Q3 2023 Citizens Financial Group Inc Earnings Call
Participants
Brendan Coughlin; Executive VP, Head of Consumer Banking & Vice Chairman; Citizens Financial Group, Inc.
Bruce Winfield Van Saun; CEO & Chairman of the Board; Citizens Financial Group, Inc.
Donald H. McCree; Vice Chairman & Head of Commercial Banking Division; Citizens Financial Group, Inc.
John F. Woods; Vice Chairman & CFO; Citizens Financial Group, Inc.
Kristin Silberberg; Head of IR; Citizens Financial Group, Inc.
Erika Najarian; Analyst; UBS Investment Bank, Research Division
Kenneth Michael Usdin; MD and Senior Equity Research Analyst; Jefferies LLC, Research Division
Manan Gosalia; Equity Analyst; Morgan Stanley, Research Division
Matthew Derek O'Connor; MD in Equity Research; Deutsche Bank AG, Research Division
Peter J. Winter; MD & Senior Research Analyst; D.A. Davidson & Co., Research Division
Robert Scott Siefers; MD & Senior Research Analyst; Piper Sandler & Co., Research Division
Vivek Juneja; Senior Equity Analyst; JPMorgan Chase & Co, Research Division
Presentation
Operator
Good morning, everyone, and welcome to the Citizens Financial Group Third Quarter 2023 Earnings Conference Call. My name is Greg, and I'll be your operator today. (Operator Instructions) 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.
Kristin Silberberg
Thank you, Greg. 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 our third quarter results. Brendan Coughlin, Head of Consumer Banking; and Don McCree, Head of Commercial Banking, are also here to provide additional color.
We will be referencing our third quarter earnings presentation located on our Investor Relations website. After the presentation, we will be happy to take questions. Our comments today will include forward-looking statements, which are subject to risks and uncertainties that may cause our results to differ materially from expectations. These are outlined for your review on Page 2 of the presentation. We also reference non-GAAP financial measures, so it's important to review our GAAP results on Page 3 of the presentation and the reconciliations in the appendix.
And with that, I will hand over to Bruce.
Bruce Winfield Van Saun
Thanks, Kristin, and good morning, everyone. Thanks for joining our call today.
We continue to execute well through a challenging environment. Our focus has been on playing strong defense and maintaining a strong balance sheet. During the quarter, we grew our CET1 ratio to 10.4% near the top of peers, while still buying in $250 million in stock with noncore loan runoff of $1.4 billion and deposit growth of $500 million in the quarter, we lowered our spot loan-to-deposit ratio to 84% at quarter end. We focused on building up our liquidity even further, given geopolitical uncertainty and the regulatory direction of travel adding almost $4 billion to cash and securities. We also built our ACL further to 1.55%, well above our pro forma day 1 CECL reserve of 1.3% with our general office reserve now at 9.5%.
While the balance sheet has been a principal focus, we continue to execute well on our strategic initiatives, which should drive strong medium-term performance. Our Private Bank is being built out. We had a soft launch during the back half of Q3, and we brought in around $500 million in deposits and investments. Full launch is scheduled over the next several weeks. We're executing well on our New York City metro push, our deposit strategies, our top programs, our ESG initiatives and our payment strategy.
Our underlying EPS for the quarter missed the mark slightly at $0.89 as several Capital Markets deals slipped from Q3 to Q4, given late quarter market volatility. This was the weakest Capital Markets quarter since the third quarter of 2020, 3 years ago and prior to several acquisitions like JMP and DH Capital. The good news here is that the pipelines remain strong, and we continue to maintain and grow our market share. NII expenses and credit costs all track to expectations.
We included what we hope is an informative and useful slide in the deck, Page 5, which breaks out results for our legacy core business, our Private Bank start-up investment and the drag from noncore. Note the legacy core performance shows Q3 EPS of $1.08, NIM of 3.33% and ROTCE of 15.3%. The Private Bank should turn positive by mid-'24 and be nicely accretive in 2025, and noncore will dramatically run down over the next several quarters. This dynamic will help offset the drag from forward starting swaps and helped propel results higher over time.
Given the continued macro uncertainty and pressure on revenue from higher rates, we've initiated a zero-based review of expenses in an effort to keep expenses flat in 2024. We'll report further on this on our January call when we give 2024 guidance.
For Q4, we expect to see key trends begin to stabilize. NII will decline, but by less than in the past 2 quarters. Fees should bounce back somewhat, though the extent is market dependent. Expenses and credit costs should be stable, and we should buy in a modest amount of stock given continued solid earnings and loan runoff.
This has clearly been a challenging year for regional banks like Citizens. Rest assured, we are working hard. We're navigating the current turbulence well, and we're taking the actions to position us well for the medium term.
And with that, let me turn it over to John to take you through more of the financial details. John?
John F. Woods
Thanks, Bruce, and good morning, everyone. Let me start with the headlines for the third quarter, referencing Slides 5 and 6. For the third quarter, we generated underlying net income of $448 million and EPS of $0.89, this includes the Private Bank start-up investment of $0.05 and a negative $0.14 impact from the noncore portfolio. Our underlying ROTCE for the quarter was 12.5%. On Slide 5, you'll see that we provided a schedule separating out our noncore runoff portfolio and the start-up investment in our new Private Bank from our legacy core results, so you can see how those impact our performance.
Our legacy core bank delivered a solid underwriting ROTCE of 15.3%. Currently, the Private Bank startup investment is a drag to results, but relatively quickly, this will become increasingly accretive, 5% EPS benefit in 2025. Similarly, while noncore is currently a sizable drag to revenues, it will run off quickly, further bolstering our overall performance and partially mitigating the expected impact of forward starting swaps.
