All right, good afternoon to you all. I am going to start off with a quick update. Last year on the stage, your colleague, Mr. Kaufman, was here, and my trivia revealed that there were 215 banks operating in the U.S. with the word "Citizen" in their name. Given the slowdown in this reconsolidation, it is no surprise that the number of Citizens banks fell by just five over the past year to 210. So, here with us again is the largest of that group, Citizens Financial, which has a $28 billion market cap, is $234 billion in assets, and is headquartered right here in New England. I will reiterate what I said last year in my intro. Citizens is a bank on the move.
Since Royal Bank of Scotland fully sold out of the bank 11 years ago, Citizens has undergone significant operational improvement, added a lot of talent, and launched a number of growth initiatives, one of the latest being the build-out of the private bank. I think the leadership of this bank and the improved quality of the franchise remain underappreciated. Simply look at beta. The one-year beta of Citizens stock is greater than all of the 25 largest banks ranked by market cap in the country, except for Citigroup and Capital One. Joining us here today is EVP and CFO, Aunoy Banerjee. Welcome.
Thank you. Thank you, John.
Just one note, we will leave plenty of time for questions, and I will start off with the questions. Noy, you have crossed the one-year mark with Citizens last month. As you look at the competitive landscape today, how do you feel about Citizens' current positioning?
Yeah, thanks, John. Thanks for the invite, and thanks for having me here. Look, I had the good fortune of joining Citizens a year ago, and I was one of those new hires which came in, and I've been spending a lot of times with the team. So whether it's our commercial bankers, whether it's our private banking teams, our ops people, our tech folks, the branch colleagues. What I am really impressed and optimistic about the franchise we have, and I'm really optimistic about where we are heading as well and about our position today. As we think about our triangle strategy, what excites me is the vectors of growth that we have and the momentum that we are actually having in that.
First, on our transformed consumer bank, if you think of it, we bank a lot of affluent and mass- affluent customers, and we have a long track record of growing low-cost deposits. We are the number one HELOC originator in the country, and that's an important relationship product as it brings attractive clients to Citizens. We feel there is a great opportunity for us to cross-sell wealth products and services, and this helps in deeper penetration of our households.
In the consumer bank, we are investing in digital, we are investing in client experience and data, and I'm sure you guys have heard about NEXT, and we'll talk a little bit about it. It's a very deliberate approach to accelerate deposit and household growth within our existing footprint. New York Metro is a great example of that, where you see that we have been growing.
It's one of our fastest-growing regions so far, household deposits, and we still see that there is a considerable opportunity for us to gain there. I think the second leg of the stool is our commercial bank, and we have developed a strong super-regional franchise with national reach and deep sector expertise, and a product set that competes with the best of the industry. We have built the capabilities in markets, in treasury solutions, corporate advisory, private capital, and as transaction activity picks up, we should see those benefits flowing into our results. Then the private bank, you spoke a little bit about it, John. I think three years ago, we started the private bank, and today it's a meaningful contributor to our bottom line.
We brought in an exceptional team, and we are attracting high-quality talents, and if you think about it, we are providing the white-glove service, which can be compared to anyone in the industry. The business itself is now $18 billion of deposits, $12 billion of loans, $12.4 billion of client assets. It's a meaningful contributor to our bottom line at 11% of our EPS. Then if you take a step back, I'm really excited about Reimagine the Bank program, and this is the program that is using technology, it's using agentic AI, and we are really rethinking about how work gets done at Citizens and how we can serve our clients even better.
If you take even zoom out a little bit more, even if you think about what many of these capabilities are bringing in, is really about One Citizens, and that's just not just organizational constructs, et cetera. It's really a growth mindset for us where we can really put the client in the center and bring all of our capabilities to bear. My enthusiasm comes from, like, we are not just relying on one initiative or one business or one favorable market conditions. We have multiple growth vectors, and we are executing with precision.
If we could dig into the first subject you touched on, the private bank and wealth. Leap of faith launching that back in 2023, and it appears to be working out very well. As you mentioned, the business contributed 11% of third-quarter earnings. Can it continue to grow at this pace, and what does the future look like there?
