Earnings Call: Q1 2019

Apr 18, 2019

Welcome to the Citizens Financial Group First Quarter 2019 Earnings Conference Call. My name is Brad, and I'll be your operator on the call 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 conference is being recorded. Now, I'll turn the call over to Ellen Taylor, Head of Investor Relations. Ellen, you may begin. Thanks so much, Brad. Hello, everyone. We really appreciate you finding time to join us this morning. We're going to kick things off with our Chairman and CEO, Bruce Van Saun And CFO, John Woods, reviewing our results. And then we'll open the call up for questions. We're really happy to have Brad Connor, Head of Consumer Banking and Don McCree, Head of Commercial Banking with us. Of course, I need to remind everyone that in addition to today's press release, we've also provided a presentation and Financial supplement, and you can find these materials at investor. Citizensbank.com. And our comments today will include forward looking statements, which are subject There are risks and uncertainties. We provide information about the factors that may cause our results to differ from expectations in our SEC filings, including our 8 Okay, that we filed today and then we utilize non GAAP financial measures and we provide you information and a reconciliation of those measures to GAAP in our SEC And with that, I'm handing it to Bruce. Thanks, Ellen. Good morning, everyone, and thanks for joining our call. We're pleased to announce strong quarterly results today. It's always great to get off to a good start to the year. But importantly, beyond the short term results, I We're really doing a good job of staying focused on evolving our long term strategy given the rapid changes in technology, customer expectations and the competitive With change comes opportunity and risks and we seek to exploit opportunities that strengthen our franchise while minimizing potential risks. We have a significant cross section of our leadership team engaged in these efforts and the Key will be to make good decisions, to prioritize well and then go out and execute. Balancing the long and short term requires And I believe we're doing a good job overall on this. Let me give you a few high level takes on the quarter before John gives you the full details. Now the quarter had some seasonal impacts, so the year over year comparisons are the most meaningful. Our underlying Earnings per share was up 19% year over year faced by strong operating leverage which was 3.2% And even more impressively was 5% excluding acquisitions. What really stood out for me was strong fee income growth of X percent ex the acquisitions compared with only 2% expense growth ex acquisitions. We've consistently invested in our commercial fee businesses and we're gaining real traction in deepening relationships. Our capital markets revenue hit a record in the quarter up 38% as did our global markets business which is foreign exchange and interest rate products Where revenues were up 33%. We've assembled some great talent and we're able to compete highly effectively Against the biggest banks and our peers. And our top programs really are differentiating allowing us to become more efficient while serving customers More effectively, we bumped up our top five estimated impact to $95,000,000 to $105,000,000 which is up $5,000,000 and we're hard at work Our strong year over year average loan growth of 6% along with sequential loan growth of 1.5%. We continue to focus on attractive areas to deploy capital and improve our risk adjusted returns. On the deposit side, we grew average deposits 6% year on year and 2% sequential quarter. We brought the spot quarter end loan to deposit ratio down below 95% with some nice performance from Citizens Access We've had $4,600,000,000 in deposits as of quarter end. Even with the strong deposit growth, Our deposit costs were manageable and our NIM held steady. We now have some additional balance sheet flexibility as we look ahead. On balance sheet management overall, I'm pleased with our BSO efforts which provide us a razor sharp focus on enhancing our growth, our NIM and our return on capital. We continue to deploy some great new technology And to run the bank better. Slide 14 of our presentation provides you with some of the color including 4 new FinTech partnerships in the quarter. Suffice it to say, we expect a big leap forward in our technology capability and delivery in 2019. To me, it is one of the keys to our year. So overall, we maintain a positive outlook for the balance of 2019 As we expect another year of good execution and further progress across the board. Let me stop there and turn it over to our CFO, John Woods. Thanks Bruce and good morning everyone. We are pleased with solid first quarter results that highlight steady execution against our enterprise level initiatives with particular focus on robust positive operating leverage. We continued our momentum in delivering cost efficiencies while making the long term investments required So let me kick off by covering several important highlights of the quarter. So on Page 4, We delivered EPS growth of 19% year on year with PPNR up 13%. Our strong focus on growing the top line while being disciplined on expenses drove positive operating leverage of 5% before the impact of our recent acquisitions. Overall, credit quality remains very good with a relatively stable net charge off ratio of 31 basis points and a decrease in the non performing loans ratio. Our Consumer and Commercial Banking segments are delivering strong and prudent loan growth, 1.5% linked quarter and 6% year over year And we continue to gain traction in fee income with this quarter's results highlighted by record capital markets and FX and interest rate product fees. Deposit growth outpaced loan growth during the quarter in part due to ongoing momentum in Citizens Access and as a result, we drove a nice improvement in our spot LDR to 94.9%. This puts us in a strong liquidity position as we head into the 2nd quarter. In addition, DDA was stable year over year as we continue to do a nice job of executing on our initiatives to gather low cost deposits more efficiently and effectively. We also continue to actively manage our capital base, returning $349,000,000 of capital to common shareholders through higher dividends and share repurchases. We delivered underlying ROTCE of 13.1 percent which is up 141 basis points year over year. And our tangible book value per share was up 9% year over year and 3% sequential quarter. We finished the quarter with a strong 10.5 percent CET1 ratio. Across both business segments, we continue to make significant investments In broadening our capabilities and strengthening the franchise as we balance delivering on our near term objectives and executing against our long term strategy. We have some exciting things to talk about this quarter and I'll expand on our strategic initiatives in a few minutes. On Page 6, Our net interest margin came in broadly stable for the quarter even though average LIBOR rose less than the prior quarter and the long