Citizens Financial Group, Inc. (NYSE:CFG) Q4 2024 Earnings Conference Call January 17, 2024 9:00 AM ET

Company Participants

Lovin Thomas - Senior Vice President, Investor Relations
Bruce Van Saun - Chairman and Chief Executive Officer
John Woods - Chief Financial Officer
Brendan Coughlin - Head of Consumer Banking
Don McCree - Head of Commercial Banking

Conference Call Participants

Scott Siefers - Piper Sandler
Erika Najarian - UBS
Matt O'Connor - Deutsche Bank
Gerard Cassidy - RBC Capital Markets
Manan Gosalia - Morgan Stanley

Operator

Good morning, everyone and welcome to the Citizens Financial Group Fourth Quarter and Full-Year Earnings Conference Call. My name is Ivy, and I'll be your operator today. 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. I'll now turn the call over to Lovin Thomas, Senior Vice President, Investor Relations.

Lovin, you may begin.

Lovin Thomas

Thank you, Ivy. Good morning, everyone, and thank you for joining us. I'm stepping in today for Kristin, who is out sick.

First this morning, our Chairman and CEO, Bruce Van Saun and CFO, John Woods, will provide an overview of our fourth quarter and full-year 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 fourth quarter and full-year earnings presentation located on our investor relations website.

After the presentation, we will be happy to take questions. Our comments today will include forward-looking statements, which are subject to risks and uncertainties that may cause our results to differ materially from expectations. These are outlined for your review on page two of the presentation.

We also reference non-GAAP financial measures, so it's important to review our GAAP results on page three of the presentation and the reconciliations in the appendix. And with that, I will hand it over to Bruce.

Bruce Van Saun

Okay, thanks, Thomas. Good morning, everyone, and thanks for joining our call today. We were pleased to finish the year with a strong quarter as our financial results reflect good sequential revenue growth led by NIM expansion and capital markets fees, positive operating leverage, favorable credit trends, and a robust balance sheet across capital, liquidity and LDR.

We are still seeing subdued loan demand, but we've more than compensated for that with 10 basis points of NIM expansion that drove sequential NII growth of 3%. Fees grew sequentially by 6%, paced by capital markets and mortgage. While expense growth was 3.5%, paced by hiring in private bank, private wealth, and commercial middle market, we still delivered positive operating leverage of around 50 basis points.

Our credit trends are looking favorable with NPAs down sequentially, criticized assets trending down, and no surprises in charge-offs as we work through our CRE office portfolio. Given these trends and the contraction in loan balances, we added $162 million to our provision against $189 million in charge-offs, and our ACL-to-loan ratio increased slightly to 1.62%. We currently expect that the credit trends should continue and that we should be able to see credit costs come down in 2025.

We continue to repurchase shares in the quarter $225 million, bringing the full-year total to $1.05% billion. We repurchased 28 million shares in 2024, or 6% of the beginning of year balance. With respect to execution of our key initiatives, we made further progress across the private bank, our New York City metro strategy, serving private capital, and growing our payments business.

BSO efforts saw a reduction in non-core loans of $4.2% billion in 2024 with a remaining balance of $6.9% billion. We are looking for opportunities to accelerate the rundown, so stay tuned on that. In addition, we made further progress in exiting low-returning relationships in C&I and in reducing overall CRE loans.

Our TOP 9 program was executed well, delivering $150 million in annualized Q4 run rate benefits, and we've launched TOP 10 with a target benefit of $100 million. The private bank, private wealth progress is worth spotlighting. The business continues to ramp up nicely, growing the customer base and hitting all financial targets.

We reached $7 billion in deposits, $3.1% billion in loans, and $4.7% billion in AUM, and we were profitable in the quarter. We are confident in our ability to meet or exceed our goal of having this business be 5% accretive to our bottom line in 2025. And we added a banking team to Southern California in Q4 and this morning we announced an additional wealth team in South Florida.

For the full-year 2024, we hit most line items in our beginning of year guide, that's shown on slide 34 with the exception of balance sheet volume. That said, we were able to repurchase more shares given the lack of loan demand. Turning to our 2025 outlook, we expect solid growth in NII given further NIM expansion and a resumption of modest net loan growth.

Fees should grow nicely, paced by capital markets and wealth. We have confidence in this revenue outlook, so we'll step up investments in OpEx and CapEx to support key growth initiatives. We anticipate attractive positive operating leverage for the full-year of around 1.5%.

Credit costs are projected to improve year-on-year, and we expect to see reserve releases continue throughout the year. We will manage our CET 1 ratio above the high end of our 10% to 10.5% range, given ongoing uncertainty, but we expect to continue with regular share repurchases. We've included some slides on our medium-term outlook and how the drag from our legacy swap portfolio will dissipate with time.

We remain confident in our ability to achieve our medium-term 16% to 18% ROTCE target. Exciting time for Citizens. Our strategy rests on a transformed consumer bank, the best positioned super regional commercial bank, and the aspiration to have the premier bank-owned private bank.

We've made steady progress and will continue to execute with the financial and operating discipline you've come to expect from us. I'd like to end my remarks by thanking our colleagues for rising to the occasion and delivering a great effort in 2024. We know we can count on you again this year.

So with that, let me turn it over to John.