Yeah. As you said, it was a big leap of faith, but I would describe our private bank journey as both ambitious, but also very measured and deliberate. I think the fundamental premise which we started with three years ago worked. The clients followed their bankers as well as their wealth teams with the strength of the relationships, but also the quality of the experience that we were providing.
At the same time, we are also focused in building the business, building the technology, building the control environment, and creating the service model so that we make it a sustainable business. Not only it's contributing 11% of our bottom line, it also has a above 25% ROTCE in this business. So we are not only growing, but we are also growing sustainably and growing profitably. We have made excellent progress in California.
If you think of it, that's where a lot of the teams came from. We are building out the footprint in Florida, in Northeast, and including our offices in New York City, in Palm Beach, and West Palm. We have added highly regarded private wealth teams across the country in Florida, in California, in New York, New Jersey. We just announced another private wealth team in late October for Newport Beach in Southern California. We have 10 full-service private bank offices across the country. We call them PBOs, and we are opening seven next year.
Over time, that could grow up to 30 in very attractive markets across the company. If you think about our balance sheet around this business, $18 billion of deposits, good DDAs, it's more than 30% of the deposits are non-interest generating.
We are winning the operating accounts with our clients. On the lending side, we are seeing loan growth pick up, and we are seeing a variety of asset classes in those loan growth. But we are very disciplined. We want to ensure that the loan-to-deposit ratio in this business will not cross 70%, but that additional scale will give us additional NIM, additional NII as we grow.
Then on the wealth side, we have a compelling opportunity with as clients bring their wealth products, their AUMs with us, and that's around $12.4 billion today. And we expect that in the medium term to be more than $30 billion in client assets. Look, it's a great business. We are on this journey, but strong growth that we talked about. But we are not pursuing growth for growth's sake.
We are very mindful in building a high-quality franchise with strong financial discipline and which will sustain over time.
Shifting over to commercial bank and associated capital markets, the company's done a lot since the IPO and investments and capabilities. What's the strategy to continue to grow that business? Are you missing it? Do you have any missing pieces, and how much could capital markets contribute in a positive environment?
Yeah. If I may say so, I think we are probably one of the best positions commercial bank in our asset class. And I think the foundation of the commercial bank still remains the middle market banking. This is where you serve companies that have revenues between $25 million- $500 million. We have a strong regional coverage model. I just spent a day with the team of bankers there. Our bankers really knows their clients well and understands the local markets.
And we've also expanded into the mid-corporate segment, and this is where you serve companies with $500 million-$3 billion. They're more public. They have more needs, and it's just not about giving balance sheet capacity. This is where you think about the expertise that you get in, whether you have the industry expertise or you have capital market expertise.
And over the last few years, we have been building those expertise, and we are very clear on where we have the right to win. For example, in digital infrastructure, in 2022, we bought DH Capital, which was one of the leading advisory business in this sector. If you think about where compute and data centers have gone, I think we would say that was a timely acquisition. Similarly, there are other sectors like online gaming, defense, aerospace. We have very, very good vertical expertise. The other thing we had done very early on, we recognized that sponsors are going to have an increasing share in the middle market complex. So we bank roughly 4,500 middle market companies, and if you think about a portion of them, they'll always transact.
So we build the sponsor coverage, we build the products, and that has created a natural opportunity for us as for giving broader advice and facilitating transaction. We bought JMP a few years ago, and that gives us some equity capabilities and highly complementary to the private bank because of its West Coast heritage as well as the tech activities there. As the IPO market improves, that should give us another growth lever. So we feel good about our products and capabilities.
To your question on where it could go from now, if you think about the current environment, the momentum is encouraging. If you look at our performance this year, first quarter was a record quarter, second quarter was a record quarter, third quarter we had a very strong quarter, and we have a good outlook for the fourth quarter. Our M&A pipelines are strong.
It's at record levels, and we have substantial backlog going into 2027. I think the debt activity, there was some timing between Q3 and Q4, but the equity backlog is also strong, though some large transactions need to clear the market. There will be always seasonality in this business, if you think of it, but in a constructive environment, we would think that this business could generate roughly $125 million-$175 million a quarter, and maybe potentially more in a good environment. So, the point is that we have made the investments, we have been at it for the last few years, and as the environment improves, we think that the revenues will show up in our results.
