Huntington Bancshares Incorporated (HBAN) Earnings Call Transcript & Summary

As everyone takes their seats, we could put up the first ARS question like we've been doing for everyone else. Next up with us. Very pleased to have Huntington Bancshares. From the company. We have Zachary Wasserman, Chief Financial Officer. And we talked to Zach, who's going to kick it off with some introductory remarks, and then we're going to dive into Q&A.

Thanks, Jason. Good morning or I should say now we have good afternoon officially. And thanks, Jason, and thanks to Barclays for hosting us today. On this anniversary of September 11, I'd also like to see our thoughts and prayers go out to the families and their victims. I'd like to start my prepared remarks today by welcome everyone who's listening and also everyone here in the room, really appreciate your interest in Huntington. This morning, I'll start by sharing a few insights of what we're seeing so far this quarter and also provide some updates to our 2023 financial guidance points. We'll then turn it back over to Jason for Q&A. Before I start, I will remind you that my remarks, including the Q&A period, will contain forward-looking statements. Such statements are based on information and assumptions available at this time and are subject to changes, risks and uncertainties, which may cause actual results to differ materially. We assume no obligation to update such statements. For a complete discussion of risks and uncertainties, please refer to material filed with the SEC, including our most recent Forms 10-K, 10-Q and 8-K filings. To begin, there are 5 key messages I would like to share with you today. First, Huntington has a distinguished deposit franchise, and we have delivered sustained core deposit growth over the course of the last year. Our strategy is to acquire and deepen primary bank customer relationships are yielding results. We have delivered continued deposit growth while remaining disciplined on pricing and managing overall deposit beta. Secondly, we have, and we will continue to drive capital ratios higher, supported by robust earnings generation and capital optimization initiatives. Third, credit quality continues to perform very well, with disciplined credit and risk management being a hallmark of Huntington. Fourth, remaining dynamic as we manage through the current interest rate environment, positioning the company to benefit from a higher for longer rate scenario while remaining poised to product revenues and potential down rate scenarios. Finally, given the strong foundation we have in place with growing deposits and liquidity, expanding capital and strong credit, we're positioned to remain on our front foot. We're focused on executing our strategy, including self-funding revenue-producing initiatives and proactively managing expenses. Let me spend a moment expanding deposits. Related to deposits, we are seeing consistent average deposit growth through July and August and our full year deposit growth outlook remains unchanged at positive 1% to 3% for the full year. While there is a sustained level of competition for core deposits, the breadth of our business, including commercial, business banking and consumer customers supports our optimized approach to deposit gathering. In consumer, deposits have increased for 9 months in a row through August. Within commercial, we have seen deposit balances modestly grow quarter-to-date. Overall deposit betas are tracking to our expectations and we continue to forecast total deposit beta to be approximately 40% through the cycle. We also are preparing for potential down beta moves later in 2024 to ensure we are well positioned to bring down deposit rates should we see a beginning of rate reductions next year. On the capital front, we are executing on our plan to drive capital higher and prepare for new requirements. Our common equity Tier 1 adjusted to include AOCI net of cash flow hedges on loans, was 8.12% at the quarter end. This benefits from the significant hedging program we had put in place earlier in the cycle to protect capital and OCI uprate moves compared to our peer set, our adjusted CET1 is top quartile. We shared in earnings, our plan to drive adjusted CET1 to be at or above 9% by the end of 2024. We are still assessing the potential impacts of Basel III and other new regulatory impacts to capital. However, our forecast for 9% plus level for CET1 inclusive of AOCI by the end of 2024, puts us in a strong relative position. Related to credit metrics, we delivered exceptional