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Operating throughout New England and the central parts of the U.S., the bank chain owns over 1,000 locations and 3,000 ATMs in 11 states.

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With a banking business serving customers primarily in the Northeast, Citizens operates 1,000 branches and 2,800 ATMs. Citizens held $176.7 biliion in assets as of March 31, 2020.

This year's Fortune 500 marks the 65th running of the list.

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One of the oldest financial institutions in the U.S., Citizens Financial Group was founded in 1828 and now provides a variety of retail and commercial banking products and services, operating through its consumer banking and commercial banking segments. The consumer banking segment offers products including mortgages and credit cards and services like wealth management, while the commercial banking segment provides services such as lending and leasing, foreign exchange, and deposit management to companies in various sectors. Formerly called RBS Citizens Financial Group, the company became Citizens Financial Group in 2014.

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Citizens Financial Group (CFG): Company Profile, Stock Price, News, Rankings

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Citizens Financial Group

citizens financial group

Good morning, everyone, and welcome to the Citizens Financial Group First Quarter twenty twenty five Earnings Conference Call. My name is Ivy, and I'll be your operator today. Currently, all participants are in a listen only mode.

Following the presentation, we will conduct a brief question and answer session. As a reminder, this event is being recorded. Now I'll turn the call over to Kristen Silberberg, Head of Investor Relations. Kristen, you may begin.

Thank you, Ivy. Good morning, everyone, and thank you for joining us. First this morning, our Chairman and CEO, Bruce Van Sorn and CFO, John Woods, will provide an overview of our first quarter results. Brendan Coughlin, Head of Consumer Banking and Don McCree, Head of Commercial Banking are also here to provide additional color. We will be referencing our first quarter 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, which are subject to risks and uncertainties that may cause our results to differ materially from expectations. These are outlined for your review in the presentation. We also reference non GAAP financial measures, so it's important to review our GAAP results in the presentation and the reconciliations in the appendix. And with that, I will hand over to Bruce.

Thank you, Kristen, and good morning, everyone. Thanks for joining our call today. We announced financial results today that were in line with our expectations. Highlights include NIM expansion of three basis points to 2.9%, core loan growth of 1%, resilience in our fee categories despite some softness capital markets given market uncertainty and credit trends remaining favorable along with continued share repurchases. Our balance sheet remains very strong with CET1 ratio of 10.6%, LDR of 77.5%, virtually no Federal Home Loan Bank borrowings and a strong credit allowance position.

During the quarter, we entered into an agreement to sell $1,900,000,000 in purchased student loans, which reside in non core. Dollars 200,000,000 of the portfolio was sold in Q1 with the balance to be settled ratably over the next three quarters. We will use the proceeds to pay down high cost funding, purchase low risk weight securities and repurchase shares. The transaction will be accretive to NIM, EPS and ROTCE. We had already included the impact in our full year guide.

During the quarter, we also issued $750,000,000 in senior debt, further bolstering our funding base. We executed well on our strategic initiatives during the quarter. The private bank continued to see excellent growth, reaching $8,700,000,000 in deposits and $5,200,000,000 in AUM. We added private wealth teams in Florida and Southern California during the quarter and another one today in New Jersey. Our New York City metro, private capital and payments initiatives also saw continued progress.

As we look forward, there has clearly been an increase in uncertainty in the macro environment given the policy decisions and rollout emanating from Washington. This has caused many market participants to hit pause on investments or deal activity. On a positive note, our corporate and consumer borrowers are generally in good shape and are in position to weather these challenges. The basis for our full year guide had anticipated some choppiness in the first half of the year tied to the rollout of tariffs and downsizing of the federal government. Our view held that as the lower tax, deregulation and pro energy agenda kicked in later in the year, we would see a pickup in loan demand and deal activity in the second half.