All right. In consumer banking, three-plus months ago, you unveiled the Network Evolution and Experience Transformation initiative, which you've called NEXT. What are you trying to accomplish, and what are the near and long-term implications of this?
Yeah. We love our acronyms. NEXT is, we are very excited about it. If you think about, if you take a step back, look, if you think about some banks are moving outside of their core region, some banks are pursuing acquisitions to obtain those deposits. We believe, and we strongly believe, that we can achieve at a lower cost and a substantially lower risk by investing in our core Northeast footprint. There are three pillars to NEXT. I think the first is about the physical presence that we have. We have roughly 100- 120 of remaining in-store branches, and we want to close them down and use those savings to really put up 50- 60 traditional branches. We have considerable experience doing this kind of repositioning.
These traditional locations will actually help better serve our clientele that we have, some of the business banking and wealth clients, et cetera. We will also selectively relocate or refresh some of the branches and create this more advisory-oriented and business-ready format for these branches. The sequencing will be deliberate. We will protect the customer experience, we will support our communities, and we will continue to build the Citizens brand.
Second pillar is the people, more specialized banker in the branches, so they are at the front line. We have approximately 450 wealth advisors in our branch network, and we are adding roughly 10 a quarter. We are also expanding our private client teams as well as small business coverage teams. In the regions that we have piloted this thing, we have seen very, very encouraging results.
Thirdly, part of it is about adding some de novo branches in the existing footprint, especially in the New York metro area as a focus. This is a long-term strategy. This is about 10 years, and it is about building an efficient density in our network in the most attractive parts of our footprint. So we are not looking for an acquisition to create that density. We expect that our total branch count will remain the same till 2035.
Financially, as you have known from Citizens, we are very disciplined. Over the 18- 24 months, you will see more of it come through our results. The savings from the exit of these in-store branches will offset any expense of putting these new traditional branches. These in-store exits are more front-loaded, while some of the de novo builds will be over a longer period.
Over the long term, I would say this solidifies our long-term and medium-term performance, and it is not a hindrance to our 16%-18% ROTCE target for 2027.
All right. I mentioned before we started that that sad Coldplay song that was on before was more fitting for Nasdaq than this bank conference today. Can you just talk about macro view a bit and how you're thinking about the economy and interest rates?
Yeah. Look, in our view, the underlying economic fundamentals are positive. Although there is a lot of uncertainty and volatility, and it will likely to start, going to remain elevated, that's the name of the game. I think GDP growth will be probably at least 2%, if not closer to 2.5% over the next four or five quarters. The Fed decided to hold rates steady in the October meeting. We'll see what happens later on in the quarter. The third quarter GDP was strong at 3.4%, and consumer spending remains quite resilient. The economy is still growing. Unemployment remains range-bound, 4%, and inflation is being affected by the higher energy prices and the tariffs and geopolitical conflicts.
Ultimately, I think the Federal Reserve should be able to bring down the inflation down, particularly if there is more progress towards some of the conflict resolution around the world. We do expect a few additional rate increases. The question is how many, how many are required, how quickly they will occur, and what's the economic conditions surrounding them. But if the economy remains healthy, the customer confidence holds up, and the market has reasonable clarity around the Fed's intention, a couple of rate hikes should be okay for a business environment.
I think the labor market is an important source of support for the consumer. So as long as the unemployment remains around the current levels, I think consumer spending should be resilient in that way. From our clients' perspective, we see commercial clients are still investing.
They're still playing offense, but there is some uncertainty, and there is a little bit of conservatism. But they're borrowing, they're investing, and they are still executing on their strategic plans. On the consumer side, look, higher income households are continuing to benefit from the strong equity markets as well as resilient home values, and a lot of our retail customers are actually homeowners. So, further down the income spectrum, you would see some people making some trade-offs on their spending, but we don't see any broad areas of concern. So look, the environment remains constructive, but it's not without risk.
