Citizens Financial Group, Inc. (CFG) Earnings Call Transcript & Summary

We have CFO, John Woods from Citizens. Thanks so much for coming.

Great to be here.

Before we dive more deeply into Citizens businesses, could you tell us a little bit more about how business sentiment is trending now that we're 22 days into a new administration and perhaps you have a better sense of the rate path.

Yes. I mean I'd say things are trending very positively, right? I mean I think the administration is certainly attempting to be pro-business and will be, I think, over time, there's so little hiccups here and there with respect to tariffs, which creates some uncertainty. But I think the market is mostly shrugging that off and hopefully, this is more about just negotiations rather than anything that will be long-term negative for sentiment. When it comes to our conversations with customers, sentiment has really picked up post election. And I'd say a lot of activity had really dropped off in the second half of '24, just pending the outcome. And all of that is starting back up again. We can really see our pipelines filling up but it takes a while for deals to form. And I think that's what's really underpinning our outlook for the second half of '25, where we just really can see the pipelines being suggestive of a significant impact -- I'm sorry, significant increase in activity in the second half.

That's great. In January, going back to when you mentioned that, you did reiterate that your 16% to 18% medium-term ROTCE target is very achievable. Could you walk us through the path to getting there and where the challenges may be? And just to confirm, just the terminated swap impact in noncore book suppress your ROTCE today by 300 to 400 basis points.

Yes. Yes, that's right. I mean that impact is real, and it's only time-based for it to actually just kind of run off over the medium term. So big picture, we're kind of around 11% or so here at the end of '24. And the objective is to get to 16% to 18%. And the time-based aspects of that are 300 to 400 basis points of ROTCE increase just by removing the impact of terminated swaps and noncore, which will run off. So that's huge. When you add in also the impact of fixed asset repricing as well as what's happening with the rest of the balance sheet, our legacy swap -- active swap book runs off as well. And considering the rate environment, you put all that together and you get to the low end of -- right around the low end of that range, around 15% to 16% ROTCE just from those dynamics alone. Then you add in all of the strategic initiatives that we've launched across our three large businesses, consumer, commercial and Private Bank, as well as credit kind of normalizing a bit to low to mid-40s (sic) [ low to mid-30s ] from where we are, a little over 50 basis points of loss. And that's the road map that we feel really confident in getting us to 16% to 18% over the medium term.

And that's a strong message when you can get to 15% on mechanical balance sheet movements Yes. you continue to invest heavily in the Private Bank build-out and other strategic initiatives, which you mentioned. How should we think about the investment arc over the medium term? I know that was a hot topic on the call.

Yes. I mean there's -- I think there's a balancing act here. We have a window and an opening where there's white space that to really be opportunistic in the Private Banking space and in the private wealth space. So we're taking advantage of that. And so you saw that into 2024 and we've built that in, in 2025. But I'll hasten to add that a big piece of increase in expenses coming from the Private Bank is just the calendarization, full year effect of investments made in 2024. And all of that is driving the revenue outlook and the 5% accretion that we expect out of the Private Bank. And we're expecting returns to be north of 20% -- 20% to 24% by the time you get to the end of the year. So the investments have -- are paying off. We are going to generate an accretive outcome for EPS. We're going to have an accretive outcome when it comes to returns in the Private Bank. And we have an accretive outcome when it comes to a capital-efficient and net liquidity provider. I mean this is really ticking many boxes. So that's a long way of saying that. I think we've balanced it well to date in terms of how much to invest versus still allowing accretion to occur across the board, whether it's balance sheet or profitability. And I think we're going to be opportunistic throughout 2025, and we've built in the ability to expand, right? We're going to be expanding our Private Banking offices. We're going to open New York in the first half of '25. We're going to open three Private Banking offices in California in the second half of '25. So -- and all of that is still consistent with the ability to be accretive to the rest of the platform. So it will be a balancing act, opportunistic investment, but maintaining an accretive contribution to the rest of the platform.

