Good morning, everyone and welcome to the Citizens Financial Group Second Quarter 2021 Earnings Conference Call. My name is Alan and I'll be your operator today. Currently, all participants are in a listen-only mode. Following the presentation, we will conduct a brief question-and-answer session. As a reminder, this event is being recorded. Now, I'll turn the call over to Kristin Silberberg, Executive Vice President, Investor Relations. Kristin, you may begin.

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.

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 TOP 6 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 in 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 and 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, while 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.

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 six 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 four 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 seven, 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.

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

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

All right, great. Thank you. Good morning. I saw a few references to TOP 7 in your press release. I was actually hoping you could talk a little bit more about what we might expect from the new TOP 7 program and also how it might differ from TOP 6? Thank you.

Sure, Ken, it's John here. As you've seen over the years, we've made continuous improvement part of our culture. Last year TOP 6 was somewhat unique and it was transformational with a 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 savings. There are a lot of traditional contributors in TOP 6 and there was a transformational aspect to it. TOP 7 may bring us back to some of that foundational continuous approach to driving efficiencies and a couple of areas that we're looking at include revisiting some of the areas we drove in TOP 6 such as agile delivery and simplifying how we operate. Next-gen tech has another wave of rationalizing applications associated with it. So you could see a 2.0 revisiting some transformational areas of TOP 6, and then continuing our bread-and-butter activities to simplify how we operate and fundamentals around how we manage the franchise. I'd suggest there may be some more room to go on optimizing branch density. But really it's getting back to driving continuous improvement year-over-year.

Pardon me. The next question will come from the line of Matt O'Connor with Deutsche Bank.

Good morning. Bruce, I was hoping you could elaborate a bit on your M&A strategy. Obviously you just announced the HSBC branch deal and have done some fee deals. There were some interviews and quotes from you a few weeks back about being more open to bank deals I think. So, maybe just update us on your thinking there. Thanks.

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 our top priority. We've focused next on fee-based bolt-on acquisitions and with some success; you're seeing the results in our commercial business now that we've incorporated M&A capabilities into our offerings to our customers. The mortgage acquisition was thoughtful and well timed and the wealth, Clarfield acquisition has been a home run in terms of opening up cross-sell particularly to our commercial business owners. We are pursuing more of those and I feel good that there will be some announcements over the course of the second half of the year. With respect to full bank acquisitions, the first step here was this HSBC transaction, which I think strategically makes good sense for us and is financially attractive and compelling. One of the things we like about it is it fills in some geographical holes we have, particularly the New York metro area and moves us down a little bit in the mid-Atlantic toward Washington and also gives us a beachhead in South Florida. Those fit well with our distribution strategy. If we find other bank transactions that fit that bill, strengthen footprint and distribution, and we can get them at the right price and with the right culture and financial economics, we'd be open to that. I don't think it's a driving desire here; it will be opportunistic. If we can find a good deal, we would certainly consider it.

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

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. I'm just wondering, again, you're calling for flat earning 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.

Yes. We've been thinking that with economic activity improving you could see some of that deposit growth begin to moderate. Deposits have continued to grow and we've seen strong flows. What's nice is that this growth has been coming in the categories we want, and demand deposits have been really strong which underpins everything. That has allowed us to run our deposit playbook and you're seeing our interest-bearing deposit costs decline, headed toward very low teens or better by the end of the year. 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 moderate and possibly some of it begin to run off, but we think most of the surge deposits from 2020 and early 2021 will stick around — as much as two-thirds or more. That's great fuel and support for what we expect to see later in the year with loan growth and into 2022 lots of momentum. Those are some of the thoughts I have on the deposit side.

I would just add to that, Ken, that spot numbers are quite optimistic. We had a record level of originations on the consumer side in the second quarter and very strong levels on commercial, which go back to pre-pandemic originations. We're still seeing relatively high pay downs which mutes the average a little bit, but 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 iPhone upgrade program activity and I think those pay downs should start to moderate a little bit. So, we're quite optimistic that we'll see 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 and may not fully reflect that in Q3, but I would stay focused on the spot number.

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

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?

Yes. At the end of the quarter, the average PPP balances during Q2 was about $4.5 billion.

$4.5 billion. 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 heard you say about $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 bounce you're expecting over the next quarter or two.

Yes, that's right. As I mentioned in my remarks, it's about $24 million of unique items that were specific to Q2. That's something that will set us up nicely for Q3, without expecting those things to recur. We do think that in the third quarter volumes will hold up and we may have some modest decline in gain on sale margins, but given those non-recurring items from Q2 as well as still strong volumes, we do think mortgage rebounds into the third quarter.

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

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.

Hey John, it's Don McCree. We are definitely seeing price competition across the board. Part of the reason our loan growth is a little bit more tepid than it might be is we're trying to stay disciplined on price and terms. Spreads are down maybe 10 basis points generally across the board. On the commercial side, we're out with our clients in person which is quite gratifying. The thing restricting utilization is supply chain backups and some labor issues. As those begin to clear, particularly labor, which we think clears up toward September, and supply chain begins to normalize toward the fourth quarter, we would expect more normal working capital build to resume. That gives me confidence. Also, PPP prepayments were a big part of the quarter dynamics and that will begin to moderate. So, there are headwinds we've been selling into which should clear out and give good momentum in the back half, but we'll stay disciplined on pricing and credit.

