Good morning, everyone and welcome to the Citizens Financial Group Second Quarter 2021 Earnings Conference Call. My name is Alan 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 Kristin Silberberg, Executive Vice President, Investor Relations. Kristin, you may begin..

Thank you, Alan. Good morning, everyone and thank you for joining us. First, this morning, our Chairman and CEO, Bruce Van Saun and CFO, John Woods, will provide an overview of second quarter results referencing our presentation which you can find on our Investor Relations website. After the presentation, we'll be happy to take questions.

Brendan Coughlin, Head of Consumer Banking and Don McCree, Head of Commercial Banking are also here to provide additional color..

Thanks Kristin. Good morning everyone. Thanks for joining our call today. We continue to execute well through the second quarter, driving forward on key initiatives in both consumer and commercial, accelerating our digital transformation, making steady progress on TOP 6 and announcing the acquisition of HSBC's East Coast branches and online bank.

The diversity and resilience of our business model was evident as record revenue and capital markets and wealth partially offset the sizable drop in mortgage. Our credit results continue to be excellent given further improvement in the economy.

The headline numbers for the quarter with EPS of $1.46 and ROTCE of 17.7% were flattered by a sizable reserve release. Importantly, we feel PPNR has now bottomed and growth should resume in the second half.

We achieved 1% average loan growth in the quarter, a little less than projected as pay downs on PPP loans and across the back book and commercial offset generally good levels of originations. We did a nice job on expenses, protecting the areas aligned with our growth initiatives, while delivering on our expense efficiencies associated with TOP.

Looking out to the second half, we believe we will see a pickup in loan growth, particularly on the consumer side and student point of sale finance and auto. In commercial, we should start to see gradual growth in line utilization off of low levels along with the pickup in deal related financings.

Mortgage revenues should rebound modestly, given hedge losses in Q2 and generally strong production, while capital markets pipelines remain healthy. We expect to return to positive operating leverage in both Q3 and Q4. Credit should continue to be excellent.

We are now calling for further improvement in charge-offs to 20 basis points to 25 basis points in the third quarter and 25 basis points to 35 basis points for the full year.

We continue to feel good about our progress and our ability to come out of the pandemic period with increasing differentiation and growth in franchise value versus our peers over time..

Thanks Bruce and good morning, everyone. Let me start with the headlines for the quarter. We reported underlying net income of $656 million and EPS of $1.46. Our underlying ROTCE for the quarter was 17.7%, which includes the impact of the sizable credit provision benefit.

Revenue of $1.6 billion was down slightly linked quarter on lower mortgage fee income with net interest income up slightly given interest earning asset growth. Average loans were up 1% in the quarter on the strength of retail originations hitting an all-time high giving us good momentum heading into the second half of the year.

Key highlights include record results in capital markets and wealth. Mortgage fees were lower as margins continue to tighten, although origination volumes remain quite strong and we continue to control expenses down 2% quarter-over-quarter.

We recorded a credit provision benefit of $213 million, which reflects sustained macroeconomic improvement and strong credit performance with lower charge-offs. Our ACL ratio is now at 1.75% excluding PPP loans.

And finally, we are in a very strong capital position with CET1 at 10.3% after returning $168 million to shareholders in dividends during the quarter. We also continue to grow our tangible book value per share, which was $33.95 at quarter end, up 6% compared with a year ago.

Next, I'll refer to a few slides and give you some key takeaways for the second quarter, I'll then outline our outlook for the third quarter. Net interest income on slide six was up 1% linked quarter, given interest earning asset growth and higher day count. Average loans were up 1% and net interest margin was down slightly.

The net interest margin reflects lower earning asset yields reflecting the low rate environment. Spread pressures and elevated lending competition although improved funding mix and better deposit pricing are helping to mitigate these factors.

Interest-bearing deposit costs improved four basis points to 16 basis points from continued discipline on deposit pricing. Our asset sensitivity increased to about 10.7% from 8.5% at the end of the first quarter.

The increase primarily reflects the ongoing stability in deposit levels and the improvement in funding mix given the increase in low cost deposits.