So with respect to an update to our full year guide, at this point, we reaffirm our EPS estimate, though there could well be some puts and takes. Events in the Q2 will help clarify whether the second half outlook will solidify as we had planned. On our guide slide in our presentation, we call out some risks that affect both us and the industry at large given the environment, and we also show some potential offsets to the full year guide. The main risk associated with continued economic uncertainty and a slowing economy include a push out in capital markets fees, slower loan growth and higher credit provision. Potential offsets to these possible impacts include even better performance on funding costs, greater share repurchases and further efforts on cost transformation.

It's worth noting that there is a significant amount of pent up demand around M and A activity. We are working on a record number and dollar value of transactions and are hopeful that they get done as uncertainty subsides. So while it's still early to make a call as to how the environment plays out, we remain focused on pulling the levers we can to offset any macro headwinds as we did in 2024 in meeting our initial year guide. And as we look to the medium term, we remain confident in our NIM trajectory, which powers our ROADC improvement and in our ability to execute on our key strategic initiatives like the private bank. In short, we feel good about our positioning overall from a strategic business and financial standpoint.

We will stay focused on execution and the things we can control as we continue our efforts towards building a distinctive great bank. With that, let me turn it over to John.

Thanks, Bruce, and good morning, everyone. As Bruce indicated, we delivered first quarter results, which were broadly in line with our expectations and reflected typical seasonal impacts. Referencing Slides five and six, we delivered EPS of $0.77 for the first quarter with ROTCE of 9.6%. Net interest income came in at the better end of our expectations for the quarter as we performed well in our margin, which continued to benefit from the time based decline of non core and terminated swaps along with strong deposit cost performance. Fees were up nicely year over year and linked quarter performance reflects the impact of seasonality and market uncertainty on capital markets.

Wealth fees were a record for the quarter as we continue to build out the private bank. Expenses were managed tightly, including the usual seasonality in salaries and benefits. Credit came in as we expected, and we maintained a strong reserve coverage level. During the quarter, we entered an agreement to sell approximately $1,900,000,000 of non core education loans. This acceleration in non core runoff will be accretive to NIM, EPS and ROTCE with the redeployment of the freed up capital and liquidity as the sale settles over the course of the year.

We continue to execute well against our strategic initiatives. Notably, the Private Bank continued to steadily grow its profitability, contributing $04 to EPS and finishing the first quarter with $8,700,000,000 of deposits. Also, we continue to make good progress in New York Metro, and our top 10 program is well underway. We ended the quarter in a very strong balance sheet position with CET1 at 10.64% or 9.1% adjusted for the AOCI opt out removal, a pro form a Category one LCR of 122% and an ACL coverage ratio of 1.61. This includes a robust 12.3% coverage for general office.

We also executed $200,000,000 in stock buybacks during the quarter, taking advantage of our strong capital position. Next, I'll talk through the first quarter results in more detail, starting with net interest income on slide seven. Net interest income decreased 1.5% linked quarter, driven by the day count impact of about $28,000,000 and slightly lower interest earning assets, which was partially offset by the benefit of higher net interest margin. As you can see from the NIM walk at the bottom of the slide, our margin was up three basis points to 2.9%, driven primarily by the time based benefits of non core runoff and reduced drag from terminated swaps and the benefit of improved deposit costs, partially offset by the net impact of rate driven impacts on the balance sheet. We continue to execute our down rate playbook in the deposit portfolio.

Our interest bearing deposit costs decreased 18 basis points, while maintaining the mix of non interest bearing deposits at 21%, stable with the prior quarter. Our cumulative interest bearing deposit down beta improved to 53% in the first quarter. Moving to slide eight. Non interest income is down 3.5% linked quarter with seasonal impacts in capital markets and card fees. Capital markets saw lower M and A and loan syndication activity given seasonality and the impact of uncertain market conditions pushing M and A deals out.

