All right, perfect. Quick disclosure out of the way. For important disclosures, please see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. The taking of photographs and use of recording devices is not allowed. If you have any questions, please reach out to your Morgan Stanley sales representative. With that out of the way, we're delighted to have with us today John Woods, CFO of Citizens Financial. John, thanks so much for joining us.
Yeah, great to be here.
Perfect. John, since, you know, maybe to start, since this is fresh off the press, Friday post-market, you guys announced that Citizens has hired about 50 private bankers that were formerly at First Republic. Can you give us a brief overview of that and how that fits in with your broader wealth strategy?
Yeah, great. I mean, this was a really exciting opportunity. As many of you know, for a number of years, we've had an interest in growing that business, both organically and inorganically. So we've made a number of investments on the organic side, hiring financial advisors, and really converting that business from a transactional business to more of a recurring, you know, sort of annuity, financial planning approach. Very customer-centric, et cetera. That's a long but slow and good build that's been building over the years. And then we supplemented that with our Clarfeld acquisition a couple of years ago, and that's been going incredibly well.
Fast-forward to this opportunity, and, as, you know, many of you would know, that we had some interest in the actual FRC as an entity in the FDIC process. You know, that, you know, kind of, made it clear that we had some admiration for the way that they really went after their customers, extremely customer-centric, et cetera. You know, we had some interest expressed from a number of, you know, relationship managers on that side, and, you know, it's been nice to be able to announce something along those lines.
Just broadly, it's a coast-to-coast team, and what's really great about that is that, you know, we've got, you know, a number of bankers, very diverse in terms of their capabilities across commercial and on the consumer side of things, in terms of what their specialties are. What's great about it is that the locations, being in Boston, you know, just our backyard, it's a core market for us. We've got a team in from New York, which fits into our New York Metro approach. You know, we also had launched a couple of wealth centers in Florida, so this will accelerate that approach geographically. You know, we have our West Coast presence in commercial, and with the JMP acquisition in Northern California, so that really works extremely well also.
It's just kind of a hand in glove in terms of what our multiyear strategic kind of objectives were in that business. And sort of the customer centricity of their business model just fit perfectly. We're extremely excited about it, and, you know, looking forward to getting this thing going this week.
Presumably, you guys want to do more of this as you see the opportunity?
Yeah, I mean, I think this is a, you know, we had launched late last year, a private client, you know, initiative, where we were assigning relationship managers to our wealthy customers. This is taking it to the next level, really. It's an evolution into a true private banking experience for high net worth and ultra-high net worth individuals, where the entire bank is really delivered by this relationship manager, which is a lot like what you would see in a commercial model, where you have a relationship manager that brings, you know, the depth and breadth of the entire bank to bear for a client.
This is the same exact model, but for high net worth, ultra-high net worth individuals, couldn't be more excited about being able to broaden that out into that, into that space. It's a massive multiyear acceleration of our private banking aspirations. You know, it was nice to be able to get that done.
All right, perfect. You know, maybe let's take a step back. You know, there's clearly a lot of uncertainty in the macro environment. I get a lot of pushback from investors that the overall banking environment has changed for most banks, and for all banks, really. You guys have put out a ROTCE target of 16%-18%, which you reiterated at a recent conference.
Yeah.
Can you talk about, you know, A, if you're making any change in strategy related to this environment? And B, why shouldn't the longer term targets be lower, given how fundamentally things have changed over the last three months?
Yeah, it's a great question. I mean, I think I'll offer up right at the outset. The last time we had offered an increase in targets was January of 2020. Also not exactly the most auspicious moment. Two months later, the pandemic hits. A couple of years after that, after getting through those uncertainties, we were able to hit the targets that we set in January of 2020. Here we are again, in January of 2023, we set our next goal, and yet again, another March surprise. I mean, there's a lot of things left to be played out. I mean, banks typically, as a business will, you know, will adapt their business models to the environment.