end of the curve was lower than anticipated. The December short term rate rise drove higher loan yields, but this was tempered a bit by robust growth and shift mix in deposits, which put some upward pressure on deposit costs, As well as by an increase in securities premium amortization due to the drop in loan rates. Turning to fees on Page 7. We delivered very solid results despite some seasonal headwinds. As I mentioned earlier, we saw record results in both capital markets and in foreign exchange and interest rate products, Reflecting continued benefits from investments in broadening and enhancing our capabilities as we are increasingly able to win lead left mandates against the larger This helped overcome expected seasonal headwinds in mortgage, service charges and card fees. Capital Markets delivered a 38% increase in fees year over year with strength in loan syndications, M and A and advisory fees and bond underwriting fees, Overcoming lower market volumes and loan syndications, which were down significantly. Results were up 20% linked quarter, Largely tied to an increase in M and A and bond underwriting activity as market conditions improved from the 4th quarter, which helped offset the impact of this typical seasonal In global markets, FX and interest rate products were up 33% year over year Led by the IRP team, which was able to win some nice lead transactions and take advantage of the flat yield curve by restructuring existing client hedges. In FX, higher dollar volatility created the opportunity for favorable hedging across a number of currencies. Because of what we saw happening with the long end of the curve, We took the opportunity to lock in some securities gains and executed on targeted asset dispositions, which increased other income in the Q1. This helped offset headwinds in mortgage where Franklin's fees were down $14,000,000 linked quarter largely as lower rates And $11,000,000 of MSR losses and wholesale origination levels dropped reflecting tough market conditions. The integration of Franklin is on track. And while the Q1 was challenging, we see an improving environment in 2Q and continue to believe this This is an attractive and important customer business for us to be in over the long term. Turning to Page 8, expenses were up 3% linked quarter reflecting seasonally higher salaries and employee benefits, partially offset by seasonally lower outside services costs. Year over year before the impact of acquisitions, non interest expense was very well controlled, up 2% strong expense management and benefits from our TOP program. We are identifying further opportunities to streamline our operations and activities across the organization to capitalize on the next level of efficiencies, which include a strong focus on end to end automation Across the front and back office. These activities will be critical to maintain our operating objectives over time. As a result, we remain committed to self fund our growth initiatives and deliver compelling products and services to an increasingly digitally oriented customer base. Let's move on and discuss the balance sheet. On Page 9, you can see we continue to grow our balance sheet and generate nice returns from the investments We've made in our geographic and industry verticals expansion strategies with strong progress in higher growth geographies like the Southeast and Texas. We are also seeing attractive risk adjusted return opportunities in commercial real estate with growth tied to high quality projects largely in office and multifamily. We remain disciplined around client selection where we are focused on larger NSAs. On the retail side, We also continue to drive growth in innovative and attractive risk adjusted return categories like education refinance and unsecured, including our merchant partnerships. Overall, we grew loans by 1.5% linked quarter and 6% year over year. Despite the impact from the planned runoff in auto, non core and leasing as well as some modest impact from asset dispositions tied to balance sheet optimization. Loan yields improved by 13 basis points in the Q1, reflecting continued mix shift towards higher returning categories and a backdrop Higher short term rates driven by the December rate increase. As you can see on Page 10, we are doing a nice job of growing deposits, Which were up 2% linked quarter and 6% year over year with stable results in DDA as we continue to do a nice job of executing on our initiatives to gather low cost deposits and capitalize on the inherent value of our franchise. Our total deposit costs were relatively well controlled given strong growth, A 15 basis points linked quarter reflecting the impact of higher rates and a shift in deposit mix as we drove new customer acquisition And managed down the LDR from 97.6 percent to 94.9 percent at the end of the quarter. Note that interest bearing deposit costs We continue to make investments across Citizens Access digital platform Where we are gaining share nationally in the mass affluent and affluent segments. This platform has contributed nicely to our funding Diversification and optimization of deposit levels and costs. At the end of the Q1, we reached $4,600,000,000 in Citizens Access Deposit. Year over year, our asset yields expanded 49 basis points, reflecting the benefit of higher rates and the impact of our BSO initiatives. Our total cost of funds was up 48 basis points reflecting a shift towards a more balanced mix of long term and short term funding and higher rates. Next, let's move to Page 11 and cover credit, which continues to look quite good with the continued mix shift towards higher quality lower risk retail loans And a relatively stable risk profile in our commercial book. The non performing loan ratio improved to 66 basis points of loans this quarter down from 78 basis points a year ago. The net charge off rate of 31 basis points for the Q1 was relatively stable linked quarter and Up modestly year over year from relatively low levels. Overall, we feel good about the credit metrics and trends in the book including a downward shift in criticized asset levels. Provision for credit losses of $85,000,000 was relatively stable with prior quarter and prior year levels. Our allowance to loans Coverage ratio remains relatively stable ending the quarter at 1.06% and as we increase the mix of higher quality retail portfolios in our overall loan book. The NPL coverage ratio improved to 160% as we saw improvement in NPLs and runoff in the non core portfolio. On Page 12, we maintained our strong capital and liquidity positions ending the quarter with a CET1 ratio of 10.5%, which came down from 10.6% in the 4th quarter. Also this quarter, we repurchased $200,000,000 of common stock And returned a total of $349,000,000 to common shareholders including dividends. Our planned glide path to reduce our CET1 ratio remains on track And we remain confident in our ability to drive improving financial performance and attractive returns to shareholders. Our current plan is to announce Our buyback plans later in the Q2. As a broad comment, we expect to meet