Participants

Lovin Thomas; Senior Vice President, Investor Relations; Citizens Financial Group Inc

Bruce Van Saun; Chairman of the Board, Chief Executive Officer; Citizens Financial Group Inc

John Woods; Vice Chairman of Executive Board, Chief Financial Officer; Citizens Financial Group Inc

Brendan Coughlin; Vice Chairman of Executive Board and Head of Consumer Banking; Citizens Financial Group Inc

Presentation

Operator

Good morning, everyone, and welcome to the Citizens Financial Group fourth-quarter and full-year earnings conference call. My name is Ivy, and I'll be your operator today. (Operator Instructions) As a reminder, this event is being recorded.
I'll now turn the call over to Lovin Thomas, Senior Vice President, Investor Relations. Lovin, you may begin.

Lovin Thomas

Thank you, Ivy.
Good morning, everyone, and thank you for joining us on stepping in today for Christian results.
First this morning are Chairman and CEO, Bruce Van Saun and CFO, John Woods, will provide an overview of our fourth-quarter and full-year results.
Brendan Copeland, Head of Consumer Banking, and Don McCree, Head of Commercial Banking are also here to provide additional color.
We will be referencing our fourth-quarter and full-year earnings presentation located on our Investor Relations website.
After the presentation, we will be happy to take questions.
Our comments today will include forward looking statements are subject to risks and uncertainties that may cause our results to differ materially from expectations.
These are outlined for your review on page 2 of the presentation.
We also reference non-GAAP financial measures.
So it's important to review our GAAP results on page 3 of the presentation and the reconciliations in the appendix.
And with that, I will hand over to Bruce.

Bruce Van Saun

Okay.
Thanks, Thomas.
Good morning, everyone, and thanks for joining our call today.
We were pleased to finish the year with a strong quarter as our financial results reflect good sequential revenue growth, led by name expansion and capital markets fees, a positive operating leverage, favorable credit trends at a robust balance sheet across capital, liquidity and OBR.
We are still being subdued loan demand, but we've more than compensated for that was 10 basis points of NIM expansion that drove sequential NOI growth of three per sub fees grew sequentially by 6%, paced by capital markets and mortgage, while expense growth was 3.5%, paced by hiring and private bank, private wealth and commercial middle market, we still delivered positive operating leverage of around 50 basis points.
Credit trends are looking favorable with NPAs down sequentially, criticized assets trending down and no surprises and charge offs as we work through our CRE office portfolio.
Given these trends and the contraction in loan balances, we added 162 million to our provisions against 189 million in charge-offs, and our ACL to loan ratio increased slightly to 1.62%.
We currently expect that the credit trends should continue at we should be able to see credit costs come down in 2025.
We continued to repurchase shares in the quarter 225 million, bringing the full year total to EUR1.05 billion.
We repurchased 28 million shares in 2024 or 6% of the beginning of your ballots.
With respect to execution of our key initiatives, we made further progress across the private bank, New York City metro strategy, serving private capital and growing our payments business.
VSOF. saw a reduction in non-core loans of EUR4.2 billion in 2024 were there remaining balance of $6.9 billion.
We are looking for opportunities to accelerate the rundown.
So stay tuned on that.
In addition, we made further progress in exiting low returning relationships in C&I and then reducing overall CRE loans are top nine program was executed well, delivering $150 million in annualized Q4 run rate benefits.
And we've launched top end with a target benefit of $100 million.
The Private Bank private wealth progress is worth spotlighting.
The business continues to ramp up nicely, growing that customer base and hitting all financial targets.
We reached 7 billion in deposits, 3.1 billion in loans and 4.7 billion in AUM, and we were profitable in the quarter later, we are confident in our ability to meet or exceed our goal of having this business be 5% accretive to our bottom line in 2025, we added a banking team to Southern California in Q4, and this morning, we announced an additional well team in South Florida for the full year 2020, ending up your guide that's shown on slide 34 with the exception of balance sheet volume.
That said, we were able to repurchase more shares given the lack of loan demand.
Turning to our 2025 outlook, we expect solid growth.
And I given further name expansion and a resumption of modest net loan growth fee should grow nicely paced by capital markets and wealth.
We have confidence in this revenue outlook.
So we'll step up investments in OpEx and CapEx to support key growth initiatives.
We anticipate attracted positive operating leverage for the full year of around 1.5%.
Credit costs are projected to improve year on year, and we expect to see reserve releases continued throughout the year.
We will manage us at one ratio above the high end of our 10% to 10.5% range given ongoing uncertainty.
But we expect to continue with regular share repurchases.
We've included slides on our medium term outlook and how the drag from our legacy swap portfolio will dissipate with time.
We remain confident in our ability to achieve our medium term 16% to 18% Roxy target exciting time for citizens.
Our strategy rests on a transformed consumer bank, the best position super regional commercial bank and the aspiration to have the premier bank owned Private Bank made steady progress, and we'll continue to execute with the financial and operating discipline you've come to expect from us.
I'd like to end my remarks by thanking our colleagues for rising to the occasion and delivering a great effort in 2024.
We know we can count on you again this year.
So with that, let me turn it over to John.