results in the first half of 2023, with net charge-offs year-to-date of 17 basis points. Our full year outlook continues to project net charge-offs between 20 and 30 basis points and reflects ongoing normalization in the back half of the year, albeit remaining at the low end of our through-the-cycle expected range of 25 to 45 basis points. Our ACL reserve coverage at 1.93% is top quartile compared to peers and by 40 basis points higher than the PMPM. In regards to our interest rate positioning, we are seeing the higher for longer rate environment play out consistent with our expectations. We continue to project net interest income dollars stabilizing around year-end and then expanding over the course of 2024, given a modestly rising net interest margin. We have also remained dynamic in our hedging program during the quarter. On the capital protection front, we continue to optimize our hedges, extending duration of protection and added approximately $6 billion notional of pay fixed swaps during the quarter to take us to around $15.5 billion which would protect approximately 35% to 45% of securities value at risk in up 200 or 300 basis point scenarios. On the NIM protection side, while the inverted curve has made it more challenging to efficiently add downside protection hedges during much of this year, we may be nearing the point that those strategies can be extended. During the quarter, we added $2 billion notional to our forward-starting receive fixed collar strategy, we continue to evaluate other strategies in this [indiscernible] . We remain very disciplined on expense management. As discussed, we entered 2023 expecting a challenging revenue environment and therefore, set up a series of proactive actions on top of our ongoing efficiency program to keep expense growth to a very low level. We increased the size of our ongoing branch optimization program, streamlined operations within our segments to realign them and executed a voluntary retirement program. The result of these actions has been a low level of underlying expense growth of approximately 4% year-over-year, excluding Capstone and Torana, one of the lowest written growth rates in the peer group. As we prepare for 2024, we remain focused on continuing this rigorous and proactive expense management approach. We are driving the next leg of operational efficiencies, leveraging business process offshoring, we continue to execute on our operation Accelerate program and scrutinize every area of our business to drive efficiency. We execute on these programs even as we continue to self-fund investments in key revenue-producing initiatives. We will also support and enhance our capabilities to operate the business within our aggregate moderate to low risk appetite in a changing environment. The net of this proactive management of baseline costs [indiscernible] investments is the right balance as we position us to manage through and drive to powerful growth into 2025 and 2026. Before I turn it over to Jason for Q&A, let me share a few updates related to our full year guidance. For loan growth, we still forecast 5% to 6% growth for the full year, unchanged from prior outlook. We are purposely optimizing loan production for returns and capital accretion with loan growth decelerating throughout the course of this year. Net interest income benefiting from loan growth and the higher rate environment is expected to grow between 3% and 5%, again, unchanged from our prior guidance. Fee revenues, despite a continued challenging capital markets environment are projected to grow within the prior range of guidance we shared at earnings. Expenses, we now see coming in at around 2% core underlying level, plus the $50 million from Capstone and Torana and the $30 million from the 2 basis points higher 2023 FDIC run rate assessment costs. For the third quarter, we see total expenses between $1.075 billion-$1.085 billion. Net charge-offs for the full year continue to -- we continue to expect between 20 and 30 basis points as credit continues to normalize. On capital, we continue to drive CET1 reported to the level of 10% by the end of this year at the top of our target operating. In closing, we continue to closely monitor the macro environment to ensure Huntington remains well positioned to outperform. We're balancing the growth of the business, which will support revenues with the higher capital trajectory we discussed and remain dynamic in managing the impacts of the rate environment. With those opening remarks, let me turn it over to Jason to open the Q&A.