expectations. On Page 13, I want to highlight a few exciting things that are happening With our enterprise wide initiatives. As we work on running the bank better and improving our customer experience, we've launched a new digital mortgage application and home buying platforms That we are very excited about as it will drive cost efficiencies and an improved customer experience. Given our strong focus on strengthening our advice based We recently opened a new banking and wealth center in downtown Boston. This approach allows us to deliver tailored advice, Ideas and solutions to help our clients with all of their banking and investment needs. We are full steam ahead on the integration of Carrefill which is progressing ahead of schedule. We continue to gain traction on our merchant partnership platform where we recently signed agreements with several new partners including ADT which should be announced later in Q2. In commercial, we continue with the build out of our Treasury Solutions business as we began piloting Optima, our new cash management platform, which offers clients a comprehensive suite of online cash management resources and real time mobile capabilities. We also launched real time payments to make customer payments more efficient and we have partnered with Worldpay to expand our international payment capabilities. These are just the latest examples of the significant investments Citizens is making in the commercial banking technology and solutions in We have now increased the expected benefit from our top five program by about $5,000,000 with an expected estimated benefit in the range of $95,000,000 to 105,000,000 Our outlook for the Q2 is on Page 14 and it reflects continued momentum in both our top and bottom line results. We expect our linked quarter average loans to be up approximately 50 basis points and we are considering selling some loans in the quarter as we seek to redeploy capital under our BSO initiative. We also expect net interest margin to be stable to down slightly due to continued but decelerating deposit repricing that will abate over the back half of the year. The NIM should bottom out in the second quarter and gradually rise in the second half of the year given less deposit pressure and the benefit of fixed loan and range given continuing strength in commercial and a seasonal uptick in consumer. We expect non interest expense to be flat to up 1% As seasonal decreases are offset by higher revenue related expenses. We also continue to expect to deliver positive operating leverage and further efficiency ratio improvement. Additionally, we expect provision expense to be in the range of $95,000,000 to $105,000,000 And finally, we expect our CET1 ratio to be broadly stable. Overall, we expect our full year results to be broadly in line with our overall guidance, but there will be puts and takes with modestly lower net interest income offset by better fee income and expense performance. Also in response to the rapidly changing environment and a little less tailwind from rising rates, we have been doing some early work on a transformational expense And designed to boost efficiency and effectiveness. This will provide additional capacity to invest more heavily in revenue producing capabilities, while To sum up, on Page 15, our results this quarter demonstrate our continuing strong performance as we execute against our strategic initiatives, Carefully manage our expense base and improve how we run the bank to drive underlying revenue growth. Let me turn it back to Bruce. Okay. Thanks very much, John. Brad, I think it's time to open it up for some questions. Thank you, Mr. Hassan. We are now ready for the Q and A portion of the call. And the first question in the queue will come from the line of John Pancari with Evercore. Please go ahead. Good morning. Hi. Good morning. Just looking to get a little bit more color on the deposit efforts this quarter. In what areas, what types of deposits were you pushing? Was there any broad based Increase in stated rates. And then what's your outlook there? Is there a continued push beyond your existing national platform that you're going to continue to push The product and therefore deposit rates higher? Thanks. Yes, John. How are you doing? It's John here. I'll go ahead and comment on that. So average total deposits were up very strongly this quarter. We were very pleased to see the take up. It was driven primarily by term and savings. Those are the 2 drivers. I think we saw some good performance in the DDA area as well. We've been making Lots of investments in that space. So year over year DDA was relatively flat. We're very pleased with that. We had a strong 2018 and we look to continue that momentum going Citizens Access had an excellent quarter. That will continue into the future. I'd say that strong deposit growth Really drove the LDR down to around the 95% level as you heard earlier. I think looking forward, I think you could see that LDR level Staying relatively stable into the Q2 and continuing to see growth looking forward in the term and savings space. But I think big picture, a big deceleration I would say in interest bearing deposit costs, the further away you get from the Fed rise in December Is going to see that deceleration in the Q2 to where that solidifies in H2, which Connects back to our NIM guide which will look to increase in the latter part of the year. I would just add a little color there is that there's broader efforts than just Citizens Access. Citizens Access In and of itself is a huge success story. But on commercial, we've been investing in certain areas Where we think we can gain some real traction in picking up natural share of deposits with our Preexisting customers where we maybe didn't have the capabilities, we've talked about escrow, we've talked about bankruptcy. So we're Building those out, those don't turn on a dime. They build gradually with time. So we're pleased with how that's developing. And then on the Core consumer side continuing to invest in data and analytics and being a little sharper in our offerings and targeting them to different segments of the market Particularly past affluent and affluent, so we're seeing traction there. So pretty good performance across the board and very pleased the LDR is at a lower Our level now, which gives us a lot of flexibility going forward. Got it. Thanks, Bruce. And then separately, just on what you just mentioned in your At the end of your prepared remarks, transformational expense program that you're looking at. I know you said you'd be prepared to give us details On the Q2 call, but just in general, how do you view it being transformational and using That phrase, I mean is it more about how you're looking at your branches or is it a longer term profitability Change in terms of where you're operating on an efficiency ratio basis, just a little bit more color there on how you view it as transformational? Thanks. Sure. So I think What we've done for the 5 years prior has been Really just work on ideas and coming up with deployment of different strategies around organizational