Citizens Financial Group Inc (CFG) Q1 2023 Earnings Call Transcript

Citizens Financial Group Inc (NYSE: CFG) Q1 2023 earnings call dated Apr. 19, 2023

Corporate Participants:

Kristin Silberberg — Executive Vice President, Investor Relations

Bruce Van Saun — Chairman and Chief Executive Officer

John F. Woods — Vice Chairman and Chief Financial Officer

Brendan Coughlin — Head of Consumer Banking

Donald H. McCree — Vice Chairman and Head of Commercial Banking

Analysts:

Erika Najarian — UBS — Analyst

Peter Winter — D.A. Davidson — Analyst

Scott Siefers — Piper Sandler — Analyst

Gerard Cassidy — RBC — Analyst

John Pancari — Evercore — Analyst

Presentation:

Operator

Good morning, everyone, and welcome to Citizens Financial Group’s First Quarter 2023 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 Vice President, Investor Relations

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 first-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 first-quarter 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 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.

With that, I will hand over to you, Bruce.

Bruce Van Saun — Chairman and Chief Executive Officer

Great. Thanks, Kristin. Good morning, everyone. Thanks for joining our call today.

First quarter brought many unexpected challenges in the environment. Nonetheless, we proved resilient and adaptable, and we delivered a solid quarter for our stakeholders. We maintained a strong capital, liquidity and funding position with our CET1 ratio at 10%, our TCE ratio at 6.6% and a solid deposit franchise that skews two-thirds consumer. We’ve seen the churn in the deposit market continue to diminish since the bank failures with our deposits broadly stable in the month of March.

For the quarter, we posted underlying earnings per share of $1.10 and return on tangible equity of 15.8%. Our NII was down 3% reflecting day count impact, slightly lower earning assets and a stable net interest margin of 3.3%. Non-interest income and non-interest expense came in broadly as expected, both impacted by seasonality. Our credit metrics are also trending as expected. And we’ve built our ACL to loans ratio to 1.47%, which was up 4 basis points during the quarter and it’s 17 basis points higher than our pro forma day-1 CECL ACL ratio. We repurchased $400 million in shares during the quarter, which reduced our share count by 1.7%.

In our slide deck, we tackle head-on some of the industry issues that investors have been concerned about. I’ll let John run through the details, but the headline is that we have strong confidence in our capital, liquidity and funding position. We have been conservative in maintaining a capital ratio near the top of our peer group in focusing on a stable consumer-oriented and granular deposit base and in establishing a prudent credit risk appetite and reserve level. While we have some commercial real estate exposure, we feel good about our diversification, the asset characteristics and the borrower quality. CRE criticized assets and work-outs will increase during this cycle, but we currently expect losses to be manageable. And we’ve started to set aside meaningful reserves.

On the regulatory front, it is clear that some changes will occur. Our hope is that the response is thoughtful and appropriate leaving the bank landscape that has served our country so well, in fact [Phonetic] and even stronger than before. In any case, we anticipate any changes will follow a review and comment process with any provisions likely to be phased in gradually. While much of the past month has been focused on playing strong defense, we continue to play prudent offense by investing in and advancing our strategic initiatives. We will clearly prioritize deposits deepening and efficiency initiatives for the balance of 2023.

Our New York City Metro integration is progressing extremely well with the successful core conversion of Investors Bank in February and growth metrics that are well ahead of plan.

Our outlook for 2023 still shows attractive ROTC for the full year despite the challenging environment. There’s still a great deal of uncertainty, which makes forecasting more difficult, but we remain confident in the strength of our franchise and the ability to weather the storm. We are building a great bank, and we remain excited about our future. Our capital strength and attractive franchise should position us to be nimble and to take advantage of opportunities as they arise.

With that, let me turn it over to John to take you through more of the financial details. John?

John F. Woods — Vice Chairman and Chief Financial Officer

Thanks, Bruce, and good morning, everyone.

Let me start with the headlines for the financial results.

Referencing Slide 5. Big picture, first quarter results were solid against the backdrop of volatility in the macro-environment. We continued to progress against our portfolio strategic initiatives including the well-executed conversion of the investor platform in February. For the first quarter, we generated underlying net income of $560 million and EPS of $1.10. Our underlying ROTCE for the quarter was 15.8%. Net interest income was down 3% linked quarter, given the lower day count and lower interest-earning assets. Our margin was stable at 3.3%. Period-end loans and average loans were down slightly quarter-over-quarter reflecting the impact of our balance sheet optimization efforts, such as our ongoing run off of auto. Deposit levels declined in the quarter, primarily due to the impact of seasonal factors, the compounding impact of the rate environment and particularly earlier, this occurred in the quarter. Importantly, our deposit levels were broadly stable during the market turbulence in March. Our quarter-end LDR is 89.8%, and our liquidity position remains very strong with current available liquidity as of today of about $66 billion. Our credit metrics and overall position remains solid. Total net charge-offs of 34 basis points are up 12 basis points linked quarter in line with ongoing normalization trends. We recorded a provision for credit losses of $168 million and a reserve build of $35 million this quarter, increasing our ACL coverage to 1.47%, up from 1.43% at the end of the fourth quarter, with most of the increase directed to the general office portfolio. Our current coverage ratio is about 17 basis points stronger than our pro forma day-1 CECL reserve of 1.3%. We repurchased $400 million of common shares in the first quarter and delivered a strong CET1 ratio at the top of our target range of 10%. And our tangible book value per share is up 6% linked quarter.