Appreciate that. And before I delve into some questions here. I just want to clarify one thing. You kind of went through the updated guidance for full year 2023. And it looks like everything exactly matched kind of what you said in July, although on expenses, you said up 2% versus kind of maybe up 1% to 2% previously. Maybe just talk to what kind of -- I know it's not a big number, but maybe just talk to kind of what specific driver is there.

On expenses?

Yes.

Yes. I appreciate the question. Again, it's great to be with you all. On expenses, just to take a step back and frame that, as I noted, as we came into 2023, we knew that this year would be exceptionally difficult. And so we set up a series of proactive actions. And I think that's what's allowing us to keep this growth at that low level of 2%. I think at the margin, what we wanted to do, and this is the balance that we need to strike is to drive significant efficiencies in the underlying run rate cost in the baseline, while continuing to support self-funding, albeit, but continue to support a run rate level of investment in our key strategic growth areas that will really continue to support the competitive strength and growth opportunities for the company over the medium term, while also putting in the necessary cost to develop operational capabilities that allow us to meet new regulatory standards and requirements that are coming through. So that's really the puts and the takes that are taking us to that 2% level for this year.

Okay. And maybe just kind of maybe just delve into some of the things you're seeing in this footprint. You talked about sticking with 5% to 6% loan growth, including that there's some optimization you're doing. Maybe just talk to, first off, kind of just what you're hearing from customers, both consumer and corporate in terms of kind of loan demand and kind of how you're thinking about the outlook there? And then maybe just talk to what optimization opportunities you're looking at going forward?

Sure, in terms of what we're seeing from clients and sort of bellwether indicator on the economy, broadly speaking what we continue to see is pretty encouraging and I think corroborative to overall macroeconomic metrics, which continue to indicate growth and positive economic trajectory here. On the commercial side, I think generally speaking, we're seeing our clients still have the opportunity to grow their own revenues that they manage through the inflationary environment in a way that allows them to protect their profits broadly and our -- are dealing with the impacts of the higher interest rate environment. Clearly, the longer the higher interest rate environment and the high inflation environment persists, there are more and more one-off or idiosyncratic situations that are causing pressure. So to some degree, that's the type of driver we think kind of will normalize modestly, albeit still at a very low level from here. And from our perspective, we're continuing to see opportunities to drive growth in loans. Areas like our corporate specialty business and distribution finance and equipment finance to name a couple. On the consumer side, likewise, continue to see fairly solid trends within the consumer business. Debit card spending is very consistent in this level of growth that we've seen for a while, which I think indicates health and ongoing customer resiliency. Clearly, in some pockets like, for example, in mortgage, the higher interest rate environment is obviously causing challenges to incremental growth there. But we continue to see opportunities to drive loan growth in the consumer lower and shorter grade mortgage products in our auto and RV/Marine business continuing fairly well on track. No significant move in terms of production levels, but continuing to drive production there. I think in terms of optimization, for us, the most important thing we've been orienting the balance sheet strategy to do is to drive capital higher in the near term. And we've been focusing decelerating loan growth. It was 10% at the end of 2024, 5% by Q1, 3% year-over-year by Q2. I think much of the growth we'll see at this point for this year has come in already in the next couple of quarters be fairly neutral in terms of growth. But that really will allow us to continue to drive capital higher as we've discussed. I think it's a good posture. The other thing that bringing the loan growth down has enabled us to do is to, at the margin, alleviate some of the pressure on funding. And I think that's what is enabling us while we're continuing to grow deposits and feel good about where that trajectory is going to manage the overall deposit cost beta consistent with our prior expectations. What's critical in our view, is that we calibrate the level of loan growth to support that growing capital and to ensure that the marginal returns on assets that are being funded continue to be really accretive and positive. And I think in the level that we've got them now, we're really achieving that balance well.

You touched on deposits. You guys have been able to outpace peers in terms of kind of core deposit growth. Maybe just talk to kind of how you're able to do that?

The power of the deposit franchise to us is the foundation of value of the company. And so it's been an area that has gotten tremendous attention over many years, to drive the kind of deposit gathering capabilities you're now seeing now, fundamentally it's driven by our strategy of acquiring and deepening primary bank relationships. As I -- as we came into this year, we had been on a significant growth trajectory in our commercial business. In my expectation in 2023, early this year was to see multiple deposit growth throughout the course of this year to be commercial led. What has actually played out has been more consumer-led. And we've been really leaning into consumer, particularly after the market events of March to really continue to sustain and drive growth from here. And so feeling really good about the balance of where deposits are coming between consumer and commercial. Of course, Much of the growth is coming from the categories you'd expect of time deposits and money markets. But I will tell you the lion's share of it comes from our existing customers. So it really is a deepening of customer relationships. As we -- I mentioned in the prepared remarks, we still see growth this quarter, continue to see growth throughout the rest of this year as well with that targeted range. And I would say, just maybe in the last part that we're beginning to see a nice balance as we go forward here of both commercial and consumer growing at a relatively similar rates. And so I think finding opportunities to grow efficiently in both those categories.