design, Spans and layers, automating, starting to look at process automation and robotics. I think what we're and also some branch thinning and the like. I think what we're after in this go around is something That's a little broader in scope. And so really deploying new technologies, artificial intelligence And the like new strategies for technology development. So there's a lot around technology and operations And the cuts of how we're running things, there's a lot in looking at processes end to end in terms of the transactions that We have customer facing transactions and how we're going to improve those both in terms of their cost efficiency and their effectiveness and customer experience. So we have a fair amount there. So it's a broader look. And typically in the top programs up to now, we've looked for very quick Payback. So we didn't look at having significant technology investments and we wanted things that would pay back within 18 months. So in this version, we'll look at things a little more broader that might require some technology and might Payback over 2 or 3 years, but I do think we'll be able to move the needle on the efficiency ratio with the payback from these efforts. So we're quite Excited. It's early days. We're working through some ideas. The thing I would also emphasize here, John, is that We want to pair that with efforts that are going on for finding new revenue growth and finding different Trust with ways to serve customers or create new products and services potentially if they're disruptive, there's It's a huge effort that we're undertaking now to really focus on how can we differentiate ourselves and Similar to how we grew the education refinance business or we grew the Apple relationship into having a very strong Point of sale financing offering, we want to drive forward so we can have more revenue growth in our peer set and Actually keep the top line going and then create a virtuous circle where we got a good top line we can afford the investment etcetera. So it's It's really a one two punch. So part of it is let's really go after the cost base and transformational. And some of that will drop to the bottom line, but some of that We'll help fund these investments to really drive future revenue growth. Got it. Okay. Thank you. Yes. And Our next question will come from Saul Martinez with BBS. Please go ahead. Hey guys, good morning. Couple of questions. First, Can you give a little surprise with the outlook that you actually see NIMs ratcheting up in the second half and you gave Some broad strokes as to why, but if you could, John, give us a little bit more detail on what's underlying what kind of assumptions are underlying That outlook, I assume you still expect some deposit cost creep, but how much of it's being driven by balance sheet What kind of balance sheet optimization and also where you expecting securities yields to gravitate up as well in that assumption? Yes. So I'll jump in on that. So the I think if I take it in 2 pieces, I mean, I think if you look at what we expect in 2Q And then how those forces expect to unfold over the second half of the year. I think we're as we mentioned stable Down slightly in 2Q. The real driver there is rates. I mean I think when you look at where LIBOR is expected to be in 2Q, All the other drivers which I'll cover in a second basically offset and you're left with short term rates being potentially down a couple of basis points which Has an impact on our floating loan portfolio. The other drivers that all seem to offset are expected to offset in the second quarter It's all of those front book, back book dynamics. So you've got loan front book by and loan and securities front book, back book which is positive In the second it's positive in the Q1, it's positive in the second quarter, it will be positive for the rest of the year, although possibly diminishing a bit It's long rates stay where they are. But that's been offsetting the front book back book dynamic on the deposit side. And so I think you'll see As I mentioned in my remarks, a significant abatement of deposit cost increases The farther away you get from the Fed rate rise in December. And so then so a combination of that front book, back book plus our balance sheet optimization Initiatives is offsetting those other forces on the deposit side in 2Q and all you're left with is rates. So when you get out of the second quarter As rates stabilize both on the short and the long end, you see deposit costs Stabilizing and therefore you're left with front book, back book on our fixed portfolio driving some uplift. And I think those are the dynamics that we see at the moment in terms of the back half of twenty nineteen. So even if rates remain where they're at long end and Rates remain where they're at. The Fed funds remain where it's at. You still have positive new money yields Over portfolio yields on your loan and your securities books right now? We do. So in the Q1 that was 80 basis points or so in terms of that net difference In the Q1 for investments as an example, a variety of our loan books are you could call it Ranging from 25 basis points all the way up to 150 basis points. But basically almost every category has a positive front book, back book Across all of our earning assets. And as if rates stay where they are, it's possible that will shrink a bit over time, but it'll And maybe a portfolio or 2 will eventually convert to something more neutral as you get later in the year. But all in Our overall portfolio has a positive front book by dynamic, 50% of our loans are fixed. And so that momentum continues through the rest of the year as a positive dynamic. Got it. No, that's helpful. If I could change gears on credit, I think John in various forms recently and in the past you've talked about The challenging environment in the casual dining space and can you just comment a little bit about where what you're seeing there? Is that a concern and what Size of the book is and just and then just more broadly what you're seeing in terms of credit and what drove The uptick in your loan loss provisioning guidance for 2Q, is that just normal, the fact that it is so low and you're seeing some normal seasoning on the book? So it's Don. I'll mention casual dining. It's a relatively small portion of the book and it's actually coming down a little bit. So we're working through That which we flagged a couple of quarters ago, we've really slowed down if not ceased certain segments of our franchisee and restaurant origination. So we don't see large loss Origination. So we don't see large loss content that's not reflected in provisions already. So we feel like we've got our hands around That book and I'll just mention we had a charge off this quarter which was in our real estate book which is was Reasonably significant. It's a kind of 2013 vintage origination. So it's quite old and we've been working it through our workout Groups for about 4 or 5 years now. So it kind of went a little sideways, so we charged it off this quarter and almost It's really idiosyncratic too, I would add, it's Bruce. But