Before I walk through the details of results for the quarter, let me address some of the industry issues that are top of mind on Slide 6. First, we have a very strong capital base, which is one of the highest in our regional bank peer group, even if one were to include the rate-driven unrealized losses on all of our investment securities. We have a quality deposit franchise, which has performed very well since the turbulence, which began in early March. We continue to see the benefit from all of the investments we’ve made since the IPO with 67% of total deposits from consumer and a well-diversified commercial portfolio with about 66% of our clients using us as their primary bank. Finally, 68% of deposits are insured or secured. Our liquidity position is quite strong with a diverse funding base, ample available liquidity and strong risk management capabilities. In fact, our LCR level exceeds what would be required as a Category III bank at March 31st, 2023. Looking at credit, our metrics continue to look solid. Retail is normalizing, but it’s still performing quite well as the employment picture remains strong. On the commercial side, our focus is on the CRE portfolio and on general office in particular, which is impacted by back-to-work trends and rising interest rates. We have a very strong reserve coverage of 6.7% on the general office portfolio, and I’ll go through some of the details later.

And lastly, the market is concerned about how the regulators may respond to the disruption in March, which in our view was unique to the banks in question and not reflective of broader cash [Phonetic] and regulation or management lapses. We’ll watch closely how things develop, but in any case, we think the process will be thoughtful and deliberate. Finally, we believe we are well positioned for any increase in regulatory requirements, given our diverse business model and current excess capital and liquidity regulatory ratios.

Let’s drill into the details over the next few slides, starting with capital on Slide 7. We ended the quarter with one of the highest capital levels in our regional bank peer group with a CET1 ratio at the top of our target range of 10%. This strong capital level reflects our prudent approach to deploying capital as we prioritize driving improved returns over the medium term. If you include the rate-driven unrealized loss on debt securities in AOCI, our adjusted CET1 ratio would be 8.7%. If you remove the unrealized losses in HTM, our tangible common equity ratio would reduce by 20 basis points to 6.4%. All of these ratios are expected to be near the top of our peer group again in this quarter. We expect to maintain very strong capital levels going forward with the ability to generate roughly 25 basis points of capital post dividend each quarter and before share buybacks. We have $1.6 billion of repurchase capacity remaining under our current board authorization. Timing of repurchases will be dependent on our view of external conditions.

Next, I’ll move to Slide 8 to discuss our deposit franchise. As you can see, our deposit franchise is skewed towards consumer and highly diversified across product mix and in terms of the various channels we can tap. About 67% of our total deposits are consumer, up from 60% at December 31st, which puts us in the top quartile of our peer group, and roughly 68% of our deposits are insured by the FDIC or secured, which is up from 60% at year-end. Demand deposits represent about 26% of the book down slightly from 27% at year-end as customers have naturally rotated towards higher-yielding alternatives.

On Slide 9, the headline is that our deposit performance since mid-year 2022 following the Investors acquisition and the commencement of [Indecipherable] has been in line with industry performance. We outgrew both the industry and peer average in the second half of 2022. We entered 2023, expecting that the normal seasonal deposit outflows in the first quarter would be somewhat exacerbated by the higher rate environment. And we saw a little more of that than we had forecast by about 1%, but most of that happened in January and February. Given our rundown in auto, we were willing to let some deposits run off early in the quarter, trying to hold the line on betas. In March, we saw some elevated inflows and outflows as customers across the industry can look to diversify their deposits in the wake of bank failures. But overall, our deposits were broadly stable during the month. This strong performance is attributable to investing heavily in our deposit offerings and capabilities since the IPO, and this will remain a focus as we continue to build a top-performing bank franchise.

On Slide 10, we highlight some of the things that we are doing to attract deposits and drive primacy with our customers. In Consumer, we’ve developed a compelling set of products and features that drive higher customer satisfaction and encourage them to do more with us. We have strong analytics capabilities and compelling offerings such as Citizens Plus in our Private Client Group as well as Citizens Access, our digital bank to leverage. And with the final conversion complete at Investors, we have a substantial opportunity to take deposit share in the New York Metro market. On the Commercial side, we have invested heavily in our treasury solutions capabilities with a state-of-the-art platform and strong talent to serve client needs. We continue to add better tools for our clients to manage their cash and drive higher operational deposits as well as innovative products and capabilities to attract deposits.

Moving to Slide 11. We are monitoring the commercial real estate portfolio closely given the softening macro-environment and the pressure of rising rates impacting refinance needs. The general office sector is a particular concern as tenants rethink their space needs given the remote work trends. Given these pressures, we are evaluating our loan portfolio very carefully for early signs of stress, in particular, CRE office. It’s worth noting, however, that near 100% of our borrowers are current on their obligations with NPLs under 50 basis points. We are starting to see an increase in criticized assets and have added work-out resources, but given the diversity and quality of the portfolio, we feel the credit costs will be manageable. Our total CRE allowance coverage of 2% includes an elevated coverage for the general office portfolio of 6.7%.

On Slide 12, we drilled down a bit on the $6.3 billion office portfolio, which includes $2.2 billion of credit-tenant and life sciences properties, which are not as exposed to adverse back-to-office trends and are expected to perform quite well. The remaining $4.1 billion relates to the general office segment, which we feel is reasonably well positioned across type, geography and suburban areas and central business districts. About 90% of the general office portfolio is income producing and about 70% is located in suburban areas, and the majority is Class A.

Next, I’ll provide further details related to first quarter results. On Slide 13, net interest income was down 3%, given lower day count, which was worth about $29 million, and slightly lower interest-earning assets. The net interest margin of 3.3% was stable with the increase in asset yields offset by higher funding costs. With debt funds increasing 475 basis points at the end of 2021, our cumulative interest-bearing deposit beta has been well controlled at 36% through the end of the quarter. We continue to dynamically adjust our hedge position so that we have down rate protection in the second half of 2023 and through 2026. As we approach the height of the rate cycle, we have managed our asset sensitivity down from roughly 3% at the end of last year to a more neutral 1.1% at the end of the first quarter.