You know, we've been able to operate, you know, within the mid-teens ROTCE, and that's our aspiration for this year, is to continue to operate in that space. You know, all of the, you know, having a rate environment that's more normalized is actually a positive for banks. After we get through this period of an inverted yield curve, when we get a yield curve that's more naturally upward, upwardly sloping, you know, we get past the days of zero interest rates. I think you could see us, you know, with the multi-year investments that we've made over the last couple of years, and with the strategic initiatives we put in place in both consumer, commercial, and top of the house.
You know, I think that it's too early for us to basically, you know, indicate that that's not an, you know, a desirable landing zone for the platform. We're solidifying mid-teens ROTCE at this stage. I think there are some idiosyncratic and, you know, strategic initiatives that would allow us to continue to aspire to achieve that range of 16%-18%, and so, we're gonna keep after it.
Anything you're flexing on your strategy, or are you just staying the course?
I mean, maybe just a couple of things in consumer, I'll cover commercial and top of the house as well. On the consumer side of things, you know, I'll start off with wealth. I already covered the fact that, you know, we had launched our private client initiative late last year. We're launching and accelerating the private banking initiative, you know, as of our announcement on Friday. That's been exciting. We're going to see strong results in wealth this quarter. To me, that's an area of unique benefit that you could see in consumer on the wealth side. Also, our New York Metro. We're seeing great take up in terms of customer volumes coming out of the New York Metro.
I think the statistic is we're getting, you know, 50% higher customer acquisition rates out of the New York area than we're getting in the rest of our network. That's unique in terms of a tailwind for us. We still have a pretty distinctive Citizens Pay offering, and later this year, we're gonna be... You know, we actually have a mobile app coming out, as well as a direct-to-consumer approach in Citizens Pay that we're excited about. Lastly, in consumer, we've got the national digital bank, which has done extremely well, and later this year, we're gonna have our checking product launched across that platform after already launching a national storefront on that front. Great things going on in consumer.
In commercial, you know, you know, that product set, you know, we go the full life cycle with our commercial customers, and we're deepening our capabilities there from front to back, payments ecosystem, and we're registering as a swap dealer later this year. The last, I guess, the third leg of the stool is top of the house, kind of enterprise-wide. We've had a multiyear next gen tech, sort of cloud migration, agile ways of working, exercise that has really been going extremely well. Then, you know, close to my heart, of course, you know, we've got balance sheet optimization, which we can talk about, as well as, you know, what's part of our culture at the company is TOP.
We've been, we've upsized our TOP 8 in the last quarter or two, just kind of in reflection of the environment, we've already begun work on a TOP 9. Stay tuned, stay tuned on how we're gonna basically, you know, kind of react to what we're seeing in the marketplace by flexing on the expense side as well.
Perfect. Let's start on the, on the balance sheet side, and, you know, maybe before we dig into deposits for Citizens specifically, I wanted to get your thoughts on the broader environment. You know, you have now that the debt ceiling has been suspended, you're gonna have the treasury refill the TGA by issuing more T-bills. What do you think that does to deposits within the banking system?
Yeah, it's a great question. I mean, I think the laws of gravity will have to apply here, right? If there's another $1 trillion of liquidity needed to be redirected to the general account of the treasury at the same time that the Fed is continuing, you know, QT, at the same time, money market yields, in the reverse repurchase program, remain attractive. I mean, there are clearly headwinds for the banking industry. I mean, I think banking deposits have fallen. You know, over the last 12 months, they've fallen, but over the last couple of months, they've actually stabilized and started to rise again. We'll see what the impact on TGA is broadly.
Generally, we think that the direction for deposits will be, you know, will be down, you know, over, you know, in the near future. That said, I think that we have some unique initiatives that would allow us to, you know, in all likelihood, do a little better than the industry on that front. Our deposits are up, you know, this quarter, which we can talk about, quarter to date, and all the investments that we've made with New York Metro. We've launched our CitizensPlus initiative recently, where you do more and you get more. That's been going extremely well.
