Citizens Financial Group, Inc (CFG) Q2 2021 Earnings Call Transcript

Citizens Financial Group, Inc  (NYSE: CFG) Q2 2021 earnings call dated Jul. 20, 2021

Corporate Participants:

Kristin Silberberg — Executive Vice President of Investor Relations

Bruce Van Saun — Chairman and Chief Executive Officer

John F. Woods — Vice Chairman and Chief Financial Officer

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

Brendan Coughlin — Head of Consumer Banking

Analysts:

Ken Zerbe — Morgan Stanley — Analyst

Matt O’Connor — Deutsche Bank — Analyst

Ken Usdin — Jefferies — Analyst

David George — Robert W. Baird — Analyst

John Pancari — Evercore ISI — Analyst

Peter Winter — Wedbush Securities — Analyst

Gerard Cassidy — RBC Capital Markets — Analyst

David Konrad — KBW — Analyst

Presentation:

Operator

Good morning, everyone and welcome to Citizens Financial Group Second Quarter 2021 Earnings Conference Call. My name is Alan and I’ll be your operator today. [Operator Instructions]

Now, I’ll turn the call over to Kristin Silberberg, Executive Vice President, Investor Relations. Kristin, you may begin.

Kristin Silberberg — Executive Vice President of 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 second quarter results, referencing our presentation which you can find on our Investor Relations website. After the presentation, we’ll be happy to take questions. Brendan Coughlin, Head of Consumer Banking; and Don McCree, Head of Commercial Banking are also here to provide additional color.

Our comments today will include forward-looking statements, which is 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 reconciliation in the appendix.

And with that, I will hand over to Bruce.

Bruce Van Saun — Chairman and Chief Executive Officer

Thanks, Kristin. Good morning, everyone. Thanks for joining our call today. We continue to execute well through the second quarter, driving forward on key initiatives in both consumer and commercial, accelerating our digital transformation, making steady progress on TOP6 and announcing the acquisition of HSBC’s East Coast branches and online bank. The diversity and resilience of our business model was evident as record revenue and capital markets and wealth partially offset the sizable drop in mortgage. Our credit results continue to be excellent given further improvement in the economy.

The headline numbers for the quarter with EPS of $1.46 and ROTCE of 17.7% were flattered by a sizable reserve release. Importantly, we feel PPNR has now bottomed and growth should resume in the second half. We achieved 1% average loan growth in the quarter, a little less than projected as pay downs on PPP loans and across the back book in commercial offset generally good levels of originations. We did a nice job on expenses, protecting the areas aligned with our growth initiatives while delivering on our expense efficiencies associated with TOP.

Looking out to the second half, we believe we will see a pickup in loan growth, particularly on the consumer side and student point of sale finance and auto. In commercial, we should start to see gradual growth in line utilization off of low levels along with the pickup in deal related financings. Mortgage revenues should rebound modestly, given hedge losses in Q2, and generally strong production or Capital Markets pipelines remain healthy. We expect to return to positive operating leverage in both Q3 and Q4. Credit should continue to be excellent. We are now calling for further improvement in charge-offs to 20 basis points to 25 basis points in the third quarter and 25 basis points to 35 basis points for the full year. We continue to feel good about our progress and our ability to come out of the pandemic period with increasing differentiation and growth in franchise value versus our peers over time.

With that, I’ll turn it over to John.

John F. Woods — Vice Chairman and Chief Financial Officer

Thanks, Bruce and good morning, everyone. Let me start with the headlines for the quarter. We reported underlying net income of $656 million and EPS of $1.46. Our underlying ROTCE for the quarter was 17.7%, which includes the impact of the sizable credit provision benefit. Revenue of $1.6 billion was down slightly linked quarter on lower mortgage fee income with net interest income up slightly given interest earning asset growth. Average loans were up 1% in the quarter on the strength of retail originations hitting an all-time high, giving us good momentum heading into the second half of the year.