Back to Slide 6. Total net interest income was down 4% linked quarter, and our margin was 3.03%, down 14 basis points, both in line with expectations. Deposits were up slightly in the quarter, reflecting the ongoing resilience of the franchise. We continued our balance sheet optimization efforts, further strengthening liquidity during the quarter given the uncertain geopolitical environment and in preparation for potential changes to liquidity regulations, increasing cash and securities by about $4 billion.
In addition, the noncore portfolio declined by $1.4 billion, ending the quarter at $12.3 billion. While we [need] clarity on new liquidity rules for Category 4 banks, it is worth pointing out that we currently exceed the current LCR requirements for both Category 1 and 3 banks. Our period-end LDR improved to 84%, while our credit metrics remained solid with net charge-offs of 40 basis points, stable linked quarter.
We recorded a provision for credit losses of $172 million and a reserve build of $19 million this quarter, increasing our ACL coverage to 1.55%, up from 1.52% at the end of the second quarter with the increase primarily directed to raising the General Office portfolio reserves from 8% in 2Q to 9.5% at the end of 3Q.
We repurchased $250 million of common shares in the third quarter and delivered a strong CET1 ratio of 10.4%, up from 10.3% in the second quarter. And our tangible book value per share decreased 3% linked quarter, reflecting AOCI impacts associated with higher rates.
Turning to Slide 7 on net interest income. Linked-quarter results were down 4% as expected, primarily reflecting a lower net interest margin, which was down 14 basis points to 3.03%. As you can see from the walk at the bottom of the slide, the decrease in margin was driven by deposit repricing, which includes mix shift from lower cost to higher interest-bearing categories, noninterest-bearing deposit migration as well as the mix impact of the liquidity build I mentioned earlier. These factors were mitigated by positive impacts from asset repricing and rundown of the noncore portfolio.
Our cumulative interest-bearing deposit beta is 48% through 3Q and which has been rising in response to the rate cycle and competitive environment. Our deposit franchise has performed well with deposit betas generally in the back of peers. This is a significant improvement compared to prior cycles when our beta experience was at the higher end of peers. Our sensitivity to rising rates at the end of the third quarter is roughly neutral, down slightly versus the prior quarter.
Moving to Slide 8. Fees were down 3% linked quarter, driven primarily by lower Capital Markets and card fees, partly offset by the increase in mortgage banking fees. The Capital Markets fees outlook was positive early in September, but with market volatility and higher long rates picking up to the end of the month, we saw a number of M&A deals pushed into the fourth quarter, resulting in lower linked quarter M&A advisory fees as well as lower bond underwriting.
While we continue to see good strength in our deal pipeline, uncertainty continues around the timing of these deals closing given the level of market volatility. Card fees were slightly lower, reflecting lower balance transfer fees. The increase in mortgage banking fees was driven by higher MSR valuation, the servicing P&L provides a diversifying benefit, which in the quarter more than offset the decline in production as higher mortgage rates weighed on [lock] volumes.
On Slide 9, we did well on expenses, keeping them broadly stable linked quarter, excluding the $35 million Private Bank start-up investment.
On Slide 10, average loans are down 2% and period-end loans are down 1% linked quarter. The noncore portfolio runoff of $1.4 billion drove the overall decline, partly offset by some modest core growth in mortgage and home equity. Average core loans are down 1%, largely driven by generally lower loan demand in commercial, along with exits of lower returning relationships and our highly selective approach to new lending in this environment. Period-end core loans are stable. Average commercial line utilization was down slightly this quarter as clients look to deleverage given the environment in higher rates. We saw less M&A financing activity in the face of an uncertain economic environment.
Next, to Slide 11 and 12. We continue to do well on deposits. Period-end deposits were up $530 million linked quarter, with growth led by commercial and consumer deposits broadly stable. Our interest-bearing deposit costs were up 39 basis points, which translates to a 48% cumulative beta. Our deposit franchise is highly diversified across product mix and channels, and with 67% of our deposits in consumer and about 70% insurers secured. This has allowed us to efficiently and cost effectively manage our deposits in this rising rate environment.
As rates rose in the third quarter, we saw continued migration of lower-cost deposits to higher-yielding categories with noninterest-bearing now representing about 22% of total deposits. This is back to pre-pandemic levels, and we would expect the decline to moderate from here, although this will be dependent upon the path of rates and consumer behavior.
Moving to credit on Slide 13. Net charge-offs were 40 basis points stable linked quarter with a decrease in commercial, offset by a slight increase in retail driven by auto, which normalized following a very low second quarter result. Non-accrual loans increased 9% linked quarter to 87 basis points of total loans, reflecting an increase in General Office. We feel the rate of increase in nonaccruals is decelerating after a jump in Q2.
Turning to the allowance for credit loss on Slide 14. Our overall coverage ratio stands at 1.55%, which is a 3-basis-point increase in the second quarter, which reflects a reserve build of $19 million as well as the denominator effect from the rundown of the noncore portfolio. We increased our General Office coverage to 9.5% from 8% in the second quarter.
You can see some of the key assumptions driving the General Office reserve coverage level, which we feel represent a fairly adverse scenario that is much worse than we've seen in historical downturns. As mentioned, we built our reserve for the General Office portfolio to $354 million this quarter, which represents coverage of 9.5% against the $3.7 billion portfolio. We have already $100 million in charge-offs in this portfolio, which is about 2.5% of loans.
In setting the General Office reserve, we are factoring in a very severe peak-to-trough decline in office values of about 68%, with the remaining 18% to 20% default rate and a loss severity of about 50%. So we feel the current coverage of 9.5% is very strong. It's worth noting that the financial impact of further deterioration beyond our outlook would be manageable given our strong reserve and capital position.