And I do want to double-click later on those office openings in the Private Bank. But moving up, I wanted to talk about your businesses, the way Bruce likes to talk about them, which is your triangle of businesses, the commercial bank, the consumer bank and now the Private Bank. And maybe let's start with the commercial bank, given that we just touched upon business sentiment as well. So how is the commercial bank position overall to succeed? And as we think about commercial loan growth for the rest of the year. How will that trend as we move throughout the year? And what are those drivers for increased demand from clients?

Yes. I mean I'll start with commercial and you'll dive in there as you're saying. I would say that broadly, just indicating why we're well positioned, right? We're extremely well positioned in the private capital space and in the sponsor-led community, right?

A little underappreciated by the way. So I want to make sure to put an emphasis on that for the transcript.

Yes. No, I think that we made a call on this about 10 years ago to start investing in this space, and that's been paying off really the driver there is in the private equity complexes, we have a significant subscription line relationship with a number of the top PE firms and sponsor-based firms in the U.S. We have significant capabilities in the investment banking space and our debt capital markets and now with JMP, our equity capital markets capabilities, which are well positioned for when that space begins to rebound. And I think -- so our excellent capabilities married with our distribution has put us in a good spot. We have our traditional markets geographically, but we now have our expansion markets. And so what we've done in New York Metro and what we're doing over the last year or so in California and in Florida are all going to basically add to our distribution capabilities in the commercial space. What leads us to believe -- another part of your question is what leads us to believe that commercial is on track to rebound later this year, if I heard you correctly. And the -- as I mentioned earlier, just the number of conversations that we're having, and it's really twofold. One is M&A finance is going to be a big driver broadly for the entire market. And we see conversations picking up significantly over the last, call it, 30 to 60 days. However, M&A deal formation does take typically 2 to 3 quarters to come to fruition. So that's where the second half drivers really, really are being driven from. When it comes to just more bread and butter lending, I think we -- it's our expectation that business activity is going to continue to pick up. So just general GDP, nominal GDP, with inflation being around 3% and GDP being positive, that would be consistent typically with 4% to 5% loan growth broadly with a rising tide lifting all boats just broadly. And so as the broader economy continues to deliver. We'll participate in that, and we're well diversified geographically to participate that from a commercial standpoint. I mean, I think the other thing I'd throw in there is that our Private Bank. Our loan growth in Private Bank, which has been picking up, and we're taking share there. Most of that is actually C&I lending. And so it will show up on the C&I line. And so when you add all that together, we're got a fair bit of confidence that we're going to have a nice rebound in trajectory in lending in the commercial space in the second half.

So I wanted to follow up on what you mentioned about private capital. You've long recognized like you just alluded to the need for banks to play in the sandbox with private capital. Can you give us detail on how you've aligned your coverage and your capabilities to do it and with Citizens' role as the premier bank to middle market companies as it relates to how you funnel that into the private capital ecosystem?

Yes. Maybe I'll start off with the private equity space. I mean the large private equity firms, we cover over 200 large private equity firms, and we've been covering them for a decade. So this is not a new relationship for us. It's leveraged finance, it's in our DNA. We're sophisticated in this space, our deal structuring capabilities across verticals is well established. And so that's huge capability that has allowed us to compete in this space very effectively. Our product sophistication and capabilities, as she mentioned earlier, in the investment banking space, our debt capital markets and equity capital markets ability, but our M&A advisory investments that we've made coast-to-coast over the years. We've done almost a half a dozen acquisitions in the M&A advisory space. And so that bringing ideas and solutions to the sponsor community is what's distinguishing us in that space in the large PE firms. Smaller PE firms and VC firms is we're covering them through the Private Banking investments that we've made. And so that ecosystem is pretty active, in particular, in California, and we're well positioned given our lift-out and with JMP. The ecosystem there, particularly in California, is operating synergistically across all of our businesses, whether it's the JMP legacy capabilities, the Private Bank lift out, and our commercial banking activities, all in California are operating extremely well. So that's how we cover large and small PE complexes. The private credit space, all of those capabilities that we talked about are of interest in the private credit side as well, given that these larger private capital firms will often have both. And so there's a relationship there that can cover both. But I'd add on top of that, that we've been offering the funds finance product in the private credit space. And just our broad presence in the middle market community allows us to maybe assess with deal flow into the private credit space for when we're speaking to management teams and we're advising them on whether a syndicated loan makes more sense or right now, public debt markets are actually really very attractive, and we may go that direction in terms of recommending to customers and clients. But then also the third leg, which is introducing them to a private credit solution when the leverage or structure is something that would really not be great for bank balance sheets, but it might be very attractive in a private credit space. So we're well embedded there, and it's a big part of why our commercial bank is so well positioned.