Key highlights include record results in capital markets and wealth. Mortgage fees were lower as margins continue to tighten, although origination volumes remain quite strong and we continue to control expenses down 2% quarter-over-quarter. We recorded a credit provision benefit of $213 million, which reflects sustained macroeconomic improvement and strong credit performance with lower charge-offs. Our ACL ratio is now at 1.75% excluding PPP loans. And finally, we are in a very strong capital position with CET1 at 10.3% after returning $168 million to shareholders in dividends during the quarter. We also continue to grow our tangible book value per share, which was $33.95 at quarter end, up 6% compared with a year ago. Next, I’ll refer to a few slides and give you some key takeaways for the second quarter, I’ll then outline our outlook for the third quarter.

Net interest income on slide 6 was up 1% linked quarter, given interest earning asset growth and higher day count. Average loans were up 1% and net interest margin was down slightly. The net interest margin reflects lower earning asset yields reflecting the low rate environment. Spread pressures and elevated lending competition although improved funding mix and better deposit pricing are helping to mitigate these factors. Interest-bearing deposit costs improved 4 basis points to 16 basis points from continued discipline on deposit pricing. Our asset sensitivity increased to about 10.7% from 8.5% at the end of the first quarter. The increase primarily reflects the ongoing stability in deposit levels and the improvement in funding mix given the increase in low cost deposits.

Referring to slide 7, we delivered solid fee results again this quarter with record results in capital markets and wealth, reflecting the ongoing investments in our capabilities and the benefit of acquisitions. Mortgage fees were down approximately $80 million this quarter as production revenue was impacted by continued pressure on gain on sale margins, particularly in the wholesale and corresponding channels, given increased industry capacity and competitive pressures. While we have expected a meaningful decline in mortgage revenue for the quarter, it ended up greater than expected due to two items that reduced our revenue by a combined $24 million.

The first was the $14 million of MSR valuation losses net of hedges driven by changes in implied rate volatility which moved to unexpectedly near the end of the quarter. Also, we were impacted by a $10 million increase in late quarter to mortgage agency fees retroactively applied to existing pipelines. We would not expect these impacts to recur in Q3. Secondary originations remain strong but were down about 10% from first quarter levels. As expected, we are seeing a continuing shift towards purchase originations which increased from about 35% of the total in first quarter to about 48% in the second quarter.

Also, our third party servicing book grew to $85 billion, up 3% linked quarter and 6% year-over-year and servicing contribution improved $13 million linked quarter. Moving on to some of our positive quarter-over-quarter fee contributors. We delivered record results from capital markets and wealth reflecting our ongoing investments in capabilities and demonstrating diversity in our fee income. Capital market fees hit another high of 12% linked quarter with loan syndication fees hitting the highest level since 2017. Our M&A pipeline continues to be strong at historic highs. Additionally, whilst these had a new record, up 3% linked quarter, reflecting an increase in assets under management from net inflows with record sales and strong market levels.

Finally, card fees results were strong, up 16% linked quarter as debit transactions and credit card spend rebounded to exceed pre-pandemic levels given the strengthening recovery, which also benefited from seasonal trends. On slide 8, expenses were well controlled, down 2% linked quarter with seasonality in salaries and employee benefits. Average loans on slide 9 were up $643 million or 1% linked quarter given strength in our retail portfolio, offsetting a decline in commercial.

Diving into drivers a bit more, the diversity of our retail lending business produced record high retail loan originations in the quarter, which was partially offset by elevated pay downs. This was driven by strength in mortgage, auto and education refinance, partially offset by planned rundown of the personal unsecured portfolios. Commercial was roughly flat in the quarter excluding PPP. We had a strong origination quarter led by asset-backed and subscription line finance, which have been steady contributors over the last few quarters. This was offset by elevated payoff activity which reflects highly favorable conditions for commercial companies to access the debt capital markets.

Line utilization levels stabilized near historic lows over the course of the quarter. We saw average commitments for our middle market and mid corporate clients grew by 2% in the second quarter after being flat in the first quarter. This will benefit us as economic activity drives corporate Investment. Overall spot loan growth for the quarter before the impact of PPP forgiveness was 1.8% given strong retail and commercial originations. This provides good underlying momentum for loan growth in the second half of the year.

