Earnings Call: Q2 2019

Jul 19, 2019

Good morning, everyone, and welcome to the Citizens Financial Group Second Quarter 2019 Earnings Conference Call. My name is John, and I'll be your operator today. Currently, all participants are in a listen only mode. Following the presentation, we will conduct a brief question and answer session. As a reminder, this event is being recorded. Now I'll turn the call over to Ellen Taylor, Head of Investor Relations. Ellen, you may begin. Thanks so much, John. Good morning to you all. We're really pleased to have you join us. We've got a lot of great material to cover in our presentation, which you can find at will walk through our results and our outlook and then we'll be happy to take questions. Brad Connor, Head of Consumer Banking and Don McCree, Head of Commercial Which are subject to risks and uncertainties, and you should review the factors that may cause our results to differ materially from our expectations on Page 2 of the presentation and our 2018 Form 10 ks. We also utilize non GAAP financial measures and provide information and a reconciliation of those measures And with that, Bruce, you've got the floor. Okay. Thanks, Ellen. Good morning, everyone, and thanks for joining our call. We're pleased to announce another strong quarter today. We navigated reasonably well through a dramatic change in the rate environment. Our fee businesses have really come on strong as we've integrated well our recent acquisitions and we're able to do more for our customers. And our expense discipline continues to be excellent. We continue to find efficiencies that lead to simpler processes and better customer experiences, while also creating the wherewithal for funding new growth initiatives. We are also very focused on being good stewards of our shareholder capital, both in terms of loan growth and capital returns to shareholders. Our year over year loan growth was 4% with a lot going on inside that number. Sales and runoff as part of balance sheet optimization. We are passing on commercial deals in the market where we don't like the risk, the terms or the pricing. Our deposit growth has been faster than loan growth at 7%, which has the benefit of bringing our loan to deposit ratio down to 94%. Citizens Access has been key to this as they reached $5,400,000,000 in deposits by quarter end. This lower LDR gives us increased flexibility on funding strategies, which will be highly beneficial in the current uncertain rate environment. We recently announced a 25% increase in our buyback capacity to $1,275,000,000 And today, we announced the $0.04 dividend increase to $0.36 per share with dividends now up 33% from the year ago quarter. I'm excited by the work we've done in developing a significant top 6 program and also in some of the strategy work around investment opportunities I'll let John take you through the details on our slides, but to me these programs are well designed and should deliver real benefits even further in how we deliver for customers and we want to break through on some new revenue pools, all very exciting and differentiating versus peers. Our strong first half performance with EPS up 14% reflects our disciplined operating mindset and capability as we've had to grind out results in a tougher environment than expected coming into the year, particularly around the extreme movement in rates. I think we're well positioned for the second half with strong fees and disciplined poised to offset rate pressure in NII and credit still in very good shape. We will continue to focus on disciplined execution. You can count on that. Let me stop there and I'll turn it over to our CFO, John Woods. Thanks, Bruce, and good morning, everyone. We are pleased to report another solid quarter with good fee income growth, strong expense discipline and consistent execution against our strategic initiatives. Let me kick off by covering important highlights of our underlying results. On Page 4, we delivered EPS growth of 9% year on year with PPNR of 7%. Despite a challenging rate backdrop, we delivered net interest income growth of 4% year on year. Loan growth was 4% and net interest margin was stable at around 3.21%. We also continue to drive momentum in fee income with 19% growth year on year, 6% ex acquisition, highlighted by record results in mortgage, Wealth, Capital Markets and car fees. Our disciplined focus on growing the top line and controlling expenses drove positive operating leverage of around 1% before the impact of our recent acquisition. Commercial Banking loan growth was 7% and Consumer Banking loan growth was 3% We continue to find attractive areas to deploy our capital and grow our customer base. Strong deposit growth was paced by continued momentum in Citizens Access. Our spot LDR improved to 94.2%, providing us with funding flexibility as we head into the back half of the year. Overall, credit quality remains excellent with a stable non performing loans ratio of 66 basis points and an allowance to loans ratio of 1.05%. We delivered underlying RASI of 12.9 percent and tangible book value per share was up 12% year on year and a 44% linked quarter to $0.3088 We finished the quarter with a strong 10.5% CET1 ratio. On Page 6, net interest income was up 1% linked quarter as asset growth and the benefit of day count were partially offset by a 4 basis point decrease in NIM given rate impact. Importantly, we have taken significant steps to reposition the balance sheet profile in a lower rate environment. During the quarter, we opportunistically used hedges to reduce our asset sensitivity from 4.2% to 2.9%. We shifted the vast majority of our sensitivity from the short end to the long end of the curve with 75% of it tied to rates longer than 6 months and about 25% coming from the short end of the curve. This action was the most recent step in a program that began in the Q3 of 2018 to moderate our asset sensitivity overall. This was driven in part by increasing our net to CPIC swap position Over 50% from around $9,000,000,000 in the Q3 2018 to $14,000,000,000 in the Q2 2019. Moving to fees on Slide 7. As I mentioned, we delivered strong execution in our fee based businesses highlighted by record results in mortgage, Wealth and Capital Markets as we continue to build out our capabilities and deepen client relationships. Non interest income was up 8% on a linked quarter basis and up 19% year over year. Before the impact of acquisitions, non interest income was up 3% linked quarter and up 6% year over year. In commercial, capital markets fees were up 19% year over year and up 6% linked quarter. In spite of slower market conditions, Our business has continued to perform extremely well, paced by a record number of deals and loan syndications, which