Actually like how you put all that together with the Private Bank build-out because obviously, everybody recognizes that First Republic teams and that skill set. But I haven't heard you guys may be now a long time to talk about it that way. So I think that's very helpful in terms of really framing the private capital opportunity. So shifting gears to the consumer bank. When the company uses the word transformed to describe the consumer bank, what do you mean? And can you give us an update on the consumer banking strategy in the New York Metro area in particular?

Yes. I mean I would -- for consumer banking, as you may recall, our deposit franchise in the last tightening cycle, prepandemic. We finished 10 of 10 in our peer group in terms of deposit betas. And the fundamental underpinning of the transformation has been changing the culture of the consumer bank to lead with product and relationships rather than rate. And I mean, it comes down to that. It's easy to say, it's hard to do. It takes years and years of investment and training and changing sales approaches and practices to really effectuate this. But there's a number of milestones along the way. We launched Citizens Access to really wall off more rate-led activity in a very low-cost channel. And that really transformed the way that we interact with customers, where we lead with product and capabilities and advice. And so what that did was to basically put us in a place where we finished better than average on peers in the latest historic rate tightening cycle, and we're very proud of that. I think the second big area I would add is, again, I mentioned advice-based approach. So the wealth business has been transformed. We're -- we have a focus on Private Bank and private wealth of course, which is more upmarket. That's creating a HALO effect with respect to our advice that we provide for mass affluent and affluent as well. And so that's the second big I think, area of transformation for consumer. The third is just getting really efficient on distribution. And so New York Metro, as you mentioned, was a big part of filling in that distribution capability from Mid-Atlantic -- connecting the Mid-Atlantic to the Northeast is a huge part of what we were doing. And we were -- our plan was to bring our playbooks from the Mid-Atlantic and Philadelphia, Boston, large cities and bring that to New York. And it has been just a great success. I think our objective there is to be the most authentic community bank brand in New York and recognize that New York is not one big monolithic market. There are neighborhoods and there are communities that you need to be relevant to. And we have done exceptionally well in New York. We've exceeded our expectations there, and our growth and efficiency and productivity of our branches in New York are exceeding the rest of the platform. And those are the three big reasons. I would say we've completely transformed the consumer bank over the last 10 years.

So John, I wanted to shift gears and go back to the Private Bank, if I could. So you're now expecting $5 billion of deposit growth from this line of business in '25, about $1 billion better than you had expected. And you also mentioned that 35% of what you're gathering is noninterest-bearing which I think is above your consolidated. Talk to us a little bit about how you're able to successfully bring in these new clients? And also for many of us that haven't walked into a Citizens Private Bank branch, how does it compare to the old First Republic experience?