Moving on to Slide 14. We posted solid fee results despite seasonality and headwinds from market volatility and higher rates. These showed some resilience amid a challenging environment, down 4% linked quarter with seasonal impacts in capital markets and service charges, partly offset by strength in FX and derivatives revenue and a modest improvement in mortgage banking fees. Focusing on capital markets, market volatility continued through the quarter and syndications and M&A advisory fees were seasonally lower. We continue to see good strength in our M&A pipelines and signs that deal flow should pick up as the year progresses. Mortgage fees were slightly better with higher production fees. We are seeing volumes rising and margins improving with the industry reducing capacity. This should continue to benefit margins over time. And finally, card and wealth fees posted solid results for the quarter.

On Slide 15, expenses came in better than expected, up only 2.8% linked quarter, given seasonally higher salaries and employee benefits as well as the impact of an industry-wide FDIC surcharge implemented at the beginning of the year.

On Slide 16, average loans were down slightly and period-end loans down 1% linked quarter including the impact of planned auto run off. We have seen commercial utilization decrease a bit over the quarter as inflation and supply chain pressures continue easing and clients are adjusting inventories to reflect this, as well as lower capex in anticipation of reduced economic activity. Average retail loans are down slightly, reflecting the planned run off in auto, which was largely offset by growth in mortgage and home equity.

On Slide 17, average deposits were down $4.7 billion or 2.6% linked quarter, driven by seasonal and rate-related outflows. As I mentioned earlier, the majority of the deposit decrease occurred in January and February, with balances broadly stable in March. Our interest-bearing deposit costs were up 51 basis points, which translates to a 73% sequential beta and a 36% cumulative beta.

Moving on to Slide 18. We saw good credit results again this quarter across the retail and commercial portfolios. Net charge-offs were 34 basis points, up 12 basis points linked quarter, which reflects continued normalization. Nonperforming loans are 64 basis points of total loans, up 4 basis points from the fourth quarter as an increase in Commercial was offset by improvements in retail. Retail delinquencies were broadly stable with the fourth quarter and continue to remain favorable to historical levels, but we continue to closely monitor leading indicators to gauge how the Consumer is faring.

Turning to Slide 19, I’ll walk through the drivers of the allowance this quarter. We increased our allowance by $35 million to take into account the growing risk of an economic slowdown and the outlook for losses in the Commercial portfolio, particularly general office. Our overall coverage ratio stands at 1.4%, which is a 4-basis-point increase from the fourth quarter. The current reserve level calculation contemplates a moderate recession and incorporates expectations of lower asset prices and the risk of added stress on certain portfolios such as CRE.

Moving to Slide 20. We maintained excellent balance sheet strength. Our CET1 ratio increased to 10%, which is at the top end of our target range. Tangible book value per share was up 6% in the quarter, and the tangible common equity ratio has improved to 6.6%. We returned a total of $605 million to shareholders through share repurchases and dividends.

Shifting gears a bit, on Slide 21, we continue to make good progress with our push into the New York Metro market. We were very excited to complete the branch and systems conversion at Investors in February, which went very smoothly. With that behind us, we are full steam ahead working to serve our customers and capitalize on opportunities to capture market share. We continue to be encouraged by the strong early momentum we are seeing in the branches where customer satisfaction has been improving significantly, and we continue to see some of the highest customer acquisition and sales rates in our network across the legacy HSBC and Investors branches. We’ve also seen some good early client wins and a growing pipeline in Commercial. We look forward to making further strides as we leverage the full power of our product lineup and customer-focused retail and small business model across the New York market.

Moving to Slide 22 for a quick update on our TOP8 program. Our latest TOP program is well underway and progressing well. Given the external environment, we have begun to look for opportunities to augment our TOP8 program in order to protect returns as well as ensure that we can continue to make the important investments in our business to drive future performance. We’ll have more to say about this in the coming months.

Moving to Slide 23. I’ll walk through the outlook for the second quarter and give you an update on our outlook for the full year that takes into account a modest economic slowdown with the Fed expected to raise rates by 25 basis points in May and then begin easing late in the year. For the second quarter, we expect NII to decrease about 3%. Noninterest income is up mid- to high-single digits. Noninterest expense should be stable to down slightly. Net charge-offs should remain in the mid-30s basis points. Our CET1 is expected to come in above 10% with some share repurchase planning depending upon our view of the external environment.

Moving to Slide 24. As we think about the full year, we remain focused on maintaining strong capital, liquidity and funding position while sustaining attractive returns. Of course, there is a continued level of uncertainty in the current environment. For the full year 2023, we expect NII to be up 5% to 7%. We are focused on initiatives that will stabilize and even grow our deposits modestly from first quarter levels over the remainder of the year. Noninterest income is expected to be up mid-single digits. Noninterest expense is expected to be up about 5%. Net charge-offs are expected to be in the mid- to high-30s basis points. Our current reserve level contemplates a moderate recession and known risks, and there should be less of a need for further reserve builds given anticipated spot loan decline for the year as auto runs down, and our CET1 ratio is expected to be above the upper end of our 9.5% to 10% target range. At 10% to 10.25%, assuming stable market conditions, our share repurchases are expected to build over the course of the year.

To sum up, on Slide 25, we delivered a solid quarter despite unexpected challenges and are ready for the uncertainty that lies ahead in 2023. Our strong capital, liquidity and funding position will serve us well to move forward with our strategic priorities and deliver attractive returns this year as we balance the need for strong defense with the imperative of continuing to play prudent offense to strengthen the franchise for the future. Even as we navigate through the current challenging environment, we reaffirm our commitment to our medium-term financial targets.