Referring to slide seven, we delivered solid fee results again this quarter with record results in capital markets and wealth, reflecting the ongoing investments in our capabilities and the benefit of acquisitions..

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

Thank you, Mr. Van Saun. We are now ready for the Q&A portion of the call. . Our first question will come from the line of Ken Zerbe with Morgan Stanley. Go ahead please..

All right, great. Thank you. Good morning..

Morning..

I saw a few references to TOP 7, so -- in your press release. I was actually hoping you could talk a little bit more about what we might expect from the new TOP 7 program and also how it might differ from TOP 6? Thank you..

Sure, Ken, it's John here. Yes, I mean I think as you've seen over the years we've been, just been part of our culture to really dig in on this kind of mindset of continuous improvement. And last year TOP 6 was somewhat unique and it's transformational sort of two-year profile.

We are very pleased with how that played out, delivering on the expectations of $400 million to $425 million in run rate saves. So, we're excited about that. And there is a lot of traditional kind of top contributors in TOP 6 and there was a transformational aspect to us. So, that made it a little bit unique.

I think TOP 7 may bring us back to some of that foundational sort of continuous approach to driving efficiencies and a couple of areas that we're looking at sort of looking at around to some of the areas that we were able to sort of drive in TOP 6 such as agile delivery and simplifying how we were operating.

Next-gen tech has another, call it next wave of rationalizing applications associated with it. So, I think you could see sort of a 2.0 in revisiting some of the transformational areas of TOP 6.

But then just continuing on our bread and butter to try to simplify how we operate in fundamentals around how we manage the place and I'd suggest that maybe there is some more room to go on optimizing branch density. But really just getting back to what we do, which is driving continuous improvement year-over-year..

Pardon me. The next question will come from the line of Matt O'Connor with Deutsche Bank..

Good morning..

Good morning..

Bruce, I was hoping you could elaborate a bit on your M&A strategy, obviously you just announced HSBC branch deal and have done some fee deals. But there were, I guess some interviews and quotes from you few weeks back about being more open to bank deals I think. So, maybe just update us on your thinking there. Thanks..

Sure. So, Matt, I think we've been very clear all along that we had some great strategic initiatives that should lead to very good organic growth for Citizens and that's kind of top of the heap in terms of priorities. We've focused next on fee based bolt-on acquisitions.

And with some success, I think, you're seeing the results in our commercial business now that we've kind of incorporated M&A capabilities into our offerings to our customer base and the mortgage acquisition clearly was thoughtful and well timed and then the wealth, Clarfeld acquisition has been a home run in terms of opening up cross-sell particularly to our commercial business owner.

So, we are pursuing more of those. And so, I feel good that there'll be some announcements over the course of the second half of the year in that regard. So stay tuned there.

With respect to full bank acquisitions, I think the first step here was this HSBC transaction, which I think strategically makes good sense for us and also financially is very attractive and compelling.

And so one of the things that we like about that is it fills in some geographical holes that we have, particularly the New York metro area and pushes us down a little bit mid-Atlantic South toward Washington and then gets us a beachhead in South Florida. So, those are all things that I think fit well with our distribution strategy.

And if we could find potentially other bank transactions that fit that bill that potentially could strengthen the footprint and help our distribution strategy and we can get it at the right price and it's the right culture and meets the strategy et cetera with compelling financial economics, we'd be open to that.

I don't think it's something that again is a driving desire here, I think will be a bit opportunistic if we can find a good deal, we would certainly consider it..

We'll go next to the line of Ken Usdin with Jefferies. Go ahead please..

Thanks. Good morning guys. Wanted to ask on the outlook a couple of things about the NII side. John, last quarter you had mentioned that you had expected flat earning assets and we continue to see the strong deposit growth come through.

And I'm just wondering, again, you're calling for flat earnings assets, but it looks like the deposit growth remains pretty strong for the industry and for you guys. So just wondering what are you seeing there and expecting in terms of overall deposit growth and why that would only result in flattish earning assets..

Yes, I mean, I think that we've been for some time now thinking that with economic activity you start to see potentially some of those deposits to flatten out. They've just been continuing to grow and we've seen strong flows.