Yes. I mean -- well, let me -- I'll answer that this way. There's a couple of points I'd make. What we're trying to accomplish with the Private Bank, and it's gone very well to date, and it's really going to be part of why we're going to continue to be successful. First and foremost, it's customer experience, white glove service, imported to be fair, imported from First Republic. We wanted to grab that culture with the lift out of the Private Bankers and it's gone incredibly well. And I will add that we did learn some things from the teams that we were able to be fortunate enough to lift out back in 2023. And we had some changes we needed to make to truly be able to deliver on that customer experience demand from this customer that we're wanting to be relevant to. So that's the first one. The second one, that translates into a brand that starts to create consideration and word of mouth that's never been something we've been able to be successful at prior to this lift out with the high net worth segment. I think the third thing I'll throw out there is product capability, and investment. It's not just -- it's servicing, but it's also product availability. Our lineup is much broader than First Republic had. And then lastly, distribution. Just our branch distribution and our coast-to-coast presence is something that in the appropriate kind of wealth centers across the United States is part of what's going to also distinguish us. So you put all that together, and the interactions with commercial can't be undersold. It's really important that all of those capabilities from commercial give us that ability to deepen with those customers as well. That's what's -- that's the secret sauce, not so secret sauce. We published that in our earnings materials, but not so secret sauce about how we're trying to execute and win in the Private Banking space, and we're taking share there. So that's key. Our Private Banking offices are a little bit of a blend of creating an ability to have a conversation with a high net worth individual. That space is less transactional, it's more advice-driven. It's a little bit of First Republic but it's distinctly Citizens when you walk into one of those Private Banking offices.

Are there cookies?

There are. We've had to actually get permits, and we discovered all kinds of things that would stop you from getting cookies.

Really?

We do have cookies.

That's good to know. Actually, that's important, right? It's like one of those little things in Private Banking that's not that impactful, but details matter in Private Banking. Going back to what your...

We need health inspections too, because of the cookie.

Really? Wow.

Well regulated.

Well, exactly. You talked about in the beginning, John, about the footprint launches the PBOs, Private Banking offices in the second half of the year. places like Menlo Park, Fort Beach clearly ripe for that kind of clientele. What's your strategy for entering a new market? And do you already have the teams, I assume to go into these locations?

Yes, they're somewhat in place. I mean, I think we've -- in Northern California, we're well represented with the original lift out. There's a significant kind of scale of distribution and Private Banker coverage that exists in the Bay Area already. And so we're adding the Private Banking offices just to be able to access customers and be more convenient for customers that we already bank. So that's great. And there will be upside for those that want to switch. So that's good. And so it's -- if you know the Bay Area, we're in the city, and we're in [ Marine ] but Menlo down on the Peninsula. And so that's important to have that presence. Southern California, we did a team acquisition recently, and it's -- so we have that -- the team in place the office that we'll open in Southern California. And don't forget the New York Manhattan, which will open here in the first half of '25.

You know my old First Public banker keeps calling me?

Well, we're here.

So maybe before we switch topics, what are your hiring plans for advisers in '25? And how does $6 billion of 2025 growth breakdown?

So the $6 billion when you say this -- are the AUM.

Yes. AUM.

Yes. I mean I think there's a combination of things there's contribution from organic referrals and natural growth, and there's a split between that. And we've got a pipeline of teams that we're in discussions with to continue to add to the platform. So there will still be a reasonably strong contribution from team lift-outs in '25 on top of organic growth that we would see and the natural beta that you get from the market. So that's a driver. And the other part of the question was...?

The hiring -- or you said hiring plans. I mean it's a mix.

It's a mix. I mean in terms of hires, it's mostly lift out. But we're being opportunistic even if it's not a full team lift out. we'll be opportunistic and as we are across all of our sales forces in terms of hiring throughout '25. That's an area we're investing in, as I mentioned earlier, balancing the expense drag that, that creates against the business case on the revenues, which are highly accretive in that space.

So pulling everything up back to the top of the house, you actually already answered this well in your previous response when you talked about the environment is right for a natural 4% to 5% loan growth. So when you reported earnings, there were investor questions about the spot loan growth expectation of mid-single digits, which you just explained how you got there, excluding the noncore runoff. Of course, many of your peers total loan growth guide, which is generally lower than mid-single digits, also include runoff in their consumer books. So maybe unpack a little bit more about your confidence about reaching this target.