The election obviously has just occurred, so I don't know if how many, h ow much discussion has been internally, but do you think that could impact the growth outlook?
Yeah, look, I think with the change of control in the Congress and the Senate, I think there will be probably increased oversight over the executive branch. But if you think about the tax policy benefits are largely embedded, if you think about the regulatory environment and the pro-business agenda, they should be still supportive. So we feel that there's still a lot of growth to be garnered from here.
I mean, I think we're halfway through. It'd be good to open up for questions. I have a lot. That way we make sure we get to as many people. And we're going to bring a mic up.
Hey, thanks.
All right.
Hey, Ryan Kenny with Morgan Stanley. Given the volatility in the interest rate environment that we've seen over the last few weeks, and volatility in specific sectors of the stock market, notably technology, are you seeing any risk to the capital markets pipeline in any pieces of your business, sponsor activity, or equity capital markets, and any risk to the Q4 fee income guidance up 4%-5%?
Look, I think volatility has been the name of the game the entire year. If you go back to the first quarter, if you go back to March, if you go back to the second and third quarter, there has always been volatility. But our clients are transacting. We have a very, very strong pipeline, and our pipeline has even grown from where we started the quarter, and we are seeing a lot. We are getting hired each and every day across our capital markets franchise.
The question will be, how does those deals get closed in certain times and that. So, there might be some timing impact. To your question on how are we seeing on the outlook, our overall outlook, we just started the quarter, one month in, we still have two months to go.
October, there was definitely some rate volatility around, but we also had some deals that got moved from Q3 to Q4, so we had those deals come in. So overall, we still feel good about the quarter for the guidance that we gave during earnings.
Great. Thank you.
Thanks. While we wait for the next one, I guess along the lines of the rate volatility, we have seen that impact some banks' share repurchase behavior or expectations. I guess, how does that impact Citizens and capital management, and what might occur?
Yeah, look, if you think about our primary ratio, our regulatory capital ratio, it is CET1, and under the current regulatory framework, we are running at 10.5%, which is at the higher end of our operating range. We guided to a 10.6%- 10.7% at the end of the year, which is slightly higher than the operating range. Obviously, you saw the AOCI adjusted ratio, which was at 8.7% at the end of the quarter, but since then, if you think about rates have come back, especially the long-term rates, so that will move around. If you add from the Basel III framework, from the RWA benefits that we would get, that roughly adds another 110 basis points. So that 8.7% on that basis is closer to 9.8%- 10%.
I think, if you think from that perspective, as we think of this, all the and even the TCE ratios, as we think of all these things, we take into account all these things as we monitor this. We also look at our, where is RWA heading, what is the regulatory environment, what is the rates outlook, and how much capital, organic capital that we are generating each and every quarter. So we evaluate all these things. For on repurchases, there is not a single mechanical trigger. We look at all these things, and we take a holistic view, and we will also look at the share price where it is. The flexibility of the repurchase program actually lets us adjust to the pace and the capacity that we can do.
We do expect to continue to return capital through common dividends as well as share repurchases, while we will maintain the capacity to deliver for our clients and invest in the company and preserve a strong capital position, which we have always done.
Any other questions?
Scott Siefers is with TD Cowen. When do you start to worry about rate-seeking behavior on the deposit side? I mean, it has been, like over the last decade or so, it has been such a favorable change, in terms of, call it, like Citizens versus itself a decade ago. So, the betas have been great. Overall, things have been pretty benign. When do you start worrying about what higher rates end up doing to you?
Yeah, Scott, that's a great question. I would say, look, I think what we are trying to do at Citizens across the three businesses is really to get the operating accounts and really have the clients have multiple products, of which deposits is one, and how do we ensure that that is the mainstay of our relationship. If you look at our, we put this chart in our earnings call always.
If you think about our low-cost deposits as well as DDAs, that's roughly 42% of our deposit base, and that has remained pretty consistent over time, right? As you see that. You see the private bank, like the $18 billion of deposits, which has been growing quite nicely every quarter. We have maintained a DDA percentage over 30%. It was 33% at the end of 3Q.
