John F. Woods
Vice Chairman and Chief Financial Officer at Citizens Financial Group
Great. Thanks, Bruce. Good morning, everyone. First, I'll start with our headlines for the quarter. We reported underlying net income of $476 million and EPS of $1.07. Our underlying ROTCE for the quarter was 13%, which includes the impact of a modest credit provision benefit. Net interest income was up 2% linked quarter, driven by strong loan growth and a 9 basis point improvement in margin.
Period-end loan growth was up a solid 2% linked quarter. Our retail loans are up about 3%, while commercial loans are up 2% or 3% ex-PPP impacts. Average loans are up 3% linked quarter paced [Phonetic] by commercial up 3% or 4% ex-PPP and retail up 3%. Fees were down 16% linked quarter, driven primarily by lower capital markets fees of a record prior quarter, given market volatility, seasonal impacts and some pull forward of transactions into the fourth quarter. On a positive note, we had our best quarter ever in interest rate and commodities revenues, as we help clients manage through the volatile environment.
We remain disciplined on expenses, which were up 3% sequentially excluding acquisitions, reflecting seasonal payroll tax impacts. Year-over-year expenses were up a modest 2% excluding acquisitions. We reported an underlying credit provision benefit of $21 million, which reflects strong credit performance across the retail and commercial portfolios. The near-term macroeconomic outlook remains positive, though we are monitoring, whether Fed actions slow inflation can do so, while engineering a soft landing for the economy.
The underlying credit benefit for the quarter excludes $24 million for the double-count of day one CECL provision expense tied to the HSBC transaction. Our ACL ratio stands at 1.43%, down slightly from 1.51% at the end of 2021 and 1.47% day one CECL level.
Our tangible book value per share was down 10.5% linked quarter, driven primarily by the impact of rising rates on securities and hedge valuations that impact AOCI. We continue to have a very strong capital position with CET1 at 9.7% after a 20 basis point impact from the HSBC transaction.
Next, I'll provide some key takeaways for the first quarter, while referring to the presentation slides. Net interest income on Slide 6 was up 2% given strong loan growth and the benefit of higher rates, more than offsetting the approximately $41 million combined impact from the lower day count and the reduced benefit from PPP forgiveness.
The net interest margin was 2.75%, up 9 basis points, reflecting the benefit of higher rates with front book yields rising, which more than offset reduced PPP benefit. Margin is also benefiting from lower cash balances, as we continue to redeploy some of our excess liquidity into loan growth. But note, PPP spot loans were down to roughly $400 million at quarter end and forgiveness benefit headwinds are substantially behind us. We made continued progress lowering our interest-bearing deposit costs, which are now 10 basis points, an all-time low down 3 basis points linked quarter.
Moving to Slide 7, given the Fed's recent rate hike and the expectation for Fed funds rate to end the year in the 225 [Phonetic] basis points to 250 [Phonetic] basis points range, we thought it would be helpful to discuss why we are confident that we will realize meaningful benefits from rising rates, as the forward curve plays out.
We entered this rate cycle with a much higher level of asset sensitivity at 10% before the first rate hike in March. This is already starting to benefit NII in the first quarter and is driving a significant improvement in our full year outlook, and those benefits will continue to accumulate into 2023. Importantly, our expected asset sensitivity reflects how we have completely transformed our funding base since the IPO. We are beginning the current up-cycle with a very strong liquidity profile. Our LDR is much lower, our deposit costs are as low as they've ever been, and our overall funding profile was greatly improved.
Our period-end demand deposits are now 32% of the book compared with 27% at the beginning of the last rate cycle. And within our interest-bearing deposits, our consumer CDs are now less than 3% of total deposits compared with about 10% at the start of the last cycle. We are also starting this cycle with a much lower level of floating on self-funding. This improved deposit profile reflects the significant improvements we've made to our deposit franchise since the IPO with improved and expanded retail and commercial deposit offerings.
We have also enhanced data analytics that allow us to attract and retain more stable deposits. With a better starting position and the improvements in our deposit mix and capabilities, we expect our interest-bearing data to be about 35% over this rate cycle, which is meaningfully lower than the last cycle. Our overall asset sensitivity stands at 7% at the end of the first quarter. This was down modestly from 10% at the end of 4Q, with the decrease primarily driven by the denominator impact of our higher NII outlook, given the benefits from the April 6th forward curve and the evolution of the balance sheet.
