Citizens Financial Group Inc

NYSE:CFG

Earnings Call Analysis

Strong momentum expected in Q4, driven by operational efficiencies and Private Bank growth.

In the third quarter, the company generated $392 million in net income, with EPS at $0.79. Notably, the Private Bank has shown remarkable progress, reaching breakeven and projected profitability in Q4, amid overall positive operational momentum heading into 2025. The CET1 ratio remains robust at 10.6%, supported by $325 million in stock buybacks. Looking forward, net interest income is expected to rise by 1.5% to 2.5%, primarily due to better net interest margin from favorable deposit repricing and noncore runoff, while overall fee revenue growth is anticipated in the mid to high single digits. The company targets a 16% to 18% return over the medium term.

Strong Quarterly Performance Amid Challenges

In the third quarter, Citizens Financial Group demonstrated resilience with an underlying net income of $392 million and earnings per share of $0.79. This performance included a negative impact of $0.11 from a noncore portfolio running off, indicating future improvements are likely as these noncore assets continue to decline. The return on tangible common equity (ROTCE) stood at 9.7%, underlining the bank's effectiveness in generating profits from its equity.

Capital Strength and Share Buybacks

The bank maintained a solid capital position, reporting a Common Equity Tier 1 (CET1) ratio of 10.6%. Following an adjustment for AOCI opt-out removal, this ratio would adjust to 9.2%. In a positive move for shareholders, the company executed $325 million in stock buybacks during the quarter, demonstrating confidence in its ongoing performance and future growth potential.

Net Interest Income and Fee Trends

Net Interest Income (NII) faced a slight decline of 2.9% compared to the prior quarter, attributed mainly to lower Net Interest Margin (NIM), which dropped by 10 basis points to 2.77%. This decline was influenced by rising hedge costs, but the bank expects a rebound in both NII and fees for the fourth quarter. Specifically, it anticipates a 1.5% to 2.5% increase in NII, benefiting from improved NIM, as a result of deposit repricing and the runoff of noncore assets.

Private Bank Growth and Future Earnings Accretion

The Private Bank segment showed significant promise, reporting a deposit increase to $5.6 billion, up from $4 billion. Notably, the Private Bank reached breakeven in mid-third quarter and is projected to contribute to earnings in the fourth quarter. Moreover, the bank's assets under management grew to $30 billion, signaling successful expansion strategies in wealth management.

Outlook for Fourth Quarter and Beyond

Looking ahead, the bank provided an optimistic outlook for the fourth quarter, forecasting modest loan growth despite previous challenges due to limited demand. The anticipated rate cuts by the Federal Reserve, expected to be around 25 basis points in both November and December, could provide further support to net interest income and overall profitability. The bank projects improved NIM to approximately 2.82% by the next quarter, driven by proactive measures in deposit management and easing interest rates.

Operational Efficiency Initiatives

Citizens Financial Group is focused on enhancing operational efficiency, with its TOP 9 program expected to yield $135 million in pretax run-rate benefits by year's end. Additionally, a forthcoming TOP 10 initiative aims for over $100 million in efficiencies by 2025. These strategic programs are vital as the bank aims for better operating leverage in the medium term.

Credit Quality and Reserves

Despite some volatility in credit markets, the bank expects net charge-offs to remain stable while adding to its reserves. The allowance for credit losses (ACL) rose to 1.61%, reflecting a proactive approach to credit management against an improving macroeconomic backdrop. The company remains vigilant regarding its general office portfolio, closely monitoring any potential impacts on overall credit quality.

Conclusion: A Strategic Path Forward

Overall, Citizens Financial Group's performance in the third quarter reflects robust management amid challenges. With a strong capital base, positive momentum in key segments like the Private Bank, and a clear strategic direction towards operational efficiency, the bank is well-positioned for growth in 2025. The emphasis on disciplined financial management and targeted growth initiatives could lead to enhanced shareholder value in the coming quarters.

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, everyone, and welcome to the Citizens Financial Group Third Quarter Earnings Conference Call. My name is Alan, and I'll be your operator today.

[Operator Instructions]

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.

[Kristin Silberberg, executive]

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 our third quarter results. Brendan Coughlin, Head of Consumer Banking; and Don McCree, Head of Commercial Banking, are also here to provide additional color.

We will be referencing our third quarter earnings presentation located on our Investor Relations website. After the presentation, we'll 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 2 of the presentation. We also reference non-GAAP financial measures, so it's important to review our GAAP results on Page 3 of the presentation and the reconciliations in the appendix.

And with that, I will hand over to Bruce.

[Bruce Van Saun, executive]

Thanks, Kristin, and good morning, everyone. Thanks for joining our call today.

We continue to execute well through an uncertain environment. We've made good progress on our strategic initiatives, our balance sheet remains strong across capital, liquidity, funding and loan reserves and our profitability has stabilized and is poised to move higher. Let me start with an update on our initiatives. First, the Private Bank delivered another terrific quarter. We reached $5.6 billion in deposits, up from $4 billion in Q2, and our assets under management reached $4.1 billion.

During the quarter, we opened 2 new private bank offices in the San Francisco Bay Area, and we added a new private banking team to cover Southern California. We reached breakeven in August and September and expect to be profitable in Q4 with good momentum entering 2025.