All the product investments that we've made, you know, I think, along with our national digital bank, I think it allows us to potentially do a little better than the industry on the deposit side, acknowledging that the industry will likely continue to have headwinds in terms of deposit levels.
Yeah, I was just gonna say the story for Citizens is different. I mean, I think Bruce highlighted at a prior conference that deposit balances were up. You know, can you maybe give us some more detail on, you know, where you expect deposit balances to wrap up as we get towards the end of 2Q?
I mean, I think we're up quarter to date, across the board, so in both consumer and commercial. You know, driven by, you know, we're up in, from a product perspective, we're up in savings and money market as well as CDs. So that's been going well. I mean, I think that it's important to maintain liquidity and demonstrate the strength, stability, and diversification of our deposit-taking franchise. I think that we've been able to demonstrate that, which is really good to see. You know, it's our expectation to remain stable to modestly higher through the end of the second quarter. You're seeing some of the seasonality kick in a little bit.
You know, the first quarter is a down quarter, you know, you know, just broadly, for the banking system. Some seasonality benefits as a tailwind. Some of the investments we've been making unique to us are a tailwind, and we expect that to carry over through the end of 2023, to remain in a sort of stable to up position in deposits as you get through the rest of the year.
What does that mean for the mix of deposits? You know, I think you're at about 26% of NIB as a percentage of total. Last cycle, you reached about 23%-24%. You know, given rates are higher this cycle, is there a lot more room for that to decline further?
Yeah, it's a good question. I mean, I think we're, you know, we're in the neighborhood of 24% or so, at this point, down from 26%. I think it's our expectation that we're going to get back to something that resembles a pre-pandemic level for the bank, which should be in the neighborhood of 23%, call it, and by the end of the year. I would say, you know, that although on the one hand you have higher rates, and that might be a headwind to that, to that metric, just the investments that we've been making across the platform that are, you know, unique and idiosyncratic to us, is really why we think that they're balancing out to probably end up in a similar spot.
You know, just, I won't go back all through the investments I just mentioned, but the, you know, we continue to broaden the product set, deepen with our customers, really intensify the relationship approach to raising deposits. We have a very diversified, you know, model. We have the national digital bank, in addition to our branch system that we expanded in the New York metro area, which is going extremely well. All the product investments we've made in commercial as also, you know, like, all of those tailwinds, I think, you know, kind of, balance out, you know, like the macro in terms of rates. A gain, it's our outlook that we'll get into the neighborhood of a pre-pandemic 23% or so by the end of the year.
Pre-GFC is too low. I know it's too low for Citizens, but do you think it's too low for the industry in general?
I'm sorry, can you say that again?
When we go back to pre-GFC, NIB, as a percentage of total, was a lot lower than where it was even in 2019.
Sure.
How do you think about the pre-GFC levels for Citizens and for the industry as a whole?
Yeah, I mean, we, you know, we are, almost unrecognizable, compared to the subsidiary of a foreign bank that we were at that time. Even three or four years ago, you could almost suggest that we have made so many, advancements and investments in our platform, that we're very different than even the last three or four years, much less, you know, call it 15 years ago, pre-GFC. I don't think anything pre-GFC is really instructive for Citizens. And, you know, just given the IPO in 2014 and 2015, you know, it just, it's just night and day. I don't think there's anything we can really glean for us from back then.
Got it. maybe digging into the consumer versus commercial aspect of deposits. you know, I think about two-thirds of your balances are from consumer.
Mm-hmm.
Consumer deposits tend to be stickier, but at the same time, deposit betas in the consumer side are lagging, and a lot of the deposit beta increase from here should come from the consumer side. I guess, can you talk about what trends you're seeing there and how that consumer deposit base is helping you?
I mean, I think broadly, I mean, I think you heard, I think we mentioned that our, that our betas were likely going to get to the mid-40s or so by the end of the year. I think that that's about where you could see that play out. You know, I think, I think what we like about our consumer base is it's highly diversified, and it's operational in nature, of course, with checking accounts and things like that. That's quite stable. You know, we've got more than 2/3 of our deposits are in that consumer space.