And then you've been fairly active in terms of managing the balance sheet to protect both NIM and capital. There's a cost of doing so. But I guess you've kind of talked about protecting sort of kind of well positioned with the current rate backdrop, higher for longer as well as ways to capitalize if that they do. How do you go about that? How do you manage it? Kind of what gives you comfort that you can actually grow net interest income next year? I think you have a few banks that kind of publicly say that's going to be your plan.

I think the balance sheet strategy is designed to support the strategic objectives that I mentioned earlier, grow capital, but also to grow and really harvest the yield opportunities that are here in this higher for longer rate environment. We continue to be asset sensitive. And so as we've seen the interest rate environment and forward outlook tick up, so has our own internal outlook for revenue optimization and NIM support that we're seeing fixed asset repricing come through very nicely. And so I think the opportunity to continue that in the RV/Marine portion of our asset base in our mortgage book, we're seeing that fixed asset repricing come through and also consistently looking at opportunities to continue to collar the NIM as we go out further leveraging the hedging portfolio. I would say that at this moment in time, it's difficult to add substantively to downrate NIM protection strategies given the inverted yield curve and given already a forecast in expectation of the yield curve of declining rates. With that being said, we're, as I mentioned in the prepared remarks, we're probably getting closer to that opportunity. And so those are things that underlie the outlook we got.

And maybe just delve more into the income side. You guys have in terms of building out payments, wealth management and investment banking. It feels like those areas are actually doing maybe a bit better more recently. Any color in terms of that, is there?

Yes. For the full year outlook, our fee projection continues to be within the range of that you gave before, which was down 2% to 4% annualized, excluding the impact of our work to market potential option on capital hedging protection portfolio. And kind of within that, the 3 major strategic drivers for our fee business capital markets, payments and Wealth Management all performing in line with operations really a challenging one this year in capital markets. That is both in the advisory side of Capital Markets that comes with the business we acquired last year, Capstone which in and of itself is doing really well, beating our own business case, but is down from the trend rates it was achieving earlier this year, just given the market environment. I do think we're incrementally getting better as we go throughout here. Q2 will probably see retrospect was the most challenging quarter there. The other element of our capital markets business that is having some new pressure is the element of it that comes from -- that's related to loan production on the commercial side as we bring down some loan production opportunities for [indiscernible] fee revenues or interest rate protection programs provided to our clients. With that being said, now seeing the expected sequential growth of capital markets into the third quarter, and I would expect that to continue as we go on from here. So still a longing operating environment, we are seeing, however, improved sequential growth aligned to our expectations. On the payment side, a lot of really robust growth. Our card business continues to chug along very well. I think I mentioned the debit card trajectory looks good. Credit card likewise is growing nicely off of last year's new product launch. And on the commercial side, treasury management continues to perform exceptionally well. [indiscernible] growth remanagement business, really fundamentally driven by penetrating those services deeper within the customer base. And then lastly, on Wealth Management, a key area of focus for us that we detailed extensively in last year's Investor Day, really encouraging what we're seeing there, continue to set new internal records around asset gathering, managed asset portfolios and benefiting of significant penetration into the client base. And so all 3 of those are performing really well. And I think longer term, those fee businesses will really be critical or if anything, just leaning in more to drive them.

And then we're kind of entering the 2024 budget season, you talked about 2% underlying expense growth for 2023, aided by a lot of initiatives that you guys have talked a lot about. Just how do you kind of think about the expense environment for next year in light of uncertain economic backdrop?