John Woods

Thanks, Bruce. Good morning, everyone. As Bruce indicated, we delivered results in 2024 that were broadly in line with our expectations at the beginning of the year.

3Q was our trough quarter, 4Q was a nice bounce back, and we are well positioned for growth in 2025. On slide six, you can see that we delivered underlying EPS of $3.24% for 2024, which includes a $0.45% drag from non-core and a net $0.05% investment in the private bank. Full-year ROTCE was 10.5%, which was 12% excluding these items.

Despite loan volumes being lower than expected given market dynamics, net interest income came in broadly in line with our expectations for the year, down 9.7% as we delivered a full-year margin of 2.85%. Fees were up a strong 9%, led by a pick-up in capital markets, card and wealth fees, while expenses were managed tightly, up only 1.5%, notwithstanding meaningful investments to support the build out of the private bank and private wealth. We also manage to alter an uncertain credit environment, maintaining strong reserve coverage levels with credit losses coming right in line with our expectations at the start of the year.

The transformation of our deposit franchise since our IPO became clear in 2024, as we managed through a very competitive environment against a backdrop of rapidly rising rates. Our deposit cost performance is better than the peer average, a meaningful improvement compared with prior rate cycles. And with the latest Fed rate cuts, we have aggressively lowered deposit costs in 4Q.

Importantly, our financial strength has allowed us to execute well against our strategic initiatives, providing momentum as we head into 2025. We've opportunistically built out the private bank, which has raised $7 billion of deposits through the end of the year and as expected became profitable in the fourth quarter. We also continue to make solid progress building out our New York City metro franchise.

We are investing in our payments platform and we are solidifying our commercial middle market coverage with investments in key expansion markets that complement our private bank success. I'll start with some of the highlights of the fourth quarter financial results referencing slides five and seven before we get into the details. We generated underlying net income of $412 million, EPS of $0.85%, and ROTCE of 10.7%.

This includes a negative $0.10% impact from the non-core portfolio, which will continue to steadily run off, creating a tailwind for overall performance going forward. As I mentioned, the private bank contributed to earnings in the fourth quarter, adding about a $0.01% to EPS. Importantly, we've returned to positive sequential operating leverage in the fourth quarter with a nice lift in NII and fees, even as we made important investments in the private bank and private wealth and added commercial middle market bankers in key expansion markets.

We ended the year in a very strong balance sheet position with CET1 at 10.8% or 9.1% adjusted for the AOCI opt-out removal, a pro forma Category 1 LCR of 119%, and an ACL coverage ratio of 1.62%, up from 1.61% in the prior quarter. This includes a robust 12.4% coverage for general office, up from 12.1% in the prior quarter. We also executed $225 million in stock buybacks during the quarter.

Next, I'll talk through the fourth quarter results in more detail, starting with net interest income on slide eight. NII was up 3.1% linked quarter, reflecting a higher net interest margin and slightly lower interest earning assets. As you can see from the NIM walk at the bottom of the slide, our margin was up 10 basis points to 2.87%, reflecting the benefit of non-core runoff, fixed rate asset repricing, and better deposit and loan betas, partially offset by our net asset-sensitive position as rates declined.

With the Fed cutting rates to the end of the year, we executed our down rate playbook, reducing rates ahead of the cuts and bringing down higher cost deposit balances. Our cumulative interest bearing deposit down beta was about 50% better than our initial expectation. Moving to slide nine, fees were up 5.6% linked quarter, primarily driven by an improvement in capital markets.

Capital markets saw strong loan syndication activity and a pickup in M&A, which benefited from seasonality and a general improvement in the environment. Debt underwriting was lower coming off a strong third quarter. Mortgage banking fees reflect higher MSR valuation with overall operating results remaining stable.

The wealth business delivered a solid quarter with good momentum and AUM growth from the private bank, but that was offset by lower transactional sales activity. On slide 10, expenses were up 3.5% linked-quarter, primarily reflecting hiring for the private bank and private wealth build out and commercial middle market bankers to complement our private bank footprint in Southern California and Florida. Our TOP 9 program achieved a $150 million pre-tax run rate benefit exiting the year, which is above our original target of $135 million. And we have launched our TOP 10 program, which is targeting $100 million in run rate efficiencies by the end of 2025.

On slide 11, average loans were down slightly and period-end loans were down 1.7% linked-quarter. This reflects the non-core portfolio runoff of approximately $900 million, a decline in commercial loans given paydowns in C&I and CRE against a backdrop of low client demand and lower line utilization. The private bank continues to make nice progress with period end loans up about $1.1% billion to $3.1% billion at the end of the year.

Next, on slides 12 and 13, we continue to do a good job on deposits in a very competitive and dynamic environment. Period-end deposits were broadly stable linked-quarter with attractive growth in retail in the private bank offset by the continued pay down of higher cost treasury and commercial deposits. This was primarily tied to non-core loan run down and a proactive effort to optimize the liquidity value of deposits.

The private bank continues to add customers and grow nicely with period end deposits up about $1.4% billion to $7 billion at the end of the year. Our retail franchise did a nice job raising deposits this quarter in low-cost categories, and importantly, we've seen strong retention as the CD portfolio turns over at lower rates. We also grew non-interest-bearing deposits by about $940 million linked-quarter driven by the private bank and seasonal flows in commercial. Combined our non-interest-bearing and low-cost deposits increased to 42% of total deposits in the fourth quarter.