That shows me that we are actually winning the operating mandates each and every. Look, there's a lot which goes on to those relationships. There's lending, there's operating cash, there is always clients that are trying to optimize their [audio distortion] testing. There is wealth, there is the other transaction fees. How can you provide the real services, payment services, et cetera? What we want to be is truly be the operating bank for both our consumer clients as well as our commercial clients. That's the aspect of it.
Obviously, every day, every quarter, people will start to optimize for rates that they see. But if you can bring your holistic bank, if you bring the total value for that to that client, the client will see the value and then probably not always try to nitpick you on five basis point of rates.
But that's the purpose, and that's where we are heading as a bank.
Hey, [Aunoy].
Hey.
How are you doing? When you think about the Reimagine the Bank initiative, just given how the pace of change from AI has accelerated, outside of the financial change that you made at earnings, maybe just talk about how this is influencing your plans for the program. Are you accelerating any of it, and does it change the end goal at all? Thank you.
Yeah. Look, I am really excited about Reimagine the Bank, and Ryan, this is a continuation of our technology journey that we have been on for several years. If you think about it, we are probably one of the few banks that are on the cloud fully, and that gives us a lot of flexibility about how we think about our processes, how we think about how to reimagine some of those processes that we work on both.
So, under Brendan's leadership and with Bruce's guidance, we have been at it for the last one year or so, right? When we started this, we really thought about and looked at all our processes, so whether it is our compliance testing, whether it is our client onboarding, whether it is our fraud processes, even some internal processes like finance and HR processes, et cetera.
We looked at everything, and the question that we asked is, with the advent of the new technology, what can we do to really materially change the client experience and also have a material impact to our efficiency? That is why there are 50 initiatives that really came up, and we have been implementing them over the last month or so. We are seeing some very good results.
I will give you a few examples, and we spent the last three days with our Reimagine the Bank team, and roughly 500 people are actually involved in reimagining this field. So one of the things I would say is, look, if you think about our applications, this year alone, we have rationalized 35 applications year- to- date. It is just not about the applications, it is about how much simplicity that you can create in the environment.
Your controls become better, your cost starts to come down. We are also going through and using AI and thinking about, in our credit cards, how do you think about complaints, and how can you put your complaints in a bunch and ensure that you can find out the recurring themes and you can actually serve our customers better? Similarly, in the commercial bank, we are looking at about our credit processes and how you can get your credit memos done faster. You can think about client prospecting, you can think about your annual reviews with your clients. So, all of those things are really, really getting a lot more productive as we go through. These are some of the things that has happened this year alone, right? I think so.
We are incredibly excited about it. If you think about, just to make sure that we still have the financials, you know that we run these programs with a very, very tight discipline, and this is no different. We upped the financials, as Ryan said, by $25 million in 2027. This year, we are exiting at $100 million exit run rate on the savings, and the program is net neutral on an expense basis this year. That is quite an accomplishment, I would say, in the first year of a massive transformation program. In 2028, we exit at $450 million run rate, with 2/3 of those savings are in the expense line, which, if you do the math, it's like 5% of our expense base, of our 2025 expense base. We are focused.
We are running this with a lot of discipline, and we are quite excited about not only just the financial aspect of it, but what it means for the bank and how we are really reinventing our processes.
Just shifting to asset quality, strong for you across the industry. Given everything that's happening that we touched on before, what areas are receiving the most attention right now, and anything worrying the bank?
Yeah, no, overall, John, we feel good about credit. We are not seeing any meaningful hotspot in C&I, if I start with commercial. Not any signs of any stress in that book. In CRE, as you know, we continue to work through our office portfolio, and a large part of that is behind us, and the portfolio is considerably smaller.
We probably have a few more quarters before it's fully behind us, but we don't see any broad-based changes within the C&I. We obviously monitor companies with exposures to consumer discretionary spending or more towards any consumer end markets. On the consumer side, we don't see, again, anything broadly concerning. Our consumer base skews more towards mass affluent and affluent households, and most of our retail customers, as I said, are homeowners. Resilient home values and equity markets provide meaningful support on these households.