Yes. I think the thought process and positioning for '24 is virtually identical to how we thought about '23 at this time last year, i.e., it's going to be a somewhat more challenging year. We're going to see revenue grow over challenges undoubtedly, particularly in the first half of '24. And as we want to set up the expense base to be growing as low as possible, while also striking a balance. We want to make sure that our core strategic initiatives continue to be self-funded, and we set ourselves up with competitive strength to really capture the kind of growth opportunities that look to be available as we exit '24 and go out into '25. And so we're beginning now to set up -- to both lean into the ongoing efficiency programs that we have. We have a program called Operation Accelerate, which is about reengineering customer-facing processes. We've got our ongoing physical branch rationalization program, but we're also now adding to that -- and the next leg of growth really is around business process offshoring, where there's, I think, a good opportunity for us to find efficiencies as well as looking at efficiency opportunities throughout the breadth of the business, particularly in areas that wouldn't be likely to grow as fast in the near term as others. And so there'll be just as much if not more focus on restructuring the baseline cost as we go to '24 as we have had this year. It is a significant amount of focus while also, as I mentioned, continuing to fund the key growth initiatives we've got in a number of our key strategies and also dealing with at the margin kind of costs that are required to support new regulations that are coming down the pike and addressing those as well.

Got it. I guess, maybe credit quality. You talked to a net charge of 20, 30 basis points this year. So I guess implies some normalization in the back half of the year, albeit it's still below the 25 to 45 number you guys talk about on a normalized basis. And talk about trends you're seeing in respect to delinquencies on performance, charge-offs, any particular haves of the portfolio, you're particularly focused on?

So overall, our credit performance continues to be exceptionally good. 17 basis points of charge-offs through the first half of the year, projection for the full year between 20 and 30. So to your point, it does imply some higher charge-offs in the back half of the year, but continuing to be at a level which is well below the level we expect to see through the cycle. So a very strongly performing amount. Through Q2, we have seen nonperforming assets tick lower for 8 quarters in a row. My expectation is we'll see that modestly tick up into the third quarter. I think when we look across our portfolio, there really are no significant pockets of any concern. You're watching the entirety of the portfolio exceptionally closely and rigorously. At this point, for the most part, what we're seeing is what you'd expect to see in a well underwritten portfolio, little idiosyncratic one-offs that are a function of the kind of cumulative nature of the interest rate environment, the inflationary environment for so long. Certainly, we're looking monitoring very carefully the commercial real estate expenses of the company at 11% of assets, it's a lower amount of exposure than most in our peer group. And we have a 3% credit reserve against it. So we feel good about where that is. But I do think CRE will be an environment in a cycle that plays out over quite a long period of time. And so we're watching and managing that carefully. No fundamental concerns at this point. Other areas are largely, as I said, idiosyncratic in the consumer book, likewise, no change in delinquency trends of [indiscernible]. One place we're watching or as a bellwether that is truly for our own economics is [indiscernible] portfolio that's clearly variably priced and if anywhere it is going to feel pressure initially, it's probably there. And so we're seeing a modest tick up in delinquencies there. But again, nothing that's particularly [indiscernible] would move the needle for Huntington as an overall enterprise.

I mean you mentioned the 1.93 ACL ratio, which is much well above peers. I guess maybe just talk to kind of what drives that? And like does that mean we really should see a big increase going forward given you have a 17 basis points area, [indiscernible] a 1.93 reserve is a nice reason?

We feel really good about the 1.93% ACL coverage. And I think not only in covering potential risk in the portfolio. But certainly, also, when you couple that with our level of capital because of AOCI would put us at one of the highest loss absorbing capacities in the period. I think from here, I'm not expecting to see very substantive changes in that for the foreseeable future. It's clearly a function of the economic forecast. And so we saw a few basis points higher ACL coverage in the second quarter, which was largely a function of just changes in the macroeconomic forecast that we're coming through. So to the extent of those macroeconomic forecasts are largely stable, I would expect to see only [indiscernible] range plus or minus a few basis points potentially. Over the longer term, I would expect to see that ratio come down. To give you a sense, CECL day 1 for Huntington was about 170, and we've actually probably shifted more toward lower risk category since that time over the last 3 years. But for the foreseeable future until we have more clarity on where the cycle is going to go, I wouldn't expect substantive moves in that ratio for the time being.

