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    CFG
    Earnings call· Dec 2024(Q4 FY24)

    CITIZENS FINANCIAL GROUP INC/RI CFG

    Jan 17, 2025 Source

    Executive summary

    Citizens Financial Group Q4 FY24 — Strong Finish with NIM Expansion and Positive Operating Leverage

    Citizens Financial Group concluded FY24 with a strong fourth quarter, marked by significant NIM expansion and positive operating leverage, driven by strategic investments in the Private Bank and disciplined expense management. The company is well-positioned for growth in FY25, anticipating solid NII and fee growth, improved credit trends, and continued capital returns, while maintaining a robust balance sheet. Management expressed confidence in achieving its medium-term ROTCE target by 2027.

    Highlights

    5

    • Net Interest Margin (NIM) expanded by 10 basis points sequentially to 2.87%, driving 3.1% sequential NII growth.

    • Underlying net income for Q4 was $412 million, with EPS of $0.85 and ROTCE of 10.7%.

    • Achieved positive operating leverage of 50 basis points in Q4, with expenses up 3.5% vs. fees up 5.6% and NII up 3.1%.

    • Private Bank reached profitability in Q4, growing deposits to $7 billion, loans to $3.1 billion, and AUM to $4.7 billion.

    • Repurchased $225 million in shares in Q4, bringing full-year repurchases to $1.05 billion (6% of beginning-of-year shares).

    Concerns

    3

    • Loan demand remained subdued, with period-end loans down 1.7% linked quarter, reflecting non-core runoff and lower client demand.

    • Average loans for FY25 are projected to be down roughly 2% to 3%.

    • Debt underwriting was lower in Q4, coming off a strong Q3.

    Guidance & targets

    25
    CategoryTargetConfidence
    Operating Leverage
    around 1.5%
    high materiality
    High
    Net Interest Income Growth
    up 3% to 5%
    high materiality
    High
    Net Interest Margin
    about 3%
    high materiality
    High
    Spot Loan Growth (overall)
    low-single digits
    medium materiality
    Medium
    Spot Loan Growth (excluding non-core)
    mid-single digits
    medium materiality
    Medium
    Average Loans
    down roughly 2% to 3%
    medium materiality
    Medium
    Overall Earning Assets
    down about 1%
    medium materiality
    Medium
    Noninterest Income Growth
    8% to 10% range
    high materiality
    High
    Expense Growth
    up about 4%
    medium materiality
    Medium
    Expense Growth (ex-Private Bank and Private Wealth)
    about 2.6%
    medium materiality
    Medium
    Net Charge-offs
    $650 million to $700 million
    medium materiality
    Medium
    CET1 Ratio
    10.5% to 10.75% range
    high materiality
    High
    CET1 Ratio
    10.5% to 10.75% range
    medium materiality
    High
    Return on Tangible Common Equity (ROTCE)
    16% to 18%
    high materiality
    High
    Net Interest Margin (NIM)
    3.25% to 3.5%
    high materiality
    High
    Net Charge-offs
    low to mid-30s basis points
    medium materiality
    Medium
    Private Bank Deposits
    $12 billion
    medium materiality
    High
    Private Bank AUM
    $11 billion
    medium materiality
    High
    Private Bank Loans
    $7 billion
    medium materiality
    Medium
    Private Bank Accretion to Bottom Line
    5%
    medium materiality
    High
    TOP 10 Program Run Rate Efficiencies
    $100 million
    medium materiality
    High
    Fed Rate Cuts Assumption
    2 Fed cuts
    high materiality
    Medium
    10-Year Treasury Rate Assumption
    4.5% to 4.75%
    high materiality
    Medium
    Prior Fed Rate Assumption for Medium-Term NIM
    3.50-ish or 3.75% Fed
    low materiality
    Low
    FY25 Exit NIM
    3.05% to 3.10%
    high materiality
    Medium

    Segment performance

    1
    SegmentRevenueYoYQoQMargin
    Private Bank
    The Private Bank continues to ramp up nicely, growing the customer base and hitting all financial targets. It contributed about $0.01 to EPS in Q4.
    Deposits: $7 billionLoans: $3.1 billionAUM: $4.7 billion
    		———Profitable in Q4

    Operational metrics

    37
    Underlying EPS
    $3.24
    FY24

    Includes a $0.45 drag from non-core and a net $0.05 investment in the Private Bank.

    Underlying Net Income
    $412 million
    Q4 FY24

    Includes a negative $0.10 impact from the non-core portfolio.

    EPS
    $0.85
    Q4 FY24

    Underlying EPS for the quarter.

    EPS Impact from Non-Core Portfolio
    -$0.10
    Q4 FY24

    Negative impact from the non-core portfolio on Q4 EPS.

