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Important Announcement Date: July 17, 2025
Join us on Thursday, July 17, 2025, at 10 a.m. ET for an important discussion on our financial performance and outlook.
Key Participants in Today’s Conference Call
Chairman and Chief Executive Officer — Bruce Van Saun
Vice Chairman and Chief Financial Officer — John F. Woods
Vice Chairman and Head of Commercial Banking — Donald H. McCree
Vice Chairman and Head of Consumer Banking — Brendan Coughlin
Investor Relations Contact — Kristin Silberberg
Operator — Denise [last name not provided]
If you need a quote from one of our analysts, please email us at [email protected].
Understanding the Financial Risks Impacting Our Operations
The allowance for credit losses on our general office portfolio has seen a decline for the first time amidst ongoing concerns, as management has chosen to reduce reserve coverage while actively addressing the backlog of accounts.
Management has acknowledged a delay in the completion of several significant mergers and acquisitions (M&A) deals, which has resulted in over $30 million in anticipated fees being deferred until July 2025. This shift is attributed to persistent market uncertainty.
Issues related to tariffs and ongoing negotiations surrounding these tariffs continue to create an atmosphere of uncertainty in the second half of the year, which could potentially impact both deal activity and loan demand.
Key Financial Takeaways from Q2 2025 Earnings
EPS Performance: $0.92, reflecting an increase of $0.15 or 19% compared to Q1 2025.
Net Interest Income (NII): There was a 3.3% increase in net interest income from Q1 2025, primarily driven by an expansion of net interest margin (NIM) by five basis points to 2.95%, alongside modest growth in interest-earning assets.
Noninterest Income Growth: Noninterest income rose by 10% sequentially, led by record-breaking quarters in wealth management and credit card services, despite some delays in M&A fees.
Improved Efficiency Ratio: The efficiency ratio has improved to below 65% as expenses remained stable from the previous quarter, yielding approximately 5% positive operating leverage.
Shareholder Returns: We have repurchased $200 million in common shares at an average price of $39, resulting in a total capital return of $385 million (including dividends). The share repurchase authorization has been increased to $1.5 billion as of June 2025.
Common Equity Tier 1 Ratio (CET1): Reported at 10.6% CET1; adjusting for the AOCI opt-out, CET1 was at 9.1%.
Loan Growth Performance: Total loans at the period-end increased by 1% sequentially. Excluding non-core runoff of $700 million, spot loans demonstrated an increase of approximately 2%.
Private Banking Sector Performance: Loans in the private banking sector surged by $1.2 billion to reach $4.9 billion; average deposits in the private bank rose by $966 million, contributing $0.06 to EPS from the private bank segment.
Deposit Composition: Noninterest-bearing deposits have risen to constitute 22% of the total book, while stable retail deposits make up 67% of total deposits, significantly higher than the peer average of approximately 55%.
Deposit Costs Management: Interest-bearing deposit costs have decreased by two basis points, achieving a 54% cumulative down beta.
Credit Trends Overview: Net charge-offs decreased to 48 basis points from 51 in Q1 2025 after adjusting for the non-core education loan sale; nonaccrual loans saw a decline of 4% sequentially.
Allowance for Credit Losses: This has been slightly reduced to 1.59% of loans, while the reserve for the general office portfolio stands at $3.222 billion (covering 11.8%), indicating active reserve utilization as charge-offs occur.
Future Guidance: Management anticipates Q3 NII to rise by 3%-4% sequentially, with NIM improving by about five basis points. Expectations for noninterest income are projected to rise in low single digits, while expenses are projected to increase by approximately 1% to 1.5%. CET1 is expected to remain stable, including planned $75 million share repurchases. The full-year outlook remains unchanged from the guidance provided in January.
Net Interest Margin Projections: Management has reaffirmed targets for NIM to reach 3.05%-3.10% by Q4 2025, 3.15%-3.30% in Q4 2026, and 3.25%-3.50% in 2027, with hedging strategies in place to protect against downside risk in a lower rate scenario.
Strategic Transformation Initiative: The launch of a multi-year “reimagining the bank” transformation program has been announced, leveraging Generative AI (GenAI) and AgenTik AI technologies. This initiative is set to commence in Q2 2025, under the leadership of Brendan Coughlin and a dedicated project team.
Private Bank Growth Aspirations: Progress is being made towards a $12 billion deposit target for year-end 2025, with mid-July deposit levels already exceeding $9.5 billion.
Financial Summary of Citizens Financial Group, Inc.