Debt and equity underwriting improved coming off a slower fourth quarter. Even in a quarter impacted by seasonality and market volatility, we managed to perform well in middle market sponsored book runner deals, ranking number three by volume. Our deal pipelines across M and A and DCM remain very strong despite market uncertainty. In fact, our M and A pipeline is at all time highs in terms of number and value of transactions given pent up demand. We are hopeful these deals get done as market uncertainty subsides.

The wealth business delivered a solid quarter with increased annuity sales activity. We also continued to see positive momentum in fee based AUM growth from the private bank. Our global markets business was up slightly this quarter with increased client hedging activity in FX and energy related commodities. On Slide nine, expenses were managed tightly, up 1.7% linked quarter, primarily reflecting seasonality in salaries and benefits. Our latest TOP program is underway, and this gives us the capacity to self fund our growth initiatives.

On Slide 10, period end and average loans were down slightly. This reflects the non core transaction of $1,900,000,000 as well as auto run off of $700,000,000 Excluding non core, loans were up approximately 1% on a period end basis. The private bank continued to make good progress with period end loans up about five fifty million dollars to $3,700,000,000 at the end of the quarter. Commercial loans were up slightly with a modest increase in line utilization as some of our corporate banking clients drew down on their lines to finance inventory builds ahead of tariffs. We also saw a modest increase in capital call line usage given M and A activity in our sponsor base.

And core retail loans grew slightly driven by home equity and mortgage. Next, on Slides eleven and twelve, we continue to do a good job on deposits growing on a spot basis, primarily in low cost categories in what is typically a seasonally down quarter. Period end deposits were up approximately $3,000,000,000 or 2%, driven primarily by low cost growth in the private bank and consumer, partially offset by a seasonal decrease in commercial. The private bank continues to add customers and grow nicely with period end deposits increasing by about $1,700,000,000 to $8,700,000,000 at the end of the first quarter. Our retail franchise grew deposits in low cost categories this quarter and we continue to maintain strong CD retention rates even as we reduced yields.

Stable retail deposits are 68% of our total deposits, which compares to a peer average of about 55%. This was a big driver of our improving deposit costs this quarter as our deposit franchise continues to perform well in a competitive environment. Our interest bearing deposit costs are down 18 basis points linked quarter translating to a 53% cumulative down beta. We continue to maintain a robust level of liquidity with a pro form a LCR of 122%, significantly above the Category one bank requirement. Moving to credit on Slide 13.

Net charge offs of 58 basis points for the quarter included a seven basis point impact from the noncore transaction. Excluding this impact, net charge offs were 51 basis points, which was down modestly from 53 basis points in the prior quarter, in line with our expectations. Commercial charge offs were down modestly driven by a sequential decline in general office. Retail charge offs were broadly stable, excluding the impact of the non core transaction. Of note, non accrual loans were down 5% linked quarter, reflecting a decline in commercial as we continue to work out general office loans.

Retail non accrual loans also decreased as a result of the non core transaction and continued runoff of the auto portfolio. Turning to the allowance for credit losses on slide 14. The allowance was relatively stable at 1.61% this quarter as portfolio mix continues to improve due to back book runoff and lower loss content, front book originations, offset by a slightly more conservative loss forecast. The economic forecast supporting the allowance reflects a mild recession similar to last quarter and macro impacts from tariffs. The reserve for the $2,860,000,000 general office portfolio is $351,000,000 which represents a coverage of 12.3%, broadly stable with the prior quarter.

Note that the cumulative charge offs plus the current reserve translates to an expected loss rate of about 20 against the March 2023 loan balance when industry losses commenced. Moving to slide 15. We have maintained excellent balance sheet strength. Our CET1 ratio is 10.64%. Adjusting for the AOCI opt out removal, our CET1 ratio was stable at 9.1%.

Given our strong capital position, we repurchased $200,000,000 in common shares and including dividends, we returned a total of $386,000,000 to shareholders in the first quarter. Turning to slide 16, we provide some details on the non core portfolio. As I mentioned earlier, we took the opportunity to accelerate the rundown of the portfolio with an agreement to sell approximately $1,900,000,000 of education loans. We recognized a $25,000,000 charge off associated with this portfolio that was covered by a pre existing allowance. Dollars 200,000,000 of the sale settled in the first quarter, with the remainder scheduled to settle ratably each quarter through 2025.