We have a very experienced CRE team who are focused on managing the portfolio on a loan-by-loan basis and engaging in ongoing discussions with sponsors to work through the property and borrower-specific elements to derisk the portfolio and ultimately minimize losses. I should also note that about 99.2% of CRE General Office is in current pay status.
Moving to Slide 15. We have maintained excellent balance sheet strength. Our CET1 ratio increased to 10.4% as we look to grow capital given the dynamic macro environment and new capital rules proposed by the bank regulators. We returned a total of $450 million to shareholders through dividends and share repurchases. We plan to maintain strong and growing capital and liquidity to levels that fortify our balance sheet against macro uncertainties and position us to quickly transition to any new regulatory rules that may impact banks of our size.
Turning to Slide 16 and 17. I'll update you on a few of our key initiatives we have underway across the bank, so that we can deliver growth and strong returns for our shareholders. First, on Slide 16, we've included just a few of the business initiatives we are pursuing to drive improving performance over the medium term. On the commercial side, we highlight how we are positioned to support the significant growth in Private Capital. Although deal activity has been relatively muted recently, many sponsors have meaningful amounts of capital to deploy. So there is a tremendous amount of pent-up demand for M&A and Capital Markets activity given the right market conditions.
We have been serving the sponsor community with distinctive capabilities for the last 10 years and we've established ourselves at the top of the middle market sponsor league tables. And our new private bankers will significantly expand our sponsor relationships, and we stand ready to leverage our capabilities in this space when sponsor activity picks up. We also think there is a tremendous opportunity in the Payment space, and we've been investing in our Treasury Solutions business developing integrated payments platforms and expanding our client hedging capabilities.
On the consumer side, our entry into New York metro is going very well with some early success attracting new customers to the bank and growing deposits about 9x faster than in our legacy branches, as we leverage our full customer service capabilities to drive some of the highest customer acquisition and sales rates in our network.
The build-out of the Private Bank is also going very well. These bankers have hit the ground running and have already brought in around $500 million in deposits and investment balances through a soft launch in the back half of Q3. This is a coast-to-coast team with a presence in some of our key markets like New York, Boston and places where we'd like to do more like Florida and California. We plan to open a few private banking centers in these geographies and build appropriate scale in our wealth business with our Clarfeld legacy wealth business as the centerpiece of that effort.
Turning to Slide 17 on the top left side is our balance sheet optimization program, which is progressing well. The chart illustrates the relatively rapid rundown of the noncore portfolio, which is comprised of our $9 billion shorter-duration indirect auto portfolio and purchased consumer loans. This portfolio is expected to decline by about $7.6 billion from where we are now to about $4.7 billion at the end of 2025. And as this runs down, we plan to redeploy the majority of cash paydowns to building core bank liquidity with the remainder used to support organic relationship-based loan growth in the core portfolio. The capital recaptured through reduction in noncore RWA will be reallocated to support the growth of the Private Bank.
In summary, this strategy strengthens liquidity has already been a source of about $3 billion of term funding ABS issuance for this year. It builds capital by reducing RWAs and it's accretive to NIM, EPS and ROTCE.
Next to our TOP program on the right side of the slide. Our latest program is well underway and on target to deliver a $115 million pretax run rate benefit by year-end. Our TOP programs are essential to improving returns over the medium term and we are ready to launch on TOP 9, looking for efficiency opportunities driven by further automation and the use of AI to better serve our customers. We are looking at ways to simplify our organization and save more in third-party spend as well. In light of pressure on revenue given the rate environment, we are targeting to keep 2024 underlying expenses flat.
On the technology front, we have a very extensive agenda with a multiyear next-gen tech cloud migration, targeting the exit of all of our data centers by 2025 and the program to converge our core deposit system onto a cloud-based modern banking platform. We've come a long way in modernizing our platform since the IPO.
And on the ESG front, we recently announced a $50 billion sustainable finance target, which we plan to achieve by 2030 and commitment to achieve carbon neutrality by 2035. And we are working diligently to help our clients prepare for and finance their own transitions to a lower carbon economy.
Moving to the outlook for the fourth quarter on Slide 18. Our outlook incorporates the private bank and assumes that the Federal rate steady through the end of the year. We expect NII to be down approximately 2% next quarter, given the impact from noninterest-bearing and low-cost deposits migrating to higher cost categories, albeit at a decelerating rate more than offsetting the benefit of higher asset yields, noncore runoff and day count.
Based on the forward curve, we expect the cumulative deposit beta at the end of 2023 to be approximately 50% and to rise to a terminal level of low 50s percent before the first rate cut. Noninterest income is expected to be up 3% to 4% with a seasonal pickup in Capital Markets depending on the market environment. Noninterest expense should be broadly stable, which includes the Private Bank and excludes the anticipated FDIC special assessment. Net charge-offs are expected to rise to approximately mid-40s basis points as we continue to work through the General Office portfolio and expected further normalization. We feel good about our reserve coverage around the current level and the ACL level will continue to benefit from loan runoff.
Our CET1 is expected to increase to approximately 10.5%, with the opportunity to engage in a modest level of share repurchases, the execution of which will depend upon our ongoing assessment of the external environment. Beyond the 4Q '23 guidance, as I mentioned earlier, we are targeting flat 2024 underlying expenses. This includes the Private Bank and the noncore portfolio and excludes the anticipated FDIC special assessment.
Also, we've included Slide 25 in the appendix on the swaps impact through 2027. We expect higher swap expense in 2024 to be partly offset by the benefit to NII from the noncore rundown. Notably, the swap expense drag will reduce meaningfully over 2025 through 2027 as swaps run off and the Fed normalizes short rates. In addition, the impact of terminated swaps is dramatically lower in '26 and 2027.