Yes. I mean, I guess the way I would say is I'd actually pair the Private Bank and the noncore and almost set that aside. We have a unique strategic initiative with the Private Bank that is really taking share and it happens to be offsetting the runoff of noncore, give or take. You can almost set it aside and just go back to the original guide and say that for something that's a little bit more comparable and say that low single digit is about where the rest of the bank is going to be. And I think that's the main way to look through it and ensure there's some runoff going on outside of noncore, but you factor all that together, it's really going to be driven by, I guess if you're excluding the Private Bank in noncore, it's really going to be driven by M&A finance that we talked about earlier. Natural increase in business activity, which we think will start to come back in the second half of 2025. And then consumer, we've been clicking along in consumer with a really high-quality home equity product, one of the best, we believe, in terms of one of the best experiences you can have which are often not great in the mortgage space, whether it's home equity or a first mortgage. So home equity has been a very good product for us given where mortgage rates are and even mortgage itself is starting to pick up, contributing from the Private Bank, actually Private Bank contributes some mortgage and C&I. So we still have contributions coming from consumer. I mentioned commercial and Private Bank and noncore basically are mostly offsetting.

Got it. It's a good way to frame it. Let's move to the other side of the balance sheet, if you don't mind. So what are your expectations for deposit growth for the course of the year? And what are the circumstances for noninterest-bearing deposit growth to return to CFG?

Yes. So deposit growth for this year is probably in the low to mid-single-digit range in '25, all three of the legs of the stool are contributing. So Private Bank, you saw significant contributions that we expect coming out of the Private Bank in the deposit space. And I'd say the other two businesses are also expected to contribute. When business activity picks up, that's both sides of the ledger. You see when loans are being formed, that's actually consistent with deposit formation as well in commercial so that's the expectation on that front. And consumer has been actually outperforming peers over the last year in the context of deposit growth and on the low-cost side. When it comes to noninterest-bearing, we've seen some stabilization in the noninterest-bearing as a percentage of overall deposits. And that's to be -- it's typically to be expected when the Fed has begun historically, when the Fed starts to cut typically consistent with the stabilization and an ability to start growing off of a lower base for noninterest bearing. That's our expectation, we're going to see noninterest-bearing growth both -- we see that in the Private Bank, and that's accretive. But even outside the Private Bank, we're expecting to see some noninterest-bearing growth as you get through the end of '25, if the Fed stays in this space and doesn't -- as long as things generally are holding in which we can talk about. We didn't talk about rates yet. But the -- as long as rates are generally holding in and may be coming down by one or two cuts in '25, we see that consistent with some noninterest-bearing growth.

Let's talk rates.

All right. Good suggestion.

Bruce mentioned during the earnings call that you can exit '25 with a net interest margin or NIM between 3.05% to 3.10% versus the 2.87% in the fourth quarter. Slide 27 in your earnings deck, loved it, whoever did that. Great job. Essentially 17 basis points of that expansion is in the bag which would get you to 3.04%. Could you just reiterate for the audience on that 17 basis is points is coming from? And what could drive the NIM closer to the top end of that range towards 3.10%?

Yes. So the main drivers there are the time-based tailwinds that we have, which are in terminated swaps and noncore as it runs off. Noncore is in a net negative position from a net interest margin standpoint and terminate just keeps running down. It's just time based. So that's the main drivers. The -- as you think about that range of -- we get to the low end with that, what happens within that 3.05% to 3.10% is really -- I'd say rates is a big driver and I throw deposits, deposit betas and mix or maybe the things you keep track of. So with every -- if rates are a little higher, which have the window, there's some -- with a conversation and with the discussions from the Fed today, who knows maybe rates could come in a little higher. That would be consistent with the upper end of our range. If they're a little lower then that would be consistent with the lower end, meaning around 4% exit.

It's still asset sensitive.

We're asset sensitive and increasingly so over time. So will be more asset sensitive in the fourth quarter of '25 than we are today. We'll be more asset sensitive in '26 than we are today, et cetera. So rates are a big driver and then the whole deposit behavior. So we're expecting stable to improving mix profile on deposits. But if depositor behavior is a little better, that would drive you higher, a little worse to drug a little lower. So those are the two big things I would think about on that front.

And just to be clear, when you set -- because it was such a busy earnings season, I want to reiterate some of these points. When you set your normalized NIM target of 3.25% to 3.50% by '27, 30 basis points of improvement from 2.87% is that time-based factors that you mentioned. So maturing of legacy active swaps net of other impacts would be on top of this.