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

Bruce Van Saun — Chairman and Chief Executive Officer

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

Questions and Answers:

Operator

Thank you, Mr. Van Saun. [Operator Instructions]. Your first question will come from the line of Erika Najarian with UBS. Go ahead, please.

Erika Najarian — UBS — Analyst

Hi, good morning.

Bruce Van Saun — Chairman and Chief Executive Officer

Good morning.

Erika Najarian — UBS — Analyst

As we contemplate your original net interest income guide of 11% to 14%, now up 5% to 7%, could you walk us through what the major changes are in assumptions, and how much of it was cyclical, such as the deposit run off, higher beta, and how much of it could be a little bit more structural as you anticipate the different rules such as carrying higher liquidity funded by wholesale funding?

Bruce Van Saun — Chairman and Chief Executive Officer

Yeah. Let me start, and I’ll quickly flip it to John. But I would say, Erika, that really we’re just recognizing what we’ve seen in the deposit markets and the cost of deposits is going up. I think that was partly a response to kind of the Fed rapid rises and money funds becoming alternatives. So there was, I think, a greater sensitivity around earning a return on cash that kicked in. And then that was, I think, further exacerbated by the bank failures in March. And so I think there was kind of heightened velocity of deposits moving around the system. And so to retain those deposits, folks had to increase rate paid. We feel that we did a pretty good job here. We came into the year expecting that there’d be some seasonal outflows in Q1. And since we had built deposits in the second half of the year, and then we had auto running down, so less volume on the asset side, we were prepared to let those rundown by about 3.5% in the quarter. We actually saw about 1% higher than that in the run off, but in any case, we tried to hold the line on betas. And I think the betas that we posted are slightly better than peers that have reported at this point. So — but if you kind of play out the rest of the year, we’re going to be paying more for our funding than we thought coming into the year. And that’s pretty much the big driver. I would say there might be kind of a little more discipline in terms of who we’re extending credit to, given I think probably a higher likelihood that we could see a short and shallow recession. So there might be a little volume impact there from slightly lower earning assets, and maybe there’s a little mix where we’re holding a little precautionary cash, but if I had to kind of put it in order, I would say, number one is the cost of deposits and maybe slightly the volume on assets, and then thirdly would be composition. So, John, I’ll flip it to you.

John F. Woods — Vice Chairman and Chief Financial Officer

Yeah, [Indecipherable] right points to focus on. I’d say you break it down, Erika, between rate and volume on the rate side. As you heard from Bruce, we have the migration from a deposit standpoint, you’re going to see the full year effect of that, of what’s happened over the last quarter or two. And the drivers of that are well documented. We’ve got the cycle with higher rates and quantitative tightening going on that’s causing those forces to kind of hit us. I would also say that betas [Phonetic] move up a bit more than maybe we had planned given the outlook. So we were, I think, in the high 30s prior, maybe we’re in the low 40s through the cycle. So we’re building that in. You also mentioned that from a liquidity standpoint, we feel very good about that. From that, we are already compliant, if we had — if we were a Category III bank, we’re already compliant on the LCR. But from a volume standpoint, we are in rundown in auto, we’re looking at some balance sheet optimization initiatives in Commercial. And so you’ll see the LDR fall throughout the rest of the year. And then finally, I would say that the other things I look at on the positive side, I mean, our loan betas are from a cumulative standpoint will still exceed cumulatively where we’re coming out on deposits. So you’ll see that mid- to upper-40s on loans versus the low 40s on deposits. You got front book, back book. When the Fed finally kind of pauses and starts to cut, you’ll see a lot of the balance sheet continue to contribute over the quarters post maybe a possible pause and cut that the Fed may kind of engage in. So lots to [Speech Overlap].

Bruce Van Saun — Chairman and Chief Executive Officer

You might add too, John, about the swaps that we continue to dynamically recalibrate the swaps to provide protection for the event that the Fed ultimately moves lower.

John F. Woods — Vice Chairman and Chief Financial Officer

Yeah. I think it’s a really good point. I mean when you think that’s — that we’re just talking about is the ’23 sort of story. I mean when you get into the end of ’23, into ’24, this cycle compared to last cycle, we have a lot more down-rate protection in place for the second half of ’23 and into ’24 than we might have had in prior cycles. [Speech Overlap].

Bruce Van Saun — Chairman and Chief Executive Officer

[Speech Overlap] help support a good guide for ’24. And I guess just to close this off, Erika, I would say, if you look at the outlook for the year, kind of the one thing that got marked down was really NII. We still feel pretty good about the fee outlook. We’re going to work a little harder on expenses and probably bring that in below where we thought coming into the year. I’d say credit provisioning should be about kind of where we thought coming into the year. We’re still angling to repurchase shares over the course of the year. So our expectation is that we can continue to deliver return on tangible equity in the kind of mid-teen area and — just reflective that we won’t make quite as much net interest income this year, but still investing in the things to position us to have a good kind of runway into 2024.

Erika Najarian — UBS — Analyst

I’ll let one of my peers ask more detail on the swap recalibration because I think that’s important as we think about NII for ’24, but since we have you, Bruce, I want to ask you about how you’re thinking about these anticipated regulatory changes for regional banks. I think that — I’m glad that you said in the prepared remarks that it takes time, right? You have the NPR, which could come out end of the year or a year from now, a year common period in a phase-in, so as we think about what the market is anticipating, whether it’s TLAC or getting rid of — opt out on AOCI, and of course, you said you’re already LCR compliant, how are you thinking about managing your capital relative to your stock down at time, right? So — and it seems like banks can never buy back as much at the time when they should be buying back and the potential in ’24 for some nonbanks to be in bigger trouble and potentially taking market share, but balancing that with what’s going to be potentially tighter requirements on capital and liquidity. How much are you front-loading that versus thinking about the opportunities that can come your way if you remain as profitable as you say you’re going to remain?