Citizens Financial Group, Inc.(CFG 3.49%) has identified a pivotal moment, as all three business lines—commercial, consumer, and private banking—reported net loan growth for the first time in recent quarters. Management pointed to a sequential reduction in non-core runoff and an uptick in line utilization in subscription and private credit lines as key drivers of these results. Fee income experienced a significant boost due to record performance in wealth management and credit card services, coupled with activity in capital markets. However, the timing of several M&A deals has slipped into July, impacting the fee timeline. Management also discussed the next-generation “reimagining the bank” strategy, which emphasizes comprehensive digital transformation and efficiency through emerging AI capabilities. Loans are backed by robust credit quality, with management highlighting high FICO scores (in the high 700s), prudent underwriting practices, and improved credit indicators as discussed in prior quarters. Furthermore, challenges in commercial real estate are diminishing as reserves are actively utilized and backlogs are effectively managed.
John F. Woods noted that the private bank continues to grow its profitability, contributing $0.06 to EPS this quarter, up from $0.04 in the prior quarter, reflecting a notable increase in loan growth.
Brendan Coughlin remarked that there was a remarkable 95% growth rate in mortgage originations within the private bank on a linked quarter basis.
Bruce Van Saun emphasized that the bank’s diversity has been advantageous, as strength in equity underwriting and loan syndications has helped offset weaker performance in debt capital markets and delays in significant M&A deal completions.
The deposit franchise has demonstrated strong performance, with low-cost deposits in the retail sector surpassing peer averages by over 300 basis points year-to-date, thereby benefiting funding cost management.
Looking ahead, the loan pipeline and capital markets deal flow are expected to remain robust in the second half of 2025, with anticipated fees exceeding $30 million from delayed M&A transactions expected to be recognized in July 2025, alongside healthy syndication market participation.
Despite pronounced competition for loans and deposits, management remains focused on multiproduct, relationship-led growth to maintain pricing discipline and protect margins.
Notably, the general office portfolio has experienced its first decline in allowance for credit loss (ACL) coverage since concerns began. This quarter marks the first instance where charge-offs are being applied against the reserve without the need for re-provisioning, according to John Woods.
Glossary of Industry Terms
BSO: Balance Sheet Optimization — Citizens’ initiative focused on reducing lower-return assets (e.g., select commercial real estate, noncore loans) while reallocating capital toward strategic lending and relationship growth areas.
GenAI: Generative Artificial Intelligence — AI systems capable of autonomously producing content or solutions, recognized as a pivotal tool for Citizens’ digital transformation.
AgenTik AI: Proprietary or next-generation artificial intelligence referenced in connection with operational and client-facing enhancements at Citizens; specific competitive positioning or vendor remains unnamed in this call.
ACL: Allowance for Credit Losses — Bank reserve established for estimated losses on loans and lease financing, actively managed based on credit trends, loan mix, and macroeconomic conditions.
Noncore Runoff: The planned paydown or sale of loans and portfolios misaligned with Citizens’ ongoing strategy, particularly involving certain commercial real estate and student loan exposures.
CET1: Common Equity Tier 1 Capital — A critical capital measure under regulatory frameworks, prominently featured in capital management and buyback disclosures.
Comprehensive Transcript of the Conference Call
Bruce Van Saun: Thank you, Kristin, and good morning, everyone. We appreciate you joining our call today. We are excited to announce strong financial results that have exceeded expectations, even amidst significant uncertainty in the macroeconomic environment during the quarter. Highlights include robust NII growth of 3.3% sequentially, supported by NIM expansion of five basis points and the resumption of net loan growth across consumer, private bank, and commercial segments. Additionally, we experienced noteworthy fee growth of 10%, primarily driven by wealth management, credit card, and mortgage services. Our expense discipline has remained strong, with expenses broadly flat, resulting in an operating leverage of approximately 500 basis points, and credit trends are favorable, along with significant share repurchases. It’s important to note that our capital markets division performed well despite the prevailing uncertainties.
Our diversity has proven advantageous, as strength in equity underwriting and loan syndications has helped compensate for weaker performance in debt capital markets and delays in significant M&A deal completions. We anticipate recording over $30 million in fees from these delayed transactions in July, and our pipelines remain strong, positioning us well for the latter half of the year. Our balance sheet remains robust across capital liquidity, funding, and our credit reserve position. We continue to execute well on our strategic initiatives, with the private bank showing strong growth in loans and assets under management (AUM), while average deposits have increased significantly, although spot deposits have been slightly affected by timing fluctuations.