were up 73% linked quarter. FX and interest rate product revenues were relatively stable with record first quarter levels despite the backdrop of uncertainty that caused many clients to delay hedging. On the consumer side of the house, wealth fees were up 13% linked quarter, driven by higher sales volumes and an increase in managed money balances. Card fees were also a record for the quarter, up 8% sequentially, driven by higher purchase volumes, including seasonal benefits. In Mortgage Banking, we saw a nice rebound in the quarter, up $19,000,000 or 44% linked quarter, driven by an $18,000,000 increase in production revenue, reflecting seasonally higher originations and a pickup in refi activity. Servicing revenue was broadly stable given the benefit of hedges. In addition, we continue to grow the servicing portfolio, which is now over $90,000,000,000 Turning to Page 8, Underlying non interest expense was up 1% in linked quarter, reflecting strong cost discipline and the benefit of our TOP program initiatives. Salaries and employee benefits were relatively stable as seasonal reductions in payroll taxes and 401 matching costs were largely offset by higher revenue based incentives, consistent with the strong fee revenue trends in the quarter. There was also a $3,000,000 severance charge. Outside services increased Let's move on to Page 9 and discuss the balance sheet. You can see we continue to grow in commercial with a focus on our geographic and industry verticals expansion strategy. In Commercial Real Estate, we are selectively seeing attractive risk adjusted return opportunities with growth tied to high quality projects, largely in office and multifamily. On the retail side, we also continue to drive growth in attractive risk adjusted return categories like education refinance and unsecured including our merchant partnerships. Overall, loans were relatively stable linked quarter and up 5% year over year. These results reflect the planned runoff in auto, non core and leasing as well as some modest headwinds from greater than expected asset dispositions of 1Q 'nineteen and 2Q 'nineteen loan sales with commercial up 0.8% and consumer up 0.3%. Going forward, we will continue to elevate loan sales as part of our balance sheet evaluate loan sales as part of our balance sheet optimization initiatives. Moving to Page 10. We're doing a nice job of growing deposits, which were up 2% linked quarter and 7% year over year with stable results in DDA. We continue to benefit from our Citizens Access digital platform, which has contributed nicely to our funding diversification and the optimization of our deposit levels and costs. At the end of the quarter, we reached $5,400,000,000 in Citizens Access deposits. Our total deposit costs were well controlled despite This reflects a proactive approach to deposit pricing as we have been aggressively managing our deposit costs. We've reduced CD rates and money market rates in our branch footprint as well as taken down the savings in CD rates in our digital bank. Year over year, our loan yields expanded 37 basis points, reflecting the benefit of higher rates and the impact of our BSO initiative. Our total cost of funds was up 33 basis points, reflecting a shift towards a more balanced mix of long term and short term funding and higher interest rates. Next, let's move to Page 11 and cover credit, which continues to look quite good, reflecting growth in high quality retail loans and an improved risk profile in our commercial portfolio. The net charge off rate of 36 basis points was up modestly linked quarter from relatively low levels and included a $9,000,000 increase in commercial charge offs. This is largely driven by a couple of idiosyncratic losses as the broader portfolio looks very good with continued improvement in risk ratings and a continued lower trend in criticized and classified loans, which were down 4% linked quarter and 19% year over year. Provision for credit losses of $97,000,000 was up from prior quarter and prior levels, reflecting the higher charge offs. Our allowance to loans coverage ratio remained relatively stable ending the quarter at 1.05%. The NPL coverage ratio was relatively stable at 159% as we saw improvement in NPLs and runoff in the non core portfolio. On Page 12, we've maintained our strong capital and liquidity position, ending the quarter with a CET1 ratio of 10.5%, which compares well with peers and gives us excellent financial flexibility. As you know, we recently announced a new share repurchase authorization under our 2019 capital plan of up to $1,275,000,000 and this represents a 25% increase over last year's authorization. We also increased our quarterly dividend by 13% to $0.36 a share, which reflects a 32% increase from a year ago, And we continue to target a dividend payout ratio of 35% to 40%. Our plan glide path to reduce our CET1 ratio remains on track. On Page 13, I want to highlight a few exciting things that are happening across our bank. First, we are extremely proud to have been ranked number 3 of the top 40 banks in the country for our reputation among consumers in the 2019 American Banker Reputation Institute survey. Note that we moved up 12 positions, the largest move of any bank, which is a real testament to what our colleagues do every day to help our customers reach their potential. Next, we launched a suite of digital tools that transform the end to end mortgage customer experience and help us operate more efficiently. In commercial, we are pleased to introduce AccessOptima, a best in class cash management platform that is now available to new clients. We are migrating current clients to the platform over Q2 to Q4. Let's move on to Page 14. The Tapping Our Potential or TOP programs have been instrumental in driving efficiencies that allow us to self fund investments and continue to deliver future growth. We have executed very well on the top five initiatives, which are expected to deliver $95,000,000 to $105,000,000 pretax by the end of 2019. We are now pleased to share some of the early details of our top 6 program, which will consist of 2 parts. The first being the transformational program, which is designed to transform how we operate and deliver for customers and colleagues. We aim to deliver a more customer centric, efficient and agile environment By modernizing our cross organizational operating model and IT practices, by accelerating migration to the cloud, by more ambitiously utilizing data and artificial intelligence and by digitizing end to end processes. The second part will consist of a more traditional top improvement program similar to those that we've successfully executed over the last 5 years. Importantly, the benefits of the program will help to mitigate the