Q3 2024 Earnings Summary
- CFG anticipates increased loan growth in both consumer and commercial segments due to improving client demand and a favorable interest rate environment, which should drive revenue growth.
- Management expects significant operating leverage in the medium term, driven by net interest margin expansion to the 3.25% to 3.40% range by 2027, enhancing profitability with minimal increase in expenses.
- CFG believes non-performing assets are near their peak, with stable criticized and classified loans and adequate reserves, indicating improving credit quality going forward.
- Citizens Financial Group faces ongoing risks from its exposure to the general office commercial real estate sector, which is expected to be a multi-quarter issue extending through 2024 and into 2025, potentially leading to higher non-performing assets and charge-offs.
- The increase in auto loan delinquencies year-over-year, coupled with the lack of new originations, suggests that the bank may experience further credit deterioration in its auto loan portfolio as existing loans mature and season.
- The anticipated net interest margin expansion relies heavily on interest rate cuts and deposit repricing; however, if rate cuts are fewer or deposit betas do not decline as expected, NIM growth could be lower than forecasted, impacting earnings.
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NIM Expansion Outlook
Q: What drives the expected 5bps NIM expansion in Q4 and reaching near 3% NIM by end of 2025?
A: The expected 5 basis point NIM expansion in the fourth quarter is driven by several tailwinds: ongoing contribution from noncore items (about 2bps per quarter), active balance sheet management including fixed asset repricing, and improving deposit migration trends shifting from a headwind to neutral or slightly positive. Additionally, receipt swaps that were previously a headwind will become a tailwind. Looking ahead, 18bps of time-based benefits are "baked in," bringing NIM to 2.95%, with another ~5bps from factors like front book/back book benefits, strategic deposit initiatives, and proactive downrate protection strategies. We aim to reach near 3% NIM by the end of 2025. -
Loan Growth Confidence
Q: What's driving confidence in loan growth for Q4 and into 2025?
A: While not expecting significant loan growth in the fourth quarter, we're seeing positive trends, particularly in the Private Bank, with the largest quarterly increase and a strong pipeline. As rates come down, clients are more willing to borrow. In the Commercial Bank, increased activity in private equity is boosting utilization, especially in subscription lines. On the consumer side, non-core loan runoffs are slowing from $1.2-$1.3 billion per quarter last year to $800-$900 million now. We're seeing growth in mortgage and home equity, and we expect these dynamics to contribute to loan growth into 2025. -
Credit Quality and NPAs
Q: Are NPAs peaking, and what's the outlook on credit quality?
A: We believe NPAs are peaking this quarter, particularly in the general office portfolio, which we're actively managing with significant reserves. While there was a blip in CRE NPAs, the overall problem loan population is consistent, and criticized and classified loans have been stable for four quarters. In consumer credit, net charge-offs have normalized to pre-COVID levels of 50-55bps, and we're not observing any concerning trends. Auto delinquencies are performing as expected, reflecting portfolio dynamics rather than underlying credit deterioration. -
Deposit Beta Expectations
Q: What deposit beta are you assuming for the projected NIM expansion?
A: We anticipate our deposit beta to be nearing 40% by the end of the fourth quarter, driven by proactive management of deposit costs. Over the rate-cutting cycle, we expect down-cycle betas to approximate our up-cycle betas, gradually migrating to around 50-55%. This progression supports the NIM expansion into the fourth quarter and beyond. -
Swap Terminations Impact
Q: How does terminating $4 billion of swaps affect NIM and accounting?
A: We opportunistically terminated $4 billion of short-dated receive-fixed swaps maturing in May 2025 when the yield curve was pricing in 7-8 rate cuts, locking in the protective benefit. The impact of the termination is amortized over the remaining life of the swaps through May, resulting in a more favorable impact on NIM than if we had held the swaps. This strategic move aligns with our proactive interest rate risk management. -
Operating Leverage Outlook
Q: What's the medium-term outlook for operating leverage?
A: We see significant opportunity for operating leverage driven by NIM reflation to the 3.25% to 3.40% range, providing strong tailwinds over time. The NIM improvement largely drops straight to the bottom line as it doesn't entail additional expenses. While fee growth, particularly in capital markets and wealth, comes with associated costs, overall operating leverage should be quite positive when we look out over the 2025 to 2027 period. -
Front Book/Back Book Benefits
Q: How do front book/back book dynamics contribute to NIM expansion?
A: As fixed-rate assets in our loan and securities portfolios turn over, we capture a spread benefit of 200 to 300 basis points in the current rate environment. Approximately $750 million of residential mortgages and a similar amount of securities roll off quarterly, and the new assets are booked at higher yields. This ongoing dynamic significantly contributes to NIM expansion over the next couple of years. -
Securities Repositioning Plans
Q: Will you utilize excess capital for securities repositioning?
A: We do not plan a large-scale securities repositioning. We actively manage the securities portfolio on an ongoing basis, but given the built-in momentum to raise NIM, there's no need to deploy capital for timing shifts in NIM expansion.