Overall, our deposit franchise continues to perform well in a very competitive environment. Our interest-bearing deposit costs are down 31 basis points linked-quarter, which translates to a 50% cumulative down beta. Moving to credit on slide 14, as expected, net charge-offs were broadly stable at 53 basis points, compared with 54 basis points in the prior quarter.

A decline in C&I charge-offs was offset by an increase in commercial real estate primarily coming from the general office portfolio. Retail charge-offs were stable. Of note, non-accrual loans were down slightly, reflecting a decline in commercial given the resolution of a number of general office loans.

Criticized loans were meaningfully lower in the fourth quarter, following relative stability over the past few quarters. We continue to make consistent progress in working out the general office portfolio with limited new inflows and to work out. Turning to the allowance for credit losses on slide 15.

Our overall coverage ratio increased slightly linked-quarter to 1.62%, primarily reflecting the denominator effect of lower portfolio balances. While we maintain strong reserve coverage for certain portfolios such as general office, our overall reserve declined slightly in light of a broadly stable macroeconomic outlook and improving loan mix giving the runoff of non-core auto portfolio and originations in retail, real estate secured and commercial categories that have a lower loss content profile. The reserve for the $2.9% billion general office portfolio is $364 million, which represents a coverage of 12.4%, up from 12.1% in the third quarter as the portfolio continues to reduce.

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 16, we have maintained excellent balance sheet strength. Our CET1 ratio strengthened to 10.8%, which compares with 10.6% in the prior quarter.

Adjusting for the AOCI opt-out removal, our CET1 ratio was relatively steady at 9.1%, despite the impact of higher long-term interest rates on AOCI in the quarter. Given our strong capital position, we repurchased $225 million in common shares and including dividends we returned a total of $413 million to shareholders in the fourth quarter. Over the full-year, we repurchased $1.05% billion in common shares, representing $28.1% million or about 6% of our beginning of year outstanding shares at an average price of $37.35% per share.

Turning to slide 17, we view our overall strategy in three parts, a transformed consumer bank; the best positioned commercial bank amongst our regional peers; and our aspiration to build the premier bank-owned private bank and private wealth franchise. Slides 18 to 20 provide some updates on our positioning and progress, which you can read at your convenience. Note on slide 20, we've updated our private bank targets for 2025, given the success we've had to-date.

We bumped deposits from $11 billion to $12 billion, and AUM from $10 billion to $11 billion. We adjusted loans to $7 billion, given the impact of higher rates on borrowing demand. We are tracking well to meet or exceed our 5% accretion estimate to Citizens bottom line in 2025.

On slide 21, we provide an update on some of the tremendous progress in New York, since we made a play there about three years ago with HSBC's East Coast branches and Investors Bank. Moving [Technical Difficulty] Fed Funds rate of 4% and a 10-year treasury rate of 4.5% to 4.75%. We expect NII to be up 3% to 5%, driven primarily by an increase in NIM to about 3% for the year.

We project spot loan growth in the low-single-digits overall and mid-single-digits excluding non-core. Loan growth will be impacted by non-core runoff, paydowns, and more selective originations in CRE and muted commercial loan demand early in 2025. We expect C&I to pick up in the second-half of the year as new money gets put to work.

Private banks should see consistent loan growth throughout the year. We expect average loans will be down roughly 2% to 3% and overall earning assets to be down about 1%, which reflects the extent of the 2H ‘24 drop and continuing non-core runoff. Non-interest income is expected to be up in the 8% to 10% range, led by capital markets and wealth.

We are projecting expenses to be up about 4% as we are confident in our revenue outlook and want to step up our investments and growth initiatives after a constrained 2024. Excluding the private bank and private wealth, the increase in expenses would be about 2.6%. We have provided a walk showing the key components of our 2025 expense outlook on slide 23.

When you put the revenue and expense outlook together, we expect to deliver positive operating leverage for 2025 of roughly 150 basis points. Our outlook for net charge-offs is to trend down to approximately $650 million to $700 million or high-40s in basis point terms. We will continue to work through the general office portfolio and given macro trends, the remixing of the balance sheet, and expectations for modest spot portfolio growth, we will likely see ACL releases over the course of the year.

And finally, we expect to end the year with a strong CET1 ratio in the 10.5% to 10.75% range, which is above our medium term operating range of 10% to 10.5%, given the continued uncertainty in the macro environment. As we monitor the market environment and loan growth levels, we will opportunistically engage in share repurchases. It's worth noting that loan growth was below expectations in 2024 and we were able to offset the impact of share repurchases and less pressure on deposit costs.

We would use the same playbook in 2025 if needed. On slide 25, we provide the guide for the first quarter. Note that the first quarter has seasonal impacts on revenue, namely capital markets fees, lower day count, reducing net interest income, and taxes on FICA reset and compensation payouts impacting expenses.

Credit trends are expected to improve and we should end the first quarter with CET1 in the range of 10.5% to 10.75% with a good amount of share repurchases. Moving to slides 27 to 28, as we look out over the medium term, we have a clear path to achieving our 16% to 18% ROTCE target. Expanding our net interest margin is an important part of improving our ROTCE, which we project to be in the 3.25% to 3.5% range in 2027.