headwinds from interest rates, maintain our commitment to delivering operating leverage and improving our efficiency and ROCE. We also expect to utilize some savings to fund a net P and L investment of up to $50,000,000 over 2020 2021 Reinventing the payment experience of point of sale and launching new commercial customer digital offering. We are developing detailed plans for each and we'll keep you posted as we make progress. These investments should really benefit our medium term revenue growth over 2022 On Page 15, we provide additional details around the focus of the top program, including early days financial targets. We are targeting run rate savings from the transformational program of $100,000,000 to $125,000,000 by year end 2020 and savings of $200,000,000 to $225,000,000 by year end 2021. The traditional program is expected to deliver $75,000,000 to 100,000,000 By year end 2020 and over $100,000,000 by the end of 2021, the combined total is $300,000,000 to 3 Some of the start up costs of our strategic revenue initiatives. We have some really bold ideas, but we'll have to sync the level of investing with the near term external environment. We also point out that there will be one time costs associated with the top program, so the payback ratio is highly favorable. Note also that we do not expect to announce the top 7 next July. We currently will leave top 6 open and add to it as we go over the next few years. Our outlook for the Q3 is on Page 16 and it reflects continued good positioning for both our top and bottom line results. We expect net interest income to be broadly to be up modestly similar to the trend we saw in the Q3 last year. Given our continued focus on expense discipline, we expect non interest expense to be broadly stable. Additionally, we expect provision expense to be in the range of $100,000,000 to $105,000,000 And finally, we expect our CET1 ratio to be broadly stable. Regarding our full year outlook, notwithstanding the meaningful change in the yield curve environment, which now factors in a rate cut in July September, We expect our full year performance will track broadly in line with our January full year guidance, but there will be puts and takes with lower net interest Income offset by better fee income and expense performance with provision at the low end of the guidance range. To sum up, On Page 17, our results this quarter demonstrate our continuing strong performance as we execute against our strategic initiatives, And now let me turn it back to Bruce. Okay. Thank you, John. Operator, why don't we open up for some Q and A. And first, we're in line with Matt O'Connor with Deutsche Bank. Please go ahead. Good morning. Hi. So the latest top iteration, I think, is a lot bigger than most expected. And obviously, it covers a couple of years Or a little bit of a longer period, but it's still much bigger I think than what it's been in the past and maybe what was expected. Can you help frame how much of it actually falls to the bottom line as opposed to like offset Say core expense growth or inflationary growth. I guess the question is, we see these numbers, we can make the adjustments on the one time investments, the one time costs. How much of that actually boosts the pretax earnings versus helps offset some of the other dynamics such as rates, as you mentioned, and the core expense growth? Well, I think, Matt, what you've seen historically from us is a commitment to driving positive operating leverage. And so the top programs Do a number of things for us. They give us that differential because they're oriented both towards Finding efficiencies and helping expense line, but also finding additional revenue sources and helping the top line. So we would That's the principal commitment we have here. We keep running the bank better. We keep serving customers better. And we have a commitment to continue to drive guidance till January. So until we see how the rate trajectory moves between now and the end of the I think it's a little premature to make the call on that. So would it be your hope that even in a kind of tougher prolonged environment that the top initiatives are meaningful enough to get you that positive operating leverage even with the rate headwinds as we think out medium term? That would be the goal for sure. Yes. Okay. Thank you. Yes. Our next question is from Marty Mosby with Vining Sparks. Please go ahead. Good morning. Good morning. Thanks. I was going to ask you, with the acceleration of the share repurchase, last year you front loaded a lot of your share repurchase activities. Are you thinking how's the timing of this year's plan? Is it going to be even or a little bit more in 2019? Well, I'll start, John. You can go fine. But last year, we did frontload a bit. We want to Still has firepower in every quarter, but certainly we think that stock is at suppressed valuation. So it's a good Time to buy some more stock. So you'll see us buying stock in Q3 and Q4 That amounts that will be more than you'll see in Q1 and Q2 of next year. Yes, I think that covers it. Thanks, Craig. And then, you've done a great job of getting these fee businesses kind of built out. How do you see what has been the reasons for your success And then how do you see that kind of going forward? What are still areas that you still think you're going to be able to reap The benefits of what you've been investing in? Sure. Well, we can we take the village to answer this one, so I'll go around the table here, but let me start. And I'd say on the commercial side, what we focused on is broadening our capabilities And then also expanding our coverage force and then working as a team to bring thoughtful solutions and value added to clients. And so that's really gained a lot of traction. You can see it across the board. We have more Products to offer to customers, more services to offer. And I think we're doing a great job across the board and Whether it's the capital markets, whether it's M and A, whether it's FX and interest rates hedging, we're hitting record Levels of fees every quarter. We're winning jump balls against the mega banks. We have some really great capabilities, and I'll let Don add to that. On the consumer side, it's been a long effort to try to get our mortgage business and our wealth business in particular positioned for growth. I think we're seeing that now. We had certainly Franklin had a great quarter and our underlying retail LLO business had a great quarter. So I think mortgage now is better positioned than certainly it has been. There's still work to do in that business, but we feel good about the outlook. And then also on the Wealth business, we've scaled it up. We're penetrating our customer relations with, think a very good segment