I think that was one that was in unique bubble wrap and it kind of pottered over. And so We don't see any read across anything else in commercial real estate. And I agree and that's true of the overall book. What we've seen is problems over the last 5 or 6 quarters I've been very idiosyncratic and we feel very good about the overall book and the condition of the economy and what we're seeing in terms of performance by our underlying credit. And also as the credit class Yes. And all the credit ratios are very historically low and we don't see those changing. And I'd say that just the outlook for 2Q being up a bit. I mean, I think we've historically had a significant amount of recoveries that come through the book and credit has been excellent. And so the outlook there remains so, but possibly recoveries moderating a bit And that's really yes, exactly. So that's really the reason for that. Do you disclose the size of the casual dining book? No, no, I don't think we do. Okay. All right. Fair enough. Thanks a lot. Question will come from Ken Zerbe with Morgan Stanley. Please go ahead. Okay, thanks. Good morning. I I was actually wondering, can you guys talk just a little bit on how your plans around your balance sheet optimization are changing now that the Fed may be done raising rates this year? Yes. I'll go ahead and start on that. I'd say I'm not sure they changed very much. I mean we've been talking about the broad strokes of that program Primarily on the deposit side where you would focus on all of the things you heard from Bruce earlier in commercial new interesting I think ways to fund our loan growth in the escrow space and in consumer a lot of the data analytics And efforts around customer experience that are driving DDA take up. So I mean I think all of that remains just as important in a world where the Fed is not raising rates As it is in the world where they are. So that continues in that direction. On the asset side, similar. I mean when you look at our rotation into we call it The asset categories that have really solid risk return profiles for us like such as student or unsecured or the investments we want to make in our commercial business To get more swings at the bat with respect to our customers, all of that is not meaningfully impacted by the Fed Going on hold, I think that continues and it's really something you would do with or without I think the Fed. I'd say that the one thing there Where we might be pivoting a little bit is the mortgage growth that we've had, we'd like Taper that off a little bit and financially we could consider some sales of mortgages that we have on the balance sheet. So back in a low rate environment, Putting 30 year fixed on your books isn't a great trade. And so we think we can offset that. We've been talking for a while about We're going to leverage our point of sale offering to some new partners. One of the things we're quite pleased about is that we've Now signed several important new partners including one which we can't mention today which is ADT but the press release will be out Shortly on that, but there's several other significant ones that will come out over the next several weeks. Brad, do you want to come on? Just To say we've got a very good pipeline, we felt like we built a very unique value proposition with the Apple program and there's tremendous interest in the marketplace And we've got a really strong pipeline and think there'll be more news after ADT. I'm really excited about ADT. Got you. Okay, perfect. And then your capital markets business held up really well this quarter, especially relative to peers. It looks like some of that was due to bond underwriting. Can you just remind us how your Capital Markets business or the business mix may differ from some of your peers? So why don't I take that. So first of all, we really have a very small equity business. So if you broadly talk about capital markets, It's ex equity. We do a little bit of equity in the REIT space with a partner who does the equity underwriting. Our This is really threefold. It's bond underwriting with both high yield and investment grade. It's syndicated financing which is Largely leveraged syndicated financing aimed at the mid market sponsor community. And thirdly, it's M and A. So this quarter we benefited From bond underwriting, particularly high yield bond underwriting as things recovered from the weak market last year and there was some pent up demand. So a lot of our clients in the high yield market. And then we saw Western Reserve in particular kick in and we had quite a strong M and A quarter and that we expect to continue through the end of the year both with Western Reserve and with Bowstring which was our latest acquisition. And the way I think about M and A is it took 2 or 3 quarters to have the capabilities on our platform to begin to see deal origination. And so our win rates are very high on the M and A Our client base is very active. We did have quite a weak quarter in our syndicated financing business and That should be bouncing back as we go through the balance of the year. So what I like about the mix of our capital markets business is far more diversified than it was in terms of different Fee streams a couple of quarters or a couple of years ago. So we're getting nice degrees of offset based on different markets being active. Yes. And what I would also add to that, it's Bruce I think that what Don and his team have been able to do very effectively It is to marry the solution set by having our coverage officers We've worked very closely with these enhanced product capabilities. And so when we go out and call on clients, we show up with Value added ideas, we're able to win the jump balls against very significant competition out We do a really good job of that. You can start to see the traction. We hit record capital markets fees. We hit record FX and interest rates, so coming up with good ideas on how to hedge risks is also something that I think we've got huge traction. And So very pleased to see the maturation of the model and the very strong team approach in terms of how we're covering And I'll just add to that Ken. We're very disciplined as we add new clients around capital deployment Against opportunities where we will where we do think there'll be good cross sell. So I think our new business process Several years now is beginning to yield flow based on where we've deployed capital and added clients on a net basis. All right, perfect. Thank you very much. And our next question will come from Erika Najarian from Bank of America. Hi, good morning. Hi, Brad. Just had a follow-up question on the comments on capital return. I think there was some confusion on how to treat your press when Investors were putting in your financials in the Fed template. And John, I just wanted to clarify, you said that capital The return would likely meet expectations. I have a consensus of about $2,150,000,000 right now for capital return. Is that the bar that you're looking to potentially meet? Without necessarily commenting on a particular number, we've seen a range of