Bruce Van Saun — Chairman and Chief Executive Officer

Yeah. Great question. And I guess just to set the big picture, Erika, that I would say, first off, I don’t believe that the answer to the two bank failures is more regulation on regional banks. I think those were idiosyncratic situations, and there was sufficient regulation. So you basically had business models that were not well diversified and the banks grew too fast and stretched management capabilities. The supervisors didn’t really do their job. And so I think there’ll be a thoughtful review of what were the issues and then how to address them. I think it’s probable that there will be some tightening around liquidity and capital and probably closer reviews of how banks are handling their asset/liability management. There may be other aspects of this in terms of the overnight repo facility and creating a kind of viable drain on bank deposits in the money funds and — should they change that and deposit insurance and should they take a look at that. So there’s a bunch of things that I think will come under review. Specifically, with respect to us, I think the good news is that we’ve managed our capital at the high end of our peer group. And so we’re already compliant. We would be — if we ended up having the AOCI filter removed, we’d be in compliance today. The same thing John pointed out, the LCR, we’ve run that at a high level, we’ve run very rigorous internal liquidity stress testing regimen that we’d already be in compliance with the Category III bank as well. So the fact that we have managed the balance sheet conservatively, we’re already in compliance if they go kind of heavier regulation; if it ends up going down that path, I think we’re in good position. So I think we will have — and the fact that these will be phased in over kind of, I’d say, two or three years, gives us lots of capital flexibility to be buying back our stock or taking advantage of other situations where that could arise. And if it’s strategically and financially compelling, I think we have the capability to go on offense. So anyway, that’s kind of my thoughts on that. It was good to kind of stay conservative even when we have lots of questions as to why aren’t you leveraging your capital structure more, why are you keeping your CET1 target so high. Guess what? We keep it that way, and we run conservative for precisely these air pockets that you’re always going to experience turbulence and high capital and high liquidity is your best friend in these circumstances.

Erika Najarian — UBS — Analyst

Thank you.

Operator

Your next question will come from the line of Peter Winter with D.A. Davidson. Your line is open.

Peter Winter — D.A. Davidson — Analyst

Hi, good morning. I wanted to just follow up on Erika’s question on the NII guide. I was wondering, could you be a little bit more specific on the outlook for margin and loan trends going forward?

John F. Woods — Vice Chairman and Chief Financial Officer

Yeah. I’ll go ahead and get started on that. So the guide being up 5% to 7%, what we built into that as we mentioned is the fact that we’re going to have some downward kind of impact on margin coming from the deposit migration as well as increased beta assumptions that we’re building in. So it’s — there’s a lot of uncertainty here and a lot of things to play out. But to try to frame it a little bit, go out to — if you think about where we may — in 4Q ’23 where we may end the year, we’re starting the year at 3.30% [Phonetic]. We may end the year, call it, in a wide range, maybe 3.10% to 3.20%. And if things kind of — if there’s good execution and some trends maybe end up going our way, we’ll end up at the high end of that range, and vice versa on the lower end. And then so I’d say that when you think about playing it out throughout the year, there will be a step down as you work through the year with maybe a little bit of weighting into 2Q and things basically flattening out into the second half of the year. But like I said, there’s a lot of uncertainty there. And — but that helps — hopefully, that will help give you a frame. And then you’ve got, as we mentioned, on the volume side of things, we do have the auto rundown, which we began last year that will be — is built into that guide as well as the ongoing work that we’re doing in Commercial and balance sheet optimization. So you put all that together, then that gives you the NII guide.

Bruce Van Saun — Chairman and Chief Executive Officer

I would just add to that, good answer, John, that this is an opportunity. We’ve always been on a balance sheet optimization path. But I think we’re really intensifying our focus there. So businesses like indirect auto where it was a good place to kind of park liquidity, and we run the business well. We service it very well. But it’s not really that strategically important to us. It doesn’t have direct customers that we cross-sell to because those customers frankly are customers of the dealerships. So looking hard at those business and say, hey, if deposits are more dear [Phonetic], what do we have on the left side of our balance sheet where we don’t have deep relationships, and we’re not making the best risk-adjusted returns. And so during this year, I think we’re going to really focus on making sure that the right side of the balance sheet in terms of deposit quality is as strong as it possibly can be and that where we’re lending money, we’re doing that to true customers that we have deep relationships, whether they’re consumers, small business or commercial. And so we’ll take the opportunity this year to potentially have a little bit of a reset and even intensify those efforts. So we’ll really love our balance sheet going into 2024.

Peter Winter — D.A. Davidson — Analyst

Got it. And if I could just ask about deposits, the outlook, I recognize deposits stabilized in March, and you’ve done a lot of work to improve the deposit franchise. But it just seems like in this environment, to keep deposits stable to growing deposits from here could be a little bit of a challenge, not only for you, and I was wondering if you could just give some color on some of the deposit opportunities.

Bruce Van Saun — Chairman and Chief Executive Officer

Yeah. Why don’t I stop at the — start at the top, and then maybe I’ll turn it to Brendan and Don to talk about what we’re doing in Consumer and Commercial. We did put a slide in there, Peter, about some of those opportunities. And so I think that the — right now, we just need to kind of get through this earnings season and see the cards turned over and continue to trend hopefully of less and less turbulence and getting back to a more calm situation. So that’s where kind of stability comes in. And by the way, through — halfway through April, we’re still kind of trending stable to even slightly up, but — then the initiatives that we have long invested in and the value propositions that we have both for Consumer and some of the new innovation we have on the Commercial side, we think should start to play out [Phonetic], and then we can start to build back deposits. But why don’t I first turn it to Brendan to talk about consumer?