To wrap up, we delivered solid results this quarter while navigating through a dynamic environment. Importantly, we made good progress positioning the company with a strong capital, liquidity and funding position, which will serve us well as regulatory requirements are finalized and if the environment becomes more challenging. Our balance sheet strength also positions us to take advantage of opportunities through our strategic priorities as we continue to strengthen the franchise for the future and deliver attractive risk-adjusted returns.
With that, I'll hand it back over to Bruce.
Bruce Winfield Van Saun
Okay. Thank you, John. Greg, why don't we open it up for some Q&A.
Question and Answer Session
Operator
(Operator Instructions) Your first question comes from the line of Erika Najarian from UBS.
Erika Najarian
My first question is for John. John, there has been a lot of feedback from investors on uncertainty over the NII trajectory for '24 in the environment of higher for longer. And I think you know where I'm going here. I think that investors are trying to sort of square the $11 billion, $12 billion increase in notional swaps, right? At a received fixed rate of [3.10%] in the second half of next year, and trying to square that in a higher for longer environment with some of the balance sheet optimization. So if you could just sort of take us through a little bit of the moving pieces and perhaps simplify it for the investors listening in terms of how that impacts your NII trough timing, what happens after you hit trough and are you still confident in what you said, I guess, a month ago and that you could exit 4Q '24 with a 3% NIM?
John F. Woods
Thanks, Erika. Maybe I'll take that a little bit in reverse order because it may help us with the jump off conversation. So we -- net interest margin came in as expected in the third quarter. So we've talked about that at 3.03%. I think that the two big forces that I would talk about broadly as you look out into the fourth quarter, would be our basic ongoing deposit migration and how that is expected to play out.
So I'd say that if you look at overall net interest margin, I'd say that we're going to see another -- call it, mid-single-digit sort of headwind into the fourth quarter just on the entire balance sheet outside of liquidity build. And so that 3.03% kind of gets to close -- it will comes in right around that 3%. So that's kind of playing out the way we expected, notwithstanding the fact that we are seeing ongoing migration, I'd say that, that's holding about where we think it should be.
The other item, as you may have seen in some of our walks in the slide deck is the fact that given the uncertainty and regulatory environment, we've endeavored to actually build liquidity in a much more meaningful way. That liquidity bill is NII neutral. But it does have a nominal impact to the net interest margin. And so you could see that being an impact in the fourth quarter, I'll say it was a couple -- maybe 2 basis points or so in the third quarter that could be maybe another, call it several basis points as you get into the fourth quarter. So you can see things playing out as we expect in the fourth quarter.
When you basically get to the 2024 dynamics, once you reset the table in the fourth quarter, the big puts and takes are, we do have the swap portfolio increasing as you get into -- it's pretty flattish when you get in the first half of the year, but it rises in the second half of the year. It happens that as it relates to '24, that's about when the forward curve would start implying that cuts are starting to come in. So I'd say that when you think about some of the mitigants to the outlook, with the swap portfolio. You're going to have potentially the Fed beginning to cut in the second half of 2024. You have the ongoing benefit of the noncore portfolio -- you've got the growing accretive contributions from the private bank. And with long range being where they are, asset front book, back book is -- cut will contribute positively.
And then just the broader balance sheet optimization efforts that we're doing across the bank. I think are all the areas that I would highlight as nice mitigants to what we're seeing play out. Let's see where the rate environment plays out. I mean the forwards have it in 1 place. We have Bloomberg economist consensus are probably 50 basis points lower than where the forwards are. But I mean, Nevertheless, we see this potentially playing out to a very manageable and, frankly, growing momentum as you exit 2024 on the net interest margin.
Erika Najarian
And just to clarify, are you still confident that you could exit taking all out to account exit 4Q '24 have a NIM of about 3%. And based on sort of what you're telling us, it sounds like the -- if the Fed doesn't cut as the forward curve indicated, that would be the risk to that 3%.
John F. Woods
Yes. I think in the fourth quarter, I'd say that we're all else equal we're getting around that 3% level, depending upon the impact of liquidity builds, which are NII neutral. That is that liquidity build piece that I would say, which is kind of sort of set that aside, just given where we are, it doesn't drive NII. So when you're thinking about the net interest margin that drives NII, we're going to be in that neighborhood of 3% ex-liquidity build.
Erika Najarian
Got it. And I'm going to step back after this because I think I'm taking up too much time. I just want to clarify I'm asking about 4Q '24. Are you talking about 4Q '23? I just wanted to make sure we were on the same page.
John F. Woods
4Q '23, yes, sorry, I need to make sure that was clear, all everything I was just saying was about in that last bit was that we're getting around that 3% level, give or take, at the -- in 4Q '23 ex-liquidity build and the liquidity build is NII neutral. So if you're trying to think about where we're driving NII, it's around that plus or minus 3% level ex-liquidity build.
For 2023 and all the other forces that we talked about earlier, we're -- as you're going into '24, when I was ticking off the tailwinds from noncore private bank asset front book, back book and BSO, all of those are tailwinds into '24, which will be mitigants along with, let's see where the rate cuts actually start kicking in, in the second half of '24. And we'll see where we exit 2024. But that's something we'll come back to you on in terms of adding more color in January as we typically do. And we'll assess our environment and all of those forces and puts and takes at that time.
Operator
Your next question comes from the line of Scott Siefers from Piper Sandler.
Robert Scott Siefers
I guess I want to revisit that fourth quarter margin just to make sure everybody is on the same page. The reported margin, it sounds like will be below the 3%, however, right, because you do -- and I know it will be dependent on liquidity build, but it sounds like you do anticipate liquidity build. So will we be talking kind of something in the mid-2.90s. Would that be sort of the reported expectation?