    EPS Impact from Private Bank
    $0.01
    Q4 FY24

    Contribution to EPS from the Private Bank.

    Noninterest Income Growth
    5.6%linked quarter
    Q4 FY24

    Primarily driven by an improvement in Capital Markets.

    Expense Growth
    3.5%linked quarter
    Q4 FY24

    Primarily reflecting hiring for the Private Bank and Private Wealth build-out and Commercial middle-market bankers.

    Noninterest-Bearing Deposits Growth
    $940 millionlinked quarter
    Q4 FY24

    Driven by the Private Bank and seasonal flows in Commercial.

    Noninterest-Bearing and Low-Cost Deposits as % of Total Deposits
    42%increased
    Q4 FY24

    Combined share of noninterest-bearing and low-cost deposits.

    Interest-Bearing Deposit Costs
    31down linked quarter
    Q4 FY24

    Aggressively lowered deposit costs in Q4.

    Cumulative Interest-Bearing Deposit Down Beta
    50%
    Q4 FY24

    Better than initial expectation.

    Private Bank Low-Cost Deposits
    40%
    Q4 FY24

    DDA plus CWI, remaining consistent despite healthy growth.

    Retail CD Turnover
    $5.5 billion
    Q4 FY24

    CDs coming in at about 100 basis points better in yield.

    Retail CD Turnover
    $14 billion
    H1 FY25

    Expected to turn over at lower yields.

    Criticized Assets
    17%down
    Q4 FY24

    Led by a reduction in General Office.

    TOP 9 Program Benefit
    $150 millionabove original target of $135 million
    Q4 FY24 run rate

    Pretax annualized run rate benefit.

    Non-Core Loans Reduction
    $4.2 billion
    FY24

    Remaining balance of $6.9 billion.

    Non-Core Portfolio Drag
    $0.45
    FY24

    Drag on underlying EPS.

    Private Bank Investment
    $0.05
    FY24

    Net investment in the Private Bank impacting underlying EPS.

    Full Year ROTCE (ex-non-core/Private Bank)
    12%
    FY24

    Excluding $0.45 drag from non-core and $0.05 investment in Private Bank.

    NII Growth
    3.1%linked quarter
    Q4 FY24

    Reflecting a higher net interest margin and slightly lower interest-earning assets.

    Fees Growth
    9%up
    FY24

    Led by a pickup in Capital Markets, card and wealth fees.

    Expenses Growth
    1.5%up
    FY24

    Notwithstanding meaningful investments to support the build-out of the Private Bank and Private Wealth.

    General Office Portfolio Reserve Coverage
    12.4%up from 12.1% in prior quarter
    Q4 FY24

    Reserve for the $2.9 billion General Office portfolio is $364 million.

    General Office Portfolio Expected Loss Rate
    20%
    cumulative

    Cumulative charge-offs plus current reserve against March 2023 loan balance.

    Category 1 LCR
    119%
    Q4 FY24

    Pro forma.

    AOCI Opt-Out Adjusted CET1 Ratio
    9.1%relatively steady
    Q4 FY24

    Despite the impact of higher long-term interest rates on AOCI in the quarter.

    Total Capital Returned
    $413 million
    Q4 FY24

    Including $225 million in common share repurchases and dividends.

    Non-Core Loan Runoff
    $900 million
    Q4 FY24

    Approximately, contributing to decline in period-end loans.

    Noninterest-Bearing and Low-Cost Deposits
    42%increased
    Q4 FY24

    As a percentage of total deposits.

    Net Charge-offs Rate
    53stable compared with 54 bps in prior quarter
    Q4 FY24

    Decline in C&I charge-offs offset by increase in Commercial Real Estate.

    NII Tailwind from Swaps/Non-Core Runoff
    300 to 400
    through 2027

    Expected ROTCE contribution from non-rate dependent terminated swaps amortization and non-core runoff.

    Other Dynamics ROTCE Contribution
    100
    through 2027

    Net impact of positive fixed asset repricing, runoff of legacy active swaps, and offsetting impact of asset-sensitive balance sheet.

    Efficiency Ratio Improvement ROTCE Contribution
    200 to 300
    through 2027

    From meaningful revenue growth, positive annual operating leverage, and improving efficiency ratio.

    Loan Growth (ex-Private Bank and non-core)
    low single-digit trajectory
    FY25

    Consumer legacy is half of that, other half in Commercial.

    Subscription Line Utilization
    low 40sas low as we've ever seen
    Q4 FY24

    Typically in the mid-50s.

    Fixed Rate Asset Repricing ROTCE Contribution
    15 to 20
    through 2027

    Consistently building through '25 into '26 and '27.

