at the same things, you'd be looking at the charge off rate in those portfolios over time. So anyway, I think we will Now is the proving time. So we feel good about how we've maintained our discipline and how we've done BSO and repositioned ourselves to make higher net interest margin and better returns while keeping an incredible discipline on the risk part of the equation. Yes. Maybe just to add to that, Bruce. I mean, I think you asked about metrics. I mean, I guess I'd break it down. Charge offs have always been lagging. They may be even more lagging in this cycle than in the past given all the forbearance activities that we're going to be engaging in. But nevertheless, we will be monitoring them. As you think about the current positioning, I think we keep an eye on reserves to total loans, which we indicated was 1.73 3% today. I would also maybe just highlight the diversification across the balance sheet Keep an eye on that. We are right around fifty-fifty in terms of commercial retail. And when you dig into each one of Those books, whether it's in the commercial side, the areas of interest or concern are all in the low very low percentages of the overall book and geographically diversified as well. And then on the retail consumer side of things, Yes, we're mostly collateralized in areas that we understand and have been in businesses for a very long time. And where we are not collateralized, It's distributed across several different asset classes, not all card. I mean, we're in student, we're in card. We have merchant finance and there's a personal and secured product. We think that is the name of the game there. So those are the current metrics. Forward looking metrics, really comes down to stress results, which we've fared better than median in the past and our internal modeling, which we have been increasing levels of sophistication over time and we've been back testing and trying to keep current. So I think those are the 3 areas you want to monitor when you're thinking about things through the cycle. And can you just that's all helpful color. Can you just remind us, this Slide 16 where you talk about your internal stress test showing loss rates going down 50 bps versus last year. Can you remind us what drove that? Was that some derisking or model changes? Or Just remind us what drove that big drop. Thank you. Yes. I mean, I think there was a couple of things. I mean, I think that over time, we've been doing a better job of mapping our risk ratings to what we would basically had under frankly underappreciated the strength of the risk ratings across the portfolio. And so that was the driver of the improvement. Secondly, the full effect of loss sharing arrangements in our merchant finance portfolio that we're being fully built in. And then 3rd, just over time, the non core portfolio has been dropping, which had some higher loss content, it's gotten down to a very small level. So those are the things that come to mind for me in terms of what the drivers were. And I think also the cumulative benefit of BSO is also being picked up as well. Thank you. Our next question will be from Brian Foran with Autonomous. Go ahead please. Mr. Peran, we've lost your line. If you would hit 1 then 0 again, we can try to open it once more. Mr. Moran, your line is open. Yes. Can you hear me? Yes. Okay. Sorry about that. Going back to the stress test, I wonder if you could just speak a little more to the impact of Fed support and broader government stimulus. And I'm sure it's hard to put a number on it, but I guess the thing that's striking to me is if I look at unemployment and GDP, clearly, we're probably going to be worse, at least for a little while. But on the other side, it assumes the stock market is at 13,000 BBB credit yields are at 6.5%, whereas They're like 3.5%, 4% today. So when you think about the balance between the macro versus asset prices, Clearly, the macro is probably the biggest input, but how much of a buffer or shock absorber do those better asset prices give in your mind? Yes. I'm not sure I fully appreciate it. So you're asking Well, I think The thrust of the question is the Fed has obviously stepped up here if I understand it and that's made a Big difference in the markets. Certainly, the pricing of assets has come in, which is a signal that credit quality is better Potentially companies will experience less stress at least from solvency as long as the Fed is playing the way they're playing. And so How much weight do we place on that when we kind of do our modeling and look at the reserving that we're doing? Is that the question, Will? Is that the That was, yes. Thank you. Yes. I'd say there's a couple of things. When you it has a meaningful impact. I mean, I think that's one of the big The items that distinguish this current stress environment from possibly the modeled environments you would see Coming out of the Fed, ironically. So when you go back to the 2018 cycle and you see the results there, they don't have this massive stimulus that we have given reasonable weight