strategy and matching our product and offerings to the needs of the different segments that we're We did do acquisition of Carfell to attack the very high end, the ultra high network client that's being integrated very effectively. We have a lot of flow going in there. So I think And we're passing the baton, if you will, in a period where there'll be some pressure on NII given rates I think we can pick up the slack both with stronger fee performance and continued good discipline on expense. And I think credit is in really good shape as well. So why don't we go around the table quickly, John, anything to add? No, I think that covers it. I think there's real emphasis around The organic investments coupled with the bolt ons that we've done in wealth and mortgage have been quite powerful. And all the organic investments that have been made in the commercial side are starting to pay off. What I'd also add is that not only do have a diversifying effect across the few businesses within commercial and consumer, but even within commercial in the cap markets business, the things that we've done there to diversify across M You can see that even just within lines of business as well as across lines of business. So I was really pleased to see that. Yes. Don, you want to go next for commercial? Yes, sure. I think it's been said, but I think the thing that I would emphasize is we've been on this path for 4 years. We've hired a lot of very talented people. We've added the 2 M and A acquisitions And the way we're integrating to solve clients' problems is really unique. And I've been in this business a very long time and I've never seen a team working together. So you couple The capabilities with very long relationships that we've had and we've got very high win rates. And you see that if you look at our lead table results, you see us rising virtually every lead table into very, very strong position. So I'll pick up on what John said. The thing is that I like the most is the diversification because One market is a little bit weak, we can sort of find in another market and continue the momentum on the piece. So we feel good about where we are. Great. And Brad, lastly, but not least. I think it's similar to Don in some ways. We've been building this capability for years now. I'm talking about it. And when I look at the wealth business, certainly the Klarfeld Acquisition gives us new capabilities, but we've been building out our value proposition for we've talked a long time about we're heavily weighted on Customers in our customer base and we've rebuilt that value proposition. We've been using data and analytics to be much more personalized and targeted offers. I think that's paid a dividend. And then on the mortgage side, clearly, Franklin American gives us new capabilities, But we've also been building digital capabilities. And I think we're getting to the point where our digital capabilities are right there with some of the best in class in the industry. Frank, American gave us much better diversification of our origination channel. So I think just a lot of building the right pieces over time has got us to a good place. Okay. Thank you. Thank you. Our next question is from for Erika Najarian with Bank of America Merrill Lynch. Please go ahead. Hi, good morning. Hi. Good morning. Could I just ask and help with some get help on the clarification with how we should think about net interest margin behavior Under the scenario of July September rate cuts. And also, if we could get a little bit of color on how you're thinking Deposit strategy in terms of pricing as we face potential easing environment? Yes. Let me start quick, John, and then so Erica, I think we feel quite good about how we We're kind of anticipating what was happening in the market. We geared up with our top program to Looking at expenses, but then also we got right on the deposit pricing and we're very proactive in cutting Deposit prices and optimizing across our different channels in the quarter. So I think of all the folks who've reported, all of that reported up I think we have the lowest increase in interest rate deposit costs at 3 basis points of anyone that has reported. So that feels quite good. I think the 4 basis point contraction in NIM was also shows up very well I think it's really reflective of the emphasis we had on the deposit side. I think going forward, we'll our guidance contemplates that there'll be Two cuts and so we'll have to move through getting through this NIM contraction period, which we'll probably see some more of that in Q3, but then I think we'll start to stable and level out after that. John, you want to offer some more color? Yes, I think that's right. I mean stabilization as you get towards the end of the year, I think the dynamic that we're seeing is a couple of folds. I mean, you have to deal with when we started on this whole Tightening cycle and you saw deposit betas start out low and begin to build over time, the in period beta is getting The highest that you got into the end of last year. And I think that it's our view that you'll see a similar profile in reverse where as you see the rate cuts Come through, the benefit will start off a bit low as the deposit lag dissipates over time. And then you'll see the deposit betas grow in sync and grow over time, if in fact The easing cycle extends beyond just an insurance cutter too. So that's an important issue. You also talked Pricing outside of just how your models work, how do you get ahead of pricing? I think that we got ahead of some things throughout the last several months, 1st quarter into Q2, in footprint, we were relatively early in sort of revising our promotional rates and And revising our direct mail campaigns and then you see more even more visibly you see in the Citizens Access platform where late Q1, early second, we came We pulled back on marketing and reduced our CD yields earlier in the quarter and then reduced savings here in early July. So I think all those actions that started late 1Q and into 2Q sort of showed up in what You heard from Bruce in terms of interest bearing deposit costs being up only 3 basis points. I'd say more broadly, maybe just to even take a further step back and think about What's going on with NIM overall outside of deposits? We also, as you heard in my remarks, embarked upon A program in the Q3 of 2018 to significantly increase our net received fixed swap position. We increased that by over 50% from around $9,000,000,000 to around $14,000,000,000 on a net basis, just dollar cost Averaging overtime, then we added to that position every quarter in the last three quarters. And that plus some other actions we took To shift out our exposure to asset sensitivity to the long end of the curve, so that now