Next, our commercial bank continues to demonstrate its capacity to serve private capital well. For the quarter, we were #2 in the league tables for sponsor leveraged loan arrangements, and we remain #1 over the past 12 months. We continue to add quality talent to our coverage and our capital markets teams. Our New York City Metro initiative continues to show nice growth. We had 5% year-on-year growth in households and 7% growth in deposits. We look forward to being a key sponsor of the upcoming New York City Marathon as we continue to raise our brand profile in the market.

We've executed well on TOP 9, achieving a Q4 run rate benefit of $135 million, and we're finalizing the details of TOP 10, which should have a $100 million plus run rate benefit by end of 2025. Our BSO actions continue to proceed as planned. Noncore reduced by $1 billion in the quarter, and we continue to use the liquidity generated to pay down higher cost funding like brokered CDs. We continue to execute actions in commercial to exit lending-only relationships, and we're focused on our medium-term plan to reduce CRE exposure.

With respect to our balance sheet, our CET1 ratio is at 10.6%. Adjusting for OCI puts us at 9.2%. We repurchased $325 million in stock during the quarter. Our spot LDR was 80.8%, and our Federal Home Loan Bank advances remained low at well under $1 billion. We are not seeing much loan demand, but we remain hopeful this should start to pick up in coming quarters. Our P&L was impacted by the drag from forward starting swaps, which commenced in July as well as some fees that pushed out to Q4. Nonetheless, we did a good job managing expenses and credit is performing broadly as expected.

Our Q4 guide shows a nice rebound in both NII and fees, leading to positive operating leverage in the quarter. We expect credit to remain broadly stable, and we will continue to repurchase shares. For the full year, we will hit most of our beginning of year guide with the exception of balance sheet volume impacting NII and a modestly higher ACL build. We continue to have strong confidence in our medium-term outlook, and we've added to the materials in the appendix to show more detail on our NIM progression.

Lots of uncertainty in the environment remains, but we feel good about our capacity to manage through that and continue to execute on our broad strategy. 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 will continue to execute with the financial and operating discipline that you've come to expect from us.

With that, let me turn it over to John.

[John Woods, executive]

Thanks, Bruce, and good morning, everyone. As Bruce mentioned, third quarter saw continued strong execution of our initiatives. And importantly, we believe the third quarter represents a trough in earnings as tailwinds, strengthening fees and continued expense discipline will result in positive operating leverage prospectively.

We continue to maintain a strong balance sheet with excellent liquidity and capital levels and a healthy credit reserve. This positions us well to continue to execute on our strategic initiatives, which should help drive strong momentum in 2025 and performance over the medium term.

First, I'll start with some highlights of the third quarter financial results, referencing Slides 5 and 6. We generated underlying net income of $392 million for the third quarter, EPS of $0.79 and ROTCE of 9.7%. This includes a negative $0.11 impact from the noncore portfolio, which will continue to steadily run off, creating a tailwind for overall performance going forward. The Private Bank is making strong progress towards profitability reaching breakeven mid-third quarter, and we expect it to start being accretive to earnings in the fourth quarter.

Our capital position remained strong with CET1 at 10.6% at September 30, and or 9.2% adjusted for the AOCI opt-out removal, and we executed $325 million in stock buybacks during the quarter. We also maintained a strong funding and liquidity profile. Our pro forma LCR is 122%, which is well in excess of the large bank category 1 requirement of 100% and our period-end LDR is 80.8%. Our ACL coverage ratio of 1.61% is down 2 basis points from the prior quarter, given an improved macroeconomic outlook and ongoing front book activity driving a mix shift, which lowered expected loss content in the loan portfolio. We increased our general office reserve to 12.1%, up from 11.1% in the prior quarter.

Now I'll talk through the third quarter results in more detail, starting with net interest income on Slide 7. NII is down 2.9% linked quarter, primarily reflecting lower NIM and slightly lower interest-earning assets. With respect to NIM, our margin was down 10 basis points to 2.77%, largely reflecting the impact from the increase in hedge costs as forward starting swaps kicked in during the quarter. Other [ time ] impacts were largely offsetting.

Moving to Slide 8. Our fees were down 2.7% linked quarter with seasonality in capital markets and solid card and wealth results. On the heels of a very strong second quarter, our capital markets fees decreased 30% as deal activity slowed given seasonal trends and some M&A deals pushed into the fourth quarter. Year-on-year, however, capital markets fees were up 40%, led by bond underwriting and M&A advisory fees. Our client hedging revenue was down slightly as some clients delayed their interest rate hedging plans, given the potential for a faster pace of rate cuts after the Fed eased aggressively in September.

Mortgage banking fees are down modestly given the decline in MSR results net of hedging. This was offset by securities gains we took in making adjustments of the investment portfolio. Our wealth fees were up slightly given growth in AUM from the Private Bank, which was somewhat offset by lower transactional sales activity. We continue to focus on building out our wealth business in both our branch-based financial advisory activity as well as in private wealth, where we are adding teams in our Private Bank office geographies. Total assets under management now approximately $30 billion.