Brendan Coughlin — Head of Consumer Banking

Yeah. Thanks. So the Consumer — in the Consumer business, we have got sort of kind of three segments of deposits, the traditional retail, wealth management and then small business. And it’s kind of progressing as expected. It has been chatting about over the last couple of quarters. We certainly have customers coming into the cycle that have excess deposits and liquidity from pre-COVID. We’re seeing very, very small earn down rates, but nothing that is unexpected and broadly right in line with trends from mid-summer last year through this quarter. As John pointed out, through March, on all three of those portfolios, we saw 60% to 75% increase in inflows, but the same sort of increase on outflows broadly just moving money around it. So we were very stable on net balances across those businesses through the month of March. We feel really good about the underlying health. Over the last eight years, we’ve invested a lot of time and energy in making our consumer deposit base much more granular. Our primacy rates, whether customers consider us a primary bank or not, is up dramatically to above peer levels. That’s a good thing. That means stability in low-cost deposits when payroll is coming in. We’ve done things like added benefits like early pay for consumers, which is an encouragement to bring payroll and direct deposit over, that’s going quite well, adds more granularity and stability of the deposit base. So when — as I look at levers to continue to have strong deposit performance in the rest of the year, there’s a couple of things in the consumer bank that we’re really, really focused on. One, John mentioned, New York City, New Jersey household growth getting more customers, that is going well. We’re performing at the top end of our peer set in terms of net market share gain and household growth. We expect that to continue in all of our markets and supported by the really early momentum in New York City and New Jersey that we expect to continue. We’ve also made a pretty meaningful pivot into customer relationship deepening. So we’ve rolled out program, as Bruce mentioned, Citizens Plus, which the simple concept is you do more with us, you get more, really encouraging customers to bring more of their wallet to us. We’ve seen very, very strong take up on that, a 300% plus improvement in customers going into these relationship propositions, encouraged by the breadth of the offering and bringing more to us, and profitability of those customers almost doubles when they migrate up. So we think that will give us a shot in the arm as customers look at us to consolidate relationships over. And then maybe last would be Citizens Access. So — and it gives us a great lever to raise deposits as we need it, but it also gives us a great lever to cost contain interest-bearing deposits in the consumer bank, which will allow us to have much more manageable betas in the core bank where we can focus on relationship banking, and not deposit raising for the sake of deposit raising. And when we need to contain deposit growth, we can do it in a very targeted way through Citizens Access. That’s proven to be exceptionally effective for us, and we had a great quarter in growing Citizens Access here in Q1.

Bruce Van Saun — Chairman and Chief Executive Officer

Great. Don?

Donald H. McCree — Vice Chairman and Head of Commercial Banking

Yeah. So on our side, I think a lot of it surrounds the payments and treasury services business. You’ve heard us talk for the last couple of years about the investment we’re making in that business. It has not only been around the core operating services, but also a lot of work around deposit franchises and liquidity franchises, frankly. One of the things we haven’t talked about is we have a liquidity advisory service and a liquidity portal, which goes beyond deposits, but it allows us to capture customer funds even if they are on balance sheet. And then on the deposit side, over the last couple of years, we’ve introduced five or six new products. We’ve talked about the Green Deposits. We’ve talked about Carbon Offset Deposits. We’ve talked about escrow deposits. So the product set is quite broad. The other thing we saw during the disruptions is we added about 300 new deposit clients, a lot of which interestingly came out of the JMP franchise as they referred some of the technology customers onto our platform. Some of those are funded up. Some of those aren’t funded up. But like Brendan said, the core of our franchise is really the primary core relationships and the operating relationships, and about 66% of our deposit base is really with core primary relationships. And the last thing we’re doing is we’ve turned the deposit business into a primary thrust sell. So we were asking for capital markets business, when the capital markets were opened, we’re now asking for deposits, and we’re framing the deposit raise in the context of overall relationship and have gotten a very good response from a lot of our clients.

Peter Winter — D.A. Davidson — Analyst

Thank you for the detailed answer.

Operator

Your next question will come from the line of Scott Siefers with Piper Sandler. Your line is open.

Scott Siefers — Piper Sandler — Analyst

Good morning, everyone. Thanks for taking the question. I was hoping you might be able to speak at sort of a top level about how commercial customers are behaving now with their operational deposits, like are they keeping less in operational deposits than they would have previously and then just spreading that money across several banks, which would imply maybe you lose some, but game is on, in other words, higher churn? Maybe a thought what commercial account openings have looked like over the past month or so?

Donald H. McCree — Vice Chairman and Head of Commercial Banking

Yeah. As I mentioned, we’ve opened about 300 new accounts over the last month, which has been encouraging. I’d say at the top end of the client base, we’ve seen more diversification activity. So the public companies, which had excess deposits kicking around the system, some of which were search deposits, some of those flowed out and went to other banks, and then on the flip side, some of them flowed into us as customers balanced their deposit accounts, so kind of net neutral on that. And then the other thing we’ve seen, frankly, and this was far before SVB and some of the disruption, is clients are — because the capital markets are kind of quiet and the lending markets are kind of quiet, clients are using some of their cash to fund their operations and fund capex. So we’ve seen a little bit of a drift out in terms of just utilization of excess cash balances. And then the — I’d say the core operating deposits have stayed pretty flat, I mean people are basically toggling between ECR and deposits, if there’s a toggle, but I’d say the kind of core funding of operational activities is relatively flat.

Scott Siefers — Piper Sandler — Analyst

Okay. Perfect. Sorry, I had missed that 300 accounts over the last month, but I appreciate all that color. And then maybe separately, it sounds like you had some fairly constructive comments about the possibility for investment banking to recover over the course of the year, maybe in the second half. Just maybe a little more color on how you’re expecting things to traject [Phonetic] from here, please?