I'd say what's been nice about that is that, that's been coming in the categories we want them to show up and meeting demand deposits have been really strong underpinning all of that. So, that's been quite good.

I think the -- and what that's resulted in is continuing to allow us to run our deposit playbook and you're seeing our interest bearing deposit costs decline and headed toward really low teens or even better by the end of the year. So that's been great.

I do think that, as you see economic recovery in the second half of the year, we would suspect that some of that growth will begin to moderate and possibly even some of it begin to run off, but we have -- most of that surge deposits that we saw in 2020 and early 2021, we think is going to stick around.

So, as much as two-thirds or more, and then that's great fuel and great support for what we're -- what we expect to see later in the year with this -- which is loan growth and as you get into 2022, lots of momentum. So, those are some of the thoughts I have on the deposit side..

I would just add to that, Ken that spot numbers are quite optimistic. So, I think we had a record level of originations for loans in the consumer side in the second quarter. We had a very strong level of that in commercial which goes back to pre-pandemic level of originations.

We're still seeing relatively high pay downs which mutes that a little bit, but I think when we look out into Q3 in particular, we have a bunch of seasonal strength in businesses like student and point of sale combined with I think those pay downs should start to moderate a little bit.

So, we're quite optimistic that we'll see very, very strong spot loan growth that should kick in Q3 and extend into Q4. The average is based on timing of when this all happens may not fully reflect that in Q3, but I would stay focused on the spot number..

Your next question will come from David George with Baird. Go ahead please..

Hi, thanks. Good morning.

A question on PPP, could you disclose the dollar amount of PPP loans in the quarter and then I've got a follow-up on the outlook?.

Yes, I mean, if -- basically, at the end of the quarter, the average balances during 2Q was about $4.5 billion..

$4.5 billion. Okay, great. Appreciate that. And then with respect to the Q3 outlook particularly specifically on fees, it looks like you're expecting a fairly nice jump in fee activity, and I trust, part of that's going to come from mortgage. John, I thought I think you said $14 million relative to Q2.

That is about $85 million number with MSR-related, and then there was a $10 million agency fee impact. Was there anything else that impacted that number? I'm just trying to get a sense as to how much of a balance, you're expecting over the next quarter or two..

Yes, I mean, I think, yes, that's right. As I mentioned in my remarks, it's about $24 million of unique items that feel unique to 2Q. And so that's something that will set us up nicely for 3Q, starting with that without expecting those things to recur.

We do think that in the third quarter volumes will help -- will hold up and we may have some modest decline in gain on -- on gain on sale margins, but given what's going on with those sort of non-recurring items from 2Q as well as, still a strong volume quarter that we do think that mortgage rebounds into the third quarter..

Your next question will come from John Pancari with Evercore ISI. Your line is open..

Good morning. Just on the loan front, I know you mentioned that you're seeing some loan competition around loan pricing. So, I just wanted to, if you can elaborate on that and what areas are you seeing it. And if you could maybe give us some color in terms of your new production loan yields in the various areas that would be helpful.

Then I have a follow-up on capital. Thanks..

Yes. Hey, John, it's Don McCree. We definitely are seeing price competition in terms competition across the board. So, part of the reason that our loan growth is a little bit more tepid than it might be is, we're trying to stay pretty disciplined on price and terms.

So, down maybe 10 basis points or something is what I'm saying generally in terms of our price -- our spreads across the board. I think, just elaborating on what John and Bruce has said on loan growth, we're out with our clients in person that which is actually quite gratifying.

And the thing that's kind of restricting utilization is all the supply chain back-ups and some of the labor. And as those begin to clear, particularly labor, we think clears up toward the September time frame and the supply chain begins to normalize toward the fourth quarter-ish. We would expect more normal working capital build the resume.

So, that's what gives me a lot of confidence. And then as John said, we've got about our entire downdraft and spot loan growth in the quarter was PPP prepayments and that's going to begin to moderate.

So, there is some headwinds that we've been selling into which should clear themselves out and get some good momentum as we move into the back-end, but we're going to stay disciplined on terms of price and credit..

Okay.

Brendan?.