to in our outlooks. And so That is embedded. And it's not just the government actions, which are significant on the fiscal front and the monetary front. It's also our internal actions that are idiosyncratic and all of the things that we're doing to get ahead of this that are very hard to model. Like forbearance. Exactly. All the forbearance that we're doing, all the modifications that we're doing and how aggressive we're being there and our insights and instincts around where to target those efforts, we've built that in, in our modeling along with the overall support from the government. That's a meaningful impact. And the other thing to keep in mind, and I should add this, The other important distinction when you look back at severely adverse scenarios is that all of those scenarios are all new shapes. You heard from Bruce earlier. U shapes are very stressful. These shapes are less so. And so even if GDP in prior severely adverse scenarios don't fall by as as we're all saying that it could fall today. The fact that it stays low for such a long period of time is what creates all that stress in the prior severely adverse scenarios. So when you fast forward to where we are today, what we're assuming, what we have in our numbers is more of a stronger recovery in 2H or it's more V shape And we also have the support, the significant support of the stimulus and our internal actions. I do think though it's safe To say, we've never seen, I mean that the Fed has pulled out all their tools from their toolkit from the last go around and then they've added more And the fiscal stimulus bill was ginormous and very extensive and fast in terms of trying to get the cash out to help companies and to help individuals. And so we really don't have much to go by in terms of modeling all of that ability to kind of easing off of TDR treatment on forbearance to encourage that is another Delta that hasn't been in prior models. So there's just a lot of uncertainty overall with this modeling. And I think All banks are doing the best they can both with the scenario and then kind of some of the offsets from federal government actions from the Fed and Federal Reserve actions and then from the internal actions, which is why I think we'll just need more time to clarify And what is that true picture as we go through the Q2? If I could sneak in one more, I just think about your ability to maintain dollars of CET1 capital over the next year, like total loss absorption capacity, I guess you've got $650,000,000 a quarter, maybe $700,000,000 of PPNR. I mean, it seems like you would have some securities gains you could harvest if you needed to, which would pull it into CET1 Capital. And then you've got some relief on the CECL accounting. I mean, it kind of seems like when you add it all up, The loss absorption, so to speak, over the next 4 quarters, maybe it's like $3,500,000,000 or something. Is that kind of a fair way to think about it? Yes. So I'll go ahead and start. I would probably just say it's ample that we are very focused on Continuing to deliver strong levels of PPNR, I think that's one of the first lines of defense. And we see, I think notwithstanding All of the change in the environment, our PT and R level was still up versus a year ago in the Q1 and it was close to flat on a sequential quarter basis. And we think there's a good ability to sustain that over the balance of the year. So you basically start with that. We have obviously some DSO actions that we could take if we needed to kind of release some RWAs and also create some additional capacity. And then I think on the capital line, we think our dividend is secure, but we've curtail buybacks for the rest of the year. So if you put that all together, I'd say we're very confident in our outlook that if the situation worsens, we have Very strong capital position and levers to full and an ability to continue to post good set loan ratios. Yes. And just to add to that, I mean, I think Liz mentioned stability in PPNR, that's one of the first lines of defense and our diversified increasingly diversified business model across NII and across fees is really helping on that front. Our transformation programs are helping on that front. I would also mention that you mentioned securities. Just based upon where rates are, Given we've excluded AOCI from our capital ratios. But if you were were to take a look at that, that's in the it's almost $1,000,000,000 of marks that are unrealized. And so that's part of the balance sheet strength that you would want to look at in the event that you're trying to figure out that part of the story as well. I mean, all in, RWA is expected to rise during the year. And if our scenarios hold, we expect that our CET1 ratios are going to be stable to rising throughout the year. So you put all that together and I think that's hopefully responsive to To triangulate what you're trying to get to in terms of where dollars of capital strength will be. Okay. Thank you. Next question? We will next go to the line of Gerard Cassidy with RBC. Go