John Woods

Thanks.
Good morning, everyone.
As Bruce indicated, we delivered results in 2024 that were broadly in line with our expectations at the beginning of the year.
3q was our trough quarter for Q3 was a nice bounce back, and we are well positioned for growth in 2025.
On Slide 6, you can see that we delivered underlying EPS of $3.24 for 2024, which includes a $0.45 drag from non-core and a net $0.05 investment.
The Private Bank full year Rossi was 10.5%, which was 12%.
Excluding these items, despite loan volume volumes being lower than expected given market dynamics, net interest income came in broadly in line with our expectations for the year, down 9.7% as we delivered a full year margin of 2.5%.
Fees were up a strong 9%, led by a pickup in capital markets card and these while expenses were managed tightly up only 1.5%, notwithstanding meaningful investments to support the build-out of the private bank and private wealth, we also management or an uncertain credit environment, maintaining strong reserve coverage levels with credit losses coming right in line with our expectations at the start of the year, the transformation of our deposit franchise since our IPO became clear in 2024 has been managed through a very competitive environment against the backdrop of rapid rapidly rising rates.
Our deposit cost performance is better than the peer average, a meaningful improvement compared with prior rate cycles.
And with the latest Fed rate cuts, we have aggressively lower deposit costs in 4Q.
Importantly, our financial strength has allowed us to execute well against our strategic initiatives, providing momentum as we head into 2025, we have opportunistically build out the private bank, which has raised 7 billion of deposits through the end of the year and as expected, became profitable in the fourth quarter.
We also continue to make solid progress building out our New York City metro franchise.
We are investing our payments platform, and we are solidifying our commercial middle market coverage with investments in key expansion markets that complement our private bank success.
I'll start with some of the highlights of the fourth quarter financial results Referencing Slides 5 and 7.
Before we get into the details, we generated underlying net income of 412 million EPS of $0.85 and Rossi of 10.7%.
This includes a negative $0.1 impact from the non-core portfolio, which will continue to steadily runoff, creating a tailwind for overall performance going forward.
As I mentioned, the Private Bank contributed to earnings in the fourth quarter, adding about a penny to EPS.
Importantly, we've returned to positive sequential operating leverage in the fourth quarter with a nice lift in NII and fees, even as we made important investments in the private bank and private wealth and the added commercial middle market bankers in key expansion markets.
We ended the year and a very strong balance sheet position was set 1% to 10.8% or 9.1% adjusted for the AOCI. opt-out removal, a pro forma category, one LCR of 119% and an ECL coverage ratio of 1.62%, up from 1.61% in the prior quarter.
This includes a robust 2.4% coverage for general office, up from 12.1% in the prior quarter.
We also executed $225 million in stock buybacks during the quarter.
Next, I'll talk through the fourth quarter results in more detail, starting with net interest income on Slide 8.
And I was up 3.1% linked quarter, reflecting a higher net interest margin in slightly lower interest earning assets.
As you can see from the NIM. walk at the bottom of the slide, our margin was up 10 basis points to 2.87%, reflecting the benefit of non-core run-off fixed rate asset, right pricing and better deposit and loan betas, partially offset by our net asset sensitive position as rates declined with the Fed cutting rates to the end of the year, we executed our down rebate playbook, reducing rates ahead of the costs and bringing down higher cost deposit balances are cumulative interest-bearing deposit beta was about 50% better than our initial expectation.
Moving to Slide 9.
Fees were up 5.6% linked quarter, primarily driven by an improvement in capital markets.
Capital markets saw strong loan syndication activity and a pickup in M&A, which benefited from seasonality and a general improvement in the environment.
Debt underwriting was lower coming off a strong third quarter.
Mortgage banking fees reflect higher MSR valuation with overall operating results remaining stable.
The wealth business delivered a solid quarter with good momentum in AUM growth from the private bank, but that was offset by lower transactional sales activity.
On Slide 10, expenses were up 3.5% linked quarter, primarily reflecting hiring for the private bank and private wealth buildout and commercial middle market bankers to complement our private bank footprint in Southern California and Florida.
Our top nine program achieved $150 million pretax run rate benefit exiting the year, which is above our original target of 135 million.
And we have launched our top 10 program, which is targeting 100 million in run rate efficiencies by the end of 2025.
On Slide 11, average loans were down slightly and period end loans were down 1.7% linked quarter.
This reflects the non-core portfolio runoff of approximately $900 million.
A decline in commercial loans given paydowns in C&I and CRE against that backdrop of low client demand and lower line utilization continues to nice progress with period end loans up about 1.1 billion to $3.1 billion at the end of the year.
Next on slides 2 and 13, we continued to do a good job on deposits and a very competitive and dynamic environment.
Period end deposits were broadly stable linked quarter with attractive growth in retail in the private bank, offset by the continued paydown of higher-cost treasury and commercial deposits.
This is primarily tied to non-core loan rundown and a proactive effort to optimize the liquidity value of deposits.
The Private Bank continues to add customers and grow nicely with period end deposits up about 1.4 billion to 7 billion at the end of the year.
Our retail franchise did a nice job raising deposits this quarter in low cost categories.
And importantly, we've seen strong regiments.
The CD portfolio turns over at lower rates.
We also grew non-interest bearing deposits by about 940 million linked quarter, driven by the private bank and seasonal flows and commercial.
Combined, our non-interest-bearing and low-cost deposits increased to 42% of total deposits in the fourth quarter.
Overall, our deposit franchise continues to perform well in a very competitive environment.
Our interest-bearing deposit costs are down 31 basis points linked quarter, which translates to a 50% cumulative beta.
Moving to close on Slide 14.
As expected, net charge-offs were broadly stable at 53 basis points compared with 54 basis points in the prior quarter.
A decline in C&I charge-offs was offset by an increase in commercial real estate, primarily coming from the general office portfolio.
Retail charge-offs were stable.
Of note, nonaccrual loans were down slightly, reflecting a decline in commercial given the resolution of a number of general office loans.
Criticized loans were meaningfully lower in the fourth order following relative stability over the past few quarters.
We continue to make consistent progress in working out the general office portfolio with limited new inflows into workout.
Turning to the allowance for credit losses on slide 15, our overall coverage ratio increased slightly linked quarter to 1.62%, primarily reflecting the denominator effect of lower portfolio balances.
