This is with customers. Sentiment has really picked up post-election. And I'd say a lot of activity had really dropped off in the second half of 2024, just pending the outcome. And all of that is starting back up again. We can really see our pipelines filling up. But it takes a while for deals to form. And I think that's what's really underpinning our outlook for the second half of 2025, where we just really can see the pipelines being suggestive of a significant impact. I'm sorry, significant increase in activity in the second half.
That's great. In January, going back to when you mentioned that, you did reiterate that your 16%-18% medium-term ROTCE target is very achievable. Could you walk us through the path to getting there and where the challenges may be? And just to confirm, just the terminated swap impact and non-core books suppress your ROTCE today by 300-400 basis points?
Yeah, yeah, that's right. I mean, you know, that impact is real, and it's only time-based for it to actually just kind of run off over the medium term. So, big picture, we're kind of around 11% or so here at the end of 2024, and the objective is to get to 16%-18%. The time-based aspects of that are 300-400 basis points of ROTCE increase just by removing the impact of terminated swaps and non-core, which will run off. So that's huge. When you add in also the impact of fixed asset repricing, as well as what's happening with the rest of the balance sheet, you know, our legacy swap, active swap book runs off as well.
Considering the rate environment, you put all that together and you get to the low end, you know, right around the low end of that range, around 15%-16% ROTCE just from those dynamics alone. You add in all of the strategic initiatives that, you know, we've launched across, you know, our three large businesses, consumer, commercial, and private bank, as well as, you know, credit kind of normalizing a bit to low to mid-40s from where we are, a little over 50 basis points of loss. That's the roadmap that we feel really confident in getting us to 16%-18% over the medium term.
That's a strong message when you can get to 15 on mechanical balance sheet movements.
Yeah.
You continue to invest heavily in the private bank build-out and other strategic initiatives, which you mentioned. How should we think about the investment arc over the medium term? I know that was a hot topic on the call.
Yeah, I mean, you know, there's a, I think there's a balancing act here. We have a window and an opening where there's white space to really be opportunistic in the private banking space and in the private wealth space. So we're taking advantage of that. And so you saw that, you know, in 2024, and we've built that in in 2025. But I'll hasten to add that a big piece of the increase in expenses coming from the private bank is just the calendarization, full year effect of investments made in 2024. And all of that is driving the revenue outlook and the 5% accretion that we expect out of the private bank. You know, and we're expecting, you know, returns to be north of 20%, 20%-24% by the time you get to the end of the year. So the investments are paying off.
We are going to generate, you know, an accretive outcome for EPS. We're going to have an accretive outcome when it comes to returns in the private bank. And we have an accretive outcome when it comes to a capital efficient and net liquidity provider. I mean, this is really ticking many boxes. So that's a long way of saying that I think we've balanced it well to date in terms of how much to invest versus still allowing accretion to occur across the board, whether it's balance sheet or profitability. And I think we're going to be opportunistic throughout 2025, and we've built in the ability to expand, right? We're going to be expanding our private banking offices. We're going to open New York in the first half of 2025. We're going to open three private banking offices in California in the second half of 2025.
So, and all of that is still consistent with the ability to be accretive to the rest of the platform. So it'll be a balancing act, opportunistic investment, but maintaining an accretive contribution to the rest of the platform.
I do want to double-click later on those, you know, office openings in the private bank, but pulling up, you know, I wanted to talk about your businesses the way Bruce likes to talk about them, which is your triangle of businesses: the commercial bank, the consumer bank, and now the private bank. Maybe let's start with the commercial bank, given that we just touched upon business sentiment as well. So how is the commercial bank positioned overall to succeed? And as we think about commercial loan growth for the rest of the year, how will that trend as we move throughout the year? And what are those drivers for increased demand from clients?
Yeah, I mean, so with commercial, and you will dive in there as you're saying. I would say that broadly, you know, just indicating why we're well positioned, right? We're extremely well positioned in the private capital space and in the sponsor-led community, right?
A little underappreciated, by the way. So I want to make sure to put an emphasis on that for the transcript.