Yes. And I'd say -- so that 38 basis points takes you to 3.25% which is the low end of the range. Then again, rates plus balance sheet mix, et cetera, will play into whether we're at the low end or at the high end. Right now, what we said at earnings was that 4% landing zone for the Fed would be more consistent with 3.50%. We're very asset sensitive when you get out there. So 4% would actually take us another 25 basis points higher than 3.25% all else equal.

Got it. Very helpful. I wanted to touch on fee income for a second. Of course, there's a lot of focus on NII for you. But I think one of the more underrated parts of the CFG story is the work that you guys have done to diversify earnings growth. So your underlying outlook for '25 is quite strong at 8% to 10%. Can you impact the strength that you're seeing or expecting to see rather in capital markets and wealth?

Yes. I mean -- so the capital markets that we mentioned earlier, M&A finance is a big driver of this, right? So M&A advisory fees, we positioned very well to deliver significant fees out of the M&A space. We see the pipeline forming as we speak. It will take -- who knows 6 to 9 months and we -- and we just didn't start yesterday. So it takes typically 6 to 9 months from late -- call it, from the conversations picking up in December and January. So this is consistent with a 3Q and 4Q capital markets fees from M&A advisory. The loan formation is -- doesn't take that long. That's a lot shorter. And we've seen those conversations pick up too. So we see that contributing in 2Q and 3Q. 1Q is a seasonally down quarter. So that's -- so really just focusing on -- as you look out for the rest of the year, syndications look good out the window, public debt markets are extremely attractive. So you're seeing debt capital markets really be a driver here in the first quarter or at least in January. And so back to the whole diversification point, we're able to participate if it's public markets or if it's going to be strong in the loan markets? Or is it going to be strong even in the private credit markets, we have an ability to participate along all of the three big drivers of commercial finance. And that's just in the core capital markets, we also have an FX and [ REITs ] business now that registered as a swap dealer last year. We don't have a cap on the amount of activity that we have...

That's good to know.

'25 will be the first full year of us being a registered swap dealer without caps on the amount of business that we can do. So we expect that to be a larger contributor going into '25 on the rates and FX space. And all of the investments we've made in wealth that we've talked about at length in the Private Bank space are big drivers. We've also transformed how we look at card. We're now at 100% Mastercard shop, and we're much more efficient and in terms of how we deliver those fees. And so that's been a nice area of tailwind coming out of consumer that I'd throw in there at the end as well.

Just switching gears entirely. Bruce has quoted in a Barron's podcast, that the company, given how it works for its shareholders should be open to being a buyer or a seller given how much focus you have on building out the Private Bank. How much of a priority is it for the company to buy another depository?

Yes. I mean, I think we're going to be -- in short, we'll be opportunistic. I want to -- based upon everything we've talked about, we have a full plate organically. And it's an exciting place, and there's huge upside that we can deliver organically. When you come back to -- we're around 11% ROTCE and we're going to -- our trajectory getting us to 16% to 18%. And some opportunity to get near that area at the end of '26. I mean, we're not too far off from delivering a significant amount of value for shareholders from a returns perspective. We have, we think, one of the most distinctive, if not the most distinctive portfolio of strategic initiatives in the space, extremely exciting. Lots to do. All of that said, there may be opportunities for consolidation. We executed extremely well in the last two depositories we acquired, no operational hiccups at all with investors or HSBC, and we did all of those all, frankly, in tandem. And so we feel well prepared should an opportunity arise to be part of the consolidation that might occur. But it's -- but our ability to deliver is not dependent upon the need to do M&A. And actually, we really are just focused on our organic portfolio that we've got in front of us.

So dereg, deregulation, has clearly been a theme since the election. How might a new administration impact future capital and liquidity requirements and supervisory practices? And particularly for you guys, how meaningful was the Fed's late December press release on looking to improve upon transparency, repeated that language when the stress test parameters came out and obviously, the BPI or the bank lawsuit.