While we maintained strong reserve coverage for certain portfolios, such as general office, our overall reserve declined slightly in light of a broadly stable macroeconomic outlook and improve the loan mix, giving the runoff of non-core auto portfolio and originations and retail real estate secured and commercial categories that have a lower loss content profile.
The reserve for the $2.9 billion general office portfolio is 364 million, which represents a coverage of 12.4%, up from 12.1% in the third quarter.
As the portfolio continues to reduce noted, the cumulative charge-offs plus to current reserve translates to an expected loss rate of about 20% against the March 2023 loan balance when industry losses commence.
Moving to slide 16, we have maintained excellent balance sheet strength.
Our CET1 ratio strengthened to 10.8%, which compares with 10.6% in the prior quarter.
Adjusting for the AOCI. opt-out removal are set.
one ratio was relatively steady at 9.1% despite the impact of higher long-term interest rates on AOCI. in the quarter.
Given our strong capital position, we repurchased $220 million in common shares and including dividends, we've returned a total of $413 million to shareholders in the fourth quarter.
Over the full year, we repurchased $1.05 billion in common shares, representing 20.1 million or about 6% of our beginning of your outstanding shares at an average price of $37.35 per share.
Turning to slide 17, we view our overall strategy in three parts.
I transform consumer bank, the best positioned commercial bank amongst our regional peers and our aspiration to build the premier bank owned private bank and private wealth franchise.
Slides 8 and 20 provide some updates on our positioning and progress which you can read at your convenience note on slide 20, we've updated our private and targets for 2025.
Given the success we've had to date, we bumped deposits from 11 billion, 12 billion in AUM, AUM from 10 billion to 11 billion.
We adjusted loans to 7 billion.
Given the impact of higher rates on borrowing demand, we are tracking well to meet or exceed our 5% accretion estimate to Citizens bottom line in 2025.
On slide 21, we provide an update on some of the tremendous progress in New York since we made a play there about three years ago with HSBC's East Coast branches and Investors Bank.
Moving to slide 22, I will take you through our full year 2025 outlook, which contemplates a forward curve.
The two Fed cuts, one in 2Q and the other in 4Q and in the year with the Fed fund rate Fed funds rate of 4% and a 10-year treasury rate of 4.5% to 4.75%.
We expect NII to be up 3% to 5%, driven primarily by an increase in yen to about 3% for the year.
We project spot loan growth in the low single digits overall and mid-single digits, excluding noncore loan growth will be impacted by non-core run-off paydowns and more selective originations increased and muted commercial loan demand early in 2025.
We expect C&I to tick up in the second half of the year has new money gets put to work.
Private Banks should see consistent loan growth throughout the year.
We expect average loans that would be down roughly 2% to 3% and overall earning assets to be down about 1%, which reflects the center of the 2H 24 draws and continuing non-core run-off.
Non-interest income is expected to be up in the 8% to 10% range, led by capital markets and wealth.
We are projecting expenses to be up about 4% as we are confident in our revenue outlook.
I want to step up our investments in growth initiatives.
After constrained 2024, excluding the private bank and private wealth, the increase in expenses would be about 2.6%.
We have provided a walk showing the key components of our 2025 expense outlook on Slide 23.
When you put the revenue and expense outlook together, we expect to deliver positive operating leverage for 2025 of roughly 150 days basis points.
Our outlook for net charge-offs to trend down to approximately 650 to 700 million or high 40s in basis point terms.
We will continue to work through the general office portfolio and given macro trends, the remixing of the balance sheet and expectations for modest spot portfolio growth, we will likely see ACL releases over the course of the year.
And finally, we expect to end the year with a strong CET1 ratio in the 10.5% to 10.75% range, which is above our medium-term operating range of 10% to 10.5%.
Given the continued uncertainty in the macro environment.
As we monitor the market environment, loan growth levels, we will opportunistically engage in share repurchases.
It's worth noting that loan growth was below expectations in 2020 before and we were able to offset the impact of share repurchases and less pressure on deposit costs.
We would use the same playbook in 2025 if needed.
On slide 25, we provide the guide for the first quarter.
Note that the First Colony Kathy's lower day count, reducing net interest income and taxes on Feike, a reset and compensation payouts impacting expenses.
Credit trends are expected to improve, and we should end the first quarter was set one in the range of 10.5% to 10.75% with a good amount of share repurchases.
Moving to Slide 27 to 28.
As we look out over the medium term, we have a clear path to achieving our 16% to 18% Rossi target.
Expanding our net interest margin is an important part of improving our Rossi, which we project to be in the 3.25% to 3.5% range in 1227.
However, given our balance sheet position positioning and our asset sensitivity, if the Fed maintains an elevated Fed funds rate at or above 4%, this will help to deliver a new level at the upper end of our range or higher.
On slide 28, we provide a walk to our target 16% to 18% Rossi.
We have significant NI tailwind driven by non-rate dependent terminated swaps, amortization and non-core run-off, which generate about 300 to 400 basis points of Rusty through 2027, we had roughly another 100 basis points with the net impact of other dynamics, such as positive fixed asset repricing, the runoff of legacy active swaps and the offsetting impact of our naturally asset sensitive balance sheet that puts you into the 15% to 16% range.
We expect to generate solid returns from our legacy core business, plus the successful execution of the private bank and other key initiatives I talked about earlier, which should drive meaningful revenue growth, generate positive annual operating leverage and improving our efficiency ratio, which will add another 200 to 300 basis points year-on-year.
We had some benefit from credit where we have been over providing today versus a more normal environment with charge-offs improving to the low to mid 30s basis points, reflective of the improved mix of the portfolio with less auto increase and more private bank loans and C&I KOCI. impacts are providing a Rossi benefit today with should normalize with time, and the impact will partially offset with share repurchases.
In short, we feel very confident in our ability to achieve the 16% to 18% medium-term target.
To wrap up, we delivered a solid performance in 2024, broadly in line with expectations.
Importantly, during the quarter on net interest margin delivered improving capital markets results and remain disciplined on expenses returning to positive operating leverage in the fourth quarter.
We ended the year with a strong capital liquidity and credit position that puts us in an excellent position to drive forward with our strategic priorities.
We are well positioned for 2025, and we remain confident in our ability to deliver our medium-term 16% to 18% return target.
With that, I'll hand over to Bruce.