John F. Woods
It will be lower. It just depends on the NII neutral liquidity build that we determined to be appropriate. So it's sort of -- it's -- I think it's useful to talk about an ex-liquidity build, given the fact that that's the driver of NII, and there'll be possibly additional -- just in terms of the variability of cash and how that gets funded, it will be -- that's flat to NII, but it will be a denominator effect that would take the NIM below that plus or minus 3% that I talked about before, but not an NII driver.
Robert Scott Siefers
Yes. Okay. All right. Perfect. And then maybe as we look out just in terms of sort of the handoff from the noncore loan runoff to more visible Private Bank growth. When do we sort of think that will become sort of more neutral from -- in terms of visibility to the balance sheet? Like when would we expect the loan portfolio to sort of level out?
John F. Woods
Yes. I think that we were saying that we think that the noncore runoff will be a continued driver of sort of in the first half of -- in 4Q and the first half of '24, you'll see some declines in the loan portfolio. But in the second half of '24, we start seeing the Private Bank contributing as well as organic contribution starting to see loan growth such that year-over-year, we would have an expectation you'd see us starting to see loan growth in the second half of '24.
Operator
Your next question comes from the line of Peter Winter from D.A. Davidson.
Peter J. Winter
Just -- I was wondering on the credit side, we've just seen, in general, some pre-announcements on charge-offs in the Shared National Credit space. Can you just remind us what your exposure is to Shared National Credits and how you fared in the recent exam?
Donald H. McCree
So do you want me to take that, John?
John F. Woods
Sure.
Donald H. McCree
So -- just in general, as I think -- there's a lot of focus on Shared National Credits. Actually, when we came through the exam this year, we had more upgrades than we had downgrades. So we didn't have any forced charge-offs in terms of our Shared National Credit book. We've been taking our participations down as part of our BSO exercise. We've there about 10 basis points -- 10% lower than they were a couple of quarters ago. I think there's a lot of focus on Shared National Credit. We treat participations or Share National Credit deals exactly as we treat every other credit extension.
So one, it has to return people think about it as hanging paper and then deploying loans and not returning. We go through the exact same process, whether we're participating or leading a transaction or a sole lender. And then also, we do full credit analysis of every single extension that we make, whether it be a Shared National Credit extension or not. So our SNC book doesn't perform any worse than any other book that we have in the bank. And actually, in some cases, it's larger credits, so they might perform marginally better than some of the middle market assets that we have on the book over time.
Bruce Winfield Van Saun
Yes. And I think just as part of BSO -- its Bruce, as part of BSO in general, we're kind of looking at the total relationship returns. And if we went into credit as a participant thinking we can kind of move left and become a more important bank, that's not panning out. We're not getting the cross-sell we anticipated, then we're extricating ourselves at the next available opportunity. So I think you'll continue to see that trend...
Donald H. McCree
Yes. And let me just pick up on that. Just in the last quarter, back to the loan growth question, we had about $900 million of front book loan originations, offset by about $1.6 billion of BSO activity. So we're really churning the book towards full relationship credits and away from some of those participations that Bruce mentioned. And I think a lot of the competition is doing exactly the same thing. We see people supporting their lead bank relationships and moving away from more speculative future opportunities.
Peter J. Winter
Got it. And then -- just can you just provide a little bit more color maybe on the deposit repricing and migration and how you see it playing out with a longer -- higher for longer rates just impacting the deposit pricing pressures?
John F. Woods
Yes, I'll go and handle that. I mean, I'd say, first off, I mean, I think when you look at our performance from a deposit beta standpoint, we feel like we're basically in the pack with what you're seeing across the industry, which is a really positive results compared to where we were last cycle, which is part of the ongoing investments we've been making in primacy and product capabilities and delivering the entire bank for our customers. So we're really kind of pleased to see where we -- how things are playing out cycle to date.
That said, we still are -- and frankly, when you look at the overall metric of noninterest-bearing to overall deposits were around 22%. That's basically back to where we were pre-pandemic. We've seen a decelerating migration out of noninterest-bearing into interest-bearing and seeing decelerating migration even inside of the interest-bearing book. Nevertheless, it's getting smaller every quarter. We would expect to see that really dissipating over the coming quarter or two and that's really what you see when you get late in the cycle and the Fed's on hold. So feeling very good about that trajectory.
Bruce Winfield Van Saun
Yes. Maybe, Brendan, you track very carefully how we're doing versus peers and some of our strategies to continue to maintain that low-cost focus. So maybe you can add some additional color.
Brendan Coughlin
Yes, sounds good. So much of our low-cost deposit book is in the consumer space and obviously was buoyed through the pandemic by all the stimulus. We saw the rundown of the stimulus rate peak in May, and it started to abate as we got into the summer and the fall, although it's still kind of spending down at a decent clip. We do have a lot of analytics, benchmarking analytics on how we're doing, and this is supportive of John's commentary that the franchise is performing in a very different level than it did the last up-rate cycle.
We believe we're #2 in the peer set in terms of DDA consumer migration. So we're performing exceptionally well on the DDA side. And when you look at beta on the consumer side, as compared with the growth that we're getting, it appears for about 400 to 500 basis points better in net growth on the consumer book through the cycle so far and our betas are mildly better. So more growth slightly better cost on the core book. That's excluding Citizens Access. That's a real indicator of the quality of franchise and the quality of the customer base that we've moved from sort of a community banking, high-priced deposit focus to deeply engaged primary banking relationships.