We remain on track to exceed 5% accretion to Citizens’ bottom line and achieve a return on equity (ROE) of over 20% in 2025. Our efforts across key markets, such as the New York City Metro area, private capital, payments, and BSO are tracking positively. We have initiated a project titled “reimagining the bank,” which will be led by Brendan and other top leaders, aimed at redesigning how we serve customers and operate efficiently in the bank. This initiative will capitalize on new technologies, including GenAI and AgenTik AI, and will require significant changes in our organizational model, technology, and data architecture, as well as skill development among our colleagues. This will be a multi-year endeavor and will serve as our next top program.
Looking ahead to the second half of the year, we believe that economic conditions and markets are trending favorably, although ongoing tariff-related negotiations continue to introduce a degree of uncertainty. Nevertheless, the fundamentals driving higher deal activity and an uptick in loan demand remain intact, positioning us well to capture opportunities and deliver strong results. We remain comfortable with the full-year guidance for 2025 provided back in January, and we are well-positioned to sustain this momentum into the medium term. In summary, we are optimistic about our overall strategic, business, and financial positioning.
We will continue to focus on execution and those elements within our control as we strive to build a distinctive and exceptional bank. With that, I will turn the floor over to John.
John Woods: Thank you, Bruce, and good morning, everyone. As Bruce highlighted, we achieved robust second-quarter results characterized by strong revenue performance and disciplined expense management, resulting in positive sequential operating leverage of around 5%. We noted a significant uptick in lending during the quarter, with net growth across commercial, consumer, and private banking sectors, effectively offsetting our noncore runoff. As referenced in slides five and six, we reported EPS of $0.92 for the second quarter, representing a $0.15 or 19% improvement over Q1. Net interest income increased by 3.3% this quarter, driven by margin expansion and growth in interest-earning assets. Fees also saw significant growth, with wealth and card services achieving record highs, and capital markets experiencing modest growth despite market uncertainties that led to several significant M&A deals being pushed into July. Mortgage revenue increased due to improved market valuation, and expenses remained well-managed, with net charge-offs aligning with expectations. Our balance sheet maintains robust capital levels, strong liquidity, and a healthy credit reserve, concluding the quarter with a CET1 of 10.6%, while executing $200 million in stock buybacks during the period. We remain committed to executing effectively against our key strategic initiatives, buoyed by continued momentum in our private bank and private wealth build-out.
The private bank continues to grow steadily, contributing $0.06 to EPS this quarter, an increase from $0.04 in the previous quarter, and we achieved our strongest quarter for loan growth to date, adding $1.2 billion in loans. Furthermore, we are making good progress in the New York Metro area, and our top program is on target. We have commenced work on a multi-year transformational program to reimagine how the bank operates, which I will detail further in subsequent slides. Starting with net interest income on slide seven, net interest income increased by 3.3% sequentially, driven by ongoing expansion of our net interest margin and modest growth in interest-earning assets.
As demonstrated in the NIM analysis at the bottom of slide seven, our margin improved by five basis points to 2.95%, benefiting from the time-based advantages of noncore runoff and reduced drag from terminated swaps, along with favorable fixed asset repricing. Additionally, we continue to optimize our funding strategy and have executed well on our down rate deposit playbook, resulting in a two basis point decrease in interest-bearing deposit costs. Moving to slide eight, fees grew by 10% sequentially, with capital markets witnessing modest improvement driven by increased equity underwriting and loan syndication fees. Bond underwriting fees, however, decreased due to a temporary pause in activity caused by tariff-related issues during the quarter. Similarly, M&A advisory fees also saw a decline, with several significant deals being deferred until July due to market uncertainties. We are optimistic about recording over $30 million in fees from these transactions in July. Our performance in middle-market sponsored book runner deals remains strong, ranking third by deal volume in the second quarter. Our deal pipeline across M&A and DCM remains robust in terms of both the number and value of transactions, reflecting pent-up demand. Our wealth business has achieved a record quarter with increased transaction activity and higher advisory fees driven by sustained momentum in fee-based AUM growth within the private bank.
The card business also delivered a record quarter, buoyed by seasonal improvements in purchase volumes. Notably, we recently introduced a new suite of Mastercard credit cards designed to meet the diverse financial needs and preferences of our customers, which should help accelerate growth in this segment. Mortgage revenue growth reflects an improvement in MSR valuation, along with seasonal growth in production. Additionally, other income for the quarter exceeded expectations due to several favorable developments. This line tends to fluctuate from quarter to quarter. On slide nine, overall expenses remained stable, enabling us to achieve positive operating leverage of approximately 5% and improve our efficiency ratio to below 65%. Our latest top program is progressing as planned and is set to deliver a $100 million pretax run rate benefit by year-end. We are also developing a comprehensive strategy to leverage new technologies to better serve our customers and enhance our operational efficiency, and we will provide further updates on this initiative later in the year.