Bruce Van Saun

Okay.
Thank you, Dan and IV.
Let's open it up for some Q&A.

Question and Answer Session

Operator

Thank you, Mr. Hanlon.
We are now ready for the question and answer portion of the call.
At this time, if you would like to ask a question, please unmute yourself, press star one and record your name.
Clearly when prompted you need to withdraw your question at any time, you may press star two.
Again, that is star one to ask a question.
Our first question will come from Scott Siefers from Piper Sandler.
Please go ahead.

Morning, guys.
Thank you for taking the questions.
We have seen, John, many of them wanted to start on sort of the medium term margin outlook.
Can you just sort of add some additional context on what gave you the confidence to above the top end of that medium-term range?
Do you have basically the extra air between the three 40 in the three 50 at the on the top end of the range?

Bruce Van Saun

Yes, sure.
I think the main reason for that is just the outlook on rates.
I'd say that when you think about where we where we were last quarter and in prior quarters, the Fed was landing and a terminal, a rate that was well below 4%.
When you when we put this together previously.
Now when you see the fat dumb, you see that the bond market discounting something closer to 4%.
We've basically widen the expectation of range that you could see at the upper end.
So, um, 3% would be sort of consistent with our floor of 3.2554% were given our asset-sensitive balance sheet would be more consistent with a higher number than the three 40 we showed last quarter.
You may recall last quarter we said that, hey, I three 50 ish.
There are three, 75 bed would be consistent with three 40, but now the Fed that could land somewhere near four, 4%.
And so that's that's the main reason why we have some we raised that.
I think there are other reasons to I mean, just getting you see the confidence we have a growing confidence based on our performance in the fourth quarter with a very solid of 10%, 10 basis point increase in them.
We've continued to opportunistically hedge to reduce the impact of falling into the future.
So just just a number of positive benefits that we were able to see that gave us the confidence to increase the upper industry 50.

Got you.
Perfect.
Thank you for that.
And then secondly, I was hoping you can help to put in a little bit more context of sort of higher fourth quarter costs and investments.
And it's only understand them in light of what we're building with the the private bank.
But just maybe curious about where you stand such that your confidence and cost can hold more firm after that small additional lift that we would expect in the first quarter?