Even flipping over to commercial, I mean, there was a little bit of a shakeout in the first quarter in the post-SVB, you know, space, but a majority of our commercial customers are our core primary. And I know that uninsured deposits gets a lot of airtime as well, but even uninsured deposits for us on the commercial side, you get, like, 70%-80% of those deposits have been customers of ours for more than 4-5 years. It's a very diversified, granular, stable deposit base. It's the way, you know, like a traditional commercial bank is constructed, where you basically have this balance of consumer and commercial.
Yeah, we're getting to sort of unprecedented rate rise levels. There are a number of uncertainties with respect to where the betas will end up. You know, customer behavior and migration, all of this will be tested anew. I think at the end, the consumer will prove to be extremely attractive deposits that are low to moderate cost, even in this higher rate environment, as you get into the end of the year. We're feeling good about where we're seeing that play out.
Right. Before we dig into some of the other topics, like loans and expenses, any thoughts or any updates on the quarter? I know you mentioned deposits are up, but any thoughts on the rest of the guidance that you've given for the quarter?
Yeah, sure. Still a few weeks left to play out, but as it come out in the NII space, I think we had indicated we would be down about 3% for the quarter. I think you could see that being down a little bit more based upon what's going on with deposit migration and those kinds of things. As I mentioned, you know, non-interest bearing getting down to 24%. That'll be a little more than that 3% at, on the NII side of things. In fees, you know, we're seeing some strength in wealth and strength in card, so that's been quite good. A lot of the, you know, categories of our fees are playing out as expected.
I think the one area where we'll see how the timing plays out is capital markets, as always. We're seeing there was a little bit of a slow start to the quarter, slower than we expected with respect to debt ceiling and those kinds of things, but things have picked up nicely as you get here to the end of the quarter into June. It'll all be about timing. We're seeing a nice pipeline in the M&A space, as well as some of the financing that comes with M&A activity.
We're watching the calendar, but we'll see how, you know, some of these deals, you know, as they close towards the end of the quarter, will tell the tale in terms of where we come out for fees. You know, when you get down into expenses, I think we'll be stable on expenses. You know, on the credit side of things, I mean, I think, you know, we are seeing, you know, some charge-offs that a little bit higher than we had originally expected. Mostly, you know, given certain valuation aspects of the book, which have come in a little lower than we expected.
Overall, loss content over time seems to be well controlled and as expected, and certainly really strong on the reserve side of things and capital side of things. Those are some of the areas that come to mind.
On the net charge-off front, I think you've said mid-thirties basis points, so you're saying it's a little bit higher than that?
Yeah, a little higher than that. I'd say, you know, in the 40s range for the quarter. You know, coming in a little earlier, overall, you know, still, you know, coverage is appear adequate. You know, and you may have heard from Bruce, that we stress our coverages pretty conservatively. The coverages that we put in place at 3/31 were highly stressed, even in the areas that we're all concerned about, like CRE office. Those stress scenarios have yet to realize themselves, we therefore believe that, you know, that we have good coverages. Nevertheless, with our capital levels, you know, to the extent that there would be additional need for, you know, for coverage with respect to credit losses, we have the balance sheet strength to support that.
All right, perfect. Does any of this impact the full year guide, or is it too early to tell?
Too early to tell on that front. I mean, I think the, you know, I mean, you know, the area of interest is CRE office. In CRE office, our maturities are a little bit more front loaded than some of our peers. You could see some of. Maturities are one of the drivers of charge-offs, as you know. It could come in a little earlier for us than some peers. You know, with I think we got about 60% of the book, general office maturing by the end of 2024. It's pretty ratable for that 60% and each, you know, kind of half, if you will.