ahead. Thank you. Good morning, Bruce. Good morning, John. Good morning, Stuart. First, the transparency of your slide deck is one of the best. So thank you for doing that. It's very helpful for all of us. And on Slide 5, where you give us some good detail on the forbearance. And I know this is going to be a difficult question to answer, but two parts. What percentage of your portfolio Do you think we'll actually ask for forbearance, both the commercial and the retail? And then second, How are you guys going to monitor loans that go into forbearance and actually are going to be charge offs or they're going to be non accruals, but initially you're going into forbearance because everybody is being permitted to do that. Can you share with us some of the guardrails that you might have to develop to make sure that you're not and again, not doing it on purpose, but there's an extended pretend limitation here? So Gerard, it's Don. On the commercial side, we've actually done an extremely detailed liquidity cash burn analysis across the portfolio and bucketed our clients into 3 buckets. 1, A bucket that would need for some kind of restructuring and call it we don't really call it forbearance in the commercial bank, some kind of payment relief or restructuring of payments. And that's a very small portion of the portfolio like less than 5%. And there's another maybe call it 20%, 25% where we think 2 or 3 quarters out they're going to need covenant restructuring and maybe some relief from covenants depending how the recovery materializes. And then the vast majority of the portfolio we think looks just fine from a cash on cash standpoint. So we're really looking at everything cash on cash at this point and it'll be developing, but we're very comfortable that it's a relatively limited number of people in our portfolio that are going to need really payment relief. Yes, on the consumer side, We've got about 4% of our portfolios in forbearance status at the moment. The majority of those are 3 month forbearance programs. What's interesting is we're seeing a meaningful amount of our forbearance customers that are actually cash flowing and still making their payments. And so we believe a large percentage of our customer base is doing this as a safety net and not yet under So we're working hard on analytics to sub segment our Forbearance portfolio to identify further treatments as they come off the 90 days. If there are some that have significant stress and can't make their payment, we've got another lever another 90 days prior to having them roll through charge off. And for those that waited through the quarter successfully, they'll come back into full principal and interest payments. So we've got a variety of collections tactics and support tactics for our customers to help them make the right choices. A variety of other levers in our collection shop should alternative programs make more sense than a full forbearance as well. So we'll see how the next a few months ago. Okay. Thank you. Sure. Next question? That will come from the line of Ken Usdin with Jefferies. Go ahead please. Hey, thanks. Good morning. I just wanted to ask a little bit about that on the line draws, you guys mentioned in one of the earlier slides, obviously, how they had slowed through April And that the usage has been in the industries most affected. I wanted to ask you about you mentioned that about 60% of the draws are converted to deposits. And What do we take away from that? Meaning, is it that the other 40% might be being used? Or is it that those just aren't current customers? And do you expect how do you expect any sense that whether if the line draws are less at this point That you're going to start to see some of these just get paid down if in fact we do get the V shape and how quickly? Thanks. Yes. I would actually say we are seeing some pay downs already. I think early days, say the 1st 2 weeks of the pandemic, we saw a lot of preemptive draws size, particularly in the kind of Triple B segment, which is where they were concentrated. So the bigger companies felt very liquid and strong balance sheets. The weaker companies frankly don't have a lot of capacity for draw. So they're really concentrated in the crossover sector. Some of those are starting to come back. And what we've seen over the last actually 2 weeks is more deposit inflow kind of in scale than we've seen line growth. So think there's a lot of just very defensive behavior early on as companies got their heads around. 