John Woods

Yes.
I mean, I'd say we did we'd put something in the slide deck there on Slide 23.
They can take a look at I mean, I think in four Q for the for the full year.
But in 4Q, um, you know, we've been investing in the private bank all along and just given how well that's performed, that gave us the confidence to continuing to invest in maybe accelerate some investments in the private bank through team advisor, lift-outs and and and also in the commercial bank where we where we come, where we're investing in our capabilities in Southern California and Florida.
So a combination of those two things is what caused our expense number to be to the up a bit in 4Q and end up being maybe maybe it won't.
But I'd also just add to that, Scott, it up for the full year, we were still on our desired range of one to 1.5.
And so I would say is that a 2024, given some of the built-in revenue trajectory was a year where I think all banks, including ourselves to be very, very disciplined on expenses.
When you start to see that revenue is improving, the revenue outlook is improving, which we saw that occurring in Q4.
And we can see more visibility into revenue strength in the next year than some of the things that you may be deferred that are really attractive investment cases.
You start to lean in again a bit.
So we started that process a bit in Q4.
When you look at next year, we'll be guiding to about a 4%.
But again, if you strip out the impact of private bank and private wealth, which we want to continue to a great opportunity there to fill that void in the market, we want to keep disciplined investing into that.
The rest of the bank is that it has roughly 2.5%.
So the TOP program usually provides about a 1% benefit.
So words leaning in a little bit across some attractive investment opportunities across the rest of the bank.
But still the overall numbers are kind of in a position where we should have leveraged by thoughts.

Perfect.
Thank you very much.
Sure.

Operator

Your next question comes from the line of Erika Najarian from UBS.
Please go ahead.

Yes, hi, good morning.
I just wanted to think about it on some of the dynamics that are more strategic than mechanical on margin improvement on that, give us a sense in terms of on in our homes thinking about in our deposit growth and the mix of that deposit growth and all sensitive with the repricing cadence looks nights and given that the neutral rate seems to be sampling around for, you know, the pacing changes is to build our SaaS person and slowdown as loan growth comes back.

Bruce Van Saun

Yes.
A couple of comments related to that.
I mean, I think on strategic opportunities to grow deposits, some data that you see what we've been able to do with the private bank, and we've raised our target there.
We our performance in the last rate tightening cycle has been better than average.
And we've seen our opportunities to grow low cost actually be even better than what we're seeing a lot of our industry peers.
So so the core retail, Dirk Metro, I think, are adding on top of that and our commercial businesses driving a DDA growth as well.
So brought on from a strategic standpoint, the deposit franchises in an incredibly solid foundation as we head into this sum, this potentially easing cycle.
I mean, I think when you when you look at betas, we data outperform our own expectations in the fourth quarter with eight as around 50%.
When we were originally thinking around 40 based on their the rate outlook, we expect that betas continue to can continue to increase.
So you should we went with because of the earlier beta is we did get out of the gate pretty quickly.
And I think later and you know, our our our opportunity to roll data from here, we're going to add end up seeing our betas get to low to mid 50s, maybe by the time you get to a terminal 4% so that you can do the math there on with the sequential data look like, but fueling incredibly confident in them in the underpinning of the NIM. trajectory, given the deposit franchise there.
Maybe ask Brendan to comment a little bit about deposits.