Yeah, no, I think that, you know, we made a call on this about 10 years ago to start investing in this space, and that's been paying off. Really, you know, the driver there is in the private equity complexes. We have a significant subscription line relationship with a number of the top PE firms and sponsor-based firms in the U.S. We have significant capabilities in the investment banking space in our debt capital markets, and now with JMP, our equity capital markets capabilities, which are well positioned for when that, you know, space begins to rebound. You know, and I think so our excellent capabilities married with our distribution has put us in a good spot. We have our traditional markets geographically, but we now have our expansion markets.
What we've done in New York Metro and what we're doing over the last year or so in California and in Florida are all going to basically add to our distribution capabilities in the commercial space. What leads us to believe, another part of your question was what leads us to believe that commercial is on track to rebound later this year, if I heard you correctly. You know, as I mentioned earlier, just the number of conversations that we're having, and it's really twofold. One is, you know, M&A finance is going to be a big driver broadly for the entire market, and we see conversations picking up significantly over the last, call it 30-60 days. However, M&A deal formation does take typically two-three quarters to come to fruition. That's where the second half drivers really are being driven from.
When it comes to just more bread and butter, you know, lending, you know, I think it's our expectation that business activity is going to continue to pick up. So just general GDP, nominal GDP with inflation being around 3% and GDP being positive, that would be consistent typically with 4%-5% loan growth broadly with a rising tide lifting all boats just broadly. And so as the broader economy continues to deliver, we'll participate in that, and we're well diversified geographically to participate in that from a commercial standpoint. I mean, the other thing I'd throw in there is that our private bank, our loan growth in the private bank, which has been picking up and we're taking share there, most of that is actually C&I lending. And so it'll show up on the C&I line.
When you add all that together, we've got a fair bit of confidence that we're going to have a nice rebound and trajectory in lending in the commercial space in the second half.
So I wanted to follow up on what you mentioned about private capital. You long recognized, like you just alluded to, the need for banks to play in the sandbox with private capital. Can you give us detail on how you've aligned your coverage and your capabilities to do it and what Citizens' role is as a premier bank to middle market companies as it relates to how you funnel that into the private capital ecosystem?
Yeah, maybe I'll start off with the private equity space. I mean, the large private equity firms, we cover, you know, over 200 large private equity firms, and we've been covering them for a decade. So this is not a new relation. This is not a new relationship for us. It's leveraged finance is in our DNA. We're sophisticated in this space. Our deal structuring capabilities across verticals are well established. And so that's a huge, you know, capability that has allowed us to compete in this space very effectively. Our product sophistication and capabilities, as I mentioned earlier, in the investment banking space, our debt capital markets and equity capital markets ability, but our M&A advisory investments that we've made coast to coast over the years. We've done almost 6 acquisitions in the M&A advisory space.
And so that bringing ideas and solutions, you know, to the sponsor community is what's distinguishing us in that space in the large PE firms. Smaller PE firms and VC firms, we're covering them through the private banking investments that we've made. And so that ecosystem is pretty active, in particular in California, and we're well positioned given our liftout. And with JMP, the ecosystem there, particularly in California, is operating synergistically across all of our businesses, whether it's the JMP legacy capabilities, the private bank liftout, and our commercial banking activities, all in California, are operating extremely well. But so that's how we cover large and small PE complexes. The private credit space, all of those capabilities that we talked about are of interest, you know, in the private credit side as well, given that these larger private capital firms will often have both.
And so there's a relationship there that can cover both. But I'd add on top of that that we've been offering, you know, the funds finance product in the private credit space. And just our broad, you know, presence in the middle market community allows us to, you know, maybe assess the deal flow into the private credit space for when we're speaking to management teams and we're advising them on whether, you know, a syndicated loan makes more sense or right now public debt markets are actually really, you know, very attractive. And we may, you know, go that direction, you know, in terms of recommending to customers and clients.
But then also the third leg, which is, you know, introducing them to a private credit solution when the leverage or structure is something that would, you know, really not be great for bank balance sheets, but what might be very attractive in a private credit space. So we're well embedded there, and it's a big part of why our commercial bank is so well positioned.