On Slide 9, we did a nice job on expenses, which were down 1.3% linked quarter notwithstanding continued investment in our strategic initiatives. Our TOP 9 program is on target to deliver $135 million pretax run rate benefit by the end of the year. And we are planning to launch our top 10 program, which will target more than $100 million in run rate efficiencies by the end of 2025. We will provide more details for you on our next earnings call.

On Slide 10. Period-end loans are broadly stable, and average loans are down 1% linked quarter, reflecting limited loan demand as well as continued balance sheet optimization. We continue to run down the noncore portfolio to the tune of about $1 billion in the quarter. The core loan portfolio was up about $800 million with solid contributions from the private bank and growth in retail mortgage and home equity.

On a period-end basis, the Private Bank is making good progress with loans up about $630 million to $2 billion. Excluding the Private Bank, retail loans were up about $750 million, reflecting growth in mortgage and home equity, while commercial loans were down about $580 million, reflecting paydowns driven by corporates continuing to issue in the debt markets, exits of lower returning credit-only relationships and generally lower client loan demand.

Next, on Slide 11 and 12, we continue to do a good job on deposits in a very competitive and dynamic environment. Average deposits are broadly stable with period-end deposits down 1%, driven by the paydown of higher cost treasury deposits tied primarily to noncore rundown. This was partially offset by $1.6 billion of attractive growth in Private Bank deposits.

Our interest-bearing deposit costs were up 4 basis points linked quarter. However, total deposit costs were up only 2 basis points, while total cost of funds was stable. CD balances were effectively flat linked quarter with growth in the Private Bank being offset by lower commercial. We anticipate that migration of lower to higher cost categories will drop off now that the Fed has commenced the cutting cycle.

Overall, our deposit franchise continues to perform well in a very competitive environment. Our estimates indicate we ended the upgrade cycle with a terminal interest-bearing deposit beta better than the peer average. Our deposit franchise is highly diversified across product mix and channels. About 70% of our deposits are granular, stable consumer deposits and roughly 68% of our overall deposits are insured or secured.

Moving to credit on Slide 13. The Net charge-offs rose 2 basis points to 54 basis points, primarily reflecting seasonal impacts in auto. A decline in commercial real estate charge-offs was offset by the resolution of several nonperforming credits in C&I. Nonaccrual loans increased 10% linked quarter, primarily reflecting an increase in CRE general office as we proceed with workout actions on a handful of loans. We believe we are near the peak of NPAs as criticized classified loans have been broadly stable for 4 quarters and loans and workout get resolved.

Turning to the allowance for credit losses on Slide 14. Our overall coverage ratio stands at 1.61%, which is a 2 basis point decline from the prior quarter, reflecting an improving macroeconomic outlook and better loan mix given the runoff of the noncore auto portfolio and lower loss content originations in retail, real estate secured and commercial categories. The general office portfolio was down $150 million to $3.2 billion at the end of the third quarter and our reserve of $382 million represents 12.1% coverage, up from 11.1% in the second quarter.

On the right side of the page, you can see some of the key assumptions driving the general office reserve coverage level. While rate cuts may be beneficial at the margin, we continue to expect this sector to be challenged. We believe our current reserve represents a severe scenario that is much worse than we've seen in historical downturns. So we feel the current coverage is very strong. Additionally, since the second quarter of 2023, we have absorbed $364 million of cumulative losses in the general office portfolio. When you add these cumulative losses to the reserve outstanding, this represents an almost 20% loss rate based on the March 2023 balance of $4.1 billion.

Over the past 6 quarters, we have continued to work down the exposure to general office, with the portfolio down roughly $1 billion over the last 18 months to $3.2 billion at September 30, given paydowns of about $600 million in addition to the charge-offs I just mentioned.

Moving to Slides 15 and 16. We have maintained excellent balance sheet strength. Our CET1 ratio is a strong 10.6%, which compares with 10.7% in the prior quarter. And if you were to adjust for the AOCI opt-out removal under the current regulatory proposal, our CET1 ratio increased from 9% to 9.2%. Both CET1 and TCE ratios have consistently been above the average of our peers. Given our strong capital position, we repurchased $325 million in common shares, and including dividends, we returned a total of $516 million to shareholders in the third quarter.

Moving to Slide 17. Our strategy is built on a transformed consumer bank that best positioned Commercial Bank among our regional peers and our aspiration to build a premier bank-owned private bank and wealth franchise. First, we have a strong transformed consumer bank with substantial wealth revenue potential that is set to drive further deposit growth while efficiently managing costs and we are well positioned to continue gaining market share in the important New York metro market.

Next, we believe we have built a leading commercial bank among the super regional banks. We are focused on serving sponsors and middle market companies and high-growth sectors of the economy. Our investments over the years in capital markets capabilities and coverage of the private capital space have positioned us well to take advantage when market activity picks up.

With the Fed beginning to ease and fears of a recession subsiding, the movement in our commercial client base is decidedly more positive, which has us optimistic that we'll see a strong finish to the year and good momentum into 2025. And we are pleased to report that for the third quarter in a row, our capital markets business sits the top of middle-market lead tables, holding the #1 sponsor middle market book runner position on a trailing 12-month basis.