Okay. Brendan?

Yes, similar on consumer: ex-PPP, spot balances were up just shy of 3%. Pretty decent growth overall despite some rundown in the back book. We're seeing really good strength and record originations — the highest level of originations we've had since being a public company here in Q2. The momentum should continue in the second half of the year. Adding in the Apple iPhone upgrade program, which is typically a late summer, early fall event, and the seasonality of in-school lending should give us another round of growth heading into the back half of the year. Pricing has been competitive in a couple of fronts, particularly on student loan refinancing as rates have ticked up and then started to peel back a little. That's been a place of intensity. On assets like auto, pricing intensity has picked up a little, but spreads still remain pretty high. We're seeing auto as a double-digit ROE business right now with originations elevated from normalized levels given short duration, so we can hit record originations in auto with somewhat elevated yields. Home equity is probably a bit unique compared to peers; we've been very strong on originations for home equity and are likely one of the top two or three lenders across the U.S. though we operate in only 11 states right now for home equity lending. This quarter the spot balance 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. Our credit card book is also at the bottom. Some of the deleveraging trends with the stimulus in the market appear to have hit the bottom and we're starting to see signs of returning utilization. So, hopefully a tailwind for H2.

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

Yes, I think you were also asking about asset yield. In the second quarter we were able to see origination yields up on the retail side due to the diversity of the portfolio. We suspect that may continue into the third quarter with origination yields rising, which tends to temper the front-book/back-book dynamic you were asking about.

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%. Bruce, maybe if you could talk about how you think about that target of 9.75% to 10%. We're starting to see some peers nudge down their internal targets a bit. Wanted to get your thoughts on that. Is there room to potentially adopt a lower level internal target? Thanks.

Sure. We're comfortable with that 9.75% to 10% range. Over time we've brought that down; we were at 10% earlier and now at 9.75% to 10%. As we've matured as a company and demonstrated good risk discipline in how we've grown the loan book and come through the pandemic with a low level of credit losses, some of the conservatism we had coming off the IPO is starting to be shed and we're moving closer to where peer targets are. For now we're above the 9.75% to 10% range so I don't see a pressing desire to change it. Over time, if the peer group moves down a bit, we have room versus our SCB target and the risk profile would permit that, but no immediate change planned.

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

Good morning. It doesn't look like you added any swaps this quarter. I'm just wondering what the plan is going forward. I do know rates are obviously lower. What level would rates need to get to before you think about adding more swaps?

We actually did add swaps this quarter. We added about $1 billion later in the quarter and about $1 billion right at the beginning of the quarter, so roughly $2 billion. 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 a dollar-cost averaging approach into the rate environment. The overall averages were in the mid to high 70s on average for the portfolio, which is well below where yields are for five-year equivalents today. The last couple of billion were over 90 basis points. We've been able to opportunistically monetize some of that asset sensitivity over time. We're still over 10% asset sensitivity — actually close to 11% — so there's opportunity to continue to add to the swap portfolio as and when the rate environment improves. Year-over-year headwinds from swaps have declined significantly as a result of these actions, so I think we're in pretty good shape with the swap portfolio.

We'll go to the line of Gerard Cassidy with RBC. Go ahead please.

Thank you. Good morning Bruce. Good morning John. I got two questions. First for you, John, can you give us some color — I noticed in your outlook you indicated that you think the 10-year average for the quarter will be 1.35%. Currently today 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 and net interest income? And then second for you, Bruce, the administration came out with an executive order on M&A to scrutinize deals more closely. Does that raise the risk to your HSBC deal at all? Thank you.

I'll take the first part. We've been through a few weeks of quarter-to-date where rates were a little higher. We do have an expectation of an average 1.35% for the quarter. If it were to drop into the 1.15% range, you might see roughly a $5 million-ish impact to NII and maybe a basis point or two on NIM. There are offsets and nuances in an environment like that — you could find better opportunities offsetting on the deposit side and we have demonstrated the resilience of the franchise in the past, including the downside rate protection that our mortgage business provides. So you might see a modest first-order impact if the 10-year stays down, but we have mitigants on deposits and in fee areas.

On the executive order, I don't see it impacting the HSBC transaction. That transaction is relatively modest in size, straightforward and strategic. The executive order is out for comment and will take time to settle. Bank mergers are already heavily scrutinized, so whether there's a meaningful impact longer term remains to be seen, but as it relates to the HSBC transaction, I don't see any impact at all.

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

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

Yes, when you look at where we were coming out of Q2 in terms of spot, you see momentum being generated and that's continuing into Q3 with the 2% to 3% guide we highlighted. I think you absolutely could get to that and the expectation is to get to the mid-single-digit range over time.

I'd add that excluding PPP is an important metric for underlying flows in both commercial and consumer. That gives a clearer view of the fundamental activity.

To add some color: ex-PPP 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. One of the unique aspects for us is the breadth of our lending portfolio and attractive verticals on the commercial side. We feel confident we can get to nominal GDP growth on a recurring basis.

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.

And ladies and gentlemen that will conclude your conference call for today. Thanks for your participation and for using AT&T Event Teleconferencing. You may now disconnect.