Citizens Financial Group Inc Q3 2024 Earnings Call Summary

The following is excerpted from the question-and-answer section of the transcript.

Question: Robert Siefers - Piper Sandler & Co. - Analyst : I wanted to start off with a couple of questions both related to the margin progression and that medium-term walk to which you alluded on slide 23 as we kind of start to march upward. Maybe first, in the immediate term, can you sort of walk through the puts and takes that allow for the 5 basis points or so of margin expansion into the fourth quarter? And then, I guess, more importantly, as we sort of start the journey upward and think about that next year or so, it looks like that 18 basis points of time-based benefits is largely programmatic, which all else equal would get us to like a 2.95.But of course, the wild cards are like the timing of the ebbs and flows of the swaps and the rate-based impact. So maybe if you could sort of help I guess, narrow the cone on the moving parts as we think about the next few quarters, please? John Woods - Citizens Financial Group Inc - Vice Chairman of the Management Board, Chief Financial Officer, Interim Chief Accounting Officer Yes, sure. Thanks for the question, Scott. I'd say starting off with the fourth quarter. I mean, I think when you think about the progression there, 1 of the drivers -- several drivers of tailwinds that we're seeing. First off, I would highlight noncore, which continues to contribute about 2 basis points a quarter. And so that's the starting point. I think the second big driver is broadly the active balance sheet management, fixed asset repricing and front book back book that continues to play out on -- will continue to play out every quarter going forward. And that's a huge contributor. I'll offer up one of the highlights of the balance sheet transition as you get into the fourth quarter also relates to deposit migration. We've had negative deposit migration throughout the cycle. That's been kind of declining over time. And we're seeing late third quarter, early fourth quarter trends that tell us that, that's going to flip around to be more of a neutral, maybe a slightly positive going into the fourth quarter. And that's really significant for that to become less of a headwind than it's been. And given what's been going on in the past. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 16, 2024 / 1:00PM, CFG.N - Q3 2024 Citizens Financial Group Inc Earnings Call

Question: Matthew O'Connor - Deutsche Bank AG - Analyst : I guess just to drill down on the net interest income coming in weaker than kind of your thought maybe a month ago. Was that a bigger head cut and a little bit less loan growth? And kind of and then all the positive trends that you said is what we should expect from here? Or was there something help to throw out there, too? John Woods - Citizens Financial Group Inc - Vice Chairman of the Management Board, Chief Financial Officer, Interim Chief Accounting Officer Yes. I'd say we are slightly asset sensitive. So 50, maybe a little bit more kind of than we expected. But I'd say that the deposit trends 3Q, in the trajectory of low-cost migration came down during the quarter, but they may be a little bit than we expected. And so I think we got to the end of the quarter where we expected, but the average for the quarter in terms of migration was a little higher than we were thinking. But as I mentioned, that is now flipping around and as you look at the late September, early October trends that it was almost -- the bell went off there when the Fed pull the 50 basis point lever, we really are seeing that low-cost migration really flip to more of a neutral to slight positive. And so that's really what you can see going into 4Q.

Question: Matthew O'Connor - Deutsche Bank AG - Analyst : Okay. And then separately, how do you think about operating leverage kind of more medium term? Obviously, like just income could be a bigger driver dollar-wise, if we just look at fourth quarter to kind frame it, you're guiding to revenues up about 3.5% versus costs up [2%] So 150 bps of operating leverage, but that's more driven by fees. Just thoughts on medium term how much operating leverage would you envision? John Woods - Citizens Financial Group Inc - Vice Chairman of the Management Board, Chief Financial Officer, Interim Chief Accounting Officer Yes. I mean I think we'll talk more about this in January. But I mean, I think we have significant opportunity for operating leverage. When you look at the net interest margin reflating to that $3.25 to $3.40 range provides significant tailwinds and consistent operating leverage over time. We'll come back in January and frame that for you a little more in terms of what we expect in 2025.

Question: John Pancari - Evercore ISI Institutional Equities - Analyst : Bruce, you just talked about the loan growth dynamics of (inaudible). And maybe if you could just elaborate a little bit more on your confidence in that you're seeing this inflection in demand here that should drive a modest growth in the fourth quarter. What is the bigger catalyst? Is it the rate cut? Is it clarity you expect around the election? And then -- can you maybe help us think about where like the type of acceleration in overall loan growth that you expect you could see going into -- or as you look at 2025?

Question: John Pancari - Evercore ISI Institutional Equities - Analyst : Okay. Great. And then a quick second one on credit. Can you just talk about the confidence that I believe you indicated that you've seen, you believe NPAs are peaking here this quarter. Maybe your confidence there, what gives you that? And then also on the confidence in the broadly stable charge-offs with the third quarter as you look at fourth quarter. I know your auto delinquencies were up pretty sharply year-over-year. So that would be beyond the seasonality. So I'm interested in what drove that and then thoughts on the reserve going forward?