On slide ten, we reported a 1% increase in period-end loans, which includes a non-core portfolio runoff of approximately $700 million during the quarter. Excluding non-core, loans increased by approximately 2% on a spot basis. The private bank achieved its strongest loan growth quarter to date, with period-end loans rising by $1.2 billion to reach $4.9 billion. Commercial loans increased slightly, attributed to an uptick in new money lending and line utilization. We have moved past the peak in client BSO exits, which has reduced growth drag, while core retail loans increased due to demand for home equity and mortgage products. As shown in slides eleven and twelve, we continue to enhance our deposit strategy, improving the mix with noninterest-bearing deposits now accounting for 22% of the overall book while reducing overall deposit costs. Average deposits grew by 1%, driven by increases in lower-cost categories across consumer and the private bank.
We have focused on optimizing our deposit funding, successfully reducing higher-cost treasury broker deposits this quarter, alongside a decline in retail time deposits. We have achieved commendable retail CD retention rates even while lowering yields. This has significantly contributed to the reduction in our deposit costs this quarter, as our deposit franchise continues to perform excellently in a competitive landscape. Interest-bearing deposit costs have decreased by two basis points this quarter, resulting in a 54% cumulative down beta. Notably, stable retail deposits account for 67% of total deposits, exceeding the peer average of approximately 55%. Moving to slide thirteen, net charge-offs are at 48 basis points, down from 51 basis points in the previous quarter after adjusting for the seven basis point impact of the non-core education loan sale in Q1. Retail net charge-offs improved across both core and non-core segments, decreasing by approximately 10 basis points after accounting for the aforementioned non-core education loan sale. This improvement was partially offset by a slight increase in commercial net charge-offs, primarily driven by a rise in C&I related to several small idiosyncratic credits. Encouragingly, nonaccrual loans continue to trend positively, having decreased by 4% sequentially, reflecting a decline in C&I. Retail nonaccrual loans also fell, aided by a reduction in other retail segments and ongoing runoff of the non-core auto portfolio.
As we assess the portfolio, we believe credit trends are showing signs of improvement, and we anticipate that nonaccrual loans for this cycle likely peaked in the third quarter of 2024, with net charge-offs peaking in the first quarter of 2025. Turning to the allowance for credit losses on slide fourteen, the allowance has slightly decreased to 1.59% this quarter, as the portfolio mix continues to stabilize due to non-core runoff and a reduction in the CRE portfolio, along with lower loss content in front-book originations across C&I and retail real estate. The economic outlook supporting the allowance reflects expectations of a mild recession and macro impacts from tariffs, similar to last quarter.
The general office balance of $2.7 billion has continued to decline modestly in the second quarter, driven by paydowns and charge-offs. The reserve for the general office portfolio now stands at $3.222 billion, representing 11.8% coverage. It is noteworthy that this marks the first quarter since general office concerns began that our ACL coverage level has decreased. We have allowed the reserve coverage to decrease slightly, actively utilizing the reserve as we make progress with the workout backlog, while the remainder of the book remains stable. It is important to note that the cumulative charge-offs plus the current reserve equate to a total expected loss rate of approximately 20% against the March 2023 general office loan balance, consistent with our view at the end of Q1.
Moving to slide fifteen, we have maintained exceptional balance sheet strength, with our CET1 ratio at 10.6%. Adjusting for the AOCI opt-out removal, our CET1 ratio remained stable at 9.1%. Given our robust capital position, we executed $200 million in common share repurchases at a weighted average price of $39. Including dividends, we returned a total of $385 million to shareholders in the second quarter. The board of directors has also increased our share repurchase program to $1.5 billion. Moving to slide sixteen, we are well-positioned to drive strong performance over the medium term with our overall three-part strategy.
We aim to transform our consumer bank, establish ourselves as the best-positioned commercial bank among our regional peers, and aspire to build the premier bank-owned private bank and private wealth franchise. To support these objectives, we have initiated a comprehensive reimagining the bank initiative, which will yield significant benefits by reassessing how we operate from front to back, leveraging new technologies like AI to better serve customers and enhance operational efficiency. This will evolve into a multi-year transformational program, and we will share more details as planning progresses later in the year. Moving to slide seventeen, our private bank has shown excellent progress.