Donald H. McCree — Vice Chairman and Head of Commercial Banking

Yeah. I think we’ll see, it’s going to depend on what happens in the marketplace. I will say that over the last couple of weeks, we’ve seen a pretty strong bid in a lot of different asset classes, particularly the syndicated loan underlying asset class. So there’s some signs of life in the market, whereas it was dead quiet at the beginning of the year. We’re starting to see some transactions actually clear the market some in kind of — and some get restructured in ways that are I would say not more aggressive, but more regular way from very structured transactions that were happening over the last couple of months. So good signs of life. I’d say our pitch activity and our pipelines are extremely robust. And I would come back to what I said a couple of times is in things like our M&A business, we’re a middle-market investment bank. And so we play in smaller-sized transactions, say, $250 million to $1 billion, not the $5 billion to $10 billion transaction. So the financing dependency that’s in a lot of our pipelines is not as difficult as it is for the mega transaction. So we think as things begin to stabilize and recover and the rate cycle begins to come to an end, we’ll see activity in the second half of the year. And we’re seeing that in our pipelines. And then remember, we also have a very diverse set of capabilities now. So we’re doing a lot around private equity. We’re doing — maybe placing equity for clients into, for example, a family office or a lot of pitch activity around convertible bonds. So while some traditional full market products might not be fully back yet, we have a wide arsenal that we’re actually deploying on behalf of that.

Bruce Van Saun — Chairman and Chief Executive Officer

Okay. And let me just add to that as well and maybe flip it to John. But Scott, the fee guide is supported, I think, broadly not reliant just on capital markets coming back. So we have a positive outlook across cards, across wealth, the cash management business, mortgage, cap markets. So it’s fairly broad.

Donald H. McCree — Vice Chairman and Head of Commercial Banking

Yeah. Let me just add one more thing, Bruce. So if the first quarter is an indication, we were down about $14 million quarter-on-quarter in syndicated finance, we were up about $13 million in our interest rate products and commodities hedging businesses. So diversification of those fee streams to Bruce’s point is quite important.

John F. Woods — Vice Chairman and Chief Financial Officer

Yeah, just picking up on that, so I was going to make that exact point just in terms of the bond and equity diversification along with M&A and cap markets. But in terms of cards, I mean, we do see some positive outlook in card as well, primarily in the credit card space, in mortgage, production volumes and margins starting to recover a bit, and that’s really good to see after quite a few quarters with headwinds there and so — and then on the wealth side of things, that has just been steady for us and is continuing, even early April activity has been quite strong. And so we’re feeling good in the wealth space. So it’s sort of diversified across four or five categories in terms of what we’re seeing for the 2023 outlook.

Scott Siefers — Piper Sandler — Analyst

Perfect. All right. Thank you very much.

Operator

Your next question will come from the line of Gerard Cassidy with RBC. [Operator Instructions]. Mr. Cassidy, your line is open. You may proceed.

Gerard Cassidy — RBC — Analyst

Thank you. Hi, Bruce. Hi, John.

Bruce Van Saun — Chairman and Chief Executive Officer

Hi.

John F. Woods — Vice Chairman and Chief Financial Officer

Hi.

Gerard Cassidy — RBC — Analyst

John, you talked about lowering the asset sensitivity of the balance sheet. Can you share with us how quickly you could take — can take that to neutral if you wanted to as the rate environment shifts possibly towards the second half of the year? And then also the cost or the strategies you would use to do that?

John F. Woods — Vice Chairman and Chief Financial Officer

Yeah. I mean, the way to think about that is we’re pretty close to neutral now, and when you’re down around 1%, there are a number of assumptions that go into that calculation including deposit migration, etc. And so if your models are off, one way or the other, you could easily be neutral. When we think about that, when — we consider the fact that we have a view that the Fed may hike one more time and may be on hold, but inflation — if inflation is more persistent and stubborn, things could rise right from here. So we nevertheless don’t try to overcook things one way or the other, but gradually getting back to neutral has served us well. And also you have to think about that 1% split between what’s typically hedgeable and what is a little less hedgeable. And the short end is more hedgeable. So the construct of what short rate exposure is, is actually less than 100%, I’m sorry, less than 1%. We’re actually 60-40 skewed towards the short end. So to close that down would not take very much at all, would be typically a shift in balance sheet outlook and/or additional receipt fixed swaps, but more broadly, we basically layered on a number of transactions to basically get our coverage for the rest of ’23. We’ve got about $20 billion of coverage in receiving swaps for the rest of ’23 and more like $26 billion [Phonetic] or so for ’24, and so we’re sort of thinking of ourselves around neutral with protection to the downside. And I would offer [Indecipherable] if, in fact, the Fed does at the lower rates by a lot, we have a view that we’ll end up with a trough NIM that’s well above what we saw in our last cycle. So much more stable and a much more narrow corridor of net interest margin than you might have seen from us in the past.

Gerard Cassidy — RBC — Analyst

Very good. And Bruce, I like the branding you’re doing in New York with the Giants, looking forward to the day that Citizens becomes the bank of the Yankees. But with that, as a follow-up on retail, this is maybe for Brendan. You guys gave us really good detail on Slide 31 on the FICO scores. And there is a theory out there, I don’t know if it’s true or not, that the FICO scores have been inflated because of what we came through during the pandemic. Some people claim as much as 70 points. Do you guys buy into that theory? And if so, would you then expect maybe the behaviors of your customers to be different than what the actual FICO scores are?

