Citizens Financial Group, Inc. 2026 Q3 Earnings Call

Good morning, everyone, and thank you for joining us. First this morning, our Chairman and CEO, Bruce Van Saun, and our CFO, Anuj Banerjee, will provide an overview of our third quarter results. Brendan Coughlin, our President, and Ted Swimmer, our Head of Commercial Banking, are also here to provide additional color. We will be referencing our third quarter presentation, which is located on our investor relations website. After the presentation, we will be happy to take questions. Our comments today will include forward-looking statements, which are subject to risks and uncertainties that may cause our results to differ materially from expectations. These are outlined for your review in the presentation. We also reference non-GAAP financial measures, so it is important to review our GAAP results in the presentation and the reconciliations in the appendix. With that, I will hand over to Bruce.

Thanks, Chris, and good morning, everyone. Thanks for joining our call today. We delivered another good quarter in Q3 as our strong momentum continues. EPS growth was 8.5% sequential quarter, 34% year-on-year, and ROTCE improved to 15.1%. We continue to deliver strong positive operating leverage, 1.8% sequential quarter and 5.3% year-on-year. Total revenues hit a record in Q3, paced by NII growth of 2.7% sequential quarter and up 13% year-on-year. Notwithstanding some interest rate movement and volatility during the quarter, we saw our NIM meet expectations with 2 basis point increase to 3.19%, which positions us for strong NIM expansion in Q4. Loans and deposits were broadly flat as expected, given some loan pull forward into Q2 and seasonality on deposits, which will turn favorable in Q4. Fees were down slightly given volatile capital markets conditions, which resulted in some deals pushing into Q4.

We still believe that market conditions remain healthy as we enter Q4 and our pipelines are very strong, particularly in M&A, which is at record levels. We do not see the current level of rates introducing any real stress on our various loan portfolios. Credit metrics remain broadly positive. Our capital liquidity and funding positions remain strong. Given our consistent growth in earnings, the board authorized an increase in our dividend of 13% to $0.52 per share. In addition, the board also increased the capacity of the company's common share repurchase program to $1.95 billion, an increase of $1.3 billion. Notwithstanding lower AOCI adjusted CET1 ratio in the quarter, we are comfortable operating with our gross CET1 a little above our 10%-10.5% target range, which will still allow for at least $200 million in Q4 share repurchases.

We continue to progress our strategic initiatives with good consistent progress across the private bank and wealth build-out, Reimagine the Bank, our Consumer NEXT branch project, attracting talent to the commercial bank, and growing our New York Metro presence. We have significant resources dedicated to leveraging AI and to driving a strong cybersecurity framework and capabilities. Overall, there is lots to do, but we feel we are prioritizing and executing well. We feel good about our outlook for Q4, and we feel we are positioned well for 2027 and the medium term. Our view of the macro fundamentals remains positive, though we expect uncertainty and volatility to remain high. With that, I will turn it over to Anuj for the financial details.

Anuj. Thanks, Bruce. Good morning, everyone.

As Bruce mentioned, we delivered strong third quarter results. Record revenue performance and expense discipline drove more than 500 basis points of positive operating leverage year over year. Referencing slides 3 and 4, we delivered EPS of $1.41 for the third quarter, an $0.11 or 8.5% improvement over the second quarter. We saw solid improvement in ROTCE to 15.1%, up from 13.9% in the second quarter. PPNR was up 4.5% linked quarter and up about 19% year over year. Third quarter results reflect higher NII given continued net interest margin expansion, slightly lower fees, and good expense discipline. With respect to our balance sheet, we continue to maintain robust capital, strong liquidity levels, and a healthy credit reserve.

Turning to slide 5, I will cover our third quarter results in more detail, starting with net interest income, which was up 2.7% linked quarter given a 1% increase in interest earning assets and a higher net interest margin. Our net interest margin continued to expand, increasing 2 basis points for a 19 basis point lift compared with the same quarter last year. In the third quarter, the time-based benefit from terminated swaps contributed 2 basis points. While the benefits of fixed-rate asset repricing and improved asset yields were essentially offset by funding costs as rates moved higher during the quarter. Importantly, average demand deposits were up 2%, which helped mitigate the increase in overall deposit costs, which were up 3 basis points. Moving to slide 6. Fee income is down 1% linked quarter and up 3% year over year.