Second half of 2023, first and second half of 2024, it's pretty about $700 million-$800 million fee for each one of those halves coming in. You'll see it, you know, play out over the next 18 months or so. But again, reiterating, pretty strong coverages. We're almost, I think we were just short of 7% coverage on general office at 3/31. You might see that coverage rise a little bit as you get into June 30 for general office, and we'll see how that plays out. You know, we've got an incredibly seasoned group of workout specialists that have been through these cycles and, you know, we're extremely close on a property-by-property basis on that portfolio. We're keeping a close eye on it, and, you know, we'll see how it plays out.
Are you working with borrowers and sponsors there to bring in more equity if the environment turns?
Yeah, absolutely. We're being extremely creative with sponsors and, you know, we're trying to, you know, sort of, you know, be flexible as it relates to, you know, values that, you know, properties that are, that still, you know, have value in the eyes of the sponsors. We're trying to meet sponsors halfway, where we basically can make a good outcome for both sides, which is, let's keep these properties operating and let's keep sponsors involved. We'll be creative in terms of how we support the, these, you know, projects over time.
As we move away from CRE, and you think through your, you know, auto, educational, other retail portfolio, anything to call out there on the credit side?
Well, I mean, I think that, you know, you've seen normalization outside of, outside of, you know, commercial on the consumer side, but nothing to be alarmed about, just exactly what we expected, that things would normalize. We're a prime, high prime lender, and, you know, and I think that. Highly diversified. You know, nothing really of note, outside of what we talked about, on the consumer side. Feeling good, you know, about where that trajectory of that book is headed.
Perfect. That, maybe that feeds into loan growth. You know, balances were down about 1% in the first quarter. You know, some of that was related to the auto loan runoff.
Yeah.
You know, can you talk about, you know, how you're thinking through loan growth and what you're doing on the, on the lending standards?
Sure. I mean, I think that, we've tightened, you know, on the underwriting side, just being really careful about where we're allocating. In, you know, late cycle allocating our RWA, and our capital and liquidity, we're being pretty careful about that. You know, really focusing on our relationships, and our deep relationships that where we can deliver an entire bank solution and be an advisor for our customers and clients. You know, as it relates to loan growth, you did see that, you know, overall decline in 1Q. I think you could see that again, as you, as you look out the rest of 2023, driven in large part by, the auto runoff, which tends to run off fairly quickly.
There are some other books that we're also that are also sort of part of what we would call a non-core, lower relationship group of loans that would be, you know, autos about $11 billion-$12 billion. You know, I think there's overall, call it mid-teens billions of loans that are clearly in runoff that we would describe as not being core, relationship focus. That, you know, maybe in a zero-rate environment, you know, would be, kind of reasonably good allocation of capital and liquidity. In this rate environment, you know, looking for ways to recapture that capital and liquidity that, you know, we've got to put that group of loans into runoff.
Overall, that would cause loan balances to probably be lower than where they, by the end of the year, than where they are today. The whole point of that is also in recognition of where things are headed with respect to regulations, right? You know, our loans and deposit ratio was around 89 or a little bit less than 90 at 3/31, but, you know, we're headed towards end of the year, probably more like low to mid-80s on LDR. In recognition of, you know, running some non-core loan books off, we already are in an incredibly strong capital position, but nevertheless, we have regulations that may actually raise those standards.
We're gonna recapture that trapped, you know, kind of capital and liquidity in that book, and use it to do a couple things. One is to fund our need and desire to have more liquidity, cash, and securities backstopping, you know, the balance sheet. Also rotating that capital into the relationship opportunities that we have with our commercial customers and in other places, frankly, even with the private bank announcement that you saw Friday night. I mean, these are the kind of things where we wanna focus on, you know, down the line. I'm excited about, you know, being able to rotate that into higher relationship and higher returning businesses.
That's a good segue into regulation in general. you know, when we got the reports from the regulators on Silicon Valley Bank and Signature, it seems like we're going to get an upward ramp in regulation for banks of assets under $250 billion. you know, can you talk about, you know, maybe what you think we should be expecting and how you're positioning the banks for that change in regulation?