On slide 10 deposit flows continue to be robust especially in low cost categories and our liquidity ratios remain strong. Average deposits were up 3% linked quarter and 6% year-over-year with strong growth in demand deposits. Interest-bearing deposits were broadly stable as the decline in term deposits was offset by growth in low cost categories. We are very pleased with our continued progress on deposit repricing with total deposit costs down 3 basis points to 11 basis points. Interest-bearing deposit costs were down 4 basis points to 16 basis points during the quarter and we expect these costs to continue decreasing to low teens or better by the end of the year.

Moving on to credit on slides 11 and 12, we saw excellent credit results this quarter. Net charge-offs dropped by more than half as they declined from 52 basis points to 25 basis points linked quarter, driven by improvements across the portfolio. Non-accrual loans decreased $229 million or 23% linked quarter with $116 million decrease in commercial reflecting repayments and charge-offs. Retail non-accrual loans decreased by $113 million linked quarter driven by mortgage and home equity. Given the improvement in outlook and performance of the portfolio, our reserves decreased ending the quarter at 1.75% excluding PPP loans compared with 2.03% at the end of the first quarter.

Moving to slide 13. We maintained excellent balance sheet strength increasing our CET1 ratio from 10.1% in the first quarter to 10.3% at the end of the second quarter after returning $168 million in capital to shareholders through dividends in the quarter. We paused our stock repurchases in the second quarter in anticipation of strong second half loan growth and the HSBC transaction which are expected closing in the first quarter of 2022, we use about 24 basis points of capital. We have the opportunity to resume repurchases in the second half with about $660 million of capacity remaining under our current Board authorization. The pace and magnitude of repurchases will consider the strength of organic growth as well as the potential for fee based acquisitions while managing CET1 to within our target range of 9.75% to 10%.

Before I move on to our second [Phonetic] quarter outlook, let me highlight some exciting things that are happening across the Company on slide 14, and I should have said as 3Q outlook, before I move on to that. As Bruce mentioned, we are now working on further transformational efficiency opportunities to form a TOP7 program. For example, based on the work we’ve done so far, we have further opportunities as we mature our agile delivery model and simplify how we operate, implement the next wave of our next-gen technology program, including further rationalization of applications and continue to optimize our branch density. This quarter, we released our fourth Annual Corporate Responsibility Report highlighting our commitment to advancing our environmental, social and governance goals reflecting our core values.

The report provides a snapshot of our significant progress this year including the establishment of a formal corporate responsibility governance framework and the completion of our first materiality assessment to more specifically define ESG priorities. For example, we know that it is vitally important that we help create a healthy and sustainable future and we are committed to reducing our impact on the environment. Therefore, consistent with international influence [Phonetic] we have set ambitious targets to reduce our greenhouse gas emissions from operations by 30% by 2025 and 50% by 2035.

The last item I will cover on this page is the acquisition of HSBC East Coast branches and online deposit franchise. There is a recap of the transaction on slide 15, so I won’t rehash all the details, other than to reiterate the attractive entry this provides us in the important New York City Metro, Washington DC and South Florida markets.

Sizable customer base and solid deposit franchise provide a springboard for our consumer national expansion strategy. In addition, the $7 billion net deposit position provides a significant long-term funding flexibility in support of our attractive loan growth opportunities. And now for some high level commentary on the outlook on slide 17. We expect NII to be up 2% to 3% with NIM up low to mid single digits with our outlook based on 10-year treasury rate expectation of 1.35% for the third quarter. We expect average loans to be up slightly in the third quarter with spot loans up about 2% to 3%.

Earning assets are expected to be broadly stable in the third quarter. We are well positioned to see overall loan growth accelerate in the second half and into 2022, particularly given the continued strength we are seeing in mortgage, education refi and auto as well as the seasonal benefits expected for InSchool and point of sale lending in the third quarter. In commercial, we expect a slower recovery in utilization rates of historic lows with modest growth over the second half of the year led by asset backed subscription lines and deal related financings. Fee income is expected to be up 2% to 4% reflecting improvement in mortgage banking results and other categories as the economic recovery continues, partially offset by seasonal impacts in capital markets.

Non-interest expense is expected to be up slightly in the third quarter. We expect net charge-offs will be in the range of 20 basis points to 25 basis points of average loans with the provision less than net charge-offs. With a substantial improvement in credit, we expect that net charge-offs will be in the range of 25 basis points to 35 basis points for the full year, down from our prior outlook of 35 basis points to 45 basis points. To wrap up, this was a solid quarter for Citizens with good momentum heading into the back half of the year. Our expectation is that PPNR will grow quarterly in the second half of the year with positive operating leverage each quarter.