You know, I actually like how you put all that together with the private bank build-out, because obviously everybody recognizes that old First Republic, you know, teams and that skill set, but I haven't heard you guys maybe in a long time talk about it that way. So I think that's very helpful in terms of really framing the private capital opportunity. So shifting gears to the consumer bank, when the company uses the word transform to describe the consumer bank, what do you mean? And can you give us an update on the consumer banking strategy in the New York Metro area in particular?
Yeah, I mean, I would, you know, for consumer banking, as you may recall, you know, our deposit franchise in the last tightening cycle pre-pandemic, we finished, you know, 10 of 10 in our peer group in terms of deposit betas. And, you know, the fundamental underpinning of the transformation has been changing the culture of the consumer bank to lead with product and relationships rather than rate. And I mean, it comes down to that. It's easy to say, it's hard to do. It takes years and years of investment and training and changing sales approaches and practices to really effectuate this. But there was a number of milestones along the way. We launched Citizens Access to really, you know, wall off, you know, more rate-led activity in a very low-cost channel.
And that really, you know, transformed the way that we interact with customers where we lead with product and capabilities and advice. And so what that did was to basically put us in a place where we finished better than average on peers in the latest historic rate tightening cycle. And we're very proud of that. I think the second big area I would add is, again, I mentioned advice-based approach, you know, so the wealth business has been transformed. We have a focus on private bank and private wealth, of course, which is more upmarket, but that's creating a halo effect with respect to our advice that we provide for mass affluent and affluent as well. And so that's a second big, I think, area of transformation for consumer. The third is just getting really efficient on distribution.
New York Metro, as you mentioned, was a big part of filling in that distribution capability from Mid-Atlantic. Connecting the Mid-Atlantic to the Northeast is a huge part of what we were doing. You know, our plan was to bring our playbooks from, you know, the Mid-Atlantic and, you know, Philadelphia, Boston, large cities and bring that to New York. It has been just a great success. I think our objective there is to be the most authentic community bank brand in New York and recognize that New York is not one big monolithic market. There are neighborhoods and there are communities that you need to be relevant to. We have done exceptionally well in New York. We've exceeded our expectations there. Our growth and efficiency and productivity of our branches in New York are exceeding the rest of the platform.
Those are the three big reasons I would say we've completely transformed the consumer bank over the last 10 years.
John, I wanted to shift gears and go back to the private bank if I could. You're now expecting $5 billion of deposit growth from this line of business in 2025. It's about $1 billion better than you had expected. You also mentioned that 35% of what you're gathering is non-interest bearing, which I think is above your consolidated. Talk to us a little bit about how you're able to successfully bring in these new clients. Also for many of us that haven't walked into a Citizens Private Bank branch, how does it compare to the old First Republic experience?
Yeah, I mean, well, let me, I'll answer that this way. There's a couple of points I'd make, so what we're trying to accomplish with the private bank, and it's gone very well to date, and it's really going to be part of why we're going to continue to be successful, is first and foremost, it's customer experience, white glove service, imported, to be fair, imported from First Republic. We wanted to grab that culture with the liftout of the private bankers, and it's gone incredibly well, and I will add that we did learn some things from the teams that we were able to be fortunate enough to lift out back in 2023. And, you know, we had some changes we needed to make to truly be able to deliver on that customer experience demand from this customer that we're wanting to be relevant to.
So that's the first one. The second one, that translates into a brand that starts to create consideration and word of mouth that's never been something we've been able to be successful at prior to this liftout with the high net worth segment. I think the third thing I'll throw out there is product capability and investment. It's not just it's servicing, but it's also product availability. Our lineup is much broader than First Republic had. And then lastly, distribution. Just our branch distribution and our coast to coast presence is something that in the appropriate, you know, kind of wealth centers across the United States is part of what's going to also distinguish us. So you put all that together and the interactions with commercial can't be undersold. It's really important that all of those capabilities from commercial give us that ability to deepen with those customers as well.
