Q2 2024 Earnings Summary
- Citizens Financial Group (CFG) is experiencing strong growth and positive outlook in fee-income businesses, specifically capital markets and wealth management. They continue to hold the number 1 middle market sponsor position for the second quarter in a row, and expect wealth fees to be a bigger contributor in the third quarter due to investments and hiring in their Private Bank.
- CFG expects loan growth to accelerate in the second half, driven by positive customer sentiment, increased activity in private banking, strong growth in HELOCs and mortgages, and strengthening commercial customer activity, particularly in M&A advisory-driven finance and subscription lines.
- CFG anticipates solid deposit growth in the second half, supported by an increase of $1.6 billion in Private Bank deposits during the quarter, favorable seasonal trends, and leading performance in consumer low-cost deposits, which can provide a positive funding mix and tailwind for net interest income and margin.
- Citizens Financial Group has significant exposure to office commercial real estate loans, with a current allowance for credit losses of 11.1% on the $3.3 billion general office portfolio. Management anticipates that resolving these issues will be a multi-quarter process extending into 2025, with uncertainties around valuations and losses potentially impacting earnings.
- The Private Bank's commercial deposits are primarily from private equity and venture capital firms, which may be more volatile and pose liquidity risks if these industries experience downturns, potentially affecting the bank's funding stability.
- The bank plans to reduce its commercial real estate exposure by at least 25% over the medium term, which could impact loan growth and interest income. This reduction comes as the current commercial real estate loans are about 130% of risk-based capital plus reserves, indicating high exposure and potential vulnerabilities.
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Net Interest Margin Outlook
Q: Can you discuss the fourth-quarter net interest margin expectations?
A: John Woods expects net interest margin (NIM) to rebound in the fourth quarter of 2024, exceeding initial expectations. Positive factors include the peaking of swap costs in the third quarter, contributions from loan growth, and benefits from deposit cost stabilization. The NIM is set to rise off a third-quarter trough, driven by factors such as noncore run-off contributing about 2 basis points of NIM expansion per quarter and positive front book/back book dynamics. A potential September rate cut by the Fed would be helpful but is not necessary for the rebound. -
Capital Buffer and CRE Exposure
Q: Are there plans to reduce the higher stress capital buffer?
A: Bruce Van Saun acknowledged disappointment with the higher Stress Capital Buffer (SEB) result but noted that it doesn't hinder their strategy due to sufficient capital. They plan to optimize the balance sheet by reducing commercial real estate (CRE) exposure over time, particularly in office and multifamily sectors. This shift will create capacity to lend in areas that deepen relationships, such as commercial and industrial (C&I) lending. -
Office Loan Loss Reserves
Q: What will allow office reserves to decrease?
A: Bruce Van Saun explained that uncertainty in the office sector remains high, affecting valuations and cap rates. The bank is conservatively maintaining a high reserve of 11.1% on office loans and plans to let charge-offs run through while keeping the reserve stable. Improvement in the sector, possibly in 2025, would be needed before drawing down the reserve. -
Loan Growth Outlook
Q: Update on loan outlook for the second half?
A: John Woods sees positive signs for loan growth in the second half of the year. All three business segments—Private Bank, Commercial, and Retail—are expected to contribute. The Private Bank is growing loans by penetrating its customer base, Commercial activity is picking up, particularly in M&A advisory-related finance, and Retail is seeing opportunities in HELOC and mortgage lending. -
Fee Income Outlook
Q: Thoughts on investment banking pipeline and fee outlook?
A: John Woods anticipates a strong fee income performance despite typical third-quarter seasonal weakness in capital markets. The fee base is more diversified and resilient this year due to investments in Wealth and other areas. Donald McCree added that there is a pickup in new money activity, driven by private equity, M&A, and potential IPOs, suggesting a favorable backdrop for the second half and into 2025. -
Cost Management
Q: How are you managing costs amid investments and hires?
A: John Woods highlighted their ongoing TOP program, expected to generate about $135 million in run-rate benefits by year-end 2024. Savings come from vendor contributions, data and analytics, investments in fraud programs, and branch rationalization. These efficiencies help self-fund growth initiatives without increasing overall expenses. -
Balance Sheet Growth
Q: Is balance sheet growth aligned with business growth?
A: John Woods stated that while overall balance sheet growth has been flat, they plan to deploy excess liquidity into lending in the second half of 2024. Over the medium term, they anticipate balance sheet growth in line with business growth, adjusted for optimization initiatives. The Private Bank's expansion offers an opportunity to grow slightly faster than nominal GDP. -
Capital Stack Optimization
Q: Thoughts on capital stack and preferred stock levels?
A: John Woods explained they are comfortable with their capital position, aiming to maintain around 125% of Risk-Weighted Assets in preferred stock, possibly up to 150%. They see opportunities to refinance preferred stock to lower coupons, as some issues come into call periods in 2025, helping optimize their capital structure.