Yes, similar on consumer I'd say, ex-PPP, spot balances were up just shy of 3%. So, pretty decent growth overall despite as Bruce pointed out some rundown in the back book. We're seeing really good strength and record originations, really the highest level of originations, we've had since we're a public company here in Q2.

So, the momentum, should continue in the second half of the year. And then as both Bruce and John pointed out, adding in iUp, the Apple iPhone upgrade program, which is typically a late summer, early fall event. And then the seasonality of InSchool lending should really give us another round of growth heading into the second half of the year.

But pricing has been really competitive in a couple of fronts, particularly on student loan refinancing as rates have ticked up and now are starting to peel back a little bit. That's been a particular place of intensity. I'd say on assets like auto, pricing intensity has picked up a little bit, spreads still remain pretty high.

So, we're looking at that business still as a double-digit ROE business right now with originations which is elevated from normalized levels in auto given the short duration. So, we're able to hit record originations in auto as an example with still somewhat elevated yields, which has been really, really good.

So, I'm optimistic -- that was actually the last point home equity, which is probably a little bit unique from what you're hearing against peers. We've been really, really strong on originations for home equity. In fact, we are seeing some benchmarking that puts us in probably the top two or three lenders across the U.S.

although only operating in 11 states right now for home equity lending. This quarter, the spot balance has actually grew, and from a quarterly basis, that's the first time since the financial crisis, we've seen net loan growth in home equity and our credit card book is also bottom.

So, some of these de-levering trends with all the stimulus out there in the market with consumers, I think in our line of credit products have hit the bottom. We're starting to see signs that those returning. So, hopefully a tailwind as we would think about H2..

Great.

John, do you want to finish up with anything or?.

Yes, I mean, I think....

Yes. Sorry, go ahead John..

I meant, John Woods. Sorry..

Lot of Johns, it's such a unique name. Yes, I mean, I think you were also -- you were just kind of our asset value yield. And you know in the second quarter, we were able to see origination yields up in the retail side of things due to a number of -- due to the diversity of the portfolio.

And we suspect that may -- that's something that we may see continue into the third quarter with origination yields rising, and that tends to temper the front book, back book dynamic that I think maybe you were trying to get after..

No, that's helpful. Thanks so much for all that. And then on capital, I know you saw some good strengthening in the CET1, the 10.3%, I guess Bruce, if you could just maybe talk about how you think about that target of 9.75% to 10%. I mean we're starting to see some of your peers nudge down their targets, their internal targets a bit.

Wanted to get your thoughts on that. Is there room to potentially adopt the lower level there on the CET1 internal target? Thanks..

Sure. But we're comfortable with that 9.75% to 10%. As you know, over time we brought that down, it was 10% in the quarter, then it was 10% to 10% in a quarter, then it was 10% and it's 9.75% to 10%.

So, I think as we've matured as a company, as we've demonstrated good risk discipline in how we've grown the loan book and you can see we've come through the pandemic with a low level of credit losses.

I think some of that 'new guy' little bit of conservatism we had coming off the IPO, we're starting to shed that and move back closer to where pure targets are. So, for now we're above the 9.75% to 10%. So, I don't see any real burning desire to change it. But over time, certainly the pack moves down a little bit.

We have plenty of room versus our SCB target. And certainly I think the risk profile would permit that..

Your next question will come from Peter Winter with Wedbush Securities. Your line is open..

Good morning. It doesn't -- I just want to ask about the swaps hedging. It doesn't look like you added any swaps this quarter. And I'm just wondering what the plan is going forward. I do know rates are obviously lower. I'm just wondering what level rates need to get to before you think maybe adding some more swaps..

Yes, we actually did have some swaps this quarter..

You did?.

Yes, I mean, we added maybe, call it $1 billion or so. And we added $1 billion or so later in the quarter and actually $1 billion right at the beginning of the quarter. So, really right around $2 billion. You add that to the $6 billion, we executed late in the first quarter.

And we've got around $8 billion that we've added as part of our sort of early stage kind of dollar-cost averaging into where the rate environment.