Got it. We can maybe put up the next ARS question, which asks us about impact on RWAs from Basel III Endgame. And I guess since we last spoke in July, we had the Basel III Endgame proposal, we had the long-term debt requirement NPR, there's been talk of liquidity changes for coming, particularly for regionals. Can you help size the dimensionalize those things? And just how does that impact Huntington's operations go toward?

Well, certainly, the Basel III proposal has more regulatory descent than has been the case for other recent proposals. So there's certainly a probability that the final rules could be different than what's there now. And what we saw come through in the NPR certainly included a fair amount of significantly higher RWAs than, for example, the European and global standards, not to mention a number of double counts and other elements that are being advocated around now. With that being said, if you analyze what's in there, I think for the industry, what we've seen is expectations of anywhere between 5% and 15% higher RWAs across the industry. I would expect Huntington to be at the lower end of that spectrum and the kind of mid-single-digit increase in RWA -- almost no impact on the fundamental review of the trading book and the kind of market impact relatively small exposure there, fairly de minimis for us on RWA impact. Operational risk, that's where the most substantive increase will be on the credit risk side, probably likely to be neutral to maybe slightly higher or potentially slightly lower. But net-net, I think sort of mid-single digits is what we're expecting. If I take a step back, our approach here has been to drive capital inclusive of the AOCI up to that 9% level by the end of '24, which would put us in our estimation, very well ahead and ready to deal with the RWA Basel III-driven requirements that would presumably come after that without much difficulty. And so I think that's the plan we've got at this point, fairly well [indiscernible], and we'll be able to deal with it as we get forward at that point. On TLAC, we're pleased to see the proposed rule would grandfather in bank level issued unsecured debt for the initial period of implementation, which would reduce the overall new issuance load that the industry would have to make for us, we've assumed that our modeling would indicate a relatively small incremental holdco debt required and really not a substantive economic impact relative to the next alternative funding.

And can we talk about 9% by the end of '24, which I think puts you in a good position. When can you start thinking about share buyback again?

Our plan at this point is we, of course, discuss this with the board each quarter, and this could change, but our operating posture at this point is to have no share repurchases through the end of 2024. And that the path to draw capital higher is both organic capital generation and to some degree of the margin balance sheet optimization. If efficient opportunities can be developed there. And then as we get into 2025, likely, at that point, get back into a more normalized capital distribution model that could include share repurchases as well, depending on where the world is and where the final adjudication of these capital requirements make you at that point as well.

And then any thoughts about potential LCR liquidity type proposals?

We'll see. For Huntington, liquidity is exceptionally strong. We've talked about that over time. Our cash and a borrowing capacity of $90 million is more than 200% of our deposits. That's almost in double the next best peers. So -- and we already meet a fully unmodified LCR coverage ratio, irrespective of any tailoring. And so I don't have any concerns we would have to fundamentally engage what we're doing or alter the business model with respect to liquidity. But certainly, there's a number of operational capabilities around liquidity management that are in process, and that's part of the program.

Got it. And one of the things we talked about previously acquisition revenue synergies. I mean, you guys laid out $300 million-plus type number. Just kind of where are you on that journey and kind of what do you think you can get there?

What we discussed at Investor Day was revenue growth opportunities coming from TCE roughly $300 million in the [indiscernible] which would represent us between the time of acquisition in 2025, about a 1% lift in the revenue CAGR of the company. We continue to see the opportunity to generate that. It was about 1/3 consumer this was growing the Huntington consumer approach, the consumer product set and the consumer productivity into the acquired TCF geographies, particularly Michigan, Chicago, Minnesota, Denver, that's all doing very well. We're seeing the kind of productivity uplifts within the branch and our digital acquisition channels that you would expect. Interestingly, the kind of the mix of where that revenue is coming is changing a little bit to be more weighted toward deposits, but again, generating really significant value and on track. Another 1/3 was roughly commercial. This was growing out our -- particularly our middle market business into the TCF geographies whereas TCF really did not have a substantive sized middle market or mid-corporate business. We've hired those teams. They are building pipelines and driving forward. Again, that not kind of top fully toward deposits than we would have originally. But I think on track for more revenue [indiscernible] and then the final 1/3 of that opportunity were 3 smaller ones, business banking, growing our SBA business into the TCF geographies, wealth management and then the combined efficiency of the capital equipment as business and likewise, those are all really doing well. To give you a sense, from an SBA loan production, we talk a lot about how Huntington is the #1 SBA loan producer in the country by units of loans produced. We're now #1 in Colorado, and #2 in Minnesota from 0 activity prior to the TCF acquisition, just as an indication of the progress there. And the wealth management business is being built out in Minnesota, Chicago, Denver are also performing very well.