estimates externally. We think we're broadly in line with where The market expects our buyback capacity to be. We have that flexibility. I mean the Fed template as you know we're We're a Category 4 firm. We're subject to the Fed template this year. We overall have a glide path that that Fed Template allows us to continue to execute against and we have a dividend Return expectation over time of 35% to 40%. We've talked about our expectation of getting the CET1 ratio down to about 10.2% by the end of the year. So I think the main message is number 1, the Fed template allows us the flexibility to execute against what we want to do. And We think that we'll deliver against deliver broadly against what the market expects for buybacks in the window. And so the 10.2 projection for the SEP-one at year end is still the projection. Got it. And just a follow-up, Bruce, in terms of the top 6 program that you're looking to announce. As we think about the potential impact, Right now with the consensus is expecting something like a 57% efficiency ratio for your company this year. That's about in line with peers. Should we expect that top 6 could bring you to a position That's better than peers, let's say, in the mid-50s from a natural efficiency standpoint? Yes. So we have A stated medium term objective to bring that down to 54%. And so I think a top 6 like program Is going to be required to accomplish that. So I do think it's important Particularly if the Fed is done raising rates and maybe on hold for a while here, you'll get less NIM tailwinds than we had previously. So I think you have to go back and look at What are some of the offsets that you can deliver certainly control of your expense base is 1, but doing it smartly, doing it in ways that Actually provide the funding capacity to still play offense. So that's what we're all about. Okay, please go ahead. Yes. And another area that we're really focused on is The growth in the fee based business is where I think we have gotten off to a great start on the commercial side in Q1 and the outlook remains strong for the year. We We got off to a little bit of a rough start on the consumer side, but the outlook for Q2 is quite good on the consumer side. So I'd expect to see some bounce back in mortgage and then So I expect to see some bounce back in mortgage and then also bounce back in wealth. So things move around. There's puts and takes. But I think the expense base is going to be important and then also driving that fee growth. And our next question in queue will come from Ken Usdin with Jefferies. Please go ahead. Hi, good morning guys. A follow-up on the capital structure question. It's nice to hear that that guide path to 10.2 is intact. And your long term target you Talked about in January to get to 10 CET1. Some peers are distinctly talking about much lower than that at this point. And then given the tailoring in the Category 4 that you just talked about, How do you evaluate at what point you might be able to run the company even lower than 10? And then how do you also evaluate The choice of how you choose to get there, was it just the buyback or just leaving room for balance sheet growth? Thanks guys. Sure. So I'll go first. John, you can chime in. But I think we're gradually bringing it Down to 10 and we don't really face a decision note until we get there. And then I think we need to look at a number of considerations Including where our peers and what's the regulatory and rating agency comfort with operating At a lower number including our own, but importantly comfort with being there. I think there's no reason structurally From a business standpoint that we should maintain a ratio that's above peers, Our kind of business risk profile certainly is in line with peers. In fact, I think we're slightly on the prudent side. So If you look at how we model the stress scenarios, we come out quite robust and even in the Fed modeling certainly on credit losses We're at the median or slightly better than the median. So I think we'll have that flexibility. When we think about how we deploy our capital, Well, obviously if we can deploy it smartly to further organic growth that's Mission 1, so if we can get loan growth, if we can do some of these accretive small acquisitions that Broaden our capabilities so we can get more from our relationships on the commercial side and the consumer side. Those are things that we're continuing to On the list ahead of buybacks I think frankly. But again if we we certainly don't want To have capital lying around, so we'll try to keep that ratio sharp and relatively in line with peers. Yes. I mean, I would just say just to emphasize that last point. I think given where we are in our lifecycle, I think of the opportunities to deploy capital organically And in strategic initiatives including fee based bolt ons that we've been doing remain into the future. So that's job 1 is to put that capital to work on behalf of our shareholders in an accretive way. And then we monitor all the other sources and The outlook for earnings etcetera, organic loan growth and then we take it from there. I think we also have Another lever which is our capital stack is a little bit more oriented towards CET1 than some others and most peers have more preferreds outstanding than we do. So that's another lever we can look at over time that provides benefits as well. So just some really solid Strength in the capital positioning. Business spot flexibility. Yes. Yes. Thanks. And my follow-up on that John you just hit on it was going to be You did have done a couple of those preferreds to start to move the capital stack towards that more efficient place. You're only about halfway there. So Is that something we should expect over time as you continue to bring CET1 down, we logically see that preferred sextile in underneath it? Yes, I think that's logical over time. I mean we're not going to commit to an exact execution date on that. But I mean I think that we've done this in the right way. I mean as our ROTCE has improved over the years, it becomes much more appropriate To consider the repositioning of the capital stack such that if preferred if the cost So preferreds are attractive and they are versus ROTCE and we find a good execution point and we'll consider that. That's a nice bit of flexibility as you heard earlier in terms of our ability to reallocate and remix our capital profile. Okay. Got it. Thanks guys. Appreciate it. And our next question will come from Peter Winter with Wedbush Securities. Please go ahead. Good morning. Yukon, in the prepared remarks, you mentioned that net interest income was coming in a little bit lower For the full year, is that mostly driven by less margin expansion than you originally thought? Yes. So we broadly reaffirm the full year outlook. And I think whenever you start moving through the year, there's There's some modest puts and takes. I think when you look at NII, the volume side of that equation is Solid. So I think we're still looking to be solidly in the loan growth range that we set out to achieve. I think the NIM given the flatness