Brendan Coughlin

Yes.
Thanks for the question, Erika.
I maybe a quick point on five.
It and I'll talk for a minute about core retail deposits on private and are low.
Low-cost deposits remain on 40% SRDDA. plus C reset despite the pretty pretty healthy growth.
The quality of the deposit book has been very consistent and very accretive to the overall mix to citizens.
And we expect that while that could pull back a little bit, we expect the accretion mix to still be very strong throughout 2025.
So that gap growth will both be in quantity and quality and quality for the overall franchise, which is great.
On the retail book.
You have mentioned this on most every call, but the full year performance for the retail portfolio is very, very strong against peers with benchmarks that we look at what we think we're somewhere in the range of 150 basis points better than peer average of low cost deposits, which is again largely DDA. and CVRDDA. book or the outflows of sort of stopped around August September, we've been flattened flattening out.
We saw a very modest growth at the back half of Q4, including a pretty sizable tick-up in CV in the back half of Q4.
Sort of the strength there is still very good.
We believe we are indexed probably number one in the regional banks.
You're set in retail banking, core DDA growth for the full year 2024.
There's nothing that I see that suggests that we won't continue to outperform peers on a relative low cost deposit performance.
In.
The other thing I would I'd say is we've been very, very successful in our CD book turning over at lower yields with high retentions.
So in Q4, we had about 5.5 billion in CDs in the retail book turnover with over 90% retention rate.
And those CDs are coming in at about 100 basis points better in yield.
And when I look at the first half of the year, we've got a little bit north of 14 billion in CDs on the retail book that will also turnover.
So that should give us some dry powder to drive those yields lower.
And we expect to have retained the vast majority of those balances largely in deposits with some trickling out into support for the wealth business going into managed money in AUM.
But that gives us a good amount of dry powder for thinking about the four out of the year are bringing deposit yields in the CD book about debt.
That's helpful answers.
Secondly, at just a quick follow-up, and I just wanted to ask a bigger question.
The first nine months.
And John, given all those elements and with the fact that you're entering a QAD Southern on on for the for the year and you have a 3% net interest margin guide for the full year, does that mean the exit of somewhere between three to three ton?
And if so, where is that keeps you up for a very strong?
They're not just mechanically, but strategically?
I think the question that I was coming this morning is where are we in turn and as the investment horizon and with regards to the private owned now and the private wealth and incidence, in other words, you're setting up for great NRI growth in 2026.
And investors are wondering if you're going to continue to frontload some of the investment spend on the wealth and private banking Michigan's debt.
So I just to your favorite question, exit rate on NIMI. would bump that up a little bit and say probably more like three or five to three times.
So thus not just in terms of how we think about the private bank.
We've launched this back in the middle of 23.
It's been a tremendous effort to get folks in place and support them appropriately and have them transition and customers.
And there's been a really great success story is certainly not the finished article more to do to get to white glove service, but feeling good about the trajectory that we're on.
But I wanted to just make it clear, though, that we're very committed to delivering our financial commitments on this business.
We want to demonstrate that it is a profitable business that can deliver attractive returns, and we're running at a bit differently than the way it ran at First Republic.
So we have some guardrails around the kind of nature of the business we want to take on and the spreads we hope to achieve, et cetera, et cetera, over the over one thing that we wanted to deliver this year was to be profitable in the fourth quarter.
We said we'd be profitable in the second half of the year.
We got to that in August, we had enough headroom that we felt confident that we could add another team in Southern California, as you as you know, Erica, the when you bring in these private banking teams, they show up in that are all expenses initially.
And then over time, that transition and customers and then the lines cross and maybe some profitable.
So we still delivered a profitable fourth quarter about a penny of EPS.
And so when we look at next year, depending on how fast that business is growing at for hitting our targets, there may be opportunities to add additional teams while still delivering the profitability of the 5% accretive to the to the bottom line.
And by the way, that translates that we're starting to get out GCE. target for the business already by the end there.
So we're keeping those guardrails in place as we grow the business.
But look, if there's such a big opportunity there, there was some great people out there.
What I joined the platform that we have to be thinking about kind of how to fill the void in the market and really build a great franchise.
So I think we have that balance, right?
And you can expect us to be disciplined in how we approach that.
I'd like to see if we're running faster than projected that we're going to be leaning in and adding some additional teams.
The wealth teams up typically are accretive right from the get-go.
So those we can keep doing throughout the years more out of the private banking locations, CBO's and additional teams that we just need to fit into the overall financial.
The not dynamic that we're trying to deliver.
Very helpful.
Thank you.
Your next question comes from the line of Matt O'Connor from Deutsche Bank.
Please go ahead.
Good morning.
Just one on the timing of the rocks and target that you laid out medium term, is that implied for 2027 or subsequent to the armor and the which which targets the MT. of the RMR thus far the 16% to 18% medium term?
And the way to frame the timing?
Yes.
Well, I think we've got the medium term for us is by 2027.
It will be on and our upwards our through 25 and 26 in order to get to that destination.
So I don't necessarily want to put a pin in it as to whether we could get there.
And 26.
There's there's possible scenarios that that could happen, but certainly by 2017, our fall and get there.
And on clarify, the operating leverage of 1.5% next year.
Obviously, there's a nice improvement in that in the next couple of years to support back rights in Melbourne.
Yes.
I think clearly, as we continue to see the benefit of the Fed of swap runoff and non-core run-off and the NIM. lift, that really juices your positive operating leverage.
And that's a big there's some no contribution from that in 25, but it actually accelerates in 26.
And so we would expect positive operating leverage to be even more in 2026 for who are trying to.
Thank you.
But and again, for those on the phone, if you would like to ask a question, please key star one.
Your next question comes from Gerard Cassidy from RBC Capital Markets.
Please go ahead.
Members and John Emery, right, Bruce, can we take a step back for a moment?
Obviously, we have a new administration coming in and we're going to get a number of new heads of the different regulatory agencies, maybe the most important changes coming device, tier safety and soundness of defense with Barr stepping down on both two weeks ago, that one you look at it and you kind of thinking about what can change to the benefit for not just citizens from the banking industry.