We achieved our strongest loan growth quarter thus far, adding $1.2 billion in loans, concluding the second quarter at $4.9 billion. This reflects substantial growth in commercial lending as line utilization increases with heightened client activity, along with growth in mortgage lending. Average deposits rose by $966 million for the quarter and remained stable on a spot basis, considering a temporary surge in deposits at the end of the first quarter and some outflows at the end of Q2. We are observing positive deposit gathering momentum early in the third quarter, with deposit levels exceeding $9.5 billion in mid-July. The overall deposit mix remains attractive, with approximately 36% classified as non-interest-bearing at the end of the quarter.
We have successfully added three more strong wealth teams this quarter, strategically located in Northern New Jersey, New York City, and Los Angeles. By the end of the quarter, we reported .5 billion in AUM, reflecting an increase of $1.3 billion for the quarter. The private bank contributed $0.06 to EPS in the second quarter, aligning well with our target of 5% accretion to Citizens’ bottom line in 2025, with aspirations to deliver a 20% to 24% return on equity for the year and over the medium term. Moving to slide eighteen, we provide our guidance for the third quarter, which anticipates a 25 basis point rate cut in September.
We expect net interest income to rise approximately 3% to 4%, driven by an improvement in net interest margin of around five basis points, with interest-earning assets experiencing slight growth. This anticipated improvement in net interest margin is primarily due to time-based benefits from noncore runoff and a reduced drag from terminated swaps, along with favorable fixed asset rate repricing. We project noninterest income to increase by low single digits, supported by rebounding activity in capital markets, although partially offset by reductions in mortgage and other income. We are forecasting expenses to rise by approximately 1% to 1.5%, reflecting ongoing private bank expansion and robust fee revenue. We expect to achieve positive operating leverage for the second consecutive quarter. Credit trends are anticipated to improve modestly from the second quarter charge-off levels, and we aim to conclude the third quarter with CET1 remaining stable, incorporating share repurchases of around $75 million, which could be influenced by the level of loan growth. Our full-year outlook remains broadly aligned with the guidance provided in January, which anticipated increased business activity in the latter half of the year. Looking into the medium term, we clearly see a path to achieving our 16% to 18% return on tangible common equity (ROTCE) target.
Enhancing our net interest margin remains a critical driver, and we continue to project it reaching 3.05% to 3.1% in Q4 2025, 3.15% to 3.3% in Q4 2026, and between 3.25% and 3.5% in 2027. Slide twenty-one in our appendix provides additional insights into our net interest margin progression through to 2027. This, combined with the successful execution of our strategic initiatives and improving credit performance, will significantly enhance our return on capital through 2027. In conclusion, we are pleased to report strong second-quarter results that surpassed expectations, highlighted by growth in net interest margins, solid fee performance, and positive operating leverage.
We ended the quarter with robust capital, liquidity, and reserves, placing us in an excellent position to support our clients while continuing to drive growth and advance our strategic initiatives. With that, I will hand it back to Bruce.
Bruce Van Saun: Thank you, John. Denise, let’s open the floor for Q&A.
Denise: We are now ready for the Q&A portion of the call. Please unmute your phone and clearly state your name when prompted. Your name is required for us to introduce your question. To withdraw your question, our first inquiry comes from Ryan Nash with Goldman Sachs. Your line is open.
Ryan Nash: Good morning, everyone.
Bruce Van Saun: Hi, Ryan. We’ve seen impressive loan growth this quarter, and a considerable portion of it can be attributed to the gains made in our private banking sector. Given the many moving parts with loan growth, including runoff in commercial real estate and strategic runoff, could you share your insights into the growth trends in the private bank and other areas? Additionally, how optimistic are you regarding borrower sentiment for the remainder of the year? Thank you.
Bruce Van Saun: Sure, I’ll start and then pass it to Brendan and Don for more specific insights. It feels like we have reached a turning point, as all three of our business segments—commercial, consumer, and private banking—reported net loan growth at the enterprise level, surpassing the impacts of the DSO and non-core rundown actions we are executing. As we look towards the second half of the year, I am optimistic about the macro environment, with pent-up demand in the sponsor space leading to new deal flow.
We are beginning to observe an increase in line utilization, particularly in private banking and to some extent in corporate banking. The private bank is establishing itself as operations ramp up, focusing initially on building relationships and gathering operational deposits. While initially slow, we are now witnessing a pickup in loan demand. A portion of the growth this quarter stems from line utilization on some of our private equity subscription lines, as well as increased consumer borrowing, especially in mortgages. We anticipate that a decrease in rates later this year would serve as a tailwind. In the consumer segment, our HELOC product continues to lead the market, driving demand, while mortgage lending remains a steady area of growth. Furthermore, we launched a new credit card suite this quarter, and we expect balances in the card segment to rise as a result.
