Q4 2024 Earnings Summary
- Net Interest Margin (NIM) Expansion Driven by Asset Sensitivity: The bank expects its NIM to increase, with an exit rate in 2025 of around 3.05% to 3.10% , and has raised the upper end of its medium-term NIM target to 3.5% by 2027. This confidence is based on their asset-sensitive balance sheet, which benefits from higher rates, and strategic deposit management leading to improved deposit costs .
- Strong Growth in Private Bank and Private Wealth Initiatives: The Private Bank is a significant growth driver, expected to contribute about $1 billion in loan growth per quarter and be 5% accretive to the bottom line in 2025 . By the end of next year, the Private Bank is starting to approach a 20% ROTCE target , indicating strong profitability and return on equity.
- Positive Operating Leverage Supported by Cost Management: The bank anticipates delivering positive operating leverage of around 1.5% in 2025 , with further improvement expected in subsequent years due to NIM expansion. Cost management initiatives, such as the TOP program which provides about a 1% benefit, support disciplined expense growth even as the bank invests in growth initiatives.
- Prolonged Exposure to Commercial Real Estate Office Portfolio May Continue to Impact Credit Quality and Earnings: The bank acknowledged that working through its general office portfolio is a multiyear process and is only in the middle innings of resolving these issues. This prolonged exposure could continue to weigh on credit costs and earnings in 2025 and beyond.
- Reliance on Private Bank for Loan Growth Amidst Subdued Loan Demand Poses Risks: The bank's projection of mid-single-digit spot loan growth depends heavily on the Private Bank, contributing about $1 billion per quarter. Excluding this, loan growth drops to low single digits, and overall loan demand remains subdued. If the Private Bank does not perform as expected, loan growth may be insufficient to meet targets.
- Increased Expenses Due to Investments May Pressure Earnings: The bank expects expenses to be up about 4% in 2025, primarily due to investments in the Private Bank and expansion into new markets. While these are intended to drive future growth, there is a risk that higher expenses may outpace revenue growth, potentially pressuring earnings if the investments do not yield expected returns.
| Metric | YoY Change | Reason |
|---|---|---|
Total Revenue | Flat YoY | Stable net interest income was offset by a modest shift in deposit and loan mix, as well as normalization of certain fee-based revenues. These factors collectively kept overall revenue near the same level as the prior year. |
Net Income | +112% YoY | The increase from $189 million to $401 million reflects improved credit trends, lower provision for credit losses, and cost discipline. Market conditions that favored credit quality also boosted profitability. |
Basic EPS | +137% YoY | EPS growth was driven by higher net income and share repurchases, which reduced the weighted-average shares outstanding. These initiatives amplified the impact of the increase in earnings on EPS. |
Interest Expense | -12% YoY | Lower deposit costs due to a more favorable funding mix and a slight decline in wholesale funding contributed to the overall drop. Although interest rates remained relatively stable, the focus on shifting deposit composition helped contain expenses. |
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
CET1 ratio | Q1 2025 | no prior guidance | 10.5% to 10.75% | no prior guidance |
Average Loans | FY 2025 | no prior guidance | -2% to -3% | no prior guidance |
Earning Assets | FY 2025 | no prior guidance | -1% | no prior guidance |
Noninterest Income | FY 2025 | no prior guidance | +8% to +10% | no prior guidance |
Expenses | FY 2025 | no prior guidance | +4% | no prior guidance |
Operating Leverage | FY 2025 | no prior guidance | +150 bps | no prior guidance |
Net Charge-Offs | FY 2025 | no prior guidance | $650M to $700M | no prior guidance |
CET1 ratio | FY 2025 | no prior guidance | 10.5% to 10.75% | no prior guidance |
Share Repurchases | FY 2025 | no prior guidance | Opportunistic | no prior guidance |
ROTCE | FY 2025 | no prior guidance | 16% to 18% by 2027, with progress in 2025 | no prior guidance |
| Metric | Period | Guidance | Actual | Performance |
|---|---|---|---|---|
Net Interest Income | Q4 2024 | Up about 1.5% to 2.5% | -227 | Missed |
Noninterest Income | Q4 2024 | Up mid- to high single digits | 31 | Missed |
Share Repurchases | Q4 2024 | About $200 million to $250 million | -1,677 | Missed |
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Net Interest Margin Outlook
Q: What gives confidence to raise NIM outlook higher?
A: The main reason is the higher rate outlook; the Fed's terminal rate is now expected to be closer to 4%, up from well below 4% previously, and with their asset-sensitive balance sheet, this justifies raising the upper end of the NIM range to 3.50%. Additionally, a solid 10 basis point increase in NIM during the fourth quarter and continued opportunistic hedging have boosted confidence. -
Private Bank Investment and Expenses
Q: Can higher costs from private bank investments be contained?
A: Investments in the private bank and commercial capabilities led to higher expenses in Q4. However, with improving revenue outlook, they are confident that costs can be managed. They are guiding to about 4% expense growth next year, but stripping out Private Bank and Private Wealth, expenses are down roughly 2.5%, and they expect to deliver positive operating leverage in 2025. -
Deposit Growth and Betas Impact
Q: How are deposits and betas impacting NIM?
A: Strategic opportunities in the private bank and strong core retail deposits provide a solid foundation. Deposit betas outperformed expectations in Q4 at around 50%, higher than the initially expected 40%. Based on the rate outlook, betas are expected to increase to the low to mid-50% range by the time the terminal rate reaches 4%, supporting confidence in the NIM trajectory. -
NIM Exit Rate and Private Bank Investment
Q: Is NIM exit rate between 3% to 3.10%? Will investment in private bank continue?
A: The NIM exit rate is adjusted upward to approximately 3.05% to 3.10%. The private bank, launched in mid-2023, is progressing well, delivering profitability in Q4 with about $0.01 of EPS. They are committed to growing the business profitably, potentially adding teams while maintaining financial discipline, aiming for a 20% ROTCE target for the business by the end of next year. -
ROTCE Targets Timing
Q: When will the 16%-18% ROTCE target be achieved?
A: The medium-term ROTCE target of 16% to 18% is expected to be reached by 2027, with an upward progression through 2025 and 2026.