We expect to use the proceeds to pay down high cost funding, invest in low risk investment securities and repurchase shares. With this redeployment, the transaction will be accretive to NIM, EPS and ROTCE. Moving to slide 17. We are well positioned to drive strong performance over the medium term with our overall three part strategy: a transformed consumer bank, the best positioned commercial bank among our regional peers and our aspiration to build the premier bank owned private bank and private wealth franchise. We continue to make excellent progress on the private bank.

We delivered our strongest deposit growth quarter so far, adding $1,700,000,000 of deposits to end the first quarter at $8,700,000,000 And the mix continues to be very attractive with slightly over 40% in non interest bearing. We also ended the quarter with $3,700,000,000 in loans and $5,200,000,000 in AUM. With a $04 contribution from the business in the first quarter, we are tracking well against our 5% accretion estimate to Citizens bottom line in 2025 and to deliver return on equity. Moving to slide 18, we provide our guide for the second quarter. We expect net interest income to be up approximately 3%, driven by an improvement in net interest margin of approximately five basis points in Day Chem.

This pickup in net interest margin is primarily attributable to the time based benefits of non core runoff and reduced drag from terminated swaps. Non interest income is expected to be up mid to high single digits, led by capital markets with some risk if market uncertainty persists. FX and derivatives and wealth should also provide a lift for the quarter. We are projecting expenses to be broadly stable. Credit trends are expected to improve slightly from the first quarter charge off level, excluding the noncore transaction.

And we should end the second quarter with CET1 in the range of 10.5% to 10.75%, including share repurchases of approximately $200,000,000 which could increase depending on loan growth. Currently, our full year outlook remains broadly in line with the guide we provided in January, which contemplated a pickup in business activity in the second half of the year. However, if the current challenges in the external environment persist, there could be select risks that impact us as well as the broader industry. Persistent market volatility could impact capital markets revenue and anticipated loan growth in the second half of the year. While the assumptions incorporated in our current reserve are conservative and our corporate and consumer borrowers are broadly in good shape, heightened likelihood of a deeper recession could lead to higher provision.

However, if these risks arise, we have potential offsets we can leverage. Lower loan growth could facilitate additional share repurchases as well as the opportunity to further lower deposit costs as we continue executing our deposit pricing playbook. We would also take the opportunity to manage expenses down through streamlining our operations and further cost transformation. Looking out to the medium term, we see a clear path to achieving our 16% to 18% ROTCE target. Expanding our net interest margin is an important driver, and we project to be 3.05% to 3.1% in 4Q 'twenty five, '3 point '1 '5 percent to 3.3% in 4Q 'twenty six and in the 3.25% to 3.5% range in 2027.

Slide 21 in our appendix provides some incremental details on our net interest margin progression to 2027. This, combined with the impact of successful execution of our strategic initiatives, should drive ROTCE meaningfully higher by 2027. To wrap up, we delivered Q1 results that were in line with our expectations, highlighted by growth in net interest margin. While the market uncertainty has impacted capital markets revenues, deal backlogs are at all time highs. We accelerated the runoff of non core with the education loan sale, which will be accretive to NIM, EPS and ROTCE.

We ended the quarter with strong capital, liquidity and reserves, which puts us in an excellent position to support our clients while navigating market uncertainty. And we continue to drive forward our strategic initiatives with the private bank progression particularly noteworthy. With that, I'll hand it back over to Bruce.

Okay. Thank you, John. Operator, Ivy, let's open it up for Q and A.

Thank you, Mr. Vansan. We were now ready for the question and answer portion of the call. Your first question comes from the line of John Pancari from Evercore ISI. Please go ahead.