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

Bruce Van Saun — Chairman and Chief Executive Officer

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

Questions and Answers:

Operator

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

Ken Zerbe — Morgan Stanley — Analyst

Hi, great, thank you. Good morning.

Bruce Van Saun — Chairman and Chief Executive Officer

Good morning.

John F. Woods — Vice Chairman and Chief Financial Officer

Good morning.

Ken Zerbe — Morgan Stanley — Analyst

I saw a few references to TOP7. So, in your press release, I was actually hoping you could talk a little bit more about what we might expect from the new TOP7 program and also how it might differ from TOP6. Thank you.

John F. Woods — Vice Chairman and Chief Financial Officer

Sure, Ken, it’s John here. Yeah, I mean I think as you’ve seen over the years we’ve been, just been part of our culture to really dig in on this kind of mindset of continuous improvement. And last year TOP6 was somewhat unique and it’s transformational sort of two-year profile. We are very pleased with how that played out, delivering on the expectations of $400 million to $425 million in run rate saves [Phonetic]. So we’re excited about that. And there is a lot of traditional kind of top contributors in TOP6 and there was a transformational aspect to us. So that made it a little bit unique. I think TOP7 may bring us back to some of that foundational sort of continuous approach to driving efficiencies and a couple of areas that we’re looking at sort of looking at around to some of the areas that we were able to sort of drive in TOP6 such as agile delivery and simplifying how we were operating.

Next-gen tech has another, call it next wave of rationalizing applications associated with it. So I think you could see sort of a 2.0 in revisiting some of the transformational areas of TOP6. But then just continuing on our bread and butter to try to simplify how we operate in fundamentals around how we manage the place and I’d suggest that maybe there is some more room to go on optimizing branch density. But really just getting back to what we do, which is driving continuous improvement year-over-year.

Operator

[Indecipherable] The next question will come from the line of Matt O’Connor with Deutsche Bank.

Matt O’Connor — Deutsche Bank — Analyst

Good morning.

Bruce Van Saun — Chairman and Chief Executive Officer

Good morning.

Matt O’Connor — Deutsche Bank — Analyst

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

Bruce Van Saun — Chairman and Chief Executive Officer

Sure. So, Matt, I think we’ve been very clear all along that we had some great strategic initiatives that should lead to very good organic growth for Citizens and that’s kind of top of the heap in terms of priorities. We’ve focused next on fee based bolt-on acquisitions. And with some success, I think, you’re seeing the results in our commercial business now that we’ve kind of incorporated M&A capabilities into our offerings to our customer base. And the mortgage acquisition clearly was thoughtful and well timed. And then the wealth, Clarfeld acquisition has been a home run in terms of opening up cross-sell particularly to our commercial business owner. So we are pursuing more of those. And so, I feel good that there’ll be some announcements over the course of the second half of the year in that regard. So stay tuned there.

With respect to full bank acquisitions, I think the first step here was this HSBC transaction, which I think strategically makes good sense for us and also financially is very attractive and compelling. And so one of the things that we like about that is it fills in some geographical holes that we have, particularly the New York metro area and pushes us down a little bit mid-Atlantic South towards Washington and then gets us a beachhead in South Florida. So those are all things that I think fit well with our distribution strategy. And if we could find potentially other bank transactions that fit that bill that potentially could strengthen the footprint and help our distribution strategy and we can get it at the right price and it’s the right culture and meets the strategy etc. with compelling financial economics, we’d be open to that.

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

Operator

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

Ken Usdin — Jefferies — Analyst

Thanks. Good morning, guys. Wanted to ask on the outlook a couple of things about the NII side. John, last quarter you had mentioned that you had expected flat earning assets and we continue to see the strong deposit growth come through. And I’m just wondering, again, you’re calling for flat earnings assets, but it looks like the deposit growth remains pretty strong for the industry and for you guys. So just wondering what are you seeing there and expecting in terms of overall deposit growth and why that would only result in flattish earning assets.