So begs the question. Acquisition has gone very well. I guess, what are your thoughts on additional banking acquisitions. Is it possible in the current environment, kind of what are your thoughts on that?

We are focused on our organic growth program and see plenty of opportunities to grow organically without doing M&A. So that's the -- that's our strategy at this point. We're certainly pleased with the performance of the acquisitions that we did last year in 2022. And so I do think that over time, over the course of time, fee-based business acquisitions are certainly possible within our strategy and you think of the kind of synergistic value creation that will come and has already come from Capstone and our Torana, our B2C payments platform acquisition from last year that was really attractive over time. But for the time being, I think there's enough uncertainty in the economic and interest rate environment, certainly the regulatory environment as well that staying focused on where we've got the clear manifest opportunity on the organic side is our priority.

Any audience question?

I mean given your outperformance versus your sort of similarly sized peers and given the sort of the -- both Basel III and the LTD proposals. Any thoughts on as you grow crossing over that from category 4 to category 3? Or is that just too far away to contemplate?

Yes. It's a really good question. It is far out there in time for us. But I would tell you as well that the requirements for Category 3, it's a pretty substantive step from Category 4, and it's one of the things that some of the technological capabilities that take some lead time to build. And so -- and the other thing I would say is that the regulatory expectations and the whole tailoring concept is clearly in some discussion right now. And so I think that the kind of capabilities will be indicative of Category 3 are becoming more and more expectations for Category 4 as well. So certainly, that's -- we're on the long-term road map to build those kind of capabilities. And I think when and if we would cross that threshold, we would be ready.

And maybe finally, in November, you guys had your first investor day in a dozen years and it is amazing how much has happened since then, that was unexpected. There you talked about medium-term goals of 6% to 9% PPNR growth, I think it's 20% plus ROTC type target. When you think about today's environment, are those type of metrics still kind of doable over the medium term?

Yes. So we thought long and hard about those metrics when we set them. Firstly, what they were, profit growth, positive operating leverage, return on capital. We really thought it was the tightest set and the most critically aligned to value creation set of metrics we could choose. We also thought about the level. These were intended to reflect a 3- to 5-year period, really kind of on average over that period. Between 6% and 9% profit growth. I continue to believe is a very solidly achievable level within the kind of opportunity set that we've got for ourselves. And that would be growing spread revenues, growing fee revenues even faster than loans and driving ongoing efficiency of the business and continues to be the playbook on operating leverage. Likewise, over the course of that time, we should see improvements in operating efficiency and there's considerable work underway to drive that, and I have strong confidence we'll achieve that. ROE is clearly going to be the hardest one if capital requirements are higher. I think across the industry, you will see the sum impact of capital of TLAC of a more conservative security strategy, probably 100 to 300 basis points of ROE impact across the industry. Not giving guidance for Huntington at this point, but I think we'll be within that range. And so that will be the most challenging metric in the near term. With that being said, over the long term, I'm personally pretty optimistic that we would be able to drive and find ways to continue to improve ROE over time. And I think it will be growing the fee business even faster. Driving even the next leg of operating efficiencies. I know you've even seen -- even having touched the implications of artificial intelligence in terms of the opportunity to drive operating improvement efficiencies. And it will be a very importantly, driving better balance sheet mix and just continuing to make the balance sheet work hard in terms of ROE, certainly that's one of the key drag this year and gives us a lot of credits so that we can continue. So near term, some challenges but over the long term, I think we feel good about the ability to move that back over time.

With that, please join me in thanking Zach for his time today.