Capital markets had a very strong third quarter, with fees down slightly compared with the strong second quarter and lower than the exceptional third quarter last year, which benefited from deals being completed following market volatility earlier in the year. M&A fees were up significantly linked quarter, and our pipeline heading into the end of the year is very strong. Loan syndications, bond and equity underwriting fees were slightly lower given market volatility. We continue to maintain strong market share, ranking as the number 2 middle market sponsor book runner for the last 12 months. Wealth delivered another record quarter, with fees up 7% linked quarter and 17% year over year, reflecting higher advisory fees driven by AUM growth in the private bank and in our retail network.

Mortgage fees were lower, primarily due to the negative net MSR valuation result of $13 million, given high volatility in mortgage rates, though servicing revenue provided a partial offset. On slide 7, expenses were well managed and stable linked quarter, and our efficiency ratio improved to 60%. We delivered positive operating leverage in the quarter of 5.3%, with year to date at 6.3%. Moving to loans on slide 8. Average and period-end loans were both up slightly linked quarter, paced by growth in private bank and retail. Private bank period-end loans were up $2 billion linked quarter, reflecting higher commercial line utilization and strong originations in high-quality residential mortgage and multifamily lending. Commercial period-end loans, excluding the private bank, were down $1.5 billion or 2% linked quarter.

Given some loan pull forward into the second quarter, third quarter results were driven by continued planned reductions in CRE, primarily given multifamily and general office paydowns, as well as lower C&I line usage. Growth in period-end retail loans ex non-core was $565 million, led by real estate secured categories. This was partially offset by non-core portfolio run-off of roughly $300 million for the quarter. Next, on slides 9 and 10. We continued to do a good job on deposits, despite some seasonality, which should reverse in the fourth quarter. Average deposits were stable linked quarter, primarily driven by growth in commercial, largely offset by lower consumer. Spot deposits were also stable linked quarter, reflecting growth in the private bank, which reached $18.5 billion at the end of the quarter, and growth in commercial, partially offset by a decrease in consumer.

Our consumer deposits represent 63% of our total deposits, which compares favorably to a peer average of about 57%. Additionally, our mix of total interest-bearing and low-cost deposits was stable at 42% of total deposits. Moving to credit on slides 11 and 12. Credit continues to be broadly favorable, with net charge-offs stable at 37 basis points compared with the prior quarter. On slide 12, you will see that we had a modest reduction in the allowance along with a slight reduction in ACL coverage ratio to 1.47%. We continue to improve our portfolio mix with the reduction in general office and multifamily balances and strong originations of lower loss content C&I, residential real estate secured, and high-quality private bank loans. The economic scenario we used was a little more conservative this quarter, reflecting the higher rate environment.

As we look broadly across the portfolio, the credit outlook remains positive, though we continue to carefully monitor the macroeconomic environment. Moving to slide 13. We maintained excellent balance sheet strength, ending the quarter with CET1 at a healthy 10.5% at the top end of our medium-term target operating range. We returned about $322 million to shareholders in the third quarter, with $197 million in common dividends and $125 million of share repurchases. Cumulatively, we have now returned $1.24 billion to shareholders in dividends and share repurchases through the first 9 months of the year. Our AOCI-adjusted CET1 ratio and TCE ratio ended the quarter at 8.7% and 6.7%, respectively. Notwithstanding these AOCI impacts, we remain confident in our capital strength and capital generation capacity. Moving to slide 14. The private bank continues to make excellent progress.

The private bank again delivered strong deposit growth ending the quarter at $18.5 billion. Importantly, the overall deposit mix and cost continues to be very attractive. The private bank also delivered solid loan growth in the quarter, adding $2 billion of loans to end the quarter at $11.7 billion. The loan portfolio maintains a healthy spread of approximately 4% over deposit costs. Client assets increased by $1.2 billion to end the quarter at $12.4 billion. We added another strong team in Tampa, and additional bankers in Philadelphia this quarter, and we plan to continue to adding top quality teams in key geographies. Moving to slide 15, we are making very good progress executing our Reimagine the Bank program, as we continue to leverage a host of new innovative technologies across the bank to simplify our business model, reshape our customer experience, and drive a meaningful improvement in productivity and efficiency.