John F. Woods — Vice Chairman and Chief Financial Officer

Yeah, I mean, I think that we’ve been for some time now thinking that with economic activity you start to see potentially some of those deposits to flatten out. They’ve just been continuing to grow and we’ve seen strong strong flows. I’d say what’s been nice about that is that, that’s been coming in the categories we want them to show up and meeting demand deposits have been really strong underpinning all of that. So that’s been quite good. I think the — and what that’s resulted in is continuing to allow us to run our deposit playbook and you’re seeing our interest bearing deposit costs decline and headed towards really low teens or even better by the end of the year. So that’s been great.

I do think that, as you see economic recovery in the second half of the year, we would suspect that some of that growth will begin to moderate and possibly even some of it begin to run off, but we have, most of that surge deposits that we saw in 2020 and early 2021, we think is going to stick around. So as much as two-thirds or more, and then that’s great fuel and great support for what we’re — what we expect to see later in the year with this — which is loan growth. And as you get into 2022 lots of momentum. So those are some of the thoughts I have on the deposit side.

Bruce Van Saun — Chairman and Chief Executive Officer

I would just add to that, Ken that spot numbers are quite optimistic. So I think we had a record level of originations for loans in the consumer side in the second quarter. We had a very strong level of that in commercial which goes back to pre-pandemic level of originations. We’re still seeing relatively high pay downs which mutes that a little bit, but I think when we look out into Q3 in particular, we have a bunch of seasonal strength in businesses like student and point of sale combined with I think those pay downs should start to moderate a little bit. So we’re quite optimistic that we’ll see very, very strong spot loan growth that should kick in Q3 and extend into Q4. The average is based on timing of when this all happens may not fully reflect that in Q3, but I would stay focused on the spot number.

Operator

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

David George — Robert W. Baird — Analyst

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

John F. Woods — Vice Chairman and Chief Financial Officer

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

David George — Robert W. Baird — Analyst

$4.5 billion, okay. Okay, great. Appreciate that. And then with respect to the Q3 outlook particularly specifically on fees, it looks like you’re expecting a fairly nice jump in fee activity, and I trust, part of that’s going to come from mortgage. John, I thought I think you said $14 million relative to Q2. That is about $85 million number with MSR related, and then there was a $10 million agency fee impact. Was there anything else that impacted that number? I’m just trying to get a sense as to how much of a balance, you’re expecting over the next quarter or two.

John F. Woods — Vice Chairman and Chief Financial Officer

Yeah, I mean, I think, yeah, that’s right. As I mentioned in my remarks, it’s about $24 million of unique items that feel unique [Phonetic] to 2Q. And so that’s something that will set us up nicely for 3Q, starting with that without expecting those things to recur. We do think that in the third quarter volumes will help — will hold up and we may have some modest decline in gain on — on gain on sale margins, but given what’s going on with those sort of non-recurring items from 2Q as well as, still a strong volume quarter that we do think that mortgage rebounds into the third quarter.

Operator

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

John Pancari — Evercore ISI — Analyst

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

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

Yeah. Hey, John, it’s Don McCree. We definitely are seeing price competition in terms competition across the board. So part of the reason that our loan growth is a little bit more tepid than it might be is, we’re trying to stay pretty disciplined on price and terms. So down maybe 10 basis points or something is what I’m saying generally in terms of our price — our spreads across the board. I think, just elaborating on what John and Bruce has said on loan growth, we’re out with our clients in person that which is actually quite gratifying. And the thing that’s kind of restricting utilization is all the supply chain back-ups and some of the labor. And as those begin to clear, particularly labor, we think clears up towards the September time frame and the supply chain begins to normalize towards the fourth quarter-ish. We would expect more normal working capital build the resume. So that’s what gives me a lot of confidence.

And then as John said, we’ve got about our entire downdraft and spot loan growth in the quarter was PPP prepayments and that’s going to begin to moderate. So there is some headwinds that we’ve been selling into which should clear themselves out and get some good momentum as we move into the back-end, but we’re going to stay disciplined on terms of price and credit.

Bruce Van Saun — Chairman and Chief Executive Officer

Okay. Brendan?