Sure. I mean, I'd say just start with capital. I mean, I think the AOCI adjustment seems like a done deal. We'll see, you know, it's gonna come out in a couple of weeks, I guess, but seems like that's a done deal. We've been sort of monitoring our capital on a, you know, net of AOCI basis for, you know, a couple of quarters, just, you know, internally. You know, we have a very strong profile from that perspective. I think we're number two in our peer group, or close to that in terms of when you adjust our capital for the AOCI marks, you know, we're towards the top of our peer group, number one. Number two, it actually ...
That gross number actually exceeds the SCB requirements that the Fed, you know, handed us last year, and that's pretty unique. Most banks would be in a deficit on that front. There are RWA proposals that are out there that may require higher, you know, capital levels. What we've been doing is we've set a trajectory, even though our operating range was 9.5%-10%, as I think we've messaged, you know, we plan to deliver a number that is north of 10%, you know, in the 10.20%-10.25% range, if you will, at June 30. We've also been able to have a modest level of buybacks along the way.
We're recapturing some RWA, and we're building capital, and would expect to continue to build capital for the rest of the year, even though still having capacity to buy back stock to the extent that that's something that seems prudent to do. That's the capital side of things. I already mentioned on liquidity, we're gonna lower our LDR by the end of the year in a pretty meaningfully. We already are at an LCR. We're a Category IV bank. We're already operating as an LCR, as a Category III bank. We're just going to add to that as you get to the rest of the year, get based on potential input from the regulators. I guess the last one is what will happen with TLAC, right?
I think there's a lot more uncertainty there. I mean, I think there's relative certainty that capital and liquidity requirements will increase. I think you could see us being extremely, you know, sort of, energetic about moving forward to comply with the rules from a capital and liquidity standpoint. When it comes to TLAC, it's still uncertain whether a Category IV bank will need to comply, and if we do, will it be single point of entry, multiple point of entry? Will bank level debt qualify, or will it be holdco? There's lots of uncertainties there. There'll be a phase-in.
You know, I think that's, that's the one area where you could see us taking advantage of a phase-in, just to sort of be an issuer over time, to make up any gap that may come our way from a Category IV perspective. That's how we look at it. Capital and liquidity, we're extremely well-positioned, nevertheless, we're gonna move ahead and probably get through whatever requirements a little earlier than you would expect. TLAC has many more uncertainties there.
Did you say you expect something in the next couple of weeks and then a longer phasing period?
Well, sure. I mean, I think that some of what we're hearing is that maybe we'll get an NPR, you know, later this month. You know, which would include a reasonably long phase-in. It may go out into as long as, you know, out into 2027. I think the point we're trying to make is that we're extremely, you know, solid on capital, and we wouldn't take advantage of full phase-ins when it comes to what the capital requirements are, depending upon what they are, depending upon our owners, they are.
We have quite a lead to begin with on the capital front, and we're gonna keep growing capital for the rest of the year, and probably move expeditiously through whatever requirements come down from a capital and liquidity standpoint. I think I was making the distinction on the long-term debt requirements rather, you know, like, that may be something that would behoove us to take advantage of a phase-in, so that you're not issuing a lots of long-term debt all at once. you know, and just making sure that there's a, you know, a reasonable environment for bank spreads, if you will, before you make those multiyear decisions.
It's certainly been a tough market on the fixed income side.
Yeah.
Maybe before I go to the audience for questions, how do you think that impacts consolidation across the banking space over the next couple of years? As you get more regulation, do you think we'll get more consolidation?
I mean, at the margin, I think it just adds another, maybe, you know, issue that smaller banks will have to deal with. You know, Therefore, and maybe at the margin, it encourages, more, you know, sort of, you know, M&A. You know, from us, you know, for us in particular, I mean, I think we're big enough to be extremely relevant to our customers and clients. I think we're also big enough and at a adequate size to address the regulations in a very prudent manner. From that standpoint, I don't know that it affects banks of our size, but it, you know, it certainly could have an impact for banks that, you know, maybe are under the $100 billion range, but nevertheless, they're still gonna end up having a lot of regulations they'll have to deal with.