And when you look at the overall averages, we did that, call it mid to high 70s on average, which is mid to high 70 basis points -- 75 basis points to 80 basis points on that overall portfolio and you know in the five years sort of well below that today. So -- and the last couple of billion which I think was over 90 basis points.

So, I think that we've been able to start to look opportunistically at ways to really sort of monetize some of that asset sensitivity over time. And we're still over 10%, actually close to 11% asset sensitivity. So, there's lots of opportunity to continue to add to the swap portfolio as and when the rate environment continues to improve.

And our year-over-year headwinds from swap has declined significantly and markedly as a result of all these actions. So I think we're -- I think we're in pretty good shape in terms of the swap portfolio..

We'll go to line of Gerard Cassidy with RBC. Go ahead please..

Thank you. Good morning Bruce. Good morning John..

Good morning..

Good morning..

I got two questions. First for you, John, can you give us some color, I noticed in your outlook, you indicated that you guys think that the 10-year or the expectation for the 10-year will be 1.35%.

Currently today, as you know, it's well below that, if it comes in at 1.15% for the quarter, what would that do to the net interest margin assumptions that you have in net interest income. And then second for you, Bruce, the president, now obviously came out with the executive order on M&A to scrutinize deals more closely.

Does that raise the risk of your HSBC deal at all? Thank you..

Yes, I'll go ahead and knock off the first part of that, Gerard. The -- in terms of, so we've gotten through a few weeks of the quarter breaks were a little higher. We do have an expectation of an average 1.35% for the quarter. If it were to drop off, call it into that range, maybe we would see, call it $5 million-ish or so of impact to NII.

Maybe a basis point or two on NIM, but I would hasten to add that there are offsets, some puts and takes when you're operating in an environment like that. More broadly, you could find better opportunities in terms of offsetting that on the deposit side.

You could also see as we've demonstrated back in the crisis and in the pandemic, the resilience of the franchise broadly even beyond that, net interest income and what the downside rate protection that the mortgage company actually provides which is extremely powerful. So, I think that maybe there is a modest impact from the first order effect.

If the 10 year stays down there, but I think we have, we have mitigants in terms of on the deposit side, and then more broadly in the fee area..

Yes, part two of that, Gerard, I don't see the executive order impacting the HSBC transaction. So, it's -- that's a relatively modest in size transaction, that straightforward and in any case the EO out for comment.

It's going to take quite a while to settle that one down and more broadly I think bank mergers are probably among the most heavily scrutinized as it is. So, whether there is a meaningful impact down the track on that remains to be seen, but certainly as it relates to the HSBC transaction, I don't see any impact at all..

Your next question will be from David Konrad with KBW. Go ahead..

Yes, good morning. It sounds like definitely very positive on loan growth trends, maybe more spot and then average to because of timing, but just curious I think historically, you've talked about a mid-single-digit to high single-digit full year spot loan growth.

I just wondered if you're still comfortable with that?.

Yes, I mean I think that's right. I mean, when you look at, look at where we're coming out in the second quarter in terms of spot, you see that momentum that's being generated and that's continuing into the third quarter with the 2% to 3% guide that we highlighted. I think you absolutely could get to that.

And the expectation is to get to that mid-single-digit range..

And I think I'd hasten to add, when you look at it excluding PPP, that's an important metric to look at when you're considering the underlying fundamental flows that we're seeing both in commercial and consumer. And--.

That was 1.8% in Q2, which annualizes to over 7% and then the 2% to 3%, we're calling out for the third quarter. Yes, we can do the math on that..

That includes -- that's -- so it will add 1% or more to that ex-PPP in 3Q. And so, I think you're--.

So, one of the aspects, I think that's unique to us is just the number of sales we set out to catch the wind there is some wind. So, we have a very broad lending portfolio on the consumer side and we play in some very attractive verticals on the commercial side.

So, broadly feel good that we can certainly get to nominal GDP growth on a recurring basis..

And at this time we have no further questions in queue. You may proceed..

Okay, great. Thanks again for dialing in today. We always appreciate your interest and support. Have a great day and everybody stay well. Thanks again..

And ladies and gentlemen that will conclude your conference call for today. Thanks for your participation and for using AT&T Event Teleconferencing. You may now disconnect..