However, given our balance sheet positioning and our asset sensitivity, if the Fed maintains an elevated Fed funds rate at or above 4%, this will help to deliver a NIM level at the upper end of our range or higher. On slide 28, we provide a walk to our target 16% to 18% ROTCE. We have significant NII tailwind driven by non-rate dependent terminated swaps amortization and non-core runoff, which will generate about 300 to 400 basis points of ROTCE through 2027.

We add roughly another 100 basis points with the net impact of other dynamics such as positive fixed asset repricing, the runoff of legacy active swaps, and the offsetting impact of our naturally asset sensitive balance sheet. That puts you into the 15% to 16% range. We expect to generate solid returns from our legacy core business plus the successful execution of the private bank and other key initiatives I talked about earlier, which should drive meaningful revenue growth, generate positive annual operating leverage, and improving our efficiency ratio, which will add another 200 to 300 basis points to ROTCE.

We should see some benefit from credit where we have been over-providing today versus a more normal environment, with charge-offs improving to the low to mid-30s basis points, reflective of the improved mix of the portfolio with less auto-increase and more private bank loans and C&I. AOCI impacts are providing a ROTCE benefit today, which should normalize with time. This impact will partially offset with share repurchases.

In short, we feel very confident in our ability to achieve the 16% to 18% medium-term target. To wrap up, we delivered a solid performance in 2024, broadly in line with expectations. Importantly, we turned the quarter on net interest margin, delivered improving capital markets results, and remained disciplined on expenses, returning to positive operating leverage in the fourth quarter.

We ended the year with a strong capital liquidity and credit position that puts us in an excellent position to drive forward with our strategic priorities. We are well positioned for 2025, and we remain confident in our ability to deliver our medium term 16% to 18% return targets. With that, I'll hand it over to Bruce.

Bruce Van Saun

Okay, thank you, John. Ivy, let's open it up for some Q&A.

Operator

Thank you, Mr. . Van Saun. We are now ready for the question-and-answer portion of the call.

[Operator Instructions] Our first question will come from Scott Siefers from Piper Sandler. Please go ahead.

Scott Siefers

Good morning, guys. Thank you for taking the question. Let's see, John, maybe wanted to start on sort of that medium-term margin outlook.

Can you just sort of add some additional context on what gave you the confidence to bump up the top end of that medium-term range to basically the extra error between the 3.40% and the 3.50% at the top end of the range, please.

John Woods

Yes, sure. I think the main reason for that is just the outlook on rates. I'd say that when you think about where we were last quarter and in prior quarters, you know, the Fed was landing in a terminal, you know, rate that was well below 4% when we put this together previously.

Now, when you see the Fed, you see the bond market discounting something closer to 4%, we've basically widened the expectation of range that you could see at the upper end. So 3% would be sort of consistent with our floor of 3.25%. But 4%, given our asset sensitive balance sheet, would be more consistent with a higher number than the 3.40%, we showed last quarter. And you may recall last quarter we said that, hey, a 3.50%-ish or a 3.75% Fed would be consistent with 3.40%.

But now the Fed, you know, could land somewhere near 4%, and so that's the main reason why we, you know, we raised that. I think there are other reasons too. I mean, just getting, you see the confidence.

We have a growing confidence based on our performance in the fourth quarter with a very solid 10 basis point increase in NIM. We've continued to opportunistically hedge to reduce the impact of rates falling into the future. So just a number of positive benefits that we were able to see that gave us the confidence to increase the upper end to 3.50%.

Scott Siefers

Got it. Perfect. Thank you for that.

And then separately, I was hoping you could help to put in a little bit more context, sort of the higher fourth quarter costs and investments. I mean, I certainly understand them in light of what you're building with the private bank, but just maybe curious about where you stand such that you're confident that costs can hold more firm after that small additional lift that we would expect in the first quarter.

John Woods

Yes. I mean, I would say we did -- we put something in the slide deck there on slide 23 that you can take a look at. I mean, I think in 4Q for the full-year, but in 4Q, you know, we've been investing in the private bank all along and just given how well that's performed, that gave us the confidence to continue to invest and maybe accelerate some investments in the private bank through team advisor lift outs and also in the commercial bank where we're investing in our capabilities in Southern California and Florida.

So a combination of those two things is what caused our expense number to be up a bit in 4Q. And maybe, Bruce, you want to add to that.

Bruce Van Saun

I'd also just add to that, Scott. For the full-year, we were still on our guide range of 1% to 1.5%. And so what I would say is that 2024, given some of the built-in revenue trajectory was a year where I think all banks, including ourselves, had to be very, very disciplined on expenses.

When you start to see that revenue is improving, the revenue outlook is improving, which we saw that occurring in Q4, and we can see more visibility into revenue strength into next year than some of the things that you may be deferred that are really attractive investment cases, you start to lean in again a bit. So we started that process a bit in Q4. When you look at next year, we'll be guiding to about a 4%.

But again, if you strip out the impact of private bank and private wealth, which we want to continue to, there's a great opportunity there to fill that void in the market. We want to keep disciplined investing into that, the rest of bank is down at roughly 2.5%. And so the top program usually provides about a 1% benefit.