But we are also watching the lower income cohorts closely, but it is not a large part of our portfolio. There is no broad-based change that we are seeing. As you see, our charge-off rates are coming down. It is in the high to mid 30s, and we expect that it will get lower as we finish working through that office portfolio. We are not at all complacent. We are monitoring each and every day, but today, as issues appear, they are pretty boxed and manageable versus any widespread or system-wide issues.
What about the topic getting more attention is just the AI boom and beneficiaries and how much maybe that is propping up local areas. I guess there is obviously the direct exposure, but the indirect exposure, electricians, HVAC suppliers, hotels. I guess if the pace does slow, how do you assess and manage the credit risk amongst the indirect exposure?
Yeah, that is a great question. I would say, look, the AI infrastructure is clearly creating a strong demand, right, in the data center ecosystem and helping the U.S. GDP growth. What gives me confidence is in our lending book, if you think about, is the quality of the team. We have a tremendous amount of experience in CRE project finance or experience in evaluating and managing construction risk. I mentioned DH Capital, which we bought a few years ago. We have those expertise.
We have expertise in DCM and ECM and ABS for that market. We have very sector-dedicated in-house credit underwriting teams. We have portfolio management teams. So, we have built a very strong intellectual capital position in this sector, I would say. Of course, this is then combined with very disciplined risk management in the digital infrastructure ecosystem.
Our direct exposure to data centers is modest. It is roughly 1% of our loans, roughly around $1.5 billion as of the last quarter. Even on data centers, our focus is really on experienced operators with strong track records and diversified portfolios. So, when we do the underwriting, we are looking for long-term leases, 12-15 years. We have power providers that are connected. The developers own the land. Our portfolio is largely geared towards the five largest hyperscalers and development companies. So, there is not much of speculation here. Our underwriting makes sure that we mitigate those risks. On your question on the ancillary sectors, as you rightly said, there is a boom that is happening, and it is a net positive, I would say.
With respect to those other sectors, we are seeing that in the benefit, but we believe that our exposure to those sectors are relatively modest. If you think about nationally, yes, AI has got a lot of GDP growth and consumption, but it is not as dramatic in our core Northeast markets because data center builds are not happening in this area. It is benefiting the companies, and obviously, at some point in time the AI wave will slow down. I think those companies are pretty resilient, and there shouldn't be a credit problem as such, but our exposures are not substantial.
Any other questions? I guess this is all related to the entire discussion, but when thinking about returns, ROTCE, 15.1% in the third quarter, the target is 16%-18% by the end of next year. How do you bridge the gap, and what could returns look past that?
Yeah. Look, we are quite confident of our 16%-18% goal at the end of 2027. I am not going to give out a new target today, but I think the way Citizens has always operated is we definitely want to print the target, we want to reach it, and we will talk about the next target after that. The opportunity is increasingly visible. If you start with the 15% of return that we did in the third quarter, roughly another 110 basis points comes from the NIM expansion. Part of it is our terminated swap, parts of it is the front book, back book, but that gets you above 16% already. Then from that, you see another 135-150 basis points of potential improvement through our business processes. As we said, we delivered 600 basis points of operating leverage this quarter.
The Private Bank is growing nicely. It is at a 25% ROTCE. We see Capital Markets fees growing. All this business execution should add another 135-150 basis points. Then as the credit, we talked a little bit about credit as the office portfolio rolls off, as the NCOs come down, the charge-off rates come down, that should add another 15-25 basis points. If you take them all together, you are well within the range of this. Remember, this does not include Reimagine the Bank benefits, which are additive to this. Now, obviously, rate volatility and AOCI will move sometime. It may get you towards the higher end of the ratio or may get you to the middle of the pack. I think that is just more over time that will dissipate.
And I think what we have, we also have share buybacks that should also get the TCE in the right place. That does not impact the direction. I think it will probably impact marginally where we land in. But we are incredibly confident about this 16%-18%, and we have a clear bridge, and we have to just execute consistently as we go through the fourth quarter as well as the quarters of 2027.
We got time for one more question. I think we are all set. That was all. We really appreciate your company coming again this year and look forward to your return next year.
Thank you, John. Thanks very much. It is great to see all of you.