Overall, we foresee growth continuing across our various business segments, and the positive news is that BSO is beginning to wind down, which will reduce the headwinds. The non-core reductions will become smaller as we progress, leading to improved net figures going forward. With that, I’ll hand it over to Brendan for further details.
Brendan Coughlin: Great, thanks, Bruce. To supplement that with some figures, in our core retail business, excluding non-core activities, we saw growth of around $400 million quarter-on-quarter and approximately $1 billion year-on-year. We are experiencing substantial progress in our HELOC offerings, evidenced by external reports indicating we have been the top originator in the states for the past few quarters, and our credit quality remains high, with FICO scores in the high 700s and CLTVs at a favorable mid-60s range. We are very pleased with the yields above 7%, as we maintain a focused approach within our target markets.
Additionally, the newly launched credit card products are strategically designed to cross-sell to our retail customer base rather than competing as a national issuer. We are encouraged by early sales of our high-end card, the Summit Reserve, which features a metal design and comes with an annual fee, positioning it to enhance the profitability of our credit card business over time. We expect to see balances and purchase activity scale in the latter half of the year. In the private banking domain, we are witnessing significant growth across the board, with $1.2 billion in growth linked to the previous quarter, and 31% of the balances attributed to consumer lending, which has shown an increase from the previous quarter. Our mortgage originations experienced a remarkable 95% growth rate linked to the prior quarter.
We have observed that our customers are adjusting to the current interest rate environment, and our operations are transitioning from securing deposits to lending, which is a positive trend. Our yields are notably strong, with 655 basis points above deposit costs, which is favorable for our ROE. To meet our private banking goals for the rest of the year, we need to average about $1 billion in growth per quarter, compared to the $1.2 billion we achieved this quarter, but we are optimistic that this trajectory will continue. We will continue to monitor the market conditions, as we expect sustained demand for capital as long as market volatility remains stable or improves. I’ll now pass it over to Don for additional insights.
Don McCree: Thank you, Brendan. To pick up where Brendan left off, we have been reducing our book excluding commercial real estate by about $1 billion per quarter as part of our BSO agenda, and we are nearing completion of that strategy. While we will continue to reduce CRE by approximately $500 million quarterly, we are observing broad business optimism across the board. This quarter, growth was primarily driven by the private complex, which we have dedicated significant resources and strategic emphasis toward. We are seeing notable utilization in our subscription lines and private credit lines, which accounted for about 75% of our loan growth this quarter, with the remaining 25% stemming from C&I. Conversations with C&I customers indicate that uncertainties are diminishing, as recent legislative developments and geopolitical resolutions have encouraged clients to invest in their businesses again. We are observing dynamic growth in our core C&I pipeline.
Additionally, our expansion into Florida and California has yielded positive results, generating not just loan growth but also fostering full wallet relationships, which we are encouraged by. Overall, the competitive landscape remains intense, and we must focus daily on cultivating relationships that lead to sustainable growth while navigating the challenges associated with competition.
Ryan Nash: Thank you for the detailed insights. I have a follow-up question regarding net interest margin (NIM) expansion. Can you discuss any steps you are taking to lock in higher margins, especially in light of a potentially dovish Federal Reserve moving forward? What is your outlook on achieving net interest margin goals even in a more accommodative environment?
John Woods: Thank you for the question, Ryan. We have outlined our range for NIM over the medium term and discussed what rate environment that range is consistent with. Even in a scenario where the Fed funds rate drops below 3%, we believe we can maintain a NIM in the low end of our projected range of 3.25% to 3.50%. Our hedging strategy involves opportunistically placing hedges in a forward-starting manner, generally at rates well above our expectations for the Fed, which provides a stable protection against downside risks. We have executed some hedging in both the first and second quarters and will continue to look for opportunities to optimize our hedging strategy in the face of rate volatility.
Bruce Van Saun: To add to John’s remarks, we are cautious about depleting our resources in a downturn scenario. We are leaving some opportunities open for future years, as we may find ourselves in a stagflation situation where we want to benefit from higher rates. The key is to maintain a disciplined approach, ensuring we are well-prepared for various scenarios.
Denise: Thank you. The next question comes from Erika Najarian with UBS. Your line is open.
Erika Najarian: Good morning. I would like to inquire about the right-hand side of the balance sheet concerning your strategy for the second half of the year. Based on the discussions from Brendan and Don, it sounds like growth is anticipated in the second half. I noticed that John mentioned robust NIB growth, but total deposits declined slightly. As we consider the outlook for growth, how do you balance growth versus optimizing the mix? Is there additional BSO planned on the asset side to support that growth?