Brendan Coughlin — Head of Consumer Banking

Yeah, similar on consumer I’d say, ex-PPP, spot balances were up just shy of 3%. So pretty decent growth overall despite as Bruce pointed out some rundown in the back book. We’re seeing really good strength and record originations, really the highest level of originations, we’ve had since we’re a public company here in Q2. So the momentum, should continue in the second half of the year. And then as both Bruce and John pointed out, adding in iUp [Phonetic], the Apple iPhone upgrade program, which is typically a late summer, early fall event. And then the seasonality of InSchool lending should really give us another round of growth heading into the second half of the year.

But pricing has been really competitive in a couple of fronts, particularly on student loan refinancing as rates have ticked up and now are starting to peel back a little bit. That’s been a particular place of intensity. I’d say on assets like auto, pricing intensity has picked up a little bit, spreads still remain pretty high. So we’re looking at that business still as a double-digit ROE business right now with originations which is elevated from normalized levels in auto given the short duration. So we’re able to hit record originations in auto as an example with still somewhat elevated yields, which has been really, really good.

So I’m optimistic — that was actually the last point home equity, which is probably a little bit unique from what you’re hearing against peers. We’ve been really, really strong on originations for home equity. In fact, we are seeing some benchmarking that puts us in probably the top 2 or 3 lenders across the US although only operating in 11 states right now for home equity lending. This quarter, the spot balance has actually grew, and from a quarterly basis, that’s the first time since the financial crisis, we’ve seen net loan growth in home equity and our credit card book is also bottom. So some of these delevering trends with all the stimulus out there in the market with consumers, I think in our line of credit products have hit the bottom. We’re starting to see signs that those returning. So hopefully a tailwind as we would think about H2.

Bruce Van Saun — Chairman and Chief Executive Officer

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

John F. Woods — Vice Chairman and Chief Financial Officer

Yeah, I mean, I think…

John Pancari — Evercore ISI — Analyst

Yeah. Sorry, go ahead, John.

Bruce Van Saun — Chairman and Chief Executive Officer

I meant, John Woods. Sorry.

John F. Woods — Vice Chairman and Chief Financial Officer

Lot of Johns, it’s such a unique name. Yeah, I mean, I think you were also — you were just kind of our asset value yield. And you know in the second quarter, we were able to see origination yields up in the retail side of things due to a number of — due to the diversity of the portfolio. And we suspect that may — that’s something that we may see continue into the third quarter with origination yields rising, and that tends to temper the front book, back book dynamic that I think maybe you were trying to get after.

John Pancari — Evercore ISI — Analyst

No. That’s helpful. Thanks so much for all that. And then on capital, I know you saw some good strengthening in the CET1, the 10.3%, I guess first, if you could just maybe talk about how you think about that target of 9.75% to 10%. I mean we’re starting to see some of your peers nudge down their targets, their internal targets a bit. Wanted to get your thoughts on that. Is there room to potentially adopt the lower level there on the CET1 internal target? Thanks.

Bruce Van Saun — Chairman and Chief Executive Officer

Sure. But we’re comfortable with that 9.75% to 10%. As you know, over time we brought that down, it was 10% in the quarter, then it was 10% to 10% in a quarter, then it was 10% and it’s 9.75% to 10%. So I think as we’ve matured as a company, as we’ve demonstrated good risk discipline in how we’ve grown the loan book and you can see we’ve come through the pandemic with a low level of credit losses. I think some of that quote unquote new guy little bit of conservatism we had coming off the IPO, we’re starting to shed that and move back closer to where pure targets are. So for now we’re above the 9.75% to 10%. So I don’t see any real burning desire to change it. But over time, certainly the pack moves down a little bit. We have plenty of room versus our SCB target. And certainly I think the risk profile would permit that.

Operator

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

Peter Winter — Wedbush Securities — Analyst

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

John F. Woods — Vice Chairman and Chief Financial Officer

Yeah, we actually did have some swaps this quarter.

Peter Winter — Wedbush Securities — Analyst

Oh!, You did.

John F. Woods — Vice Chairman and Chief Financial Officer

Yeah, I mean, we added maybe, call it $1 billion or so. And we added $1 billion or so later in the quarter and actually $1 billion right at the beginning of the quarter. So really right around $2 billion. You add that to the $6 billion, we executed late in the first quarter. And we’ve got around $8 billion that we’ve added as part of our sort of early stage kind of dollar cost averaging into where the rate environment. And when you look at the overall averages, we did that, call it mid to high ’70s on average, which is mid to high 70 basis points, 75 basis points to 80 basis points on that overall portfolio. And you know in the five years sort of well below that today.