1, whether their banks were going to be there. And I think a lot of it was testing banks and those are beginning to come back. And then just where was this thing going and let's garner as much So the market seems to have calmed down significantly. People will draw and pay back, but we see it kind of regular way right now. And what we do expect is some of those deposits to be beginning to be used as companies go through periods of disruption. So we would expect a regular downdraft of the deposits that are sitting with us. And that's really why we did this cash burn analysis that I talked about on Gerard's question, we can really see it client by client and track it to make sure our analytics are right. I think the important thing, Don, too, is that we I did see nice deposit growth away from just the company's who were drawing bonds. Exactly. Ken, I think there Yes. So a good confidence that our LDR is going to continue to stay well behaved, particularly with all the liquidity that's in the system. Yes, excellent. And then, Bruce, just a follow-up on the prior slide, you talked about assessing new opportunities arising from the current environment. I'm just wondering, Is that any change in what you had already been contemplating in terms of continuing to add to the franchise? And what types of things do you think might appear for you strategically in that regard? Yes. So we had done last year when we rolled out top 6, a fair amount of work on our Just strategic thinking, where are some opportunities where we have strengths that we have a right to win that we can leverage those strengths to find new revenue streams the way we did with education refinance or we did with our merchant partnerships. And Growing Citizens Access to digital bank, taking it to the next level was 1, better serving small businesses, SMEs is another and then going taking our merchant business in some new directions. I think all those things still make a lot of sense and we're continuing keep up our investments there. But we're also looking at how has the world changed and are there additional offerings. Certainly, the world is becoming more digital as people have to stay home and we see tremendous upsurge in folks using the online and mobile platform. And so what does that mean for the future? Does it mean that, for example, The wealth offering for mass affluent that they might be more willing to deal with the virtual advisors that business now going to take off. So we're just looking at a whole bunch of brainstorming sessions to think through the world's going to be different, how do we play, how do we make some investments and re tweak our overall way of doing business and the strategy. All right. Got it. Thank you, guys. Yes. Thank you. We'll go next to the line of John Pancari with Evercore ISI. Go ahead. Good morning. Good morning. Just to confirm, so When it comes to your loan loss reserve level now post the build that you put through this quarter, so based on what you know Now and your assumption for the direction of the of how this plays out, there's nothing you see that happened in April after you closed the books that will point to the need for an additional loan loss reserve build in the Q2 for COVID? I'll start off there. I mean, John, as I mentioned earlier, I mean, clearly, Moody's scenarios have worsened. I think we have to digest what we're hearing and seeing in those updates. As I mentioned, we have as one of our base scenarios, we have GDP falling 18% with a V shaped recovery in 2H. The update from Moody's indicates GDP falling 30%, but nevertheless still recovery later We have an internal Just as it relates to John's specific question about closing your books, mean that scenario came out this week and of course we're closed. Exactly. So I think we had the best information at the time we did our close And I think we've leaned on being at the conservative end in the assumptions that we took. But as we go through the month of April, It may be that people think this will be a bit deeper and it may last a little longer and we'd have to come back and reassess that. Okay. All right. Thanks. I just want to put that in context of what you were assuming in terms of the shape of the recovery and what was dialed in. Okay. And then Separately, in terms of on Slide 16, your stressed analysis that you ran resulting in the 4.1, what was the stressed CET1 output from when you ran that? Yes. The CET1 would be in the neighborhood In a severely adverse scenario, I guess I'd say this way in terms of what we submitted for 2020, In a severely adverse scenario, using our estimates of losses, which we believe are quite prudent and predictive, we would be in the neighborhood of 8% of SEV-one. Okay, got it. All right. Thanks. And then one Probably a little better. Probably a little better. I mean, look at I mean, that's probably maybe a temporary low point, So you'd be in the something in the 8.5 range if you go quarter by quarter. We do the 9 quarter outlook of somewhere ranging between 8.5. Got it. Okay. And did you disclose the amount of loan loss reserve against that $15,000,000,000 of higher risk sectors that you flagged? No, we did not. We have one last question in queue from the line of Saul Martinez with UBS. Go ahead please. Hi. Thanks for taking my question. So I wanted to follow-up on, I think it was Ken's question. Just it's a bigger it's more bigger picture question. Obviously, We're all kind of focused on what's directly in front of us right now. But during times like these, that's you often will see more meaningful structural change, more meaningful