That's the secret sauce, not so secret sauce. We published that in our earnings materials, the not so secret sauce about how we're trying to execute and win in the private banking space and we're taking share there. So that's key. Our private banking offices are a little bit of a blend of, you know, creating an ability to have a, you know, a conversation with a high net worth individual, but that space is less transactional. It's more advice-driven. It's a little bit of First Republic, you know, but it's distinctly Citizens when you walk into one of those private banking offices.
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That's good to know. Actually, that's important, right? It's like one of those little things in private banking that seems so, you know, not that impactful, but details matter in private banking. Going back to what you were talking about.
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Exactly. You talked about in the beginning, John, about the footprint launches of PBOs, private banking offices in the second half of the year, places like Menlo Park, Newport Beach, clearly ripe for that kind of clientele. What's your strategy for entering a new market? And do you already have the teams, I assume, to go into these locations?
Yeah, they're somewhat in place. I mean, I think we've in Northern California, we're well represented with the original liftout. There's a significant, you know, kind of scale of distribution and private banker coverage that exists in the Bay Area already. And so we're adding the private banking offices just to be able to access customers and be more convenient for customers that we already bank. So that's great. And there'll be upside for those that want to switch. So that's good. And so it's, if you know the Bay Area, we're in the city and we're in Marin, but Menlo Park's down on the peninsula. And so that's important to have that presence. Southern California, we did a team acquisition recently. And it's, you know, so we have the team in place for the office that will open in Southern California.
And, you know, don't forget the New York, Manhattan PBO, which will open here in the first half of 2025.
I know my old First Republic banker keeps calling me. He's persisting. It's good.
That's right. Well, we're here for you.
So maybe before we switch topics, what are your hiring plans for advisors in 2025? And how does $6 billion of 2025 growth break down?
So the $6 billion, when you say the $6 billion, oh, the AUM.
AUM, yes.
Yeah, I mean, I think there's a combination of things. There's contribution from organic referrals and natural growth, and there's a split between that. And we've got a pipeline of teams that we're in discussions with to continue to add to the platform. So there will still be a reasonably, you know, strong contribution from team liftouts in 2025, you know, on top of organic growth that we would see and the natural beta that you get from the market. So that's a driver. And the other part of the question was?
The hiring, you said hiring plans, right? So it's a mix.
It's a mix. I mean, in terms of hiring, it's mostly liftouts, those kinds of things. But we'll be opportunistic, even if it's not a full team liftout. We'll be opportunistic and as we are across all of our sales forces in terms of hiring throughout 2025. But it's an area we're investing in, as I mentioned earlier, balancing the expense, you know, drag that creates against the business case on the revenues, which are highly accretive in that space.
Pulling everything up back to the top of the house, and you actually already answered this well in your previous, you know, response when you talked about the environment is ripe for a natural 4%-5% loan growth. When you reported earnings or investor questions about the spot loan growth expectation of mid-single digits, which you just explained how you got there, excluding the non-core runoff. Of course, many of your peers' total loan growth guide, which is generally lower than mid-single digits, also include runoff in their consumer books. Maybe unpack a little bit more about your confidence about reaching this target.
Yeah, I mean, I guess the way I would say is I'd actually pair the private bank and the non-core and almost set that aside. We have a unique, you know, strategic initiative with the private bank that is really taking share, and it happens to be offsetting the runoff of non-core, give or take. You can almost set it aside and just go back to the original guide and say that, you know, for something that's a little bit more comparable and say, you know, that low single digit is about where the rest of the bank's going to be, and, you know, I think that's the main way to look through it and ensure there's some runoff going on outside of non-core, but you factor all that together.
It's really going to be driven by, I guess, you know, if you're excluding the private bank and non-core, it's really going to be driven by M&A finance that we talked about earlier, natural increase in business activity, which we think will start to come back in the second half of 2025. And then consumer, you know, we've been clicking along in consumer with a really, really high-quality home equity product, one of the best, we believe, you know, in terms of one of the best experiences you can have, which are often not great in the mortgage space, whether it's home equity or a first mortgage. So home equity has been a very good product for us given where mortgage rates are. And even mortgage itself is starting to pick up, contributing from the private bank, actually. Private bank contributes some mortgage and C&I.