What are you looking are hoping for that these new leaders can come in and really the name of the banking industry into the treasury secretary nominee is testimony to the banks more involved in the US economy?
Yes.
Well, I think we've started to make some headway already on that this year.
Gerard, as some of the proposals that were our response to what happened in 2023 seem to be up of overdone over cuts in terms of cap look, which changes to capital, liquidity and funding frameworks that I think the industry pushback and saw that they needed to be dialed back.
And we were starting to make progress on that in any event.
So so I do think like putting that to bed and coming up with what are the final Basel three capital rules, what are we going to do with liquidity?
What are we going to do with funding and making sure that tailoring remains central to how the framework is set.
That's kind of job one Prudential side.
I would say the other benefits could be just a refreshed look at supervision.
There's a lot of folks who work really hard and we get really good advice and input from the supervisors, but sometimes things get overlooked a bit and use the forest for the trees.
So just by making sure that that is focused at the at the right level and frees us up to have a little more flexibility in how we operate.
That could be positive as well.
And I'd say some of the pressure on fees that we've seen come out of the CFPB.
They're not always U.S. net beneficial.
They may make good headlines, but you know, squeezing of alone and it closed down this and then the bank's estimated return.
So they have to charge somewhere else.
And so just having a kind of a more setup, insightful view as to how to allow banks to operate with well disclosed fees that actually benefit our customers as opposed constantly pushing on that.
That would also be helpful.
And then I'd say last thing, there's probably a need for more consolidation in the industry, particularly at the smaller end of the spectrum.
And so I kind of taking the sand out of the gears on that and allowing that to take place with more certainty.
I think that would also benefit the industry.
So I think a number of all that should allow banks to continue to have that capital to lean in support economic growth like we've done a good job of that.
And we want to continue to be able to do that.
And just quickly and where you just said, Bruce and consolidation of the smaller end of the spectrum, how you define smaller and 10 billion unless asset size, banks are or something small yet, I don't know where to draw that line.
But I certainly I'd say a banks that are even in a 25 to 50 category just have a lot of investing to do to keep up with technology, changes of business model, going digital, cyber defenses, a lot of regulation.
And so so I just think there's a lot of great.
Thanks size category.
But ultimately, I think they'll be some who feel that they can gain some benefits from scale.
And so I so I think if the framework are more certain that you'd start to see consolidation all the way through from the very smallest banks, maybe up to those smaller regionals.
Great.
And then as a follow-on question, can you guys you give us very good detail on your commercial real estate portfolio and how you're working through the issues that the industry confronts on commercial real estate office in particular on?
Can you give us an update on India and using the baseball vernacular, one in India and using the baseball vernacular, one in these kind of in certain turn it over 8% when we we saw this happening and I kind of kicked off in the early part of 23.
And we said this is a multiyear process to kind of work this out just based on the nature of the terms of the leases and kind of return to office dynamics, et cetera, that this was going to take a lot of layoffs.
And so we've seen that consistently through the rest of 23 through 24.
I think looking into 25, we'll still be in workout mode.
But but I think we're probably past the midpoint at this point.
So maybe middle innings of the gain.
And hopefully, we see that start to really drop off as we exit 25.
But I'll leave it over to Dan Fiat, Gerard, I think that's I think that's right.
I'll share my thoughts.
Is there a sense or memorialize again and your Internet advertising baseball?
But I think the good news on real estate side, as Bruce said, we still have kind of 25 to work through.
We are seeing almost no incremental deterioration based on the entirety of the portfolio over the last year ourselves.
So everything like we have identified as problematic need to go needing goes through the work.
That cycle estimation of losses is pretty much playing out as we expected and we are getting towards the back end, as Bruce said, in 25, the good news it across the board and the real estate complexes, liquidity is really coming back.
And we we're seeing the this is not necessarily in the office portfolio, but in the rest of real estate portfolio and that can that can revolver as we get into later later portions of 25.
So we're seeing now the CMBS market, very active.
We're seeing a life companies very active or getting taken out of credit sized assets at par in the national office space, but in the multifamily space.
So there are a lot of kind of encouraging signs that we're seeing across a single slot.
A lot to be a little bit more optimistic about we've got a ways to go to work out.
And And interestingly, a lot of the sponsors think that there's some brightness end of the tunnel Southern dribbling in cash to keep the properties alive because they they think there might be an opportunity down the road.
So it's a long game and the way that cycle a little bit more than past cycles, but some but I think we feel like we have a really good handle on it and it's trending reasonably Consumer Direct.
And John, you have stat.
So the overall criticized assets came down sharply in the fourth quarter, led by the drop in CRE.
Exactly.
You have been criticized levels down significantly.
And you know, overall actually, overall criticized is down 17%, led by a reduction in general office U.S.
So that's that's great news that was in the order of about 30% of Yale, Jen last February.
Exactly.
So and the Buck and Dan mentioned inflows and outflows have really flipped it flipped around rather than inflows exceeding outflows that flipped around for fourth quarter significantly.
So inflows slowed to a trickle and then upgrades outpaced all of that in the fourth quarter.
So turning the corner in the game back to the imagery is was nice to see in 4Q.
Appreciate the color.
Thank you.
Thank you.
And our final question comes from the non-gas Dally from Morgan Stanley.
Please go ahead.
Hi, good morning.
And I wanted to ask about the value of the curve on how much of an impact does that have on both the asset and liability side of the balance sheet.
So I'm thinking if I'm going to have an asset side and it gives you some more benefit from fixed asset repricing.
But our liability side, maybe it makes it a little bit harder to drop those CD rates further.
And that is that something you guys are focusing on in it.
Does it do is there a risk that is the beauty of that curve keeps moving higher?
And could that way on CMOs that those deposit betas from here?
Now I'm going to present a comment on that.
I mean, broadly, I would just make the point that we're asset sensitive and we're basically asset-sensitive across all of the rate that key rates across the curve.
For the most part, when you look at the belly of the curve, that's actually driving our fixed asset repricing.