Just on the balance sheet growth, just wanted to if you can give us a little bit more color around loan demand, what you're seeing here in this backdrop? Are you seeing what are some of the trends in line utilization? Are you seeing any weakening of the pipeline? And also any type of pre tariff inventory build that might have driven a little bit of the growth in the near term, but might be more of a pull forward versus the outlook?

If you can just give us some color there. Thanks.

Yes. I'll start off and others will chime in here. But maybe just starting in commercial. We are seeing some line utilization increases. We saw that up a couple of percentage points at the end of the first quarter compared to the fourth quarter.

That was driven by a number of factors. I mean, we think tariffs is part of the story. But I'd also say that M and A and some working capital is in there as well. So and that was both in our Corporate Banking business as well as on the sponsor side and our utilization in our subscription line side of the house and commercial. So we are seeing some of that trending.

And frankly, given the expected pickup in business activity in the second half, there's some expectation that we'll see that continue assuming some of this uncertainty subsides. On the consumer side of things, we're seeing good take up in the on the resi and HELOC side of the ledger. Given where the rate environment is, HELOC in particular has been a really strong story for us. And last but not least, I threw out the private bank, which continues to drive growth. So you're seeing all three of the legs of the stool, as you heard earlier, contributing to the loan growth outlook.

And maybe I'll just pause there and see if there's other color to add.

Yes. I would affirm what John said. It's Don. I think as we talk to customers, we're hearing a little bit of expansion desire.

They've gone a little bit to the sidelines right now just given what's going on with the uncertainty in the environment. The other thing John that's been going on really powerfully in the first quarter as we've gotten disintermediated by the bond markets. We had an extremely strong bond quarter and some of that came off of our balance sheet as clients access particularly the high yield market. I think that probably is going to reverse given where rates are right now. So that'll be a tailwind behind us in terms of loan growth.

I don't know how much of it is tariffs in terms of the line draws. I think it's just general working capital build. People are running their businesses really tightly. So I don't think we've seen the tariff impact yet and that could be a tailwind also. And then as we'll have to see on the capital call lines.

That's a pretty big part of our balance sheet. Not huge, but it's about a 10,000,000,000 exposure overall of which about half is drawn and that's running at relatively low utilization. So to the extent we get some of the deal activity kicking in particularly in the second half that should grow nicely.

On the consumer side, if you put aside our non core rundown which as John pointed out was down about $1,000,000,000 linked quarter and look at the underlying business that we're still originating, we're seeing decent growth 1% up year over year. As John pointed out, heavily led by residential and secured, the portfolio is 75% secured. Keep in mind on the consumer side with incredibly high credit strats with high FICOs and relatively low LTVs. HELOC, we're actually up 9% year over year. And believe we're right at the top of the league tables on net growth versus peers and that's through a bunch of innovative investments we've made in analytics and customer experience that has driven a little distinct advantage for us.

We'll continue to take advantage of that given the high quality nature of the customer and expect that growth level to persist throughout the year. In mortgage, even though we have high rates, the portfolio growth is actually decent up 3% year over year. Again, quality customers prepay speeds really low on the back book given the lack of a refinance activity. So we're seeing net positive growth. The other portfolio student and credit card have been flattish, student given higher rates and credit card obviously by design as we look to launch some new products here mid year.

We expect that to see some higher returning growth assuming the economy plays in our favor in the second half of the year. So we feel pretty good that underlying loan demand is high for the second half of the year. In the private bank, we are as John pointed out, we grew about $500,000,000 linked quarter. What we're seeing there is still strong demand from that customer base as the consumer part of that portfolio builds, the mix has shifted modestly to consumer. So that's now 30% of the book where it was in the low 20s about a year ago.

That's a good sign. We expect slow steady continued progression in balancing out the book. And demand seems to have picked up. Our mortgage originations in the private bank are about double what they were same time this year despite a similar rate environment. So activity is strong and we expect growth rates to accelerate in the back half of the year for the private bank.