So we still have contributions coming from Consumer. I mentioned Commercial and Private Bank and non-core basically are mostly offsetting.
Got it. That's a good way to frame it. Let's move to the other side of the balance sheet, if you don't mind. So what are your expectations for deposit growth for the course of the year, and what are the circumstances for non-interest-bearing deposit growth to return to CFG?
Yeah, so, you know, deposit growth for this year is probably in the low- to mid-single-digit range in 2025. All three of the legs of the stool are contributing. So private bank, you saw significant, you know, contributions that we expect coming out of the private bank, you know, in the deposit space. And I'd say the other two businesses are also, you know, expected to contribute. When business activity picks up, that's both sides of the ledger. You see when loans are being formed, that's actually consistent with deposit formation as well in commercial. So that's the expectation on that front. And consumer has been actually outperforming peers over the last year in the context of deposit growth and on the low-cost side. When it comes to non-interest-bearing, we've seen some stabilization in the non-interest-bearing, you know, as a percentage of overall deposits.
And, you know, that's typically to be expected when, you know, when the Fed has begun, you know, historically when the Fed starts to cut is typically consistent with a stabilization and an ability to start growing off of a lower base for non-interest bearing. And it's our expectation we're going to see non-interest bearing growth, both, you know, we see that in the private bank and that's accretive. But even outside the private bank, we're expecting to see some non-interest bearing growth as you get through the end of 2025 if the Fed stays in this space and doesn't, you know, as long as things generally, you know, are holding in, which we can talk about.
We haven't talked about rates yet, but as long as rates are generally holding in and maybe coming down by one or two cuts in 2025, we see that consistent with some non-interest bearing growth.
Let's talk rates.
All right. Good suggestion.
Good suggestion. Thanks. Bruce mentioned during the earnings call that you can exit 2025 with a net interest margin or a NIM between 305 to 310 versus a 287 in the fourth quarter. Slide 27 in your earnings deck, loved it. Whoever did that, great job. Essentially shows 17 basis points of that expansion is in the bag, which would get you to 3.04%. Could you just reiterate for the audience where that 17 basis points is coming from and what could drive the NIM closer to the top end of that range towards 310?
Yeah. So the main drivers there are the time-based tailwinds that we have, which are in terminated swaps and non-core as it runs off. Non-core is in a net negative position from a net interest margin standpoint. And terminated just keeps running down. It's just time-based. So that's the main drivers. As you think about that range of, you know, we get to the low end with that, what happens within that 305-310 is really, I'd say rates is a big driver. And I'd throw deposits, deposit betas and mix are maybe the things you'd keep track of. So, you know, with every, you know, if rates are a little higher, which out the window, they, you know, there's some, you know, with the conversation, with the discussions from the Fed today, you know, who knows, maybe rates could come in a little higher.
That would be consistent with the upper end of our range. If they're a little lower, then that would be consistent with the lower end, meaning around 4% exit.
They're still asset sensitive.
We're asset sensitive and increasingly so over time. So, you know, we'll be more asset sensitive in the fourth quarter of 2025 than we are today. We'll be more asset sensitive than, you know, in 2026 than we are today, et cetera. So rates are a big driver. And then the whole deposit behavior. So we're expecting stable to improving mix profile on deposits. But if, you know, depositor behavior is a little better, that would drive you higher. A little worse would drive you a little lower. So those are the two big things I would think about on that front.
And just to be clear, when you set, because it was such a busy earnings season, I want to reiterate some of these points. When you set your normalized NIM target of 325-350 by 2027, 38 basis points of improvement from 287 is that time-based, you know, factors that you mentioned. So maturing of legacy active swaps, net of other impacts would be on top of this.