Moving to the Private Bank. I'm pleased to report that the effort is going very well and continues to gain momentum. We are growing our client base and now have about $5.6 billion of attractive deposits. This is a $1.6 billion increase from the prior quarter with roughly 34% noninterest-bearing. Also, we are now at $2 billion of loans and continuing to grow. We recently announced the addition of a top private banking team in Southern California, and we have plans to add new offices in the Bay Area, which adds to the offices we've already opened in San Francisco and Mill Valley, California, Palm Beach and Boston. You should expect to see us opportunistically adding talent to bolster our banking and wealth capabilities.

Notably, our Private Bank revenue rose 64% to $49.7 million in the third quarter breaking even by mid-quarter. We are on track for the Private Bank to start contributing to earnings in the fourth quarter and add meaningfully to EPS next year.

Moving to Slide 18. We provide a guide for the fourth quarter. This outlook contemplates a 25 basis point rate cut in each of November and December. We expect NII to be up about 1.5% to 2.5%, driven primarily by a 5 basis point improvement in net interest margin, reflecting the benefit of swaps given lower rates, deposit repricing, noncore runoff and favorable front book back book dynamics partially offset by lower asset yields. Spot loans should be up slightly paced by private bank and commercial sponsor activity. Noninterest income should be up mid- to high single digits reflecting expected seasonal strength in capital markets. Our deal pipelines are robust, and we expect to see a strong finish to the year.

We also expect modest improvements across other key categories. Noninterest expense is projected to be up about 2%, and we expect to achieve positive operating leverage. Net charge-offs are expected to be broadly stable, while the ACL should continue to benefit from noncore runoff and improving loan mix. Our CET1 ratio is expected to be broadly stable with about $200 million to $250 million of share repurchases. I called your attention to an updated slide in the appendix on our medium-term NIM walk which projects us to be in the 3.25% to 3.4% range in 2027.

To wrap up, we delivered a solid quarter in a dynamic environment with strong results in capital markets, wealth and card and credit performance that continues to play out largely as expected. We are playing strong defense maintaining a robust capital and reserve position, a high level of liquidity and a more structural long-term funding profile as we prepare for potential regulatory changes and any challenges the environment may bring. Importantly, we are also playing offense as we pursue our unique multiyear strategic initiatives, which will drive improving performance over the medium term. We remain confident in our ability to hit our medium-term 16% to 18% return target.

With that, I'll hand back over to Bruce.

[Bruce Van Saun, executive]

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

[Operator]

Ladies and gentlemen, we will now begin the Q&A portion of the call. [Operator Instructions] Our first question will come from the line of Scott Siefers with Piper Sandler.

[Robert Siefers, analyst]

I wanted to start off with a couple of questions both related to the margin progression and that medium-term walk to which you alluded on Slide 23 as we kind of start to march upward. Maybe first, in the immediate term, can you sort of walk through the puts and takes that allow for the 5 basis points or so of margin expansion into the fourth quarter?

And then, I guess, more importantly, as we sort of start the journey upward and think about that next year or so, it looks like that 18 basis points of time-based benefits is largely programmatic, which all else equal would get us to like a 2.95.But of course, the wild cards are like the timing of the ebbs and flows of the swaps and the rate-based impact. So maybe if you could sort of help I guess, narrow the cone on the moving parts as we think about the next few quarters, please?

[John Woods, executive]

Yes, sure. Thanks for the question, Scott. I'd say starting off with the fourth quarter. I mean, I think when you think about the progression there, 1 of the drivers -- several drivers of tailwinds that we're seeing. First off, I would highlight noncore, which continues to contribute about 2 basis points a quarter. And so that's the starting point. I think the second big driver is broadly the active balance sheet management, fixed asset repricing and front book back book that continues to play out on -- will continue to play out every quarter going forward. And that's a huge contributor.

I'll offer up one of the highlights of the balance sheet transition as you get into the fourth quarter also relates to deposit migration. We've had negative deposit migration throughout the cycle. That's been kind of declining over time. And we're seeing late third quarter, early fourth quarter trends that tell us that, that's going to flip around to be more of a neutral, maybe a slightly positive going into the fourth quarter. And that's really significant for that to become less of a headwind than it's been. And given what's been going on in the past. I mean, I think broadly

[Bruce Van Saun, executive]

Just on the color on that, let me just jump in here, John. But we have the Private Bank continuing to generate very attractive deposits, and they've been growing well over $1 billion in $1.5 billion range the last 2 quarters. So that will be positively benefiting that mix. And then typically, seasonally, in the fourth quarter, we'll see an uptick in both commercial and consumer in terms of demand deposits. So we're counting on that as part of the equation.

[John Woods, executive]

Absolutely. And I think just playing on that a little further. I mean, I think we are -- the other big category, we are slightly asset sensitive, but based on the noncore and those balance sheet trends that we just talked about those are more powerful. And are -- you got to keep in mind that the receipt swaps, which have been a headwind are going to flip over to a tailwind and be a mitigant to our asset sensitivity going forward. So they'll actually contribute into the fourth quarter. And so one of the important things we're also doing is being extremely proactive on down betas.