So we're leaning in a little bit across some attractive investment opportunities across the rest of bank, but still the overall numbers are kind of in a position where we should have quite a bit of confidence we can deliver positive operating leverage in 2025.

Scott Siefers

Perfect. All right. Thank you very much.

Bruce Van Saun

Sure.

Operator

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

Erika Najarian

Yes. Hi, good morning. I just wanted to think about some of the dynamics that are more strategic than mechanical on the margin improvement, John.

Give us a sense in terms of how you're thinking about deposit growth and the mix of that deposit growth and also sort of what the repricing cadence looks like. And given that the neutral rate seems to be settling around 4%, does the pacing change. Is the beta fast first and then slow down as loan growth comes back.

John Woods

Yes, a couple of comments related to that. I mean, I think strategic opportunities to grow deposits, you know, you see what we've been able to do with the private bank and we've raised our target there. You know, our performance in the last rate tightening cycle has been better than average and we've seen our opportunities to grow low cost actually be better than what we're seeing in a lot of our industry peers.

So the core retail franchise is performing extremely well. The idiosyncratic opportunities in New York Metro and private bank are adding on top of that. And our commercial business is driving DDA growth as well.

So from a strategic standpoint, the deposit franchise is an incredibly solid foundation as we head into this potential easing cycle. I mean, I think when you look at betas, we did outperform our own expectations in the fourth quarter with betas around 50%. When we were originally thinking around 40%, based on the rate outlook, we expect that betas can continue to increase.

So we went with the earlier beta is we did get out of the gate pretty quickly and I think later, our opportunity to grow beta from here, we're going to end up seeing our betas get to low to mid-50%s, maybe by the time you get to a terminal 4%, so that you can do the math there on what the sequential betas look like, but feeling incredibly confident in the underpinning of the NIM trajectory given the deposit franchise.

Bruce Van Saun

Yes, maybe ask Brendan to comment a little bit about deposits.

Brendan Coughlin

Yes, thanks for the question, Erica. Maybe a quick point on private, and I'll talk for a minute about core retail deposits. On private, our low cost deposits remain around 40%, so DDA [Indiscernible], despite the pretty, pretty healthy growth, the quality of the deposit book has been very consistent and very accretive to the overall mix to Citizens.

And we expect that, while that could pull back a little bit, we expect the accretion mix to still be very strong throughout 2025. So that growth will both be in quantity and quality for the overall franchise, which is great. On the retail book, I've mentioned this on most every call, but the full-year performance for the retail portfolio was very, very strong against peers with benchmarks that we look at.

We think we're somewhere in the range of 150 basis points better than peer average on low cost deposits, which is again largely DDA and [Indiscernible]. Our DDA book, the outflows sort of stopped around August, September, and we've been flattening out. We saw some very modest growth at the back half of Q4, including a pretty sizable tick up in [Indiscernible] in the back half of Q4.

So the strength there is still very good. We believe we were indexed probably number one in the regional bank peer set, and retail banking core DDA growth for the full-year 2024. And there's nothing that I see that suggests that we won't continue to outperform peers on our relative low cost deposit performance.

The other thing I would say is we've been very, very successful in our CD book turning over at lower yields with high retention. So in Q4 we had about $5.5% billion in CDs in the retail book turnover with over a 90% retention rate. And those CDs are coming in at about 100 basis points better in yield.

And so when I look at the first-half of the year, we've got a little bit more at the $14 billion in CDs on the retail book that will also turn over. So that should give us some dry powder to drive those yields lower. And we expect to retain the vast majority of those balances, largely in deposits, with some trickling out into support for the wealth business and going into managed money in AUM.

But that gives us a good amount of dry powder for thinking about the first-half of the year of bringing deposit yields in the CD book down.

Bruce Van Saun

Great.

Erika Najarian

Great. That's helpful. And just secondly, just a quick follow-up, and I just wanted to ask a bigger question of Bruce.

One, John, given all those elements and the fact that you're entering at 2.87% for the year and you have a 3% net interest margin guide for the full-year, does that mean the exit is somewhere between 3% to 3.10%. And if so, Bruce, that tees you up for a very strong year, not just mechanically but strategically. I think the question that I was getting this morning is where are we in terms of the investment horizon with regard to the private bank and the private wealth initiative. In other words, you're setting up for great NII growth in 2026 and investors are wondering if you're going to continue to front load some of the investment spend in the wealth and private bank initiative.

Bruce Van Saun

Yes. So just to your favorite question, exit rate on NIM, I would bump that up a little bit and say probably more like 3.05% to 3.10%. So that's that.

Just in terms of how we think about the private bank, we've launched this back in the middle of ’23. And it's been a tremendous effort to get folks in place and support them appropriately and have them transition in customers. And it's been a really great success story, certainly not the finished article, more to do to get to White Glove Service, but feeling good about the trajectory that we're on.

I want to just make it clear, though, that we're very committed to delivering our financial commitments on this business. We want to demonstrate that it is a profitable business that can deliver attractive returns and we're running it a bit differently than the way it ran at First Republic. So we have some guardrails around the kind of nature of the business we want to take on and the spreads we hope to achieve et cetera, et cetera.

Over, you know, one thing that we wanted to deliver this year was to be profitable in the fourth quarter. We said we'd be profitable in the second-half of the year. We got to that in August.