Yes. So just broadly, it appears that regulations may be tapping the brakes here, right? I mean we had a big push in the capital space with Basel III endgame. It doesn't appear that, that goes anywhere. And if it does, it's probably an RWA neutral at worst. And for us, as a category 4 firm, the impact for us will be AOCI-driven. And we're operating as if that's already been probably even though it hasn't been. The market is just kind of...

Since '23, yes.

Yes. Exactly. And when you look at the impact, we have a much smaller impact and most and we're north of 9% even when you deduct all of ACI, so we're one of the higher capital levels there. So really not much of an issue. On the liquidity side of things, pretty similar. I mean it doesn't appear that there's going to be a lot of liquidity or funding related. We had the long-term debt rule. It doesn't appear that, that's going anywhere, even if it does, there's a trajectory there to address [ it adjust ] that's going anywhere. And our liquidity levels, we have already started to publish as if we're a Category 1 bank. We published our Category 1 LCR every quarter, and we're one of the highest percentages even among Category 1 banks with that ratio. So capital and liquidity, extremely well positioned for that. I mean your point about the SEB, I mean we have an SEB that we think is not frictional just given where our capital levels are. It feels inaccurate, and we have a view that the models that the Fed is using could really use a dose of transparency and revision I think those are the two things I think ...

What good is transparency without revision?

Yes. I think you need them both.

Yes. Yes. Yes. Exactly.

Because just transparency alone will just confirm what I think a lot of us in the industry know already, which is there are significant opportunities and gaps that -- in areas for improvement that are likely desirable to be more predictive of the way banks would perform in stress, mostly in the PPNR side of things, a little bit less although there are still areas in credit, but a little bit less on the credit side, but PPNR in particular, could use some restructuring. And -- so I mean, I think more recently, so the scenarios came out, it looks like they're a bit less onerous this time around. But what we're keeping an eye on is the Fed indicating that they would be planning on additional transparency, but open to commentary regarding the models. And I think that's a really nice step in the right direction and we'll be an active participant in that process. And so we're looking forward to '26, and maybe we'll have a much more improved and more reliable, frankly, Fed stress test model by the time we participate in early next year.

So you talk about '26. You have a peer, a Cat 4 bank that also perhaps is pleased with our SEB output that decided to opt in this year. Why did you decide not to participate? And now that you see the scenarios, how do you think you might have fared?

Yes. I mean the scenario appears to be, again, last a little better, not by a lot, maybe by -- we do a little back of the envelope stuff, but maybe 3% or 4% better on the credit side. So that's good. I just think it was just unnecessary. I mean our capital levels are so strong that -- and the SEB isn't frictional for us. It was just a natural -- why not wait for the Fed to go ahead and get that work done in '25 and have an opportunity to improve the models so that they would be more predictive and more useful, hopefully, in '26. So it was merely a -- let's wait for them to do their best to fix their models and create transparency and participate on schedule in 2016 with the rest of the Cat 4.

So just to wrap it all up, you're 16% to 18% medium-term ROTCE target. Does that assume a denominator sort of status quo baseline for you all this change?

It incorporates an increase in capital that would be consistent with growth that would occur in the years in 2026 and 2027. So that would be a drag for ROTC and you can see that in our walk in the earnings materials where we indicate that capital is actually a drag. It's somewhat offset by buybacks that we do. So there are buybacks in there that mitigate it. But nevertheless, it's a net drag. But when you go back to it, we get to the low end, just anywhere we started, really, we get to the low end, 15% to 16%, just from all of that time-based balance sheet stuff. And then the rest of the improvement comes from all of the execution from the consumer and commercial and Private Bank and credit moderating and normalizing, which takes us into that range of 16% to 18%. And I'd highlight that against an incredibly strong platform and foundation of capital and liquidity. So it's exciting to be able to have those things as well as what we think is the most -- one of the most distinct portfolios of strategic initiatives in the group.

Great. Actually, I think it's a perfect place to end. Thank you, John. Thank you for coming.

Thank you. Appreciate it.