inflections in the competitive backdrop, consumer behavior. I'm wondering if you have any perspective on that. Have you Time to take a step back and kind of think about where the puck could be going and how this situation will influence that. And in addition to that, how you think about your own strategy in that environment, for example, does it make Citizens app the importance of investing and being successful with the Citizens Access strategy that much more important is the client acquisition tool. So just more of a broader question on the industry and how you think about How you sort of recalibrate or by recalibrate your strategic initiatives? I'll let Brendan to kick off on that one. Yes. I mean, on the consumer side, the most obvious trend is an acceleration of one that was already happening, which is a drive to digitization. And so I look at all the things that we have in flight, some of which we've got a jump on our peers like you pointed out Citizens Access and a national banking digital like merchant finance, like the future of our brick and mortar distribution network, how do we reposition that have got used to coming in less frequently, but still being able to manage their money effectively and get advice. Bruce pointed out virtual wealth advisors. We've got a lot of these things in motion. We've got a significant investment in our mobile and online banking platform that should start to go live in beta form in Q2, I view it as an acceleration of a lot of those things. So we're spending some time to figure out how do we get out on our front foot even more how do we capitalize on consumer trends that are changing very rapidly situationally. We think they could be very sustaining. And I think the level of confidence I have is high because we're in a position of strength to have all of these things already in motion with teams making progress and taking share in the market. So we're trying to figure out which ones of those they can choose to really put some significant Acceleration, and that's how I sort of see it on the consumer side. Great. Thanks, Brandon. Just one quick follow-up on CECL If we do see a longer recovery and not a V shaped recovery, and you did give some helpful reference points on your allowance by product type. And it seems this quarter, the reserve build was really spread out across Consumer and Commercial. But what segments would you think are most vulnerable to reserve true ups? And because I do think your loan book is a little different from a lot of other peers, you do have a lot of loan types with longer weighted average remaining maturities, which for any given loss content will have a higher reserve. So I'm just curious like how we should think about sort of the evolution of those reserve rates if you were to have to build greater reserves? Yes. So 26 of them are materials. I mean, we gave some a breakout of what What drove the 123 basis points that we put up. I mean, I think what drove CECL in the first place being very Punitive standard in terms of versus incurred losses, as you mentioned, those categories that have a lot of or have some longer majority associated with them. So you look at in school as a place that would be a driver. Other areas where there's higher loss content, but there's also higher returns such as card and unsecured, that's an area to keep an eye on. And so those are the 2 jump outs in me on Page 26. On the commercial front, Some of the areas inside commercial maybe show up a little bit less lost content, but those are the top 2 that I see on Page 26. Why is in school so much higher than refi? Maybe it's an obvious answer. Yes. I mean, you think about that what we mentioned a little earlier is That's and maybe Brenny can comment on this. But these are really high FICO, basically Great credit risk, great relationship opportunity, people that have been in the workforce for on average I think the average comp is a 6 figure comp type of borrower. It's pretty high quality versus being In school, deferring Well, you've got usually have a parent guarantee on that. But the thing that really kills in the CECL calculation is the maturity. And these are 10, 12, 15 year loans in many cases. So that's why that number is high. We don't necessarily think we'll have any immediate See the charge offs on those portfolios, but that's where CECL doesn't always give you the answer you would expect. And in fact, delinquency on those portfolios Hasn't moved much at all yet. And so we're early innings on watching those portfolios, but we're liking what we're So far, it's really duration. Remember, in school also has a 4 year deferment period where before they graduate, that extends the duration there too. That's really what's driving the CECL difference. Okay. Got to close it up. All right. Thank you. Sure. So anyway, Thanks everyone for dialing in today. We certainly appreciate your interest and support. Have a good day and please stay well. And ladies and gentlemen, that will conclude your conference call for today. Thank you for your participation.