Question: L. Erika Penala - UBS Investment Bank - Analyst : My first question is for you, John. On the 10-Q, you had $30 billion of notional received fixed peso for swaps for both 3Q and 4Q and $30.9 billion for 2025. Obviously, slide 24 would indicate lower notionals. Could you give us an update on whether you terminated those swaps. And maybe confirm the accounting for the swaps and that you would just -- those losses are crystallized and they would be in your NII for the duration of the swap life and then just as a follow-up, you mentioned a 3% NIM by 4Q '25. How many rate cuts would you need to ensure yourself of getting to that 3% level? John Woods - Citizens Financial Group Inc - Vice Chairman of the Management Board, Chief Financial Officer, Interim Chief Accounting Officer Yes. I'll take those. So yes, I think during the third quarter, as you may recall, there was a period of time when the yield curve was discounting as many as 7 or 8 cuts over -- through the second quarter of next year was pretty aggressive, expectation of the pace of Fed rate cuts. We happen to have about $4 billion of short-dated receive-fixed swaps that were maturing in May of '25. And so what we opportunistically chose to do was to terminate $4 billion of swaps during the third quarter in an environment where there was approximately 7 or 8 cuts that we locked in that benefit given the swaps are very short dated and really, we're only providing downrate protection through May, we felt like that, that was a good risk reward to lock in that benefit and lock in the contribution and protection against lower rates that the swaps were there to cover in the first place. Out the window. There are fewer cuts through May. So at least at this point, that was a round trip positive for us to move on from those swaps, and they did exactly what they were intended to do, was to create that protection. The accounting aspects of it are that we amortize the impact of that over the remaining life of the swaps through May. So that will be amortized through but that impact will be, again, a lower impact or a more favorable impact than otherwise would be the case that we were to have held the swaps. And so that was the point of the terminations. So that's that one. And I think the second question was about 3% (inaudible) cuts. And the rate environment that we would -- there's a range of rate environments that would still be consistent. With that. I mean I would say that we have a slightly asset-sensitive position. So net interest margin is stable across a range of rate environments into '25 given the swap portfolio, it doesn't begin to drop off until mid-2026. So I mean, the forward curve out the window implies getting to around 350 by the end of '25, but we would be able to achieve that 3% at rate environments that would be below that level as well. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 16, 2024 / 1:00PM, CFG.N - Q3 2024 Citizens Financial Group Inc Earnings Call

Question: L. Erika Penala - UBS Investment Bank - Analyst : That's the difference -- got it. John Woods - Citizens Financial Group Inc - Vice Chairman of the Management Board, Chief Financial Officer, Interim Chief Accounting Officer Okay. Yes. And so yes. Got it. And then the -- on the NIM expansion into the fourth quarter, highly proactive focus on this is going to get our deposit beta to be up to around nearing 40% by the end of the quarter. You've got all of the 100% beta stuff in commercial leading the way, but we're being highly proactive in consumer as well and just really taking all the learnings over the cycle over the last many years and applying that to how we continue to be able to drive solid deposit growth at a really attractive cost of funds. So that's the number that's baked in about 40% deposit beta in 4Q.

Question: Manan Gosalia - Morgan Stanley - Analyst : I wanted to follow up on the deposit beta question. Do you have any more specifics on what your spot deposit rates are now that we're a month past the Fed rate cut how you expect that deposit beta to traject as we get further into the Fed rate cut cycle, right? So as we get -- as we get as more Fed rate cuts are behind us, does that make it easier or more difficult to continue to drop your deposit rates going forward? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 16, 2024 / 1:00PM, CFG.N - Q3 2024 Citizens Financial Group Inc Earnings Call John Woods - Citizens Financial Group Inc - Vice Chairman of the Management Board, Chief Financial Officer, Interim Chief Accounting Officer I mean I think if you kind of do the math there, if you -- based on the forward -- from the forward curve that we'll have 2 more Fed cuts in 4Q and we're using a curve that was after nonfarm payrolls from a week or 2 ago. But after nonfarm payrolls, you've got the two cuts. Based on that curve, and if you apply a 40% beta to what you think the average SOFR rate would be in 4Q versus 3Q, you can come up with the decline in net interest-bearing deposit costs on that basis. And second question, what was the second part of that question?

Question: Manan Gosalia - Morgan Stanley - Analyst : Yes, perfect. That's what I was getting to. That's really helpful. And then maybe just on the front book back book, I think you noted the 200 to 300 basis point spread benefit. Can you talk about what balances we should apply that to? What are the fixed rate securities and loans coming due over the next year or so? And is there any room to use some of the excess capital for any securities positioning from here? John Woods - Citizens Financial Group Inc - Vice Chairman of the Management Board, Chief Financial Officer, Interim Chief Accounting Officer Yes. I mean I think that's a good metric to use that this will be growing over time. So when you see when you see the activity and loan growth picking up over time, you're going to see this being a contributor over the next couple of years. I mean, I'd say that the REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 16, 2024 / 1:00PM, CFG.N - Q3 2024 Citizens Financial Group Inc Earnings Call what turns over in the back book quarterly basis in resi mortgage, call it, call it, around $750 million a quarter -- and that's a similar number for securities as well. When you talk about what turns over those are the balances that you would apply it to is the front book, back book, but that will continue to contribute and build on itself over the next couple of years.