of the curve and some of what we've experienced here early on in the year We'll be maybe a couple of basis points lower than what we anticipated, still positive In terms of NIM for the year, year on year, but maybe there's a little leakage there. I'd Where we'll make that up is I think a more robust view on fees and a better performance on expenses. So Our ability here to protect PPNR I think is pretty solid. And then we've had beats in the past couple of years on Credit. So we'll see how that plays out. I feel pretty good right now where we sit in terms of the credit outlook. So that gives us the confidence to broadly reaffirm Thanks Bruce. And then just on credit, I'm wondering can you make any comments on how you're thinking about CECL? Yes, I'll go ahead and cover that. I mean as you saw we Regional Bank had some Commentary that we were engaging with regulators and the FASB on and just more recently That has been adjudicated to result in moving forward full steam ahead with executing on CECL. We never really stopped our programs. We are launching data related pilots for the pipes and plumbing in the Q1 here And full dress rehearsals as you get into the 2nd Q3 on CECL just from a process standpoint. Later in the year, we'll have some more views About what that will do and how that might impact the day one capital impact of adopting CECL. But in general, As you know longer dated loans will have a bigger impact than some other categories. We do think that CECL is procyclical which is not What we think is the right way to portray exposures going into downturns And it's very sensitive to your outlook of the economy going forward. So We're on track for our internal program. We'll talk to you a little talk to you some more about this later in the year in terms of the impacts. But we do think that our capital glide path and our ability to execute against that is not at risk As a result of CECL. Thanks very much. And our next question in queue comes from the line of Gerard Cassidy with RBC. Please go ahead. Thank you. Good morning, Bruce and Jen. Hey. Good morning. Can you guys share with us, clearly the direct The digital deposit program has gathered a good amount of deposits. Can you share with us, are you hoping to Develop deeper relationships with those customers aside from just the savings product that they're using right now? And if so, are there going to be some metrics that we can look at as outsiders to see the success of deepening those relationships? Yes. So So let me start, Bruce, and I'll flip it over to Brad for more color. But I would have To say that this has been a tremendous success, this development of Citizens Access launch. I describe it almost as gold. So what's gold today is gathering deposits in this environment, gathering new customers. We have $4,600,000,000 in deposits. We have over 60,000 new households that are customers of Citizens Bank. And we have developed digital capabilities and the ability to use data that I think puts us at the vanguard Our peer group and that's gold as well. So a lot of real positives coming out of this. I think the next phase now that this is up and running, We certainly want to fine tune the offerings to make sure we're gathering those deposits cost effectively while meeting customer Expectations, but if you have 60,000 customers, what else can you do with them? And so that's Really a Phase 2 project that we kicked off. And if you think about it Gerard, we have roughly 60% of our consumer loan products Today are digitally originated. So there's a possibility, there's a potential. We have a digital robo advisory service that we can also marry with Ability to Skype a person with a little braid hair. So there's a hybrid, there's a pure digital and then there's a hybrid person slash Digital offering that also could work through that channel. So there's some really interesting things to think about, but I think it's going to take It takes a while to actually bring that to market. With that, I'll flip it over to Brad. Yes. Bruce, I think you covered it really well. There are some immediate things we're doing to enhance platform including the fact that we're adding trust accounts which we launched without trust accounts, but we see tremendous opportunity. It's a perfect client base for us. It hits right in our target customer segment of mass affluent and affluent customers digitally savvy. As you mentioned, we built Specify which is 1 of the first digital advisory capabilities in the market. We think that's a perfect complement to this customer base And then several lending opportunities and lending products. So we're working on all of those and what are the next steps for continuing to enhance the relationships. Very good. And then pivoting to the loan growth, which again was strong for the quarter as you guys pointed out. And I think you guys highlighted that in the commercial real estate area, you saw some growth in the office and multifamily. Can you give us some color on the geography? Where are you guys seeing the best growth geographically in your footprint and outside the footprint? I think it's we were our real estate business is national and it's really I'd say it moves quarter to quarter. So I'll give you two examples of Expansion, we've actually moved people into Texas and people into Los Angeles where we have seen growth over the past few quarters. So that's Both to be active on the existing book of business, but also do some origination, but it's really across the Southeast And growth areas of the country where we're seeing the highest levels of growth. I'd say our real estate business in general, the growth will Slow down over the balance of the year and that's strategic because we're focusing on the better end of the opportunity set that we see. So We have to originate a fair amount just to replace what's on our books already, but I think you should expect to see our real estate growth on a gross basis be a little slower It's been in the past from a strategic standpoint. And I would also say there's still attractive opportunities in the footprint in Boston and So it's a combination of things that are in the traditional footprint in some of these growth markets that Don mentioned. And when it comes to office, we typically focus on owner occupied. So there's low risk with the type of projects that we're And what's flat lining is really multifamily and anything retail. We're really not growing those with any kind of significance. Thank you. And our next question here will come from Marty Mosby with Boenning Sparks. Please go ahead. Thanks for taking the questions. Got kind of a rapid fire here of about 3 or 4 questions. Your mortgage hedging this quarter was a negative. Was that just unusual some basis risk in there or were you just not as hedged or as a percent of the Portfolio, are you making any adjustments? So is this going to be unusual or should this be something we expect as rates go up and down have positives and negatives? Yes, Marty, I'll take that. This is John. So I mean, I think that you're going to have when you have an asset of this