Yes. Yeah. And I'd say so that 38 basis points takes you to 325, which is the low end of the range. Then again, rates plus, you know, balance sheet mix, et cetera, will play into whether we're at the low end or at the high end. Right now, what we set at that, what we set at earnings was that a 4% landing zone for the Fed would be more consistent with 350. You know, we're very asset sensitive when you get out there. So 4% would actually take us another 25 basis points higher than 325, all else equal.
Got it. Very helpful. I wanted to touch on fee income for a second. You know, of course, there's a lot of focus on NII for you, but I think one of the more underrated parts of the CFG story is the work that you guys have done to diversify earnings growth. So your underlying outlook for 2025 is quite strong at 8%-10%. Can you unpack the strength that you're seeing or expecting to see rather in capital markets and wealth?
Yeah. I mean, you know, so the capital markets that we mentioned earlier, M&A finance is a big driver of this, right? So M&A advisory fees, we've positioned very well to deliver significant fees out of the M&A space. We see the pipeline forming as we speak. You know, it'll take, you know, who knows, six to nine months, you know, and we just didn't start yesterday. So it takes typically six to nine months from late, you know, call it late, you know, from the conversations picking up in December and January. So this is consistent with a 3Q and 4Q, you know, capital markets fees from M&A advisory. The loan formation doesn't take that long. That's a lot shorter. And we've seen those conversations pick up too. So we see that contributing in 2Q and 3Q. 1Q is a seasonally down quarter.
So that's really just focusing on, you know, as you look at, as you look out for the rest of the year, syndications look good. You know, out the window, public debt markets are extremely attractive. So you're seeing debt capital markets really be a driver here in the first quarter, or at least in January. And so back to the whole diversification point, we're able to participate if it's public markets or if it's going to be strong in the loan markets or is it going to be strong even in the private credit markets. We have an ability to participate, you know, along all of the three big drivers of commercial finance. And that's just in the core capital markets. We also have an FX and REITs business.
Now that we've registered as a swap dealer last year, we don't have a cap on the amount of activity that we can do.
Oh, okay. That's good to know.
Yeah. So 2025 will be the first full year of us being a registered swap dealer without caps on the amount of business that we can do. So we expect that to be a larger contributor going into 2025 on the REITs and FX space. And all of the investments we've made in wealth, you know, that we've talked about at length in the private bank space are big drivers. We've also, you know, transformed how we look at card. You know, we're now a 100% Mastercard shop and we're much more efficient in terms of how we deliver those fees. And so that's been a nice area of tailwind coming out of consumer that I'd throw in there at the end as well.
Just switching gears entirely. Bruce has quoted in a Barron's podcast that the company, given how it works with shareholders, should be open to being a buyer or a seller. Given how much focus you have on building out the private bank, how much of a priority is it for the company to buy another depository?
Yeah. I mean, you know, I think we're going to be, you know, in short, we'll be opportunistic. I want to, you know, based upon everything we've talked about, we have a full plate organically.
Sounds like it.
It's an exciting play. There's huge upside that we can deliver organically. When you come back to, you know, we're around 11%, you know, ROTCE in, we're going to, our trajectory getting us to 16%-18% with some opportunity to get near that area at the end of 2026. I mean, we're not too far off from delivering a significant amount of value for shareholders from a returns perspective. We have, we think, one of the most distinctive, if not the most distinctive portfolio of strategic initiatives in the space. Extremely exciting. Lots to do. All of that said, you know, there may be opportunities for consolidation. We executed extremely well on the last two acquisitions we acquired. No operational hiccups at all with Investors or HSBC. We did all of those, frankly, in tandem.
And so we feel well prepared, should an opportunity arise, to be part of the consolidation that might occur. But our ability to deliver is not dependent upon the need to do M&A and actually, you know, we really are just focused on our organic portfolio that we've got in front of us.
So deregulation has clearly been a theme since the election. How might a new administration impact future capital and liquidity requirements and supervisory practices? And particularly for you guys, how meaningful was the Fed's late December press release on looking to improve upon transparency, repeated that language when the stress test parameters came out, and obviously the BPI or the bank lawsuit?