We had enough headroom that we felt confident that we could add another team in Southern California. As you know, Erika, when you bring in these private banking teams, they show up and they're all expenses initially, and then over time they transition in customers, and then the lines cross and they become profitable. So we still delivered a profitable fourth quarter, about a $0.01% of EPS.

And so when we look at next year, depending on how fast that business is growing if we're hitting our targets, there may be opportunities to add additional teams, while still delivering the profitability of the 5% accretive to the bottom line. And by the way, that translates, now we're starting to get up towards that 20% ROTCE target for the business already by the end of next year. So we're keeping those guardrails in place as we grow the business.

But you know, it's, there's such a big opportunity there. There's some great people out there who want to join the platform that we have to be thinking about and how to fill the void in the market and really build a great franchise. So I think we have that balance right and you can expect us to be disciplined in how we approach that and I'd like to see if we're running faster than projected that we're going to be leaning in and adding some additional teams.

The wealth teams typically are accretive right from the get-go. So those we can keep doing throughout the year. It's more kind of the private banking locations, PBOs, and additional teams that we just need to fit into the overall financial dynamic that we're trying to deliver.

Erika Najarian

Very helpful. Thank you.

Operator

Your next question comes from the line of Matt O'Connor from Deutsche Bank. Please go ahead.

Matt O'Connor

Good morning. Just on the timing of the ROTCE targets that you laid out, medium term, is that implied for 2027 or just on the liquidity on that.

Bruce Van Saun

And which targets, the MTO, the….

Matt O'Connor

Sorry, your -- sorry the 16% to 18% medium term. Any way to frame the timing.

Bruce Van Saun

Yes, well, I think the medium term to us is by 2027 and, you know, we'll be on an arc upwards arc through ‘25 and ‘26 in order to get to that destination. So I don't necessarily want to put a pin in it as to whether we could get there in ‘26. There's possible scenarios that that could happen, but certainly by ‘27 we feel quite confident that we'll be there, Matt.

Matt O'Connor

Okay. And then you laid out the waterfall in terms of how you get there, and just to clarify, the operating leverage of 1.5% this year, obviously there's a nice improvement in that in the next couple of years to support that ROTCE level, right.

Bruce Van Saun

Yes. I think clearly as we continue to see the benefit of the kind of swap runoff and non-core runoff and the NIM lift, that really juices your positive operating leverage. And that, there's a big, you know, there's some contribution from that in ‘25, but it actually accelerates in ‘26.

And so we would expect positive operating leverage to be even more in 2026.

Matt O'Connor

Okay, thank you.

Bruce Van Saun

Okay.

Operator

[Operator Instructions] Your next question comes from Gerard Cassidy from RBC Capital Markets. Please go ahead.

Gerard Cassidy

Hey Bruce. Hi John. How are you.

Bruce Van Saun

Hi, good.

Gerard Cassidy

Bruce, can we take a step back for a moment. Obviously, we have a new administration coming in, and we're going to get a number of new heads of the different regulatory agencies. Maybe the most important change coming from the Vice Chair of safety and soundness at the Fed, with Barr stepping down about two weeks ago.

When you look at it, how are you kind of thinking about what can change to the benefit for not just Citizens for the banking industry. What are you looking or hoping for that these new leaders can come in and really enable the banking industry to the Treasury Secretary nominee in his testimony get the banks more involved in the U.S. economy.

Bruce Van Saun

Yes. Well, I think we've started to make some headway already on that this year, Gerard, as some of the proposals that were a response to what happened in 2023 seem to be kind of overdone, overcooked in terms of, you know, changes to capital liquidity and funding frameworks that I think the industry pushed back and thought that they needed to be dialed back. And we were starting to make progress on that in any event.

So I do think like putting that to bed and coming up with what are the final Basel III capital rules, what are we going to do with liquidity, what are we going to do with funding, and making sure that tailoring remains central to how the framework is set. That's kind of job one on the prudential side. I would say the other benefits could be just a refreshed look at supervision.

There's a lot of folks who work really hard and we get really good advice and input from the supervisors, but sometimes things get overcooked a bit and you lose the forest for the trees. So just kind of making sure that, that is focused at the right level and trees is up to, have a little more flexibility in how we operate. That could be positive as well.

And I'd say some of the pressure on fees that we've seen come out of the CFPB, they're not always net beneficial. They may make good headlines, but squeezing a balloon and you close down this and then the banks have to make a return, so they have to charge somewhere else. And so just having a, kind of, a more insightful view as to how to allow banks to operate with well-disclosed fees that actually benefit their customers, as opposed to constantly pushing on that.

That would also be helpful. And then I'd say last thing, there's probably a need for more consolidation in the industry, particularly at the smaller end of the spectrum. And so kind of taking the sand out of the gears on that and allowing that to take place with more certainty, I think that would also benefit the industry.

So I think a number of all that should allow banks to continue to have the capital to lean in, support economic growth. I think we've done a good job of that, and we want to continue to be able to do that.

Gerard Cassidy

Just quickly, in what you just said, Bruce, consolidation at the smaller end of the spectrum, how do you define smaller end. $10 billion in less asset-sized banks or something smaller.