Okay. Great. Thank you for that color. Appreciate it. And just quickly on my second question is just around capital.

I know you're sitting here around 10.6% CET1 and you cited expectation for around $200,000,000 of buybacks similar to this quarter or to last quarter. But also I know you mentioned, I think Bruce you mentioned this and John you mentioned as well that if you did see weaker loan growth and weaker macro you could see higher buybacks. Can you just maybe help frame that like if we do see weaker loan growth and weaker economy, would you conversely maybe be more cautious and therefore maybe a husband more capital versus step up buybacks. Can you just talk about how you view that trade off? Thanks.

Yes. I'll go and start there. I mean we're committed to that range that we articulated at October to $10.75 If there's less RWA then we would feel opportunistically a willingness to step up on the buyback side of things. And the reason for that is a couple of folds. I think the starting point on capital is very strong both before and after AOCI.

So you look at our AOCI haircut, we're still north of 9%, which is quite a good number. We would also have to look at what the uncertainty would hold. And if you look at our reserve position that we've already set aside, we actually have a recessionary scenario already contemplated in our provision and loan loss reserve situation. So from that standpoint, I think that we could see a number of scenarios throughout 2025 that would be consistent with continuing to be able to upside buybacks in the face of lower loan growth.

Yes. And what I would add to that is if you go back to 2024, we also had a pickup in growth that would build over the course of the year when that didn't happen. We basically used the freed up capital to buy back our shares and we thought our shares were very attractive. And I'd say given kind of the crack in bank stock prices since the macro uncertainty and the rollout of the tariffs, we still feel that the stock is cheap relative to inherent value. And so, it presents a real opportunity to offset any impact that would hit in the P and L from slower loan growth if that happened through buying back our stock and buying it back at very attractive pricing.

Yes. Just hasten to add, as we keep growing our tangible book value per share, the earn backs on buying back stock at these levels is well under a year.

And so it's pretty attractive. And so we would feel good for all those reasons stated.

Your next question comes from Ken Usdin from Autonomous Research. Please go ahead.

Guys, wonder if you could talk through that push and pull on the capital markets outlook and the fee guide. So I guess, first of all, record pipeline, what's your level of confidence in terms of closing those transactions?

And I guess secondly, if that capital markets embedded expectation doesn't pull through, how do you how do we understand like the comp ratio offset and the magnitude of flex that you can have to keep PPNR close to in line? Thanks.

Yes. So I'll start and then maybe John or Don can follow on. But again, I think the exciting aspect of this from our standpoint is that we've over time built out really strong capital markets capability and a very broad M and A capability that covers middle market companies through mid corporate and specializes in industry verticals that we think are going to be active. And so the fact that there's pent up demand from sponsors to do deals, there's industry sectors that are very active, for example, data centers where we have a really strong group of folks focusing there. I'd say it's heartening to see that we've got record numbers of engagements.

Our people are working very actively and on a probability assessment none of these deals have dropped and I think we're just waiting to see some of this uncertainty subside. So we still feel optimistic that things will settle down here a little bit and that we should be able to pull that through. What I would say if that is not the case and then things do push out a bit, there's other things to consider. One is that we're broadly diversified. So, we've had the ability to if one area doesn't fire on all cylinders like if M and A is soft and oftentimes our financing, syndicated loan capability, our debt underwriting will pick up and provide an offset.

And then the FX and interest rate derivatives and commodities hedging risk management business also is seeing an uptick in activity and depending on the circumstances that could provide an offset. So the first line of defense is diversity within the fees that could help offset any push out on M and A volumes. And then secondly, there's obviously incentive compensation that would drop if the deals don't deliver. And then just broader looking at the expense base, we're constantly working on ways to streamline our businesses and perfect how we're running the bank to make it more efficiently. So we have a top 10 program up and running, but we're certainly not content with that given all of the opportunities we see around new technologies like AI and ways to deploy that just to run the bank better and serve our customers better.