Pro forma for the Investors acquisition asset sensitivity is slightly over 6%. Since the path of the rate cycle is uncertain, on the bottom left side of this page, we've given you an estimate of our sensitivity to further changes in rates either up or down from the forward curve. Essentially a 25 basis point instantaneous change in the forward curve is worth about $20 million to $25 million a quarter, with most of that coming from our exposure to -- exposure to the short end of the curve. This includes the pro forma impact of Investors.
Moving on to Slide 8, we delivered good fee results this quarter despite headwinds for capital markets demonstrating the strength and diversity of our businesses, and we drove solid performance across other fee categories. Capital markets delivered solid results, despite the market volatility, seasonal impacts and some pull forward into the full fourth quarter of 2021. Given the strength of our pipeline, capital markets fees could rebound nicely, as markets settle down, and there is more certainty regarding the path of the economy.
Demonstrating the diversity of our business, we delivered our best quarterly results ever in global market, a 46% linked quarter, as we worked with clients to manage their foreign exchange, interest rate and commodity exposures. Mortgage fees were down 9% linked quarter against the backdrop of lower industry origination volumes, given rising rates and seasonal impacts. Strong competition and excess industry capacity continue to pressure margins. Mortgage servicing income improved, as higher mortgage rates resulted in slower amortization of the MSR. Card fees and service charges and fees were slightly lower linked quarter, given seasonality. Debit transactions and credit card spend continue to exceed pre-pandemic levels, and whilst these also remain strong.
On Slide 9, expenses were well controlled, up 3% linked quarter and just 2% year-on-year, excluding acquisitions. Our TOP7 efficiency program is well underway targeting $100 million of pre-tax run rate benefits by the end of the year.
Period-end loans on Slide 10 were up 2% linked quarter. We were pleased to see strong commercial loan growth again this quarter, up 2% or 3% ex-PPP. Average loans were up 3% linked quarter, driving this was average commercial loan growth of 3% or 4% ex-PPP impacts, led by C&I with growth across almost every region, including our expansion markets. Average retail growth was also 3%.
Line utilization began to rebound a bit with an increase of about 150 basis points to a little over 36% on a spot basis, primarily driven by corporate banking led by manufacturing and trade, as companies look to build inventories to get ahead of supply chain issues and rising input prices and facilitate some M&A activity.
On Slide 11, our period-end deposits were up 3% linked quarter, as we added $6.3 billion of lower cost deposits with the HSBC transaction. Excluding HSBC, period-end and average deposits were down slightly, given seasonal impacts as well as continued normalization from elevated liquidity levels.
Moving on to credit on Slide 12, we saw excellent credit results again this quarter across the retail and commercial portfolios. Net charge-offs were up slightly at 19 basis points for the first quarter with good performance across the portfolio. Nonperforming loans increased by $87 million linked quarter, primarily driven by residential real estate secured loans exiting forbearance. Other credit metrics continue to look excellent across the retail and commercial portfolios and criticized loans were lower. While we are mindful of inflationary pressures and the higher possibility of recession, we feel good about the improvements of the portfolio we've made over the last few years and the overall positioning of our credit risk.
In the appendix on Slide 21, you'll see that the risk profile of our commercial portfolio has significantly improved, given changes through the pandemic including prudent lending and a focus on growing the bigger, mid corporate credit portfolio, which is higher rated, as well as reductions in stress sectors, such as retail, malls, education and casual dining.
On the retail side, we continue to focus on the super prime and prime segments. Our risk profile has improved, given our disciplined risk appetite and changes in our portfolio mix, including the run-off of our personal and secured product. Of note, the Investors portfolios have performed well in prior cycles, and we feel good about them.
Moving to Slide 13, we maintained excellent balance sheet strength. Our CET1 ratio remains strong at 9.7% at the end of the first quarter after closing the HSBC transaction, which had a 20 basis point impact. We also wanted to mention that we have widened our target CET1 operating range to 9.5% to 10% from 9.75% to 10%, reflective of the continued progress we've made in improving profitability, revenue diversity and overall risk management. Our fundamental priorities for deploying capital have not changed, and you can expect us to remain extremely disciplined in how we manage the Company.
Shifting gears a bit on Slide 14, you'll see some examples of the progress we've made against the key strategic initiatives and other work we are doing across the bank to better serve our customers and make Citizens a great place to work. As you know, we closed the acquisition of Investors at the beginning of April further expanding the foothold we established in the New York City Metro area through the HSBC branch transaction and significantly advancing our growth plans.