So we expect the pay down of low-cost deposits to continue to slow obviously, depended on rate environment and the economy that potentially could change. What I do feel really confident in is that our relative performance to peers will be strong and we'll continue to outperform on the consumer side and the stability of our low-cost book. At the individual customer level, they still have a little bit more liquidity in their balances than they did pre-pandemic, that's largely held by affluent and high-net-worth individuals, our mass market book and even in the mass affluent space, they've sort of moderated back down to operating floors.
So I think those are all signs that would support the continued slowdown in the rundown of low-cost deposits pending any recessionary impact that may bring them below operating floors. So we feel pretty good. And just on the uninsured and insured deposit front, we saw a little bit of a blip on the uninsured in March. And since March, that has been incredibly stable and all parts of the book have been growing.
So all the fundamentals point to continued trajectory of stability and certainly continue to outperform. And then in addition to that, we're controlling what we can control is we're performing in the top quartile in the United States in terms of household acquisition growth. The New York market, as John pointed out, is helping to give us an extra lever to drive low-cost deposit growth over and above just the portfolio trends, which are generally outperforming. So we do believe we've got a distinctive amount of levers for the franchise to continue to outperform in the medium-term outlook on low-cost deposits.
Peter J. Winter
Very helpful. And then just one quick housekeeping. I just want to confirm, John, you said that the private -- the expense outlook for next year being flat. That includes the Private Bank build-out expenses.
John F. Woods
Yes. The underlying expenses to be flat next year, including the Private Bank as well as noncore.
Operator
Your next question comes from the line of Ken Usdin from Jefferies.
Kenneth Michael Usdin
Just a follow-up on that last question. John, I just wanted to ask you, I know that the Private Bank buildout was $35 million of cost this quarter. Just wondering if there's any changes to your expectation of what that would trend like going forward as part of that cost commentary.
John F. Woods
I think Brendan will probably have some color on this. So it's pretty similar into the fourth quarter. And then, of course, into next year, you see it starting to migrate towards a -- instead of being an EPS drag, it gets back to breakeven, when you get out into 2024. And then more broadly, a 5% contribution to EPS is our outlook there. But go ahead.
Brendan Coughlin
Yes. There'll be -- into Q4, some very modest upticks in the low 40s potentially. And the reasons for that, we hired the majority of the team as you all know, in the early part of the summer, the influences on that nudging up is our successful securing of various different private banking offices coast-to-coast to house the team and start to bring in customers into the platform, some operating expenses clients come on board as well as we're playing some very selective second-tier office. There's still a lot of talent in motion and this quarter after the first 150. We also hired another 25 really top A-list talent folks in all of those same offices that we opened in the summer. And so we're going to be selective. But as we see the right talent pop up, we're going to grab them -- add them to the team. So...
Bruce Winfield Van Saun
The other thing, just in the way the comp is structured, Ken, that the folks who came over on guarantees as if they're fully producing. So as the revenues come in, there won't be incremental costs. They'll just be kind of earning those pay levels. So another factor to consider.
Kenneth Michael Usdin
Yes, that's a great point. And then as a follow-up, you guys have done a great job over the years on the TOP program and just I take your commentary about holding costs flat, inclusive of these extra builds that would imply a real turn exiting the year given that you ramped through the year on cost this year. And John, I know you mentioned AI as a piece of that increment. But you've done 100 plus of TOP each year. I'm just wondering like where else would you be digging in across the organization to get that magnitude of what seems to be a pretty meaningful implied to extra cost save out of the numbers next year.
Bruce Winfield Van Saun
Yes. So it's Bruce. And let me start off and then John can amplify. But the TOP program, I think, has been a real consistent contributor to our ability to deliver positive operating leverage. But to actually get to flat for next year, we have to go beyond that. So we've geared up a very nice TOP program and we're adding to it. But I think we're going to have to look at kind of employment levels broadly to see where we can extract some folks and we'll look at certain business activities that may be less important going forward than what we have been engaged in historically.
We've already done some of that this year. So we downsized the mortgage business quite a bit. We exited the auto business. So I think it's a combination of actions. It's continuing to find ways to upsize TOP, leverage things like AI, where we can do that, look at our overall board structure and staffing levels and see if we can pinch some efficiencies there. And then look hard at our business mix and figure out where the key years not to just have a knee-jerk revenues, there's revenue pressure in the environment. So let's really take a hard knife at all expenses. We have to be judicious about where we're cutting and protect the things that we feel are really going to help us grow and outperform in the medium term. So things like the private banks, things like the New York metro expansion. There's things that we're going to ring fence and then there's other areas we're going to have to go a little harder with the knife. John?
John F. Woods
Yes, I think that covered it well, Bruce and just ongoing the fundamentals, our bread and butter of focusing on organizational related items and third-party spend and the like. And I won't repeat all the categories that Bruce articulated, but we've got a fundamental underpinning that we feel like we have the opportunity to broaden out with while protecting the initiatives that are going to help us outperform over the medium term.
Operator
Your next question comes from the line of Manan Gosalia from Morgan Stanley.
Manan Gosalia
You have 67% of deposits from consumer, so a strong franchise there. And you noted that you should outperform peers on a relative basis. But one of your large peers noted last week that banks may still be overearning on NII. So I guess my question was, how do you see competitive factors playing out for consumer deposits next year, especially if the rate environment stays higher for longer?
Bruce Winfield Van Saun
Brendan, do you want to?
Brendan Coughlin
Yes. We certainly have seen continued heavy competition for consumer deposits. You're seeing kind of money market and CD rates in the mid-5s in some spots. We feel like we're competing really, really well on that. Obviously, it's supported by our transformation on low cost, that's where you kind of start on how you manage strong NII levels and NIM levels as having a solid foundation of low-cost, highly engaged customers. We have probably more levers than others have to manage through whatever the competitive intensity ends up coming our way in 2024.