So I'd say that would be the broad playbook. But maybe for color on the revenues Don you might want to add anything there?

Yes. No, I echo a couple of things that Bruce just said. One is, I'm really encouraged by the diversity of the franchise and the people that we continue to add. Actually, we're continuing to hire really strong talent into some of our industry teams. So that provides an ability to continue to transact in the market.

I also want to remind people that a significant part of our M and A business in particular is mid sized companies coming out of our core franchise. And they continue to have a really strong desire to sell and transact and a lot of those go into private equity. And the other thing I'd say is that the financing markets are generally pretty attractive. So we can get these things financed and they're not $10,000,000,000 deals. They're 100,000,000 2 hundred million 3 hundred million dollars deals.

So they're eminently executable. One of the things that's been interesting is and you would ask the question of why are these things pushing? Part of it's due to the de staffing of the FTC and the SEC. So it's just taking longer to get these transactions done. And I think the most important thing that Bruce said is we have not lost one mandate out of the pipeline.

So it's not as if these transactions are going away. It's they're just taking a little bit longer to execute. So I'm super confident that we're going to be able to get these things across the finish line. Whether it's the second quarter or the third quarter we'll have to see and if some of it will be volatility. But there's very little tariff dependency in any of these underlying deals.

So the big picture is we should generate the revenue. And hopefully my bonuses aren't going to go down by year end. But Chris will do that to me as he would have in the past if that does happen.

No. I would just highlight the diversity point that you made. And just on the expense side, I mean we would in an environment like that, you get the direct offset that you mentioned on incentives. And then you take a harder look at some discretionary stuff that we also touched on before. And then just more broadly, just feeling like the net interest income story has just a number of great tailwinds that are part of why we feel good about the guide for '25 as well.

Your next question comes from Peter Winter from D. A. Davidson. Please go ahead.

Good morning. I was wondering just on just looking at interest rates, which have been extremely volatile, it seems like the forward curve changes daily. But can you talk about what the ideal interest rate is interest rate environment is for Citizens and yield curve? And conversely, what type of rate environment kind of would put the NIM outlook potentially at risk? And are there any plans to reduce some of the asset sensitivity?

Yes, good questions there. I mean, out the window, our asset sensitivity is plus or minus 1% to a plus or minus 100 basis point change in a gradual shift in the yield curve, up or down over the next twelve months. So we are slightly asset sensitive. Yes, we're close to neutral based on just how those numbers are playing out. And I'd say that the first and foremost, the net interest margin trajectory is primarily not rate dependent.

So you've got the time based benefits that are really driving net interest margin, both in the near term and over time. So for example, in the first quarter, we had about five basis points of time based benefits. And given the slight asset sensitivity and seasonally lower deposits that's why we ended up at three basis points of net interest margin growth in the first quarter. When you look out to the second quarter, again, we're going to get about five basis points of time based benefit and better balance sheet trends. So that's why all of that drops to the bottom line and really get that momentum continues to build not only through 2025 but out into 'twenty six and 'twenty seven.

And we have in slide deck an illustration of the fact that by the time you get to the fourth quarter of twenty twenty seven, the cumulative time based benefit is 35 basis points. If you add that to the two ninety that we delivered in the first quarter, we're already at the lower end of the range without having to deal with interest rates. And so then from there, the rest of the story that takes us into our range of $3.25 to $3.50, You would also look at fixed asset repricing, which really is more about long end rates and there's a lot of baked in turnover of the balance sheet given coming out of the lower rate environment that we're in coming in the pandemic. So you've got 15 to 20 basis points there. And now we can talk about rates.

And so there's we're pretty well hedged from a swaps standpoint in through out through the middle of twenty twenty seven. So yes, we will do a little better if rates are higher. So if rates are the terminal rate out the window appears to be around $350,000,000 that's a good outcome for us. That would put us in the middle of our range, but higher rates, terminal rates like 4% would be consistent with the upper end of our range of around $350,000,000 But we could tolerate as low as 3% on Fed funds or even a touch lower and still hold the low end of our range at 3.25%. So we are basically comfortable with a wide range of scenarios on rates.