Bruce Van Saun

Yes, I don't know where to draw that line, but certainly, you know, I'd say banks that are even in the 25 to 50 category just have a lot of investing to do to keep up with technology changes, business model going digital, cyber defenses, a lot of regulation. And so I just think there's a lot of great banks in that size category, but ultimately I think there'll be some, who feel that they can gain some benefits from scale. And so I think if the framework were more certain that you'd start to see consolidation all the way through from the very smallest banks, maybe up to those smaller regionals.

Gerard Cassidy

Great. And then as a follow-up question, can you guys, you give us very good detail on your commercial real estate portfolio and how you're working through the issues that the industry confronts on commercial real estate office in particular. Can you give us an update on using the baseball vernacular.

What inning do you think we're in, in getting through this kind of pig in the python situation in commercial real estate and specifically office.

Bruce Van Saun

Yes, I'm going to start and turn it over to Don, but I'd say when we saw this happening, it kind of kicked off in the early part of ‘23 and we said this is a multi-year process to kind of work this out just based on the nature of the terms of the leases and kind of return to office dynamics, et cetera, that this was going to take a lot of play out. And so we've seen that consistently through the rest of ‘23 through ‘24. I think looking into ‘25 will still be in workout mode, but I think we're probably past the midpoint at this point, so maybe middle innings of the game and hopefully you know we see that start to really drop off as we exit ‘25.

But I'll leave it over to Don.

Don McCree

Yes, Gerard, I think that's right. I'll channel my Bob Uecker, since we're memorializing him and you're analogizing baseball. But I think the good news on the real estate side, as Bruce said, we still have kind of ‘25 to work through.

We are seeing almost no incremental deterioration based on the entirety of the portfolio over the last year or so. So everything like we've identified as problematic, needing to go through the workout cycle, estimation of losses is pretty much playing out as we expected. And we are getting toward the back end, as Bruce said, in ‘25.

The good news is across the board in the real estate complex is liquidity is really coming back. And we're seeing, you know, this not necessarily in the office portfolio, but in the rest of the real estate portfolio. And that can ripple over as we get into later portions of ’25.

So we're seeing the CMBS market very active, we're seeing the life companies very active, we're getting taken out of criticized assets at par, you know, in the non-office space, but in the multifamily space. So there are a lot of kind of encouraging signs that we're seeing across the board. And I think as John said in his remarks, we're seeing no new migration into our workout team.

So there's a lot to be a little bit more optimistic about. We've got a ways to go to work out. And interestingly, a lot of the sponsors think that there's some, you know, brightness at the end of the tunnel.

So they're dribbling in cash to keep the properties alive, because they think there might be an opportunity down the road. So it's elongating the workout cycle a little bit more than past cycles. But I think we feel like we have a really good handle on it and it's trending reasonably consistent with lower expectation.

Bruce Van Saun

And John, you have a stat. So the overall criticized assets came down sharply in the fourth quarter led by the drop in CRE.

John Woods

Exactly, yes, criticized levels down significantly. And overall, actually overall criticized is down 17% led by a reduction in general office, so that's great news.

Bruce Van Saun

That was in the order of like 30%.

John Woods

Yes, exactly, we got that. And Don mentioned inflows to outflows have really flipped around rather than inflows exceeding outflows. That's flipped around in the fourth quarter significantly. So inflows slow to a trickle and then upgrades outpace all of that in the fourth quarter.

So turning the corner in the game back to the imagery was nice to see in 4Q.

Gerard Cassidy

Appreciate all the color. Thank you.

Bruce Van Saun

Sure.

Operator

Thank you. And our final question comes from Manan Gosalia from Morgan Stanley. Please go ahead.

Manan Gosalia

Hi. Good morning. I wanted to ask about the belly of the curve.

How much of an impact does that have on both the asset and the liability side of the balance sheet. So I'm thinking from an asset side it gives you some more benefit from fixed asset repricing, but on the liability side maybe it makes it a little bit harder to drop those CD rates further. Is that something you guys are focusing on.

You know, does it, is there a risk that if the belly of the curve keeps moving higher, could that weigh on some of those deposit betas from here.

John Woods

Yes, I'll go ahead. I appreciate the question. I'll comment on that.

I mean, I'd broadly just make the point that we're asset sensitive, and we're basically asset sensitive across all of the key rates across the curve for the most part. When you look at the belly of the curve, that's actually driving our fixed asset repricing and when you see our net interest margin progression through time, that's consistently a positive. And so on a net basis, if the belly of the curve is rising, we're net beneficiaries of that.

You know, on the funding side, when you think about CDs, you know, that out of the gate that's typically in a less than a one-year term, that can turn over. But net-net, our asset repricing would overcome even if the belly of the curve was consistently higher, that would be a net positive for us through time. And you can see that in our net interest margin.

We've built in the curve that we see basically out the window through the medium term progression. And the fixed rate asset repricing is 15 to 20 basis points. You know, by the time you get to 2027 and that's consistently building through ‘25 into ‘26 and ‘27.

So that's a net positive. I think the only place that our funding comes into play on the belly is maybe in the senior debt space. And we're really well positioned there.

We're north of 4% of our WA. And so that's not a huge driver for us. But again, the asset sensitivity, higher rates basically is a net positive for us.