Certainly, we have Citizens Access, which has been an incredibly positive tool for us to grow interest-bearing deposits in a smart way with really sticky relationships, but also it helps not put too much contagion into the retail banking system with heavy kind of window rates on the front of the branches that may drive in hot money and bring the franchise into non-relationship-based banking. And so that's been an incredibly effective tool to both raise money and also protect how we manage and compete on interest-bearing costs. We've also -- where we have competed in the core franchise with some of the more aggressive rates. We've done it in an incredibly relationship-based way.
So the access into no pun intended with Citizen's access, access into higher rates on deposits of your core banking customer of ours requires you to be in a relationship product. We call it Quest or a private client, which is our mass affluent or affluent value proposition. So when you do more with us, you get more, that strategy has enabled us to be more targeted in how we think about introducing interest-bearing costs into the environment that we're able to protect and retain balances in a really thoughtful rate way versus reprice the entire book in some spots. So it's intense out there. We expect that to continue through the first half of the year as deposits are sort of hard to come by through the U.S. banking system, but we think we've got the right tools and the right levers to continue to win and compete well with our peers.
John F. Woods
And just maybe just to add, that's all great points there. And then just to add one other point about this. I mean, the rate environment is not -- is expected to become more constructive, I guess, is the point. Meaning if you're raising deposits in a world where the yield curve is inverted or at best getting less inverted. That's always going to be a tricky situation for banks until it becomes a more stable upward sloping situation, which I think is more likely to be the case as you get into '24 and certainly to the end of '24, when you start seeing lower short-term rates and nevertheless, an attractive long-term rate where we can basically deploy our capital and make a positive return. So that's really what I think is going to shake out as you get into '24.
Bruce Winfield Van Saun
Another -- I mean the other one last piece of color I would add is that as we enter 2024, we're still kind of having a net loan shrink, and that will eventually turn around as the private bank starts to put on loans, and we'll see where the economy is. But we won't really need to -- we're not pressured to grow deposits given that dynamic on loans. We can still see the LDR improve just by keeping loans stable or even letting them drop a little bit. So factoring that into the calculus of do you really need to be aggressive given that's your dynamic around loans and deposits that helps you manage the cost of your deposit franchise.
Manan Gosalia
Great. I appreciate all the color there. And just separately on the LCR requirements, you mentioned that you're compliant in both Category 1 and Category 3 now and that this build is also NII neutral. But I guess the question is, how much more do you think you need to build from here? And how do you think about that increasing your asset sensitivity in the long run?
John F. Woods
Yes. I mean, I'd basically say a couple of questions in there. I mean I think the regulatory requirements are generally inducing banks to become more asset sensitive. You got the issue of more broadly, if the long-term debt rule goes in, that would be along with having to hold liquidity that is shorter duration, that's going to cause asset sensitivity to grow over time. We're naturally an asset-sensitive bank. And those forces would cause us to be more asset sensitive. So that will -- we'll have to consider in the coming and during the transition periods, whether it makes sense to moderate those positions with all balance sheet types of actions.
But nevertheless, there's generally a tailwind of asset sensitivity being created from the regulatory environment, but also idiosyncratic to us, our noncore portfolio as that runs off that's mostly a fixed book and that has a tailwind to asset sensitivity. We're around neutral now. So going -- becoming a bit more asset sensitivity over time is some of the underlying forces there that I would say are in place, and we'll decide as the environment plays out, whether how and whether to moderate that.
And again, the liquidity build is NII neutral. So it's really not a driver. And it's something that, again, at the NII guide of down 2% is really driven by basically having a -- the ex-liquidity build NIM decline is really the driver of that and it equates to the 2% that you're seeing in the guide. So that's the way to pull it all together for 4Q.
Operator
Your next question comes from the line of Matt Connor from Deutsche Bank.
Matthew Derek O'Connor
A lot of talk earlier in the call, in terms of net interest income trajectory for next year and all the puts and takes. But I just wanted to circle back on that. In a stable rate environment to kind of higher for longer when and around what level does the net interest income dollars start to bottom?
John F. Woods
Yes, I mean we're still working through our 2024 outlook, right? So we're going to be much more -- I would say, transparent about what our expectations are for '24 as you get into planning season here and completing that. And of course, we do that in January.
With that said, we -- broadly, as you look at the swap trajectory for us into '24, we have a swap portfolio growing right around the time that the forwards would indicate the Fed would begin to cut. As a matter of fact, and as I mentioned earlier, there's -- you could actually see deviation around that. And we happen to have a view that it's likely -- that it will actually come in a little lower than where the forwards have it coming in at the end of '24. So that will be a mitigant.
And as I mentioned, the noncore rundown is a mitigant. And private bank as that grows is, of course, accretive. The other thing I'll mention, I mean, if you get beyond '24 and you look at what's happening in the '25 through '27 time frames, it's certainly more consistent with a more neutral Fed posture that would represent, regardless of what the transition is in '24, that would represent a significant tailwind getting into '25 through '27, as you see the swap portfolio being more of a neutral impact to net interest margin and NII.
And so working our way through '24, we get some really nice tailwinds. And that's just on the active swap portfolio. We also have a locked in and baked in tailwind from the terminated swaps which run off, as you can see on our slide, in a significant way over '25 to '27. So I would call '24 a transition year while the Fed normalizes rates, and our balance sheet optimization takes hold with noncore and creates a lot of momentum as you look out into '25 and beyond.