when the Fed does cut on the short end, we're actually more exposed to the long end of the curve than we are the short end of the curve for the first time in many, many years, which we think is Got it. And a follow-up to that is there's a thesis that for banks that have accelerated their deposit costs on Like Citizens, there's a thesis that the net interest margin under the scenario of the forward curve, which includes 3 or 4 rate cuts between now and the end of 2020 that the net interest margin could bottom this year And potentially stabilize, if not increase on a quarterly basis in 2020, as That you have walked us through or is that possible for Citizens? Yes. I mean, I think as you heard earlier, we're going to hold off on 2020 Guidance here, I mean, I think that as you stay within 2019, you heard earlier from Bruce, Which is right that as you get into the end of the year, there's some stabilization that we expect to see in NIM. As That deposit lag from the last hike in December dissipates. And as the pricing lag really burns off, you'll see That dynamic happened and therefore we do expect deposit beta for the second to be higher than the first, meaningfully higher. And we'll see how that all plays out and what the rate environment looks like and how you have to also build in what And competition for deposits are and how we're growing the balance sheet, all of those dynamics play into The overall NII outlook and as you heard from us earlier, we're looking to keep NII broadly stable into the Q3 as we're playing off loan growth Our net interest margin profile, so I think that's how I guess, Erica, to your point, I'll just add that While that might create some relative performance benefits, we're still asset sensitive. So I think we're better off if we just see A couple of cuts here and then the Fed kind of creates the stimulus to keep the expansion going and then they stop. That would be I think a preferable scenario from our standpoint. Thank you. Our next question is from Peter Winter with Wedbush Securities. Please go ahead. Good morning. Good morning. You guys mentioned the outlook for the Q3, modest loan growth in the Q3. I'm just wondering, can you talk about the loan pipelines and Overall customer sentiment right now? Yes. I'm going to just start off and I think others will jump in. I mean, I think that I think our pipelines are quite good. When you look at Where you see them in July, I basically call them strong and building. And I'd say that even when you look out The Q3 on the commercial side, I think we see nice growth in our expansion geographies and in our industry verticals. On the consumer side of things, we like the profile of education refi, mortgage and unsecured. You have to keep in mind, we We still have an auto runoff and there is the industry dynamic of home equity runoff that You've got to keep in mind, so that's maybe more flattish, but commercial looks good, particularly on a spot basis as you get into the 3rd quarter. Yes. I guess, I would add to that. I think we're still confident in our outlook that we'll hit the loan guidance for the year. I think in the Kind of second quarter and third quarter, we're focused really on managing through the transition in rates and Getting deposit costs right and getting NIM right. So we've stepped up our BSO actions and we're doing A bit more trimming of loan portfolios during this quarter. We sold about $500,000,000 of mortgages. And On the last day of the Q1, we sold about $200,000,000 of corporate loans. So those are going to affect our averages Kind of in the middle part of the year, but as John said, we see the pipeline strong. And so I think we'll see a pickup particularly later in Q4 That will leave us well positioned to hit the loan growth targets we set out for the year. Okay. And then just within loans, can I ask about other retail? I've noticed that the growth rate Has slowed and loan yields have come down quite a bit. Yes. I mean, I think there's a mix shift in that There's a few components of that within other retail. You've got a variety of things going on. You've got the card business in there And that card business is tied to 3 months LIBOR and 3 months long haul has come down. There's also some other things that in the unsecured space That would affect that in our merchant finance partnerships that would have an impact on that. So, yes, I mean, I think it's more mixed than anything else. And I wouldn't say that that's really a structure of how some of those partnerships work Can be different based on the sharing arrangements we have with the sponsor and so that can also cause different optics. But there's no real pressures there. There's no real maybe there's a little tightening of risk appetite, but nothing that dramatic. Okay. Thanks very much. Sure. Our next question is from Ken Usdin with Jefferies. Please go ahead. Thanks. Good morning, guys. Just talking about how the letter Your math came through in terms of your capital return ask and then your points about where the shares have been. Can you talk to us about any changes in your view about That CET1 expected production and the pace of which and might you think differently in the future about just Balancing RWA growth versus getting back more to shareholders via the buyback? Yes. I'll go ahead and start off. This is John. I mean, I think the pace of our glide path is still intact. I mean, we do have we're on track and have an of getting to our 10.2% number at this point. And so that's back to our broadly reaffirm Our expectations for the year that we talked about earlier. And I do think that, so not a lot has changed on that front. I mean, we still Find good value in terms of the buyback, as you heard from Bruce earlier, just in terms of how that works. And that gives us significant financial flexibility to support the investments we want to make in RWA growth as well as From time to time, you've seen us do some bolt on acquisitions. And so that allows us to keep all of that flexibility is nice to have as we get into 2020. And you've also It's nice to have as we get as we head into 2020 and you've also seen us be able to increase our return in the form of dividends as we're getting that up into the 5% to 40% arena. Eventually, as we get near a target, that will moderate and they'll get back into Dividend return and supporting RWA with a declining buyback eventually as you get closer But for this year, our trends are intact. And I would just reiterate, Ken, that as I said in the past, that our risk profile certainly is At median or better in terms of more conservative in my view. So there's no reason longer term that we need to have a capital position That's above the median in the peer group. Obviously, we'll take those decisions