Just taking all the learnings from prior cycles and what you've seen from our deposit portfolio, where our deposit betas on the up are now better than peer average from what we can tell. We're flipping all of that energy and capability into the down beta management being highly proactive in the consumer side of things.

And on the commercial side, most of our deposits there are -- the majority of them are 100% beta anyway. But we're feeling really good about how we're really pouncing on this transition to a downgrade cycle. And all of that, when you add all that up, that gives us confidence that we're going to achieve that 5 basis points. And as I may mentioned earlier, the late 3Q trends and the early 4Q trends are very consistent with that trajectory. So that's the 4Q.

I think the second -- there are similar themes, but the second question was take me out to the fourth quarter of 25%. And you're right. If you look at the $277 million in 3Q, you're at the 18 basis points, that's really time-based, and it's just really baked in. We'll get to $295 million. And there's another, call it, I'd say in the neighborhood of 5-ish basis points of benefit that we can really expect such that we can get in that neighborhood of 3% NIM in the fourth quarter of '25 and the drivers are very similar. The tailwinds related to the growing front book back book.

And when you think about our fixed loan portfolio and securities as that turns over under a wide range of rate scenarios, which is more kind of focused on longer end rates where the 10 year is going to end up in 5-year rates. We end up with anywhere from 200 to 300 basis points of front book back book benefit for as that turns over every quarter, so over the next 5 quarters, that's a driver that we feel very good about. Our strategic initiatives on the deposit side with respect to Private Bank at New York Metro continue to contribute. And when you add all that up, we end up with what we think is something nearing 3% by the end of '25 and we still have a lot of downrate protection on. Keep in mind, we've got our swap portfolio is largely intact through the middle of 2026. So we remain pretty well protected and slightly asset sensitive. But all those other factors offset it and give us a net positive as you get into the end of '25.

[Bruce Van Saun, executive]

Yes, the one other thing is to the fourth quarter lift and then would add to that target as well.

[Operator]

Your next question comes from the line of Matt O'Connor with Deutsche Bank.

[Matthew O'Connor, analyst]

I guess just to drill down on the net interest income coming in weaker than kind of your thought maybe a month ago. Was that a bigger head cut and a little bit less loan growth? And kind of and then all the positive trends that you said is what we should expect from here? Or was there something help to throw out there, too?

[John Woods, executive]

Yes. I'd say we are slightly asset sensitive. So 50, maybe a little bit more kind of than we expected. But I'd say that the deposit trends 3Q, in the trajectory of low-cost migration came down during the quarter, but they may be a little bit than we expected. And so I think we got to the end of the quarter where we expected, but the average for the quarter in terms of migration was a little higher than we were thinking. But as I mentioned, that is now flipping around and as you look at the late September, early October trends that it was almost -- the bell went off there when the Fed pull the 50 basis point lever, we really are seeing that low-cost migration really flip to more of a neutral to slight positive. And so that's really what you can see going into 4Q.

[Bruce Van Saun, executive]

And then on volume, too, I think we we anticipated a little more loan growth that, I'd say, we had nice loan growth in the Private Bank, but not maybe quite as much as we thought. I think that's really just timing. And as rates come down, that will continue to pick up similarly on commercial bank. We thought we'd see a little faster rebound in line utilization, particularly on the sponsor side. We're starting to see that. So again, I think that's kind of on the come and should -- that's why we have an outlook in the guide that fourth quarter, we should start to see slight growth in our spot loans, even comprehending the noncore rundown.

[Matthew O'Connor, analyst]

Okay. And then separately, how do you think about operating leverage kind of more medium term? Obviously, like just income could be a bigger driver dollar-wise, if we just look at fourth quarter to kind frame it, you're guiding to revenues up about 3.5% versus costs up [ 2%. ] So 150 bps of operating leverage, but that's more driven by fees. Just thoughts on medium term how much operating leverage would you envision?

[John Woods, executive]

Yes. I mean I think we'll talk more about this in January. But I mean, I think we have significant opportunity for operating leverage. When you look at the net interest margin reflating to that $3.25 to $3.40 range provides significant tailwinds and consistent operating leverage over time. We'll come back in January and frame that for you a little more in terms of what we expect in 2025.

[Bruce Van Saun, executive]

The best thing about the NIM reflation is that there's no real cost of goods sold in terms of the impact on expenses. So that pretty much drops straight through. I think there's clearly going to be continued growth in fees led by capital markets, some of the things we're doing in the payments business, some of the exciting developments in our wealth business but those usually come with payouts and investments on the expense side. But Nonetheless, I think the operating leverage should be quite positive when we look out over that 25 to 27 period.

Brendan, maybe you could add couple comments.

[Brendan Coughlin, executive]

One other comment I mentioned on the Private Bank is just remember that the cost base that we're working our way through right now is fixed on the short-term basis with the comp guarantees that we've given to the team. So as the revenue grows, we're kind of earning our way through the comp guarantees. So that's all straight positive operating leverage linked quarter where the revenue is coming without necessarily incremental expenses because we've essentially put that in.

And then over time, that will work their way through the guarantee and we get the right scale, they'll grow with further linkage together. But right now, it's just straight revenue growth on top of the fixed expense base.