John Woods: That’s a great question, Erika. I believe it’s both a growth and optimization narrative. Starting with deposits, we are pleased with our trends in low-cost deposits. The mix improved in the second quarter compared to the first, particularly in terms of demand deposit accounts (DDA) and overall low-cost deposits. This improvement has been primarily driven by our growth in the private bank, which now represents 36% of our non-bearing deposits, positively impacting our overall performance. Our core retail deposit base has also been performing exceptionally well against our peers. Seasonal factors typically contribute positively to the commercial side in the second half of the year, which aligns with our expectations for a stable to improving deposit mix while simultaneously supporting loan growth.
Bruce Van Saun: I’d like to ask for brief comments from Brendan and Don regarding strategies for consumer and private banking in the second half of the year.
Brendan Coughlin: Absolutely. To John’s point, our low-cost deposits within the retail franchise are outperforming peer averages by over 300 basis points year-to-date, which provides us with considerable flexibility regarding our deposit strategy. We have maintained a relatively flat trajectory with interest-bearing deposits, while also growing our core relationship deposits. As we have experienced significant CD maturities—approximately $8 billion in Q1 and $6 billion in Q2—we have retained about 87% of these, albeit at lower yields. This dynamic will continue to contribute to our overall deposit cost reduction strategy. We still have substantial maturities on the horizon that will help maintain our cost advantage.
In terms of private banking, we are confident about our growth outlook, as evidenced by our 36% non-interest bearing deposits and 42% low-cost deposits. The portfolio remains of high quality, and we are witnessing increased growth on the consumer side. We expect these trends to persist throughout the summer and into the fall, providing us with opportunities for significant deposit growth.
Don McCree: I’ll keep it brief. One exciting area for deposits is our strong win rate in our expansion markets, where we are securing full wallet relationships. We have also achieved notable wins in payment solutions and embedded finance accounts, which contribute to low-cost deposit growth. The liquidity team on the commercial side has developed a range of product functionalities that extend beyond core client offerings, helping to drive momentum in this area.
Ryan Nash: Thank you. Bruce, could you share your updated thoughts on the M&A landscape? We’ve observed a resurgence in deal activity among regional banks, and I’m curious about your perspective on Citizens’ potential role in the consolidation wave we could see.
Bruce Van Saun: My focus is primarily on driving organic growth. We have a significant opportunity to improve our ROTCE and capture the white space left by First Republic’s exit, as well as to build our private banking and private wealth business. I want to ensure we stay focused on executing well and increasing our ROTCE. However, if an attractive opportunity arises in the future, I am confident in our leadership team’s ability to integrate and execute effectively. That said, any potential opportunity would need to meet high standards regarding financial performance, strategic alignment, and cultural fit. For now, our priority remains on organic growth rather than immediate acquisitions.
John Pancari: Thank you, Bruce. I appreciate your insights. I have a question regarding credit. The office reserve decreased by about 50 basis points. Could you provide an update on the current trends in this space and your strategy for managing those reserves over the next few quarters?
John Woods: Certainly, the trends in credit are positive, as reflected in our results. We have seen net charge-offs decline from last quarter, and we expect further reductions. We are closely monitoring the general office sector, and our reserves are effectively managed. We are charging off against reserves without the need to re-provision, which indicates stability in valuations and our outlook for probability of default. Importantly, we believe that our peak credit losses are behind us, and we anticipate improved outcomes moving forward.
Don McCree: I’d like to add that we have not transitioned any office properties into our workout group over the past year. The properties that require restructuring are well identified and making progress, while the remainder of the portfolio is experiencing favorable conditions in various markets, particularly in New York City.
Manan Gosalia: Thank you for the insights. Bruce, I didn’t hear you mention stablecoins in the context of the reimagining the bank initiative. Is stablecoin a focus area for you, and how do you view the investment landscape in that domain?
Bruce Van Saun: I would categorize stablecoin initiatives separately from the reimagining the bank project. This falls more under our overall payments strategy. There’s significant buzz around stablecoins, and while there may be potential use cases, particularly in cross-border payments, we are monitoring developments closely. Our goal is to ensure we capture opportunities while minimizing risks associated with these trends. We plan to engage with customers and industry partners, but I do not foresee any significant immediate investments in this area.
Chris McGrady: Thank you for the opportunity. Bruce, regarding capital allocation, given the strong momentum in your capital markets business, do you see a case for increasing capital in these areas? Are there specific areas where you’d like to invest more?