size that That is $600,000,000 $700,000,000 depending upon we have a split between fair value and Locom. But it's a large asset, it's a complex asset to hedge And you're going to have some variability from quarter to quarter. Last quarter we had a $2,000,000 Net positive MSR valuation net of hedge this quarter we had 2,000,000 negative MSR valuation net of hedge. So Quarter over quarter that's $4,000,000 There were other rate impacts as well. When you look at outside of just the Great hedging piece. You also have to estimate what your amortization is just in the main servicing P and L and we had an increase of $7,000,000 from $25,000,000 to $32,000,000 in amortization that was largely rate related as well. So all in Quarter over quarter you had $11,000,000 of largely rate driven MSR related Valuation and impacts, so hopefully that gives you some context. No, it helps. And I really appreciate you all's guidance. So this is kind of a statement as well as a question. We talked about the front book versus the back book. That's really what we've been trying to outline for Investors is the fact that you have this historical spread between what's still in the market even though rates have come down versus what's on the books just Because rates were so low for so long and that over time that's kind of a grind up as you kind of just see that coming through. And in relation to that, you mentioned some balance sheet flexibility. I just didn't know if that was liquidity wise because your loan to deposit ratio had come down Or there was some other flexibility that you were talking about there? Yes, I think that we have some flexibility primarily due to We had a really strong deposit quarter after several prior quarters that were strong. But Q1 was particularly strong and The LDRs come down to around 95%, I mean that provides some flexibility. We have the we've demonstrated the ability to grow deposits At least as quickly as we grow loans. When you think about the as a good example, when you think about The big impact that growth has on the increase in interest bearing deposit costs, ours was 16 basis points in the quarter. Approximately half of that was driven by just deposit growth. So if you get ahead of things a little bit Then and you can fund your growth without necessarily having to grow a lot in future quarters that has A beneficial impact and underpinning of net interest margin going forward. The other thing, so John is describing the flexibility on The deposit side that we have, I think we have some nice flexibility on the asset side as well. So we've been well positioned to Having origination engine both on the commercial side and the consumer side that is pretty robust. That gives us the wherewithal to then Look into the back book and make asset sales and we paid approximately $300,000,000 of sales in The Q1 and so we can look to do that as we go through the year and still report net loan growth. So that's all part of BSA BSO, which is working for us on the deposit side, but it's also working for us on the asset side. And then just, 2 bigger picture questions. You've been the easiest bank to kind of estimate was going to beat market consensus every quarter. Just wanted to get you to kind of think about why and this maybe highlight for us because you all do ask for our models every quarter. So I know you're tracking What everybody is putting out there, but what are the earning surprises that people just aren't catching up to? And then Bruce, I just wanted you to give us a little bit of a thought given some of the other Transformational, let's call mergers or placements of banks in the country. How does Citizens fit into this competitive Gabe, I mean, how do you see the bank being able to evolve over the last 5 years? You're really talking about how you're competing a lot with Everybody around you, but just wanted to kind of get your thought on how you fit in there. Yes, sure. So with respect to the consistent track record of Being able to beat pretty much every quarter that we've been a public company, I just think it's a reflection of our Very strong focus on execution. And we're all I think very aligned on where we're trying to take the bank and What the key drivers of a successful turnaround were and what the next phase is going to to become the top performing bank. So I think we've got great people, great leadership team and we have good alignment Through the organization that people know is what's expected of them. They're empowered and then we hold them accountable and they've been doing a great job. So hats off To our colleagues here at Citizens. With respect to where we fit into the landscape, I do think we have I've really come a long way from where we started. So foreign ownership, foreign parent had a bunch of difficulties And left us with a strong potential franchise, but had accumulated some baggage, some lack of investment in Key areas like technology and our people program and our risk capabilities, Bill's business model wasn't fully built Now to really serve customers on an integrated way both on the commercial side and the consumer side, balance sheet had To a position where our profitability was really emasculated. So we had a lot of work to do and I think we've Now certainly made our way back into the pack and in many cases I feel that we're doing better than our results indicate Certainly better than our stock price would indicate, but I'll leave that as for another day. But certainly On the commercial side, I'm so pleased that what Don and his folks have put together, the level of talent that we have, people who worked And big banks who are covering the middle market and the mid corporate clients so well and then we can go out and we can lead deals. We Money Center Bank on the right of us, we can go out and compete for an interest rate hedge and win it against Money Center Banks which we did several times in the Q1. We've got really, really good talent and we're well positioned. And then on the consumer side, some of the things that Brad talked about with Citizens Access, Our FinTech partnerships and thinking about end to end customer experiences and the customer satisfaction is moving up nicely. I think we're doing a really good job there too. So I think we have a strategy and a capability to continue to drive this company forward and become a great bank. But I certainly would have to say as you look around the landscape and people are making scale arguments, You always keep an open mind about those things. If there's opportunities to benefit our shareholders, we have an open mind towards that. But I think the more important news is that we're well positioned to continue on the path that we're on today. Thanks. Okay. And that does conclude the questions for today. Okay. Well, great. I know it's a busy morning for you all. You probably have to hop to the next call, but certainly appreciate that you dialed in today and we appreciate your interest and support. Have a great day. Thank you. And that does conclude today's conference call. Thanks for your participation. You may now disconnect.