    Industry KPIs

    13
    MetricValueDetails
    Loans—
    Deposits—
    Rotce ROE10.7%%
    Cet1 ratio10.8%%
    Capital returns$225 millionUSD
    Fee income lines—
    Allowance reserves1.62%%
    Net interest income—
    Net interest margin2.87%%
    Net charge offs npls53 bpsbps
    Total operating expenses—
    Provision for credit losses$162 millionUSD
    Efficiency ratio operating leverage—

    Product announcements

    1
    ProductTypeDetails
    Wealth Teamexpansion

    Risks & headwinds

    3
    Subdued loan demandcontinuing into the first half of the year (FY25)

    period-end loans were down 1.7% linked quarter

    Mitigation: More than compensated for that with 10 basis points of NIM expansion that drove sequential NII growth of 3%; opportunistically engage in share repurchases if loan growth is lower than expected.

    Commercial Real Estate (CRE) office portfolio workoutmultiyear process, still in workout mode in FY25, past the midpoint

    Reserve for the $2.9 billion General Office portfolio is $364 million, which represents a coverage of 12.4%

    Mitigation: Consistent progress in working out the General Office portfolio with limited new inflows into work out; estimation of losses is playing out as expected; liquidity returning to broader real estate complex.

    Ongoing uncertainty in macro environment

    null

    Mitigation: Manage CET1 ratio above the high end of our 10% to 10.5% range; expect to end FY25 with a strong CET1 ratio in the 10.5% to 10.75% range.

    What to watch in Q1 FY25

    5

    Private Bank Profitability

    2025
    CurrentProfitable in the quarter (Q4 FY24)
    Targetmeet or exceed our goal of having this business be 5% accretive to our bottom line in 2025

    Why it matters

    Demonstrates the success and financial contribution of a key strategic growth initiative.

    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.

    Q&A highlights

    6

    What factors led to increasing the medium-term NIM range, specifically the top end from 3.40% to 3.50%?

    The primary reason is the updated outlook on rates, with the Fed's terminal rate now expected closer to 4%, which benefits Citizens' asset-sensitive balance sheet. Growing confidence from Q4 NIM performance and opportunistic hedging also contributed.

    “Now when you see the Fed -- you see the bond market discounting something closer to 4% and we've basically widened the expectation of range that you could see at the upper end.”

    asked by Robert Siefers · answered by John Woods

    2 min read6 chapters

    Detailed Narrative

    01

    Q4 Performance Highlights

    Citizens Financial Group reported a strong Q4 FY24, with underlying net income of $412 million and EPS of $0.85. The company achieved positive sequential operating leverage, driven by a 10 basis point NIM expansion to 2.87% and a 3.1% linked-quarter NII increase. Fees also grew 5.6% sequentially, primarily from Capital Markets and mortgage, while expenses were managed to a 3.5% increase.

    02

    Strategic Initiatives Progress

    Significant progress was made on key initiatives, including the Private Bank, which became profitable in Q4, exceeding financial targets with $7 billion in deposits, $3.1 billion in loans, and $4.7 billion in AUM. The company also expanded its Private Bank and Wealth teams into Southern California and South Florida, and continued to build out its New York City Metro strategy, which has seen strong deposit performance.

    03

    Expense Management and Efficiency

    The TOP 9 program delivered $150 million in annualized Q4 run rate benefits, exceeding its original target of $135 million. A new TOP 10 program has been launched, targeting an additional $100 million in run rate efficiencies by the end of 2025, demonstrating continued focus on operational discipline and providing headroom for strategic investments.

    04

    Credit Trends and Balance Sheet Strength

    Credit trends are favorable, with non-performing assets (NPAs) and criticized assets trending down, particularly in the General Office portfolio. The allowance for credit losses (ACL) to loan ratio increased slightly to 1.62%, with robust 12.4% coverage for the General Office portfolio. The CET1 ratio strengthened to 10.8%, supporting $225 million in share repurchases during the quarter and a total of $1.05 billion for the full year.

    05

    2025 Outlook and Medium-Term Targets

    For FY25, Citizens expects NII to grow 3% to 5% with NIM reaching approximately 3%, and noninterest income up 8% to 10%. The company projects positive operating leverage of 1.5% and improved credit costs, with net charge-offs trending down. Management reiterated confidence in achieving a 16% to 18% ROTCE target by 2027, driven by NII tailwinds from swap amortization and non-core runoff, and continued execution of strategic initiatives.

    06

    Deposit Franchise Performance

    The deposit franchise demonstrated strength in a competitive environment, with deposit cost performance better than peer average. Noninterest-bearing deposits grew by $940 million linked quarter, and noninterest-bearing and low-cost deposits combined increased to 42% of total deposits. The retail CD book showed high retention (over 90%) at lower yields, providing dry powder for future deposit cost reductions.

    AI-generated summary of the company’s earnings call. Not investment advice.