Bruce Van Saun: I view this more as an operational expense question than a capital allocation issue. We are actively adding coverage bankers and specialists in key industry sectors, particularly in corporate finance. We will continue to pursue this strategy. Our capital allocation is aligned with our current business focus and prudent underwriting limits, and I believe it would not be wise to simply increase our capital limits for the sake of pursuing larger deals. We strive to remain cautious as we move upmarket and maintain a granular approach to risk-taking.
Don McCree: I concur with Bruce’s assessment. We are focused on bolstering industry specialization within our corporate finance teams, and we have sufficient capital to support our current business objectives. Most of the investment in this area will come from enhancing advisory capabilities and adding industry vertical experts. While there could be opportunities to acquire boutique firms for expertise, I do not foresee any substantial investments in that direction.
John Pancari: Thank you for the response. I’d like to follow up on the commentary regarding credit trends. You noted that charge-offs are likely peaking. Are there any notable inflows or inflow reversals in recent quarters that contribute to your confidence in these projections?
John Woods: Yes, the trends are playing out favorably, and we believe we are well-positioned for potential uncertainties ahead. Our macroeconomic outlook remains stable, and we have adjusted our forecasts for unemployment slightly upward. The performance of our back book is aligning with our expectations, and we anticipate further decreases in charge-offs. Our strategy focuses on maintaining a strong risk appetite, particularly in consumer lending segments where we are targeting mass affluent customers, thereby mitigating exposure to higher-risk segments. Overall, we do not see any concerning trends in delinquencies, and our corporate strategy has shifted towards upper mid-market and mid-corporate segments, which tend to be stronger credit profiles.
Denise: The next question comes from Scott Siefers with Piper Sandler. Your line is open.
Scott Siefers: Thank you. Bruce or Brendan, as we consider the long-term outlook for the private bank beyond this year, including the $12 billion deposit target, do you anticipate reaching a critical mass where profitability accelerates, or will you continue to add teams at a similar pace as in the last year?
Bruce Van Saun: I think it’s crucial to maintain discipline in our approach as we initiated this startup, ensuring we can grow the business sustainably and profitably while generating returns. We have established clear markers and a disciplined approach to growth, which will guide us as we look to scale in 2025 and beyond. As we achieve our goals, we will explore opportunities to add private banking teams in attractive locations and open new offices that enhance our service delivery. This will align with our strategy to expand offerings in both banking and wealth management.
Brendan Coughlin: I’d like to add that we remain committed to adhering to our financial guardrails, ensuring that growth in loans is driven by securing high-quality funding. This will act as a governor on our growth and prevent us from overextending. We believe there is a significant opportunity to integrate banking and wealth services, and we are keen on attracting talent aligned with that vision. There are additional markets where we currently operate in retail and commercial that have yet to be tapped in the private banking area, providing ample room for growth.
Ebrahim Poonawala: Good morning, and thank you for the call. I have a couple of quick follow-ups. Firstly, regarding the outlook for deposit costs, we’ve observed that CDs still have some room to decline, while checking account rates have increased quarter over quarter. If there are no rate cuts, do you anticipate that deposit costs will continue to trend lower in the second half of the year?
John Woods: That’s a great question. We experienced a favorable rotation in our CD book, with about $8 billion maturing in the second quarter. We’re rotating into much lower-cost CDs, which are 120 to 150 basis points below the maturity rates. Our front-book and back-book strategies are effective here. Although we expect a slight step down in the third quarter with about $6 billion in maturing CDs, we still see a strong positive impact on the deposit mix and costs. I believe we are well-positioned to manage our deposit costs effectively.
Ebrahim Poonawala: Thank you. And for Don, regarding the lending outlook, have you noticed any uptick in capital call line lending? Are you seeing any signs of increased activity there, and how much of this growth is factored into your outlook for the latter half of the year?
Don McCree: Yes, we have indeed observed an 8% increase in capital call utilization during the second quarter, which has contributed to our loan growth. The trend indicates that we expect further growth as utilization reverts to more typical levels. Currently, we’re about six points below our long-term average in capital call utilization, but as the private equity landscape becomes more active, we anticipate that utilization will continue to increase.
Bruce Van Saun: Thank you, everyone. Before we conclude, I want to take a moment to express my gratitude to John Woods for his invaluable contributions during our transformation journey. It has been a pleasure working alongside you, John, and we wish you the best in your future endeavors.
John Woods: Thank you, Bruce.
Bruce Van Saun: With that, I would like to thank everyone for joining us today. Your interest and support are greatly appreciated. Have a wonderful day.
Denise: Thank you. That concludes today’s conference call. We appreciate your participation, and you may now disconnect.