as we go in due course, but Just worth pointing that out once again. So I think we have flexibility to keep moving lower. I think it's been, As John said, really great to have a little bit of cushion there that we can kind of have our cake and eat it too. We can have good loan growth. We can do these bolt on deals. We can Very nice payback to shareholders and capital returns. And so we still have a bit of room to run on that. Got it. And a follow-up, just how are you thinking about continuing to remix in terms of the preferred stack, which you've Been doing over the last year, still have some more room to go. With rates where they are, we think that it's pretty advantageous to get more of that done, but just your thoughts on that would be great. Thanks. Yes, I mean, I think that we're below peers in terms of that bucket, the AC-one bucket, as you know, and we've been filling that up a bit over time. I mean, You could see something like that in the future. It's something we clearly take a look at. And I think it served us well To do it over time, I mean, if we would have filled the entire bucket 6 months ago, we would we might have gotten all of that off at a level that like that in the future, but we keep an eye on that and look at that similar to Our CET1 overall, we look at that as a glide path over time. And there, Ken, the Calabres is on Where what's our return on equity and then what's the cost of the preferred stock. And so there are opportunities now to get that arbitrage now that we've got the ROE higher. We couldn't do Early days, we are in the turnaround phase, but now we have the capacity to do that and substitute preferred stock for further buybacks. So Certainly something that's on the radar that we need to look at. Okay, got it. Thanks guys. And the next question is from John Pancari with Evercore ISI. Please go ahead. Good morning. Good morning. Good morning. On the Just want to get a little bit more clarity on the net interest income guidance or the reaffirmed your full year guidance. So if it now if you're now looking For 2 cuts, 2 Fed cuts by the end of the year, but you're reaffirming your 5% to 6.5% guidance You look for stable Q3 NII. Does that imply that you could be at the low end of that 5% to 6.5% full year 2019 NII guide? Yes, John, I think you might have misheard what we said. So let me just clarify. So we broadly The full year guidance overall. So we feel that the guidance we gave back in January in terms of where Net income and EPS would be we still feel confident that we'll hit that, which is good. And then we said that the kind of There'll be puts and takes to deliver that. And so when we go through the major income statement categories, we'd be a bit to the left side of the goalpost, It's still positive on net interest income. We would be to the right side of the goalpost and outperforming on fees. We'd be to the left side of the goalpost on expenses and outperforming on expenses and we'd be near the bottom of the goalpost on credit. So Everything lines up very well. The good news is that we found offsets to the unanticipated impacts from rate on NIM. So We called out that our loan volumes will likely be where they thought they'd be. The one kind of missing link in the equation is that NIM is going to be lower than Ongoing in assumption when we started the year, but we'll make up for that in other ways. Got it. All right. That's helpful, Bruce. And then Separately, on the efficiency outlook, I know you had previously indicated a medium term Efficiency target of about 54%, how are you feeling about that now given the backdrop? Thanks. I still think we're going to get there. So one of the Advantages of this top 6 program, it's going to continue to help drive the efficiency ratio improvement that we need to get our returns up. Without a tailwind from rates or even just stable rates as we actually move to a declining in rates, It might take a little longer to get there, but we're still committed to hitting those targets. All right. Thank you. Okay. Our next question is from Gerard Cassidy with RBC. Please go ahead. Thank you. Good morning. Of the balance sheet to the short end of the curve and there's more asset sensitivity tied to the longer end of the curve. Can you share with us If the long end of the curve goes up to 2.75% by the spring of next year or the end of this year, what That due to your outlook? Yes. So it's, I'll just maybe take it at the overall level and you can break it down short and long. I mean, overall, In the instance of, call it, a 25 basis point across the curve decline, shift down, parallel shift down, You would see something in the neighborhood, a modeled, call it, dollars 60 ish million impact on a full year. Quarterly, that's about $15,000,000 These are all modeled outcomes and you'd have to A lot of outside of model things that would have an impact on that, but that's about what you would It's about $15,000,000 a quarter, which is in the neighborhood of 4 basis points. But that said, we almost never see those yields those parallel yield shifts down. If the shift down is on the short end, we have a much lower exposure, which is what we're expecting, right? We're expecting Short end cuts of 1 or 2 this year, I mean, we've modeled 2. But in that case, Within that any given quarter, it's now just a couple of single digit millions of net interest income exposure, Which is what the impact of shifting exposure at the curve has really done. So now we're at around 25% of that 15,000,000 It's sensitized to the short end of the curve falling. So and it's not exactly Symmetrical, but directionally symmetrical on the up. Not that I'm expecting that anytime soon, but That's how it looks at. And just to confirm, when you were saying the 25 basis point parallel shift, and I agree with you, we really don't see that. When you mentioned $15,000,000 a quarter, that's down, correct? That's down, yes. Yes. Okay. Yes. And I think that and as a result, I mean really what we've positioned ourselves to do here is that yield curve shape That would be more upward sloping. That's where we positioned ourselves to benefit more today than we would have, call it, a year ago. A year ago, all of our benefit was really most of our benefit was focused on rates rising on the short end, about 70% or 70 5% of our sensitivity on the up was tied to the Fed raising rates. And so as we mentioned earlier in the Q3 of last year, we started To bring the overall level down and in the early part of this year, we shifted all of the most of the sensitivity out to the long end, So that because of the just kind of positioning for the end of the rising cycle and frankly feeling like over time, Call it over the next year or so or even into 2 years, we would expect