Manan Gosalia

Yes, I'm just thinking with you guys were actually ahead of the curve when the Fed was cutting rates and you were able to drop those deposit rates sooner. So I'm just thinking now that there's not as many rate cuts in the forward curve and the belly of the curve is higher, whether that's weighing on deposit costs at all.

John Woods

Yes, no, as I mentioned, we'll be able to get deposit betas up to the low to mid-50s from where we are today at around 50%. And if -- and that's based on the curve that where we have a cut in the second quarter and a cut in the fourth quarter. If, however, there are no cuts in 2025, our deposit betas would flatten out, but that's a net positive for us, because of our net floating position and loan yields would more than make up for the fact that deposit betas might not be quite as high, because we're asset sensitive.

And I should mention that our asset sensitivity actually grows in ‘25 and ‘26 and ‘27. So on an all-in basis, our net interest margin is a beneficiary of rates being higher, because loan yields more than offset what the impact on deposit data might be because we're overall asset sensitive.

Manan Gosalia

Got it. Perfect. Thank you.

And if I can just ask a follow-up on loan growth. You're looking for mid-single-digit spot loan growth, excluding non-core loans. Can you talk about the catalyst there.

And also like where do you see loan growth coming from. Is it sponsors. Is it traditional middle market. Is it both.

Bruce Van Saun

Yes, I'll start and then John can give you more details. But I think we have been quite disciplined in making sure that where we're putting out loan capital that we're getting good returns. And so we haven't really sought to force the action.

In fact, we've, through balance sheet optimization, have actually exited a number of relationships. In commercial, we're certainly trying to run down the CRE book a little bit, and then we have non-core set up to run down assets. I think the catalyst that we're looking for to actually get back to loan growth, which is certainly desired and desirable.

The main building block here, the private bank, is I think likely to put on about $1 billion a quarter to get to the targets at the end of the year. So that's pretty idiosyncratic to us in having a startup business that's growing that we can count on for that kind of growth and not only in loans, but also in deposits. So if you take out that growth, then the spot loan growth drops, John, from mid-single-digits down to low-single-digits or something like that.

So I think we're not really calling for any aggressive resumption in loan growth. We're anticipating that things will be relatively subdued, continuing into the first-half of the year, and then start to pick up in the second-half of the year in commercials. So we saw line utilization go down quite a bit in Q4, particularly subscription lines.

So that new money deal machine, private equity, putting money to work, waiting for [Indiscernible] on that. That didn't happen in Q4. We don't expect it just because the calendar flipped the page to pick up right away in 2025.

But I think that will begin to happen and we'll see all the benefits of that, higher capital markets fees, loan growth that comes along with that. But we're being cautious in terms of how much of that we put in to the forward forecast. And then on consumer, we just have a few of the areas that have consistently been able to grow, mortgage, e-lock, our card business, no great shakes there either, just some moderate level of growth.

So, when you look across that, we've got some things running down. We have private banks steady as she goes. We have a resumption in the second-half of commercial and a little lower level of steady as she goes in consumer.

So, John, I don't know if you want to add any color to that.

John Woods

No, I just had another point or two to emphasize. I agree with that. We said mid-single-digits, ex-non-core.

If you think about a three legs of the stool, you hit all three. But if you private bank on its trajectory really is a huge driver, and is the largest driver getting us to that mid-single-digits. But if you look at it excluding the private bank and excluding non-core, we would be in a low-single-digits trajectory as Bruce mentioned.

And when the consumer legacy is half of that and the other half of it is in commercial. Consumer legacy, you mentioned, Bruce, and in commercial, subscription and M&A activities likely to pick up.

Bruce Van Saun

In expansion markets and middle market.

John Woods

Exactly. So we've got expansion markets contributing as we see in 2025. The other important part is subscription line utilization is about as low as we've ever seen it.

It's in the low-40s, typically in the mid-50s. And so we see some of that partial, we see some of that coming back, not all the way back. Fund finance, you know, that we've been successful at in the past will contribute, as well as asset-backed.

And then, you know, I mean, I would just say that, you know, all of that put together keeps us in a good spot. And as we mentioned earlier, to the extent that this doesn't happen, as we mentioned earlier, we've been able to navigate a lower loan growth environment in ’24 quite well. We would run that playbook back, and you'd see more buybacks out of us with a stock price that's attractive as we see it below intrinsic value.

And we'd at the margin likely deliver even better deposit performance, if that were to be the case. So I think we've got some nice optionality in 2025 to stay on our trajectory.

Bruce Van Saun

Yes, I would just say one final thing is that really the NII guide is as it was, as you saw in the fourth quarter, it's really driven by the NIM expansion. And so it's not as dependent on volume growth in order to deliver that. And then as John said, if you have -- if you don't see the volume growth, you have other levers such as you can repurchase your shares and then you won't push on deposits as much.

And so you can be a little more disciplined on your deposit pricing. And so I'd say we feel quite confident overall in that NII guide for next year.

Manan Gosalia

That's really helpful. Appreciate the detail on here. Thank you.

Bruce Van Saun

Okay, is that it. I guess that's it for the questions. We've got a lot of banks reporting today, so I hope everybody got a good night sleep last night and it makes it through the day.

So thanks again for dialing in today. We appreciate your interest and support. Have a great day.

Take care.

Operator

That concludes today's conference call. Thank you for your participation and you may now disconnect.