So, and the last couple of billion which I think [Speech Overlap] was over 90 basis points. So I think that we’ve been able to start to look opportunistically at ways to really sort of monetize some of that asset sensitivity over time. And we’re still over 10%, actually close to 11% asset sensitivity. So there’s lots of opportunity to continue to add to the swap portfolio as and when the rate environment continues to improve. And our year-over-year headwinds from swap has declined significantly and markedly as a result of all these actions. So I think we’re — I think we’re in pretty good shape in terms of the swap portfolio.

Operator

[Operator Instructions] We’ll go to line of Gerard Cassidy with RBC. Go ahead, please.

Gerard Cassidy — RBC Capital Markets — Analyst

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

Bruce Van Saun — Chairman and Chief Executive Officer

Good morning.

John F. Woods — Vice Chairman and Chief Financial Officer

Good morning.

Gerard Cassidy — RBC Capital Markets — Analyst

I got two questions. First for you, John, can you give us some color, I noticed in your outlook, you indicated that you guys think that the 10-year or the expectation for the 10-year will be 1.35%. Currently today, as you know, it’s well below that, if it comes in at 1.15% for the quarter, what would that do to the net interest margin assumptions that you have in net interest income. And then second for you, Bruce, the president, now obviously came out with the executive order on M&A to scrutinize deals more closely. Does that raise the risk of your HSBC deal at all? Thank you.

John F. Woods — Vice Chairman and Chief Financial Officer

Yeah, I’ll go ahead and knock off the first part of that, Gerard. The — in terms of, so we’ve gotten through a few weeks of the quarter breaks were a little higher. We do have an expectation of an average 1.35% for the quarter. If it were to drop off, call it into that range, maybe we would see, call it $5 million-ish or so of impact to NII. Maybe a 1 basis point or 2 on NIM, but I would hasten to add that there are offsets, some puts and takes when you’re operating in an environment like that. More broadly, you could find better opportunities in terms of offsetting that on the deposit side.

You could also see as we’ve demonstrated back in the crisis and in the pandemic, the resilience of the franchise broadly even beyond that, net interest income and what the downside rate protection that the mortgage company actually provides which is extremely powerful. So I think that maybe there is a modest impact from the first order effect. If the 10 year stays down there, but I think we have, we have mitigants in terms of on the deposit side, and then more broadly in the fee area.

Bruce Van Saun — Chairman and Chief Executive Officer

Yeah, part two of that, Gerard, I don’t see the executive order impacting the HSBC transaction. So it’s — that’s a relatively modest in size transaction, that straightforward and in any case the EO out for comment. It’s going to take quite a while to settle that one down and more broadly I think bank mergers are probably amongst the most heavily scrutinized as it is. So, whether there is a meaningful impact down the track on that remains to be seen, but certainly as it relates to the HSBC transaction, I don’t see any impact at all.

Operator

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

David Konrad — KBW — Analyst

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

John F. Woods — Vice Chairman and Chief Financial Officer

Yeah, I mean I think that’s right. I mean, when you look at, look at where we’re coming out in the second quarter in terms of spot, you see that momentum that’s being generated and that’s continuing into the third quarter with the 2 to 3% guide that we highlighted. I think you absolutely could get to that. And the expectation is to get to that mid-single digit range.

Bruce Van Saun — Chairman and Chief Executive Officer

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

Brendan Coughlin — Head of Consumer Banking

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

Bruce Van Saun — Chairman and Chief Executive Officer

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

Brendan Coughlin — Head of Consumer Banking

So one of the aspects, I think that’s unique to us is just the number of sales we set out to catch the wind there is some wind. So we have a very broad lending portfolio on the consumer side and we play in some very attractive verticals on the commercial side. So broadly feel good that we can certainly get to nominal GDP growth on a recurring basis.

Operator

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

Bruce Van Saun — Chairman and Chief Executive Officer

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

Operator

[Operator Closing Remarks]