Yeah. So just broadly, it appears that regulations may, you know, we're tapping the brakes here. I mean, we had a big push in the capital space with Basel III endgame. It doesn't appear that that goes anywhere. And if it does, it's probably RWA neutral at worst. And for us as a Category 4 firm, the impact for us will be AOCI driven, you know. And we're operating as if that's already, you know, been, you know, promulgated, even though it hasn't been. The market is just kind of.
Since '23.
Yeah, exactly. And when you look at the impact, we have a much smaller impact than most. And, you know, we're north of 9%, even when you deduct all of AOCI. So we're one of the higher capital levels there. So really not much of an issue. On the liquidity side of things, pretty similar. I mean, you know, it doesn't appear that there's going to be a lot of liquidity or funding related. We had the long-term debt rule. You know, doesn't appear that that's going anywhere. Even if it does, you know, there's a trajectory there to address it, but it doesn't appear that's going anywhere. And our liquidity levels, we've already started to publish as if we're a Category 1 bank. We publish our Category 1 LCR every quarter. And we're one of the highest percentages, even among Category 1 banks with that ratio.
Capital and liquidity, extremely well positioned for that. I mean, your point about the SCB, we have an SCB that we think is not frictional, just given where our capital levels are. It feels inaccurate, and we have a view that the models that the Fed's using, you know, could really use a dose of transparency and revision. I think those are the two things. I think.
As good as transparency without revision.
Yeah. I think, you know, I think you need them both because just transparency alone will just confirm what I think a lot of us in the industry know already, which is that there are significant opportunities and gaps that, you know, in areas for improvement that are likely desirable to be more predictive of the way banks would perform in stress, mostly in the PP&R side of things, a little bit less, although there are still areas in credit, but a little bit less on the credit side. But PP&R in particular could use some restructuring. And so, I mean, I think, you know, more recently, so the scenarios came out, you know, it looks like they're a bit less onerous this time around.
But what we're keeping an eye on is the Fed indicating that they would be planning on additional transparency, but open to commentary regarding the models. And I think that's a really nice step in the right direction and will be an active participant in that process. And so we're looking forward to 2026 and maybe we'll have a much more improved and more reliable, frankly, Fed stress test model by the time we participate in early next year.
So you talk about 2026, you had to have a peer, a Cat4 bank that also perhaps disagrees with their SCB output that decided to opt in this year. Why did you decide not to participate? And now that you see the scenarios, how do you think you might have fared?
Yeah. I mean, the scenario appears to be, again, a little better, a little better, not by a lot, maybe by, we just do a little back of the envelope stuff, but maybe 3% or 4% better on the credit side. So that's good. I just think that it was just unnecessary. I mean, our, you know, our capital levels are so strong that, and the SCB isn't frictional for us. It was just a natural, you know, why not wait for the Fed to go ahead and get their work done in 2025 and have an opportunity to improve the models so that they would be more predictive and more useful, hopefully, you know, in 2026. So it was merely a, let's wait for them to do their best to fix their models and create transparency and participate on schedule in 2026 with the rest of the Category 4s.
So just to wrap it all up, your 16%-18% medium-term ROTCE target, does that assume in a denominator sort of, you know, the status quo baseline pre, you know, pre all this change?
It incorporates an increase in capital that would be consistent with growth that would occur in the years in 2026 and 2027. That would be a drag for ROTCE. You can see that in our walk and the earnings materials; we indicate that capital is actually a drag. It's somewhat offset by buybacks that we do. There are buybacks in there that mitigate it. Nevertheless, it's a net drag. When you go back to it, we get to the low end, you know, just ending where we started really; we get to the low end, 15%-16% just from all of that time-based balance sheet stuff. Then the rest of the improvement comes from all of the execution from the consumer and commercial and private bank and credit, you know, moderating and normalizing, which takes us into that range of 16%-18%.
I'd highlight that against an incredibly strong platform and foundation of capital and liquidity. It's exciting to be able to have those things as well as what we think is the most, one of the most distinct portfolios of strategic initiatives in the group.
Great. Actually, I think that's a perfect place to end.
Awesome.
Thank you, John. Thank you for coming.
Fantastic. Thank you.