the yield curve to steepen. And we think that's an appropriate way to position the balance sheet today versus where we were a year ago. And just Gerard, just wanted to make sure you heard that. It's not $15,000,000 in the quarter with the next move down because of this positioning with the hedges, It was $4,000,000 rather than $15,000,000 So we've got out ahead of it and we've, I think, bought some insurance for the moves down. Exactly. And that's fallen by a third. A year ago that would have been call it $12,000,000 on a one move down and now it's $4,000,000 So We've cut by a third our exposure to the Fed lowering rates, which has turned out to be A good way to sail into the second half of twenty nineteen. No, that's very helpful. And maybe Don can answer this one. You guys touched on the new cash management, treasury management products on the commercial side. I think you called that AccessOptima. Tied to that existing bank. So when you win a new customer, is it easy or is it difficult to get them in on the treasury management side? It's difficult, but it will get easier. So the more sophisticated the customer, the tougher it is to transition a big cash management portfolio. But as we're expanding our middle market and doing more smaller sized deals, it generally comes with the banking relationship. This is called Access Money Manager, was very substandard. So we didn't have any credible market offering, which with Access Optima, We're as good as anybody else. And the early feedback from clients that we're migrating, we've migrated about 1200 already, It's very, very strong on the platform. It's a platform which has got an underlying technology from a company called Bottomline on it. So we will Upgrade the platform constantly as they upgrade their technology, so we'll stay in sync with the rest of the industry. So it works on a number of One of the things that shouldn't be lost on people is the core cash business is just part of the cash management offering. So if you look at our card business, which has been sailing over the last few years, it's growing at 20%, 25% a year. So your question, Gerard, that's an easier Because for a lot of companies, they don't have a card program already. So it's not a technology transfer. It's an additional newer way to integrate their payables businesses. We've been doing quite well on that side and that's been driving our kind of 2% to 3% growth in the overall cash management business. So we think that increases and we It is difficult to transition a bidding cash management client. And the 1200 customers that you've already migrated, what percentage of that of your Commercial book is that about? That includes business banking. So it's probably about 15% of the overall client base. We're going to do 4 waves between now and Thanksgiving to get everybody else on the platform. That's the plan. That's a test and learn as we translate. So we'll fix a little bug as we go along. So We'll fix little bugs as we go along. So it's been very little so far, but we certainly don't Actually for 6 months already with some core clients in our advisory board. So we're very confident in the quality we offer. Very good. Thank you, Gerard. Thank you. Our next question is from Ken Zerbe with Morgan Stanley. Please go ahead. Hey, good morning. With the transformational part of the TOP program, how is what you guys are doing with Cloud AI Digital different from what you've already been doing on the tech side previously and also different from what other banks are also doing on the tech front? Well, I think there's really 2 elements to kind of the tech Ecosystem in top 6, one is really around infrastructure and having the kind of DevSecOps Infrastructure migrate to something that's cloud based. We've had some progress on that But we're really going to accelerate that over the next couple of years. The second big element is how we design and develop applications And that really is migrating to an agile approach with a bunch of teams that work across the business, The staff functions and technology to get to market faster with more nimble and flexible approach. We probably have 50 pods, as they referred to in the trade, up in our agile environment today. We were going to quadruple that over the next couple of years. So it's quite a significant change in terms of how we Support and rollout new technologies. Okay, helpful. And then in terms of the balance sheet optimization At this point, I know it's been going on for several years now. Given where we are in the rate cycle, is the balance sheet optimization still having a meaningful or even Noticeable impact on remixing into higher yielding assets? Or at this point, is it more just A factor of your existing loan portfolio and the outlook for rates. Yes. It's still this is John. It's still a pretty a very big part of what we're doing here and there's a lot of room left Run-in that program. Whether you look at the asset side of the balance sheet or deposits, we are not where we would expect to be in the You'll see on the asset side of things across asset classes, we're still repositioning auto as an example and asset finance. Within asset classes, we continue to rotate and recycle capital and get better and better at where We allocate that scarce resource of liquidity in capital. So there's a lot left to go there on the asset side. On the deposit side of things, there's also a lot of exciting things happening there. When you look at DDA as a percentage of total deposits, we're still below peers. And I think that percentage doesn't fully reflect all the organic investments that have been getting made in Brad and Don's areas That have started to show up actually. When you look at the last year, I think we've outperformed DDA across the board in terms of Percentage growth. And so there's a lot more left to go there that we think is a big part of what we're doing as well as diversifying, call it, in the commercial space in terms of our deposit sources. So that program is alive and well, Lots left to go. And in the current quarter, whether you look at it quarter over quarter or year over year, there's a positive contribution from BSO That's allowing us to that's a tailwind that is one of the things that we count on to help us in our NIM performance as we sail into the headwinds of the rate environment. Is it possible to quantify some of the impact? I mean, meaning if you just assumed a static balance sheet, but then you applied sort of the remix Where you are versus where you want to be, like quantify the impact? Yes. And there are. I mean, yes, I think quarter over quarter, our estimates are we're in Kind of the mid single digits of positive benefit in the Q2 of 2019 compared to Q2 of 2018. It's best to look at it