Q2 2024 Earnings Summary
- Credit quality remains strong with net charge-offs at 29 basis points, and the outlook is positive, indicating continued strong credit performance.
- Fee income rebounded strongly, up 6% sequentially in the second quarter, driven by capital markets, payments, and wealth management; the company expects to be at the upper end of its 5% to 7% fee income growth range.
- Deposit growth has outperformed peers, providing flexibility to fund accelerating loan growth and to manage down beta; the company expects sustained deposit growth and is in a position of strength.
- Anticipated "sloppiness" in commercial real estate over the next couple of years may impact credit quality, with the company acknowledging potential issues in this area.
- The competitive environment is leading to flat loan spreads, which could pressure net interest margins and impact profitability.
- The Net Interest Income (NII) outlook could be pressured if loan growth does not meet expectations or if economic factors worsen, potentially bringing NII to the lower end of the guidance range.
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NII Outlook with Rate Cuts
Q: Where will NII land if rates are cut twice this year?
A: We expect our NII trend to be in the middle of our down 1% to down 4% range, even if we get two rate cuts in September and December. Managing a flat NIM will depend on reducing interest-bearing costs and continued loan growth. Pipelines look strong, and we could see upward bias on loan growth from new initiatives. -
Managing Downside Deposit Beta
Q: How are you managing deposit beta if rates decline?
A: We're already implementing our down beta playbook by reducing acquisition rates, shifting from time deposits to more money market accounts, and shortening CD durations. We expect a mid- to high 20% down beta over the first year. This approach allows us to benefit from rate reductions and manage deposit costs effectively. -
Asset Sensitivity Reduction
Q: Will you benefit from lower rates given balance sheet changes?
A: Yes, we're strategically reducing asset sensitivity by increasing receive-fixed swaps and allowing pay-fixed swaps to expire, reducing sensitivity by about one-third by mid-next year. This positions us to benefit from falling rates while expecting stable NIM over the next several quarters. -
Loan Growth Visibility
Q: How far out do you see loan growth trends?
A: Our pipelines extend a couple of quarters out, giving us some visibility through the fourth quarter. Customers are performing well, and as rates come down, we expect them to do even more business next year. -
Expense Growth Outlook
Q: Will expense growth be lower in 2025?
A: Yes, we expect to see a lower growth rate of expenses in 2025 compared to 2024. This year’s expense growth of 4.5% was intentionally higher to invest in growth initiatives, but the pace will reduce as we enter 2025, maintaining a lower growth rate going forward. -
Credit Quality and Reserves
Q: Are you seeing any credit issues or reserve changes?
A: Credit continues to perform very well, and the outlook is good. While there may be some issues in commercial real estate over the next couple of years, it's not a significant concern for us. Our allowance for credit losses remains adequate at 1.95%, and we'll adjust reserves as stronger economic performance and solid credit trends continue. -
Fee Income Momentum
Q: Can fee income growth continue at current pace?
A: We expect to land within our 5% to 7% full-year fee income growth range. Strong performance in payments (up 5% year-over-year), wealth management (revenues up 8%), and capital markets will drive sequential growth in the second half. -
Auto Loan Portfolio Growth
Q: Is increased auto loan production compensating for softer growth?
A: Our auto business is performing very well and is not being used as a buffer. We see it as a terrific opportunity due to some competitors pulling back. We expect to continue generating significant volume and growth with a super-prime portfolio that has very low defaults. -
Risk Transfers and Capital Optimization
Q: What's the rationale behind recent risk transfer deals?
A: These transactions help with RWA and balance sheet optimization. Our recent deal reduced RWA by $3 billion, unlocked 17 bps of CET1, and had an exceptionally low cost of capital at less than 3%. This supports our goals of increasing CET1 and funding higher-return loans. -
Loan-to-Deposit Ratio and Deposit Mix
Q: Will the loan-to-deposit ratio stay flat with loan growth?
A: We expect the loan-to-deposit ratio to drift slightly higher over time but remain within a set range. We're growing deposits similarly to loans, and any temporary differences won't significantly shift the ratio. We're also shifting from time deposits to money market accounts to manage down beta effectively.