And when you see our net interest margin progression through time, that's consistently positive.
And so on a net basis at the value of the curve is rising were net beneficiaries of that.
On the funding side.
When you think about CDs that are out of the gate, that's typically the less than one year term that can turn it over.
But net net our on our asset repricing would overcome even if the belly of the curve with consistently higher, that would be a net positive for us through time.
And you can see that in our net interest margin, we've built in the curve that we see basically out the window through the of the medium term progression.
And the fixed rate asset repricing is 15 to 20 basis points by the time you get to 2027, and that's consistently building through 25 into 2016, 27.
So that's a net positive.
I think the only place that and our funding comes into play in the Valley is maybe in the senior debt space, and we're really positioned there were north of 4% of RWA.
And so that's not a huge driver for us.
But again, the asset sensitivity, higher rates basically is a net positive for us.
Yes.
I mean, I'm just thinking with the SEC, you guys were actually ahead of the kind of when that when the Fed was cutting rates and you were able to drop those deposit rates sooner.
So I'm just thinking now that there's not as many rate cuts in the bulk of and that the value of the curve is high or whether that's weighing on deposit costs, all?
Yes, no, I as I mentioned, I will be able to get there will be able to get deposit betas up to the low to mid 50s from where we are today at around 50%.
And um, if and that's based on the curve that where we have a cotton second quarter and a cut in the fourth quarter.
However, there are no cost in 2025.
Our deposit betas will flatten out, but that's a net positive for us because of what we have our net floating position and loan yields with more than make up to the fact that deposit betas might not be quite as high because we're asset sensitive.
And I should mention that our asset sensitivity actually grows in 25 and 26, 27.
So on a volume basis, our net interest margin is a beneficiary of rates being higher because loan yields more than offset what the impact on deposit betas might be because we're overall assets.
We've got it.
Perfect.
Thank you.
And if I can just ask a follow-up on loan growth side.
Yes, you're looking for mid-single-digit spot loan growth, excluding got our car loans.
Can you talk about the catalyst there?
And also like where do you size is the traditional middle market as it does?
Yes, I'll start and then John can give you more details.
But I think the book we have we have been quite disciplined in making sure that where we're putting out loan capital that we're getting good returns.
And so we haven't really sought to force the action.
In fact, we have to balance sheet optimization.
I have actually exited a number of relationships in commercial.
We're certainly trying to run down the CRE book a little bit.
And then we have non-core setup to run down assets.
I think the catalyst that we're looking forward to actually kind of get that due to loan growth, which is certainly desired and desirable.
The other main building blocks here, the Private Bank is, I think, likely to put on about $1 billion a quarter in China to get to the targets at the end of the year.
So that's a pretty idiosyncratic to us and kind of having a start-up business that's growing that we can count on for that kind of growth and not only in malls, but also deposits.
So if you if you take out that growth than the spot loan growth drops, John, from mid single digits down to low single digits or something like that.
So I think we were not really calling for any aggressive resumption in loan growth.
We're anticipating that things will be a relatively subdued continuing into the first half of the year and then start to pick up in the second half of the year.
In commercial.
So we saw line utilizations go down quite a bit in Q4, particularly subscription line.
So that new money deal, machine, private equity, putting money to work waiting for good all of that, that didn't happen in Q4.
We don't expect it just because of the calendar flip the page, the pickup right away in 2025.
But I think that will begin to happen and we'll see all the benefits of that higher capital markets, fees of loan growth that comes along with that.
But we're being cautious in terms of how much of that we put in to the fold forecasts.
And then on consumer, we just have a few of the areas that have consistently been able to grow mortgage.
You lock our card business of no great shakes there, either just some moderate level of growth.
So kindly when you look across that, we've got some things running down.
We have private bank steady as she goes goes.
We have a resumption in the second half of the commercial, a little lower level of steady as she goes and consumer.
So John, I don't know if you've got about another color to that.
Just another point or two to emphasize.
I agree with that.
As we said, mid single digits ex non-core.
If you think about a three legs of the store, you've had all three.
But if you Private Bank on its trajectory, really is a huge driver is the largest driver getting us to that mid-single digits.
But if you if you look at it, excluding the private bank and excluding noncore, would be in a low single low single digits trajectory, as Bruce mentioned, our new consumer legacy is after that.
And the other half that is in commercial consumer legacy, you mentioned Bruce and commercial subscription and M&A activities likely to pick up in the US markets and middle market exactly you know.
So we've got expansion markets contributing as we see in 2025.
The other important part is I subscribe line utilization is about as low as we've ever seen and some low 40s typically in the mid 50s.
And so we see some of that partial to see some of that coming back.
Not all the way back fund finance, Joe, that we've been successful at in the past will contribute as well as asset backed.
And in Quito.
I mean, I would just say that, you know, all of that put together keeps us in a good spot.
And as we mentioned earlier, to the extent that this doesn't happen, as we mentioned earlier, we've been able to navigate a a lower loan growth environment in 24 quite well.
We would run that playbook back and and you'd see more buybacks out of us without software.
That's attractive as we see it below intrinsic value.
And we'd at the margin likely deliveries and better deposit performance.
If that were to be the case, I think we've got some nice optionality in 2025 to keep to stay in our trajectory.
Now I would I would just say one final thing is that really the end I guide is, as it was saw in the fourth quarter, it's really driven by the NIM. expansions.
And so it's not as dependent on volume growth in order to deliver that.
And then as John said, if you have if you don't see the volume growth, you have other levers such as you can repurchase shares and then you won't push on deposits as much.
And so you can be a little more disciplined on your deposit pricing.
And so we feel quite confident overall in net NII guide for next year.
That's really helpful.
Appreciate the detail on today and thank you.
Okay.
I guess that's it for the questions.
You've got a lot of banks reporting today.
So I hope everybody got a good night's sleep last night that makes it through the days.
So thanks again for dialing in today.
We appreciate your interest and support a great day.
Take care.
That concludes today's conference call.
Thank you for your participation.
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