[Bruce Van Saun, executive]

Yes. Good point.

[Operator]

Your next question will come from the line of John Pancari with Evercore.

[John Pancari, analyst]

Bruce, you just talked about the loan growth dynamics of [indiscernible]. And maybe if you could just elaborate a little bit more on your confidence in that you're seeing this inflection in demand here that should drive a modest growth in the fourth quarter. What is the bigger catalyst? Is it the rate cut? Is it clarity you expect around the election? And then -- can you maybe help us think about where like the type of acceleration in overall loan growth that you expect you could see going into -- or as you look at 2025?

[Bruce Van Saun, executive]

Yes. Let me start, and then I'm going to pass it to Don and Brendan to talk about their segments and their outlooks. But we're not calling for any heroics here in fourth quarter. So I think the guide is pretty much derisked from meeting significant step-up in loan growth. But it is, I think, worth noting that we're starting to see things build a bit. We said our biggest quarterly increase in the Private Bank and the pipeline is looking pretty good. So I think that will continue.

And I think there, as rates come down, folks are willing to transact and borrow. I think it's a similar thing in the Commercial Bank, where there's lots of interest in private equity kind of starting to realize some exits and put some money to work -- that's -- so we see it by the amount of conversations that we're privy to with clients, but it's starting to build. But really, the dam has not broken yet. And so I think we'll see that trend continue to flex up. But let me start first with Don and then maybe, Brendan, you could pick up a second.

[Donald McCree, executive]

Yes. I think you said it, Bruce. The leader in the clubhouse is subscription lines where we saw some very strong growth late quarter, and we're continuing to see it into the fourth quarter. And that's not really leveraged by us that we're doing. It's just activity in the private equity space that we're seeing build, and we've seen a pretty nice utilization bump in that business. We haven't really seen it in C&I yet, but the conversations we're having with our core C&I clients, particularly in the middle market, with the economy kind of stabilizing rates coming down, it's just a general level of confidence that the business environment is going to be better as we get into '25, and that will result in more working capital utilization, more investment in their businesses.

And remember, one of the things John said, one of the downdrafts we've had against kind of core loan growth has been a lot of activity where companies have been refinancing in the public securities markets. So we've seen stuff that's been on our balance sheet being refinanced, and good for our fee lines. But it's put a little bit pressure on core asset levels. So -- we think a lot of that is behind us now. So the net growth we'll see in the core book should begin to grow as we get into '25.

[Bruce Van Saun, executive]

Brendan?

[Brendan Coughlin, executive]

Yes, I'll quickly hit on consumer and then private banking. On the consumer side, I just would remind folks at the pace of rundown on non-core is turning into a net positive. So last year, at this time, we were running off [ $1.2 billion, $1.3 ] billion a quarter, and now we're in the consumer book and now we're in the $800 million to $900 million. So that's -- the linked quarter rundown is slowing a bit and that will continue into the future. And when we look at the growth portfolios, we're seeing decent growth in mortgage and home equity.

And as rates pull back a little bit, we expect to see a modest pickup in mortgage originations activity. But as everybody knows, the majority of the country is locked into 3%-ish mortgage rates. And so our HELOC business is incredibly well positioned. We've got a real strength in that business where we're the very top of the league tables and national HELOC originations in the super prime space, and you'll continue to see that grow.

And I believe that product, it will be a main lever for U.S. consumers as the economy gets more confidence in footing for consumers to borrow against record equity in their homes that's been built up over the last 5 or 6 years. So we expect that to continue.

The other tailwind -- headwind moving to a tailwind is likely student in a modest way with high rates student loan refinance product has been all that sidelined. And now with the federal government not collecting payments again on that portfolio and rates coming back down, we should see more late 20s, early 30 year olds who have great credit coming back in the money that see value in restructuring their student loan debt. So we're expecting that to modestly pick up. as we get into next year.

On the Private Bank side, it's a little bit of the same story. Rates pulling back should really put more customers an attractive place to use credit. And right now, we're seeing a lot of cash transactions, whether it's on the resi side or business is sitting on the sidelines, and we're hearing very strong feedback. But as rates pull back, they'll be more comfortable using credit versus just going cash temporarily on whether it's an investment home or facilitating business growth given that high net worth and ultrahigh net profile of that customer base.

So we've got good confidence that the rate dynamic should drive a decent amount of embedded demand. And as everybody knows, we've also went to market very strong on the deposit side. We've been very focused on getting the operations up. There's a progression here on earning the customer's full wallet of do the day-to-day banking really well. Now they'll come from borrowing needs and then we'll build a dislodge well. So there's a natural sort of earned wallet share gain that we anticipate getting as we get into next year on the private banking side that will be supported by the rate environment.

[John Pancari, analyst]

Okay. Great. And then a quick second one on credit. Can you just talk about the confidence that I believe you indicated that you've seen, you believe NPAs are peaking here this quarter. Maybe your confidence there, what gives you that? And then also on the confidence in the broadly stable charge-offs with the third quarter as you look at fourth quarter. I know your auto delinquencies were up pretty sharply year-over-year. So that would be beyond the seasonality. So I'm interested in what drove that and then thoughts on the reserve going forward?

