Q4 2023 Earnings Summary
- CFG's Private Bank is off to a strong start, with $1.2 billion in deposits raised since its launch in late 2023, and expectations for lending to pick up in 2024, particularly in the private equity and venture lending space, driving future loan growth and strengthening client relationships.
- CFG anticipates noninterest income to increase by 6% to 9% in 2024, driven by strong capital markets activity, including robust pipelines in M&A advisory and underwriting, as well as expected strong growth in wealth management fees, supported by the Private Bank investment and key hires made in Q4 2023.
- CFG outperforms peers in its consumer deposit base, with DDA balances almost 300 basis points better than peer average and net deposit growth a couple of hundred basis points better than peers in 2023, positioning the bank favorably for funding costs and liquidity, and expected to continue this outperformance in 2024.
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Credit Loss Expectations
Q: Where will credit losses peak and what drives 50 bps guidance?
A: Management expects credit losses to average around 50 basis points in 2024, slightly higher than the 46 bps in Q4 2023, primarily due to predictable charge-offs in Commercial Real Estate General Office and continued normalization in consumer lending. They have good visibility into these areas and see no hotspots in C&I lending. -
Net Interest Margin Outlook
Q: Will NIM exceed 3% in 2025 as rates change?
A: The bank expects the net interest margin to exit 2024 at 2.85% and cross the 3% level in 2025, heading towards a medium-term range of 3.25% to 3.40%. This outlook assumes deposit betas stabilize and down betas contribute positively as rates decline. -
NII and PPNR Bottoming
Q: When will NII and PPNR reach their lowest point?
A: Net Interest Income (NII) and Pre-Provision Net Revenue (PPNR) are expected to bottom in the second quarter of 2024, coinciding with the anticipated first rate cut. Factors such as fee growth and strong loan growth are expected to improve results afterward. -
Interest Rate Sensitivity
Q: How would more or fewer rate cuts affect NII?
A: The bank is positioned close to neutral for rate movements. If rate cuts are fewer than expected, it would be acceptable, as deposit migration is moderating and down betas are expected to contribute positively with the first rate cut anticipated in the second quarter. -
Capital Return Plans
Q: What are the expectations for capital returns to shareholders?
A: Management plans to maintain strong dividends and resume share buybacks, expecting a capital return ratio in the 75% to 100% range over time. In 2023, they achieved a 95% capital return performance. -
Share Buyback Resumption
Q: How much will you repurchase in Q1 2024?
A: The bank plans to repurchase approximately $300 million of shares in the first quarter of 2024, leveraging their strong capital position with a CET1 ratio of 10.6%. Buybacks are expected to be more first-half oriented in 2024. -
Expense Cuts and Efficiency
Q: How are expense cuts being managed without hurting initiatives?
A: Management has reduced staff by 3.5%, focusing on eliminating lower performers and redistributing work, while protecting risk, audit, and key investment areas like the private bank. They believe they are now lean and efficient. -
Loan Growth Drivers
Q: What are the drivers for loan growth in 2024?
A: Loan growth is expected to pick up in the second half of 2024, driven by increased commercial activity, higher loan utilization rates, and growth in private bank lending, particularly in areas like private equity and venture lending. Consumer lending opportunities in mortgages and HELOCs are also contributing factors. -
ROTCE Targets
Q: How will you achieve 15%-17% ROTCE, and what's the revenue mix?
A: The bank aims to increase fees to total revenues from 25% to around 30% over the medium term through balance sheet optimization and growth in fee-based activities like wealth management. They expect Return on Tangible Common Equity (ROTCE) to be supported by a return on tangible assets approaching 125 basis points. -
Capital Deployment Opportunities
Q: Are there new investment opportunities or M&A plans?
A: The focus is on backing organic initiatives, especially the private bank and investments in areas like payments. While open to selective acquisitions in fee-based capabilities, they are primarily pursuing growth through team lift-outs and scaling up Citizens Private Wealth. -
Basel III Impact
Q: How might Basel III Endgame affect you?
A: Management expects minimal impact from Basel III proposals, as they have strong capital levels and can absorb regulatory changes. They are more concerned about potential RWA increases affecting lending activities and hope for adjustments in the final rules to avoid reducing lending appetite in key areas. -
Consumer Deposit Betas
Q: What are expectations for consumer deposit costs?
A: The bank expects consumer deposit betas to improve as rates decline. They have outperformed peers with DDA balances 300 basis points better and net deposit growth 200 basis points higher. The pace of consumers seeking higher-rate accounts is slowing, and they are well-positioned to manage deposit costs effectively. -
Non-Office CRE Outlook
Q: How is the non-office CRE portfolio performing, especially multifamily?
A: The multifamily portfolio is performing well, with small loan sizes, fixed-term loans, and good geographic diversification. Lower rates provide additional cushion in debt service coverage ratios, and capital markets remain active in this sector with ongoing transactions. -
Fee Income Growth
Q: What drives the 6%-9% fee income growth outlook?
A: Fee income growth is expected to be driven by strong capital markets activity, with robust pipelines in M&A advisory and underwriting. Wealth management fees are also anticipated to grow significantly, supported by investments in the private bank and hiring of key talent. -
Expense Flexibility
Q: Can expenses be reduced if revenue doesn't meet expectations?
A: While always seeking efficiency, management believes further significant expense cuts could jeopardize strategic initiatives like the private bank. They prefer to balance near-term delivery with medium-term growth objectives. -
Liquidity Impact on NIM
Q: Will liquidity builds continue to impact NIM?
A: The bank has achieved its liquidity build objectives, reaching around 117% of Category 1 requirements, and does not expect liquidity to be a headwind to net interest margin going forward. -
Private Bank Deposits
Q: What is the cost and strategy of private bank deposit growth?
A: Private bank deposits are accretive to the low-cost profile, with a mix that is very attractive and includes a large proportion of DDA and low-cost checking accounts. They are not using promotions outside the norm and expect these deposits to fully fund loan growth.