In the consumer business, we were excited to complete the upgrade of Citizens Access to a fully-cloud enabled core platform, which enhances the capabilities of our national digital bank and is the first step toward our multi-year objective of convergence with our core banking platforms. We also recently announced Citizens EverValue Checking, a new overdraft-free checking account designed to meet bank on national account standards and increased banking access for underserved communities. On the commercial side, we continue to perform well in the league tables consistently ranking in the top 10, as a middle market and sponsor book runner.
On the right side of the page, we've included some digital metrics. We are very excited with how our digital first approach is increasing engagement with our customers and how this is all translating into a better experience and higher satisfaction.
Given the significant change in the rate environment and the closing of our two bank acquisitions, we provided a comprehensive update to our 2022 guidance on Slide 15. The good news here is that our guidance up on a standalone business. Rates are helping NII more than offsetting the fact that we are down a little on fees. So PPNR is higher and there is no change in our positive view on credit, and we remain confident in the outlook for the bank deals.
I'll focus my comments on the full year outlook, including both HSBC and Investors, but we've also added the standalone outlook without the bank deals to help isolate performance. We have also included a comparison to our original guide from January to help highlight what is driving the overall improvement in the full year outlook.
The rate scenario used in our outlook is based on the forward curve, as of April 6th, which implies the Fed funds target of 225 [Phonetic] basis points to 250 [Phonetic] basis points by the end of the year. On the long end, this rate curve implies the 10-year treasury to be about 270 basis points at the end of the year. It is also useful to keep in mind that the cumulative benefit from rates would also represent meaningful full year effect upside to NII in 2023.
For 2022, we expect NII to be up 27% to 30% driven primarily by the improved rate environment and solid average loan growth of 20% to 22%. On a standalone basis, NII is about $290 million to $330 million better than our prior guidance, given the higher rates.
Average interest earning assets are expected to be up 14% to 16%. Fee income is expected to be up 3% to 7%. On a standalone basis, fee revenue will be about $100 million lower than the January guide, as the environment will impact mortgage revenue as well as capital markets somewhat.
Noninterest expense is expected to be up 16% to 18% given the full year effect of HSBC and Investors, as well as our commercial fee based acquisitions. Credit is expected to remain excellent with net charge-offs broadly stable to down slightly for the year. And we expect to end the year with a CET1 ratio of about 9.75%, which incorporates an anticipated increase in our dividend in the second half of the year. Our capital projections include the impact of our expected notable items for the year, including the integration expenses for the acquisitions and our TOP7 costs. You can see those in the appendix on Slide 20.
Importantly, we expect to deliver positive operating leverage of approximately 2% on an underlying basis for the year excluding the acquisitions. And if you set aside the impact of PPP, that would be over 4% operating leverage. Including acquisitions, we expect operating leverage of over 4% and over 7% excluding PPP. Overall, we expect our full year ROTCE to land solidly within our 14% to 16% medium-term target range.
Moving to Slide 16, I'll walk through the outlook for the second quarter. On a standalone basis, we expect NII to be up 6% to 8%, driven by the benefit of higher rates and solid loan growth. With the bank acquisitions, we expect NII to be up 27% to 29%. On a standalone basis, average loans are expected to be up 1% to 2% led by commercial with interest earning assets up slightly. These are expected to be up 3% to 5% on a standalone basis, reflecting some improvement in capital markets and seasonal benefits. Including the acquisitions, fees are expected to be up 7% to 9%. Noninterest expense on a standalone basis is expected to be up 1% to 2% given higher revenue base compensation. Including the acquisitions, expenses are expected to be up 12% to 13%. Net charge-offs are expected to be broadly stable, and we expect our CET1 ratio to land at around 9.75%.
To sum up with Slide 17 and 18, we started '22 with a solid quarter. We have a winning strategy and are well positioned to succeed, given the strength and diversity of our businesses. We are very optimistic about the outlook for the rest of 2022 and beyond. We expect to materially benefit from a higher rate environment and strong loan growth. Our capital markets business is well positioned, as markets stabilize, and we are very excited about the opportunity to grow our business in New York metro region, as we integrate and build on HSBC and Investors. We will continue to focus on execution and building a top performing bank that delivers for all our stakeholders.
With that, I'll hand it back over to Bruce.