Brendan Coughlin — Head of Consumer Banking

Yeah, great question. There is a theory out there that FICO scores were inflated with all the stimulus and delinquency going down really fast. The good news is our credit underwriting is fairly sophisticated. And while FICO is an input, it tends to be one out of 100 things that we look at including free cash flow and a whole bunch of other different metrics in all of our businesses. And so we’ve taken that into account in our underwriting that the range of real FICOs versus actual printed FICOs during COVID, it [Phonetic] was incorporated into all of our credit metrics as we kind of made new loans over the last three or four years. So we feel really good about that. And I think the performance is showing that we think so far, at least we got that right. And as John pointed out, we are seeing the consumer book normalize, but both delinquency and charge-offs are still south of where they were pre-COVID, and we’re not seeing an unexpected acceleration of delinquency or charge-offs given the environment really across any of the asset classes. So I know over the years, there have been questions about some of the businesses that were faster growing in consumer and unsecured like students that are Citizens Pay business, those are well under control despite the [Indecipherable] surrounding us. So we feel really good about where we stand right now for consumer credit, given the health of the consumer and the quality of our underwriting standards. And lastly, yeah, we’ve tightened a bunch in the last six to nine months just as a cautionary measure. So as we’re kind of tightening up on things like auto on just size of balance sheet around the fringes in almost every single one of our asset classes, we’ve made credit tightenings, not because we’re seeing anything we don’t like, just in an abundance of caution to make sure that we don’t have any tail risk in any of the portfolios. So as everything we can see right now, we feel pretty good.

Gerard Cassidy — RBC — Analyst

Great. Appreciate the color. Thank you.

Operator

Your next question will come from the line of John Pancari with Evercore. Your line is open. Go ahead.

John Pancari — Evercore — Analyst

Good morning. On the expense side, I think, Bruce, you had alluded to potentially being able to come in below the expense expectation, the 5% expectation, maybe for the year as you’re focusing on that given the topline pressures. Can you maybe give us a little more color there, what you’re looking at and how material of a potential benefit you could have on that front as you see the topline pressure building on the NII side?

Bruce Van Saun — Chairman and Chief Executive Officer

Yeah, I’ll start and flip to John. But we had — coming into the year, we were going with a 7% guide, some of that was reflective of the HSBC and ISBC full-year effects and then some was the higher FDIC premiums. We’ve marked that down to 5%. So clearly in recognition that will have some compression in the net interest income, we’re going to work really hard to try to protect the bottom line. And so I think that’s what we’ve circled at this point. Clearly, TOP remains an open program, and we have lots of ideas in terms of are there other things that we can kind of get working on and actually have a benefit this year. Some of them may actually have a benefit for next year. But certainly, we’ve got our folks taking a hard look at what else we can do on the expense side. But at the same time, we’re trying to make sure that we protect all of the investments in our future, the important strategic initiatives across Consumer and Commercial, across technology and our overall client experience organization so that when the storm clouds pass, we’re growing faster than peers, and we’re in a good position to grow both customer base as well as our revenues. So that’s the balancing act as to keep looking for efficiencies while making sure that we’re prioritizing the things that really are important to future positioning. John?

John F. Woods — Vice Chairman and Chief Financial Officer

Yeah. I think that’s well said. I would just add that we try to calibrate our expense base along with the revenue base that’s being projected here. And so I think you could very well see an upsize in TOP8 in the coming months. We’re working on that. The couple of areas that we’re thinking about expanding on is the further simplification of our operating models, all of our — we’ve taken a look at — a harder look at all of our third-party spend, reimagining how we operate from an automation perspective is something that structurally we’ve been making investments in and we can double down on that going forward and just making sure everything we’re doing is absolutely focused on our core objectives of growing a top-performing bank, generating low moderate cost deposits and investing in our customers and clients. And so when you put a sharp eye on all of that, you often come up with opportunities to basically create additional efficiencies. And we’ve demonstrated that over the years, and then we’re going to intensify those efforts here in the coming months.

John Pancari — Evercore — Analyst

Got it. Okay. Great. Thank you. And then just secondly, on the commercial real estate front, can you give us a couple of stats that you may have on that in terms of — as you’re looking at refreshing or reappraising some of the properties in office, can you give us what you’re seeing in terms of some of the value declines? We had a peer of yours indicate 15% to 20% value decline in some of the office reappraisals. And then separately, I know you indicated that you’re seeing some pressure, you expect pressure on commercial real estate criticized loans. Do you have — what the percentage increase was in commercial real estate criticized and what’s the ratio?

Donald H. McCree — Vice Chairman and Head of Commercial Banking

All right. General criticized is running at about 24% for the office space. I don’t have it for the overall real estate book at this time, but office is what we’re very focused on. We haven’t seen a lot of appraisals yet because we’re not really in the restructuring mode. The ones we’ve seen have actually been modestly better than we expected. I don’t have the exact downdraft. But our entry LTVs are around 60%. So there’s a lot of cushion in our underwriting of commercial real estate. As Bruce and John said, we’ve really staffed up our workout teams, and we’re really putting each individual property, each individual MSA under the microscope. We’re focused on maturities. In the office book, we have about 60% of the book maturing by the end of 2024. So it’s not a huge amount. And we have a majority of the risk in the book swapped or fixed in terms of interest rate protection. So while we’re beginning to engage client by client, remember the way — we’re very kind of focused on who we’re doing business with, so client selection is very important, MSA is very important, suburban versus urban is very important. And so we think we’ll have some trouble in the book, and we’re going to have to restructure a lot of the transactions, it’s going to be very manageable in terms of the overall loss content.

John Pancari — Evercore — Analyst

Very helpful. Thank you.

Operator

Due to time constraints, we will now turn the call back over to Mr. Van Saun.

Bruce Van Saun — Chairman and Chief Executive Officer

Yeah. Okay. So again, thanks, everybody, for dialing in today. We appreciate your interest and your support. Have a great day. Thank you.

Operator

[Operator Closing Remarks]