[Bruce Van Saun, executive]

Yes. Maybe I'll start, and then we'll pass it around whoever wants to jump in, feel free. But yes, I'd say the big issue that's well known that we've been managing through is the general office portfolio. And that one is going to -- it's a multi-quarter workout that has commenced in '23, it's with us all through '24. It will be with us for a good chunk of 25%. And we think we've got our arms fully around that. We've got very heavy reserves there.

We've got our best people working with borrowers to try to come up with mutually satisfactory outcomes. But the timing of when you recognize the charge-offs and when something might go moves around a bit, and it's not always in our control. If a borrower decides to put a property up for sale then there are certain actions we have to take in terms of NPA recognition or charge-off recognition. So this quarter, we were on the low end of CRE charge-offs and we had a blip in CRE NPAs.

But having said that, the problem loan population that we're managing is pretty consistent. And so one of the things we take comfort in is when we look at criticized and classified loans across the board in commercial, they've been pretty stable now for 4 quarters. So that's the big thing. I'll see, Don, if you want to add any color on the CRE and then, Brendan, if anything on the delinquencies.

[Donald McCree, executive]

I think that's exactly right, Bruce. I think that we've seen, what, zero surprises in our credit book for the last 4 quarters, and it's playing out exactly as we thought it was going to play out. And as Bruce said, we'll have charge-offs going through the general office portfolio for the next several quarters, but it's pretty much playing out as we expected. We had a little bit of a blip in C&I charge-off this quarter, which was things that have been in the workout teams for literally 5, 6, 7 years, and they just happened to resolve this quarter.

So I don't worry a lot about NPA moves, what I focus on is the class levels and the fact that those have been stable. The other thing we're seeing in the general real estate area is not in general office, but in general real estate. There's a lot of liquidity coming back into the marketplace. So it's accelerating our ability to move down the overall exposures in the book, which you know is a strategic matter or something that I want to do. And we're seeing nothing in the C&I book and broadly that is disturbing to us at all, that's quite healthy from an overall credit standpoint.

[Brendan Coughlin, executive]

Yes. Consumer is broadly normalized and pre-COVID we're between 50 and 55 basis points in net charge-offs. And that's where we are now. And while there's always a little bit of puts and takes. There's nothing that we're observing in the portfolio that's making me lose any sleep.

And your question on auto, a couple of comments. One would be -- last quarter was -- on the charge-off side was very low, seasonally impacted, but also we had a very strong recovery month in used value. So this quarter was much more just a reversion to the mean. The other dynamic I would mention in auto, it's tough to read into published delinquency numbers, even though delinquency is relatively in check. But when you're not originating anymore, it takes 12 to 18 months for a vintage curve to build up to its appropriate steady state and delinquency. So when you shut the pick it off on new originations, it's just a denominator issue that you've got other origination vintages that are normally progressing along their lines to our ultimate expected loss number and you're not getting the denominator benefit of a bunch of new flow coming in that has zero delinquencies. So when you decompose all that there's really nothing that we're worried about whatsoever in the auto portfolio. It's performing exactly as we priced it and exactly as we've expected it to.

[Operator]

Your next question will come from the line of Erika Najarian with UBS.

[L. Erika Penala, analyst]

My first question is for you, John. On the 10-Q, you had $30 billion of notional received fixed peso for swaps for both 3Q and 4Q and $30.9 billion for 2025. Obviously, Slide 24 would indicate lower notionals. Could you give us an update on whether you terminated those swaps. And maybe confirm the accounting for the swaps and that you would just -- those losses are crystallized and they would be in your NII for the duration of the swap life and then just as a follow-up, you mentioned a 3% NIM by 4Q '25. How many rate cuts would you need to ensure yourself of getting to that 3% level?

[John Woods, executive]

Yes. I'll take those. So yes, I think during the third quarter, as you may recall, there was a period of time when the yield curve was discounting as many as 7 or 8 cuts over -- through the second quarter of next year was pretty aggressive, expectation of the pace of Fed rate cuts. We happen to have about $4 billion of short-dated receive-fixed swaps that were maturing in May of '25. And so what we opportunistically chose to do was to terminate $4 billion of swaps during the third quarter in an environment where there was approximately 7 or 8 cuts that we locked in that benefit given the swaps are very short dated and really, we're only providing downrate protection through May, we felt like that, that was a good risk reward to lock in that benefit and lock in the contribution and protection against lower rates that the swaps were there to cover in the first place.

Out the window. There are fewer cuts through May. So at least at this point, that was a round trip positive for us to move on from those swaps, and they did exactly what they were intended to do, was to create that protection. The accounting aspects of it are that we amortize the impact of that over the remaining life of the swaps through May. So that will be amortized through but that impact will be, again, a lower impact or a more favorable impact than otherwise would be the case that we were to have held the swaps. And so that was the point of the terminations. So that's that one.

And I think the second question was about 3% [indiscernible] cuts. And the rate environment that we would -- there's a range of rate environments that would still be consistent. With that. I mean I would say that we have a slightly asset-sensitive position. So net interest margin is stable across a range of rate environments into '25 given the swap portfolio, it doesn't begin to drop off until mid-2026. So I mean, the forward curve out the window implies getting to around 350 by the end of '25, but we would be able to achieve that 3% at rate environments that would be below that level as well.