year over year because there's a fair bit of volatility quarter to quarter and that's right in line with what we try to do for any given year is right around that Call it 4, 5 basis points and we did get that and that really is part of the story. It's not the entire story, but it's part of the story When you look at our NIM performance this quarter being down 4 basis points compared with peers, I mean, you've got to give some of the credit To our BSO programs, which are which we spend a similar amount of time on compared to the top. I mean, we do that On a very disciplined basis month to month working with our entire businesses And it's continuing to pay dividends. All right. Thank you. And next we'll go to Saul Martinez with UBS. Please go ahead. Hey, good morning guys. Couple of questions on my end. First on I just want to make sure I understand The NII guide for 3Q because you highlighted, I mean, the $2015,000,000 a quarter On a 25 basis point cut with only 25 percent being at the short end. So it's $4,000,000 and assuming a July cut, you're only getting 2 months of that, So the impact seemingly of July cut is pretty negligible on NII. If that's the case, why are we assuming NII stable and not growing. Is it the long end of the curve on average is going to be lower? It just it seems like This rate cuts really not going to impact 3Q. I would think you would actually see NII growth if that were the case. Yes. There's a couple of things that are going on. Certainly, the impact of LIBOR is built into all of this, but you've got An expectation of LIBOR being down around 25 basis points or so. But I mean, you've got these modeled results, there's 2 things to keep in mind. And you've got the deposit lag that continues to have an impact. And as I mentioned earlier, the first cut That occurs in an easing cycle. We'll have a lower deposit beta than let's say the next cut. And the numbers I was quoting to you earlier are averages over a year. So in the Q1 of any kind of of any Reversal of direction on rates, you'll have a lower benefit on deposit betas coming down Then you'll have eventually after the full effects of that cut burn in, in future quarters. So that's the really the main issue It's really how that deposit lag flows in. I'd say that you also have to keep in mind our front book, back book, which has been a tailwind for us and remains a tailwind, but the magnitude and strength of that tailwind has come down a fair bit based upon where long rates are. And so When you look at long rates being down 25, 30 basis points in the quarter and continuing to The full impact of that has to be offset as well. So I think 3 quarter could be seen as maybe a transitional quarter as we get through What's going on with that first cut, which immediately impacts us on the asset side, there's 100% beta on all our floating assets that happens right out of the gate. But the deposit betas are less than that and deposit lag and front book, back book and all of that tends And so we stabilize itself as you get into the Q4. That's helpful. And on that latter point on the asset beta, how do we obviously, You've increased your fixed rate received positions over the last year and you've had balance sheet optimization. How do we think about loan yield betas, commercial loan yield betas, retail loan yield betas with a 25 basis point Because even this quarter, I think you've actually seen a basis point of yield expansion on commercial even with LIBOR coming in. How much of that actually goes through given all the mixing, the hedging? How much of that actually goes We'll go through into your loan yields. Yes, maybe just top of the house, it'd be good to talk about the fact that We are generally fifty-fifty in the loan portfolio. After you consider swaps, we're generally 50% floating, 50% fixed and that was true in the Q1. But after continuing our program of adding receive fixed swaps, We're a little lower on that front. So you could basically say that our loan portfolio was down from 50% floating post swap So 40% to 45% or so post swap. So therefore, our back to the point that we're indicating, our overall asset sensitivity is falling In part due to the fact that our loan betas will likely be a little lower at the margin due to the hedging that we've And also due to the even more importantly all the hedging impacts by shifting all of it out the curve. So We've been positioning and all of that will flow through in loans and deposits. We've been positioning for exactly this kind of environment where the long end up is a more likely Expectation of the tailwind that over time over the next several years than counting on the short end to be up Meaningfully, and I think we're really pleased with how we position that. So that hopefully that helps. Yes. I'm sorry. Just one you said 45% loan or interest earning asset is floating? 45% of the entire loan portfolio is To be considered floating post the impact of swaps. Got it. Okay. That's helpful. Thank you. Versus 50 Last quarter and it was a little higher the quarter before because we've been adding the C fixed swaps over the last three quarters. And our next question is from Lana Chan with BMO Capital Markets. Hi, good morning. Just wanted to follow-up on that last point on the swaps. Could you give us any details around the 14 None of them are forward starting. I mean the terms are basically our receivables proposition is on a gross basis is around 20 The reason I kept saying net is because that's offset by about $5,000,000,000 or $6,000,000,000 of pay fixed swaps that we executed That is important to know that's how we shifted our sensitivity off the curve as we executed some PASIC swaps at around 170 or so at the 5 year mark, which basically indicated that our sensitivity is now out the curve. The gross of $20,000,000,000 on receipts are basically in the neighborhood of 2 years of remaining maturity and that's basically protecting Against a potential easing cycle over the next, call it, 2 years, which is where those receive fixed swaps for tax And then releasing that sensitivity as you get out farther in over the medium term where we think that It's more than likely that that will cover any easing cycle that might flow through. Okay. And sorry, the average received rate is what on those swaps? It's Closer to 2%, it's in the like call it 185% to 2% range. And we've been dollar cost averaging in over the last three quarters. So It's around the net average. Okay. Thanks, John. Great. And with no further Yes. All the questions? Yes. I'll turn it over to you, Mr. Van Saun for closing remarks. Okay. Well, thanks again everyone for dialing in We appreciate your interest and your support. Have a great day. Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.