Perfect. Any, any questions from the audience? There's one there.
Hey, thanks for being here. In terms of your indirect auto business and the wind down, could you give any thoughts of, like, how you thought about going through the ABS market versus just trying to sell the book, and where you expect that freed-up capital to be used?
Yeah, a really good question. Yeah, we have, there's about $11.5 billion of auto, you know, on our balance sheet at 3/31. It's extremely high quality. It's high prime. It's perfect for ABS transactions, we are going to, you know, look extremely hard at the ABS market. As we're talking about trying to recapture the capital and liquidity, we can recapture the liquidity even before maturity through an ABS transaction, so that's very much, you know, what we would plan. The liquidity would come back through an ABS transaction. The capital would come back as it matures. A lot of those. That's more likely the outcome. I mean, I think the recent originations are, you know, are close to par.
You know, down the line, if, if the, if rates and spreads cooperate, you could potentially see some back book sales. You know, we would remain opportunistic on that front. When it comes in terms of where we're going to reallocate, that capital and liquidity, part of it will stay on the balance sheet as cash and securities, as we know that liquidity requirements are gonna rise, on behalf of, on behalf of banks. It just so happens, we have about $11 billion of wholesale funding that funds that book.
we'll bring that back and leave that on the balance sheet, and the rest of the capital and liquidity will be used for commercial opportunities as well as consumer opportunities that we talked about with respect to the private bank. We have a phenomenal HELOC product that we really like, and other relationship lending in Citizens Pay that, you know, we're gonna take that capital and rotate it into relationship business in both commercial and consumer.
Right. John, maybe to end, the CCAR results are out maybe next week or the week after.
Yeah.
You have an SCB of 3.4%. Any actions you've taken to sort of protect that SCB or maybe even bring it down, as we go into the CCAR process?
Yeah, I mean, I think, so last CCAR, SCB has been a little higher than maybe we felt, maybe justified over the years. Some of you I've spoken to a number of you about that over the years, but it started to converge. You know, we had a pretty significant convergence with peers, even last cycle in 2022. As we continue on the PPNR front, continuing to put up solid PPNR years, that's gone into the back book of the Fed's model, and it's started to express itself. That's been good. You know, but it's really scenario-driven, right? The scenario this year is a lot more, a lot more stressful when it comes to macro and how that may play out with respect to credit.
Whereas the environment or the scenario in terms of how it would impact PPNR seems to be a little bit more benign. You know, rates a little higher on the jump off than maybe they would have been in prior cycles. Maybe you'll see PPNR continue to improve, but there'll be some pressure potentially coming out of the macro scenario for credit. You know, unique to us, we put up another year in 2022, a solid PPNR to total assets, which go into the Fed model. That's good. We've got, you know, a diversified balance sheet that will play out well. I mean, we've got rates falling in this scenario, right?
Our portfolio plays out pretty well under that approach with a balanced fix and float, you know, profile. Lastly, I guess the other unique thing to us is the inclusion of Investors for the first time. Investors, you know, you know, based upon it's hard to know with Fed models, but based upon the way that we've attempted to model how Investors would be treated in a Fed stress test, it actually stress tests pretty well, both on the PPNR side and on the credit side. You know, you know, we'll see, but there should be a net positive contribution from inclusion of Investors this time around. Significant uncertainties, right? I mean, it's hard to predict.
Anyone who's attempted to try to predict the Fed has often had some difficult days in late June. you know, you know, I like how we're positioned going into this. Most importantly, even with an SCB, which, let's be frank, I think is a little too high for us, but I'm sure every bank feels the same way. Even with all of that, our CET1 adjusted for AOCI is 50 basis points higher than our SCB, not a lot of banks can say that. We're growing our CET1 into even beyond that. If our SCB stays flattish, our cushion over the SCB will actually grow and maybe continue to grow over the rest of 2023, depending upon where it all shakes out.
Right. Perfect. With that, we're out of time. John, thanks so much for the time. Yeah.
Okay, great. Thanks.