We feel pretty well hedged with a slight orientation towards performing a little better a couple of years out if rates are a little higher. And we think about inflation and stiflationary scenarios when we think about positioning the balance sheet that way. But the objective of trying to have a lot of non REIT related tailwinds is something that you need to think about when you think about our recovery on net interest margin.

That's great. Thanks, John. If I could ask just kind of a follow-up to Ken's question. You talked about the puts and takes with this uncertain environment. But could you just give an update on the positive operating leverage for the full year versus January's forecast of 150,000,000 Just I realize there's all this uncertainty, just wondering how you're thinking about it?

Yes. We think we're reaffirming that outlook. We believe that that's very achievable around the $150,000,000 a big driver of that, again, back to net interest margin, we see net interest margin rising by about rising to 3.05% to 3.1% by the end of the year. That implies about a 15 basis point increase in net interest margin year over year. That's pretty powerful on the NII line.

And therefore, that 3% to 5% NII is a huge driver of our positive operating leverage and we feel good about that. And we talked earlier about the diversity on the capital markets and fee line broadly and how our pipelines are consistent with being able to deliver the guide with some levers to pull if certain scenarios play out. So I would add to that that

in 2024 most banks including ourselves were very tight on expenses and 2025 were inflating a little bit. So the guide was for roughly 4% expense growth and that reflects the fact that there's lots of great things for us to invest in as we build out the franchise here. So things like making sure we're adding to the private bank, we're adding private wealth teams, we're opening private bank offices, we're investing in AI and various projects data analytics capability. There's our payments capability. So there's things that we want to keep investing in to position us for that medium term growth outlook that in a tougher environment we can throttle some of those things a little bit.

But our preference is to not do that to keep investing and keep building. So just kind of putting that in context, there are some levers to pull preferences to keep going, make those investments for the future, but we can pull back a little bit if need be.

The other structural benefit that we do have as well on the private bank, keep in mind that the majority of that cost base was compensation guarantees. And so as the team is productive and we have confidence in hitting our revenue outlook, That revenue is gobbling up existing expenses and compensation not necessarily adding to it. So it's the I think operating leverage.

We're providing operating leverage right there naturally versus last year, which we have a lot of confidence to deliver the revenue outlook. So that should be a structural advantage for us too.

And your next question comes from Erika Najarian from UBS. Please go ahead.

Hi, good morning. You have thank you. You've alluded to this and how you've responded to all the questions, particularly the PPNR one. But as you know, the net interest income outlook is quite important. And as I pull up the slide from last quarter, it's set up 3% to 5%.

So if I think about affirming the exit NIM on Slide 21 and then the balance sheet seems to be fairly in line, at least average earning assets were in line this quarter. Unless we think that the balance sheet will shrink, it seems like that up 3% to 5% is still broadly in line, right, in terms of what you're affirming. So just wanted to confirm that in terms of the full year look.

Yes. You've got that right, Erica. It's John. That 3% to five feels pretty good. If you just think about NIM alone that would take us to the upper end of that range.

But what we indicated in the guide was that at least back in January that we might have interest earning assets down about 1%, which is what put us into the middle of the range. There's some flexibility there. When you think about relative value in the securities portfolio and what we're seeing in deposit flows, which are actually coming in a little better than we expected, there are there's another lever there with respect to interest earning assets in the securities book that would that we'll be monitoring throughout the year. But net interest margin trends exactly as expected, feeling very good about that with some levers to pull even in the securities portfolio and on interest earning assets, if relative value looks attractive and deposit flows continue the way they've going. So that's the way that we think about that 3% to 5%.

Citizens Financial Group (CFG) Q1 2025 Earnings Call Transcript

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