[L. Erika Penala, analyst]

Got it. And my follow-up question is twofold. First, could you explain the more favorable impact? I think I was thinking that as I amortize that impact of the terminated swap, it would just be the difference between the SOFR and received fixed rate through May 2025. So John, maybe give us some insight on what the more favorable treatment would be. And then just secondly, I just wanted to follow up. I think that there are a lot of questions over being able to achieve that NIM expansion for next quarter, which you've explained well. I just wanted to sort of nail down what kind of deposit beta you are assuming in that $2.82 number for next quarter?

[John Woods, executive]

Yes. So again, so when you terminate the swap, you basically terminate based upon the forward curve that's assumed at the time. And so the forward curve at that.

[L. Erika Penala, analyst]

That's the difference -- got it.

[John Woods, executive]

Okay. Yes. And so yes. Got it. And then the -- on the NIM expansion into the fourth quarter, highly proactive focus on this is going to get our deposit beta to be up to around nearing 40% by the end of the quarter. You've got all of the 100% beta stuff in commercial leading the way, but we're being highly proactive in consumer as well and just really taking all the learnings over the cycle over the last many years and applying that to how we continue to be able to drive solid deposit growth at a really attractive cost of funds. So that's the number that's baked in about 40% deposit beta in 4Q.

[L. Erika Penala, analyst]

Got it. Thanks so much for the straightforward answer. Appreciate it.

[Operator]

Your next question will come from the line of Manan Gosalia with Morgan Stanley.

[Manan Gosalia, analyst]

I wanted to follow up on the deposit beta question. Do you have any more specifics on what your spot deposit rates are now that we're a month past the Fed rate cut how you expect that deposit beta to traject as we get further into the Fed rate cut cycle, right? So as we get -- as we get as more Fed rate cuts are behind us, does that make it easier or more difficult to continue to drop your deposit rates going forward?

[John Woods, executive]

I mean I think if you kind of do the math there, if you -- based on the forward -- from the forward curve that we'll have 2 more Fed cuts in 4Q and we're using a curve that was after nonfarm payrolls from a week or 2 ago. But after nonfarm payrolls, you've got the 2 cuts. Based on that curve, and if you apply a 40% beta to what you think the average SOFR rate would be in 4Q versus 3Q, you can come up with the decline in net interest-bearing deposit costs on that basis.

And second question, what was the second part of that question?

[Manan Gosalia, analyst]

The second part of the question was just as we get into -- as we get into, say, the middle of next year and we have a series of Fed rate cuts behind us. Does that make it easier to continue to drop deposit rates? Or does it make it harder to drop deposit rates because there's fewer cuts in the forward curve front there?

[John Woods, executive]

I think the way to think about that is the longer the down cycle lasts, the more you can continue to contribute to ongoing lowering of deposit costs, but broadly, I think what we've said in the past was that our down cycle betas are going to approximate our cycle -- so around 50 to 55. And so we're going to be around 40 by the end of the fourth quarter, and it will gradually migrate to that 50 to 55 over the cutting cycle that's going to proceed over the -- in the coming years. And so you can kind of think about that gradual improvement in that way, I think.

[Bruce Van Saun, executive]

Yes. But there was acceleration in the up cycle towards the later part of the cycle, which I think you mirror that on the downside.

[John Woods, executive]

Yes, that's right. Exactly.

[Manan Gosalia, analyst]

Yes, perfect. That's what I was getting to. That's really helpful. And then maybe just on the front book back book, I think you noted the 200 to 300 basis point spread benefit. Can you talk about what balances we should apply that to? What are the fixed rate securities and loans coming due over the next year or so? And is there any room to use some of the excess capital for any securities positioning from here?

[John Woods, executive]

Yes. I mean I think that's a good metric to use that this will be growing over time. So when you see when you see the activity and loan growth picking up over time, you're going to see this being a contributor over the next couple of years. I mean, I'd say that the what turns over in the back book quarterly basis in resi mortgage, call it, call it, around $750 million a quarter -- and that's a similar number for securities as well.

When you talk about what turns over those are the balances that you would apply it to is the front book, back book, but that will continue to contribute and build on itself over the next couple of years.

[Manan Gosalia, analyst]

That's right. And would you do as securities repositioning from here? Is there any room to that?

[John Woods, executive]

I mean that's not in our plans. I mean we'll look at -- we actively manage the securities portfolio and we -- on an ongoing basis, but we don't have a a large single repositioning.

[Bruce Van Saun, executive]

And I would also just point to Slide 23 and some of the built-in momentum that we have to raise NIM, so that the need to expend capital to shift the timing on that NIM walk is not something that we need to avail ourselves of.

[Operator]

And at this time, you have no further questions in queue.

[Bruce Van Saun, executive]

Okay. Great. Well, thanks again, folks for dialing in today. We appreciate your interest and support in Citizens. Have a good day.

[Operator]

Ladies and gentlemen, that concludes our conference call for today. Thank you for your participation. You may now disconnect.