Bruce Winfield Van Saun
Yes. I would just add a little color here, Matt, to you and Erika's question. I think Erika was looking for John to say, are you still holding a 3% in the fourth quarter this year and the fourth quarter next year. I think the reluctance to draw a line in the sand on 3% is the amount of the liquidity build and that -- some of the cards from the regulators on new liquidity regulations aren't turned over yet. So just putting that aside, if you just say that's a bit of an unknown -- do we still have an ambition to have our exit rate at the end of '23 be roughly the exit rate at the end of '24. Yes, that would still be the ambition. We have to go through the work, as John said, to go through kind of the budget process for next year, but that's still where we'd be hoping to arrive.
Matthew Derek O'Connor
And then just in terms of the impact of rate cuts versus higher for longer scenario, what's -- what does higher for longer do versus the rate cuts? Because it sounds like you're still a little asset sensitive, but the roll-on of the swaps would obviously benefit from rate cuts, so what's the net impact if rates are stable versus what the forward curve has for next year? Is it better or worse?
John F. Woods
Yes. I'd say that where we're positioned, we're right around neutral. The -- a small increase in rates is actually positive to our platform. A large -- we tend to calculate this stuff using the 100-basis-point and 200-basis-point gradual rises, we're relatively neutral in those kinds of calculations, which you'll see disclosures on in our 10-Q. But when it comes to just another hike, or -- and those kinds of conversations, meaning we tend to -- in those environments continue to make money and have a positive impact to NII.
The other -- so generally, the forward curve is favorable to us. I think we like the tracking of the forward curve. We start getting cuts at the end of '24 and that allows the continued front book, back book. We like the long end being more anchored a little higher. That helps, too, in terms of our originations on our fixed rate loan book. So again, and it also provides opportunities to later on lock in higher rates to the extent that, that's desirable. So the forward curve is, I think, constructive for us, plus or minus is fine. I think large moves either way is where we would say it starts to kind of create potential headwinds. But other than that, we're feeling -- we would feel okay with it.
Matthew Derek O'Connor
Okay. So to summarize, steeper is better as a good rule of thumb?
John F. Woods
I'd say forward curve is better and plus or minus is not going to move the needle very much. So having some cuts at a slow -- I mean in general, over the long term, banks do better we're maturity -- where maturity intermediary. When rate -- when we have an upward sloping yield curve. So the short rates are at 550. We think that it's more constructive to see short rates around 300 to 350 over the long term. We also think it's constructive to have a 10-year that's north of 4% in that same environment. So therefore, a gradual decline from 550 down to about 300 to 350 over the next 2 years, we think it's not only good for us, but good for the industry and allow us to get back to an upward sloping yield curve. And I think that, that's the environment where we would be performing in a very good way. That said, we pivot and manage to the extent that the rate environment migrates differently than that. But that's the one that I would say works out the best for us and the industry as a whole.
Operator
Your next question comes from the line of Vivek Juneja from JPMorgan.
Vivek Juneja
I guess I have a couple of clarifications given all the discussions going on. John, when you said -- let's start with expenses. You talked about underlying expenses to be flat next year. But then you also said not that includes private bank and noncore. Noncore is not included in the way you define underlying expenses. So are you saying both underlying, which is core and reported expenses are both going to be flat next year?
John F. Woods
No, I'd say underlying expenses at the top of the house will be flat next year, '24 versus '23. Underlying includes Private Bank, it includes noncore overall CFG expenses will be flat in '24 versus '23.
Bruce Winfield Van Saun
Underlying does not exclude those things today, Vivek, it includes those things.
Vivek Juneja
Okay. Okay. So I wonder -- with all these definitions, everybody has a little difference, so it's important to clarify that. The second one, I guess, John, going back to the rate discussion, I just want to get my head wrapped around that. If I heard you right, just in response to Matt's question, is that small increase in rate is beneficial to NII. But then rate cuts is also positive. So I'm trying to reconcile how both scenarios are positive for you?
John F. Woods
Yes, I can clarify that, Vivek. I mean a small increase in rates from here would drive some NII -- a small amount of NII and a small decline would be a small negative in terms of the small decline in NII, but they're both quite small which is why we're calling ourselves neutral. But just -- but from a positioning standpoint, it would be a small positive if rates rose from here and let's say, one additional hike for example. Let's say if the Fed has a hike in the fourth quarter in November or December, we'll see an NII contribution to that. A small cut goes the other way and also -- but not a significant decline if there was a cut.
Yes. And to be clear, that's -- and the difference here is what happens immediately, say, in the next quarter versus what happens over time. We are very constructive and feel very good about a gradual decline in rates where the short rate end gets down to 3% to 3.5% over, call it, a quarterly period of time. We think that's very good as it gives time for balance sheets to adjust and to have front book, back books continue to get locked in and be supportive of a healthy balance sheet migration over the next, call it, a year or two as our balance sheet optimization continues to take hold with noncore runoff, et cetera. So we would -- our balance sheet does well with an upward sloping balance sheet that we'll migrate to over the, call it, the '24 and early '25 period.
Vivek Juneja
And one more clarification, that's helpful. On the expenses, Bruce, when you talk about stable for next year, what are you assuming for Capital Markets? Are you assuming Capital Markets revenues and therefore incentive comp goes up? Or are you just using current level? Any color on that?
Bruce Winfield Van Saun
Yes. Well, we haven't given the full guidance yet on '24, but there is a variable element of pay that if revenues go up in Capital Markets that pay would go up. That's probably the one area that has the greatest tied to revenues across the bank. And we would have to contemplate that as we go through the budget process. So we said we're targeting the flat expenses for next year, and we would incorporate our view on kind of where the Capital Markets fees are going to be and then what additional payouts would result from that. And then we'd have to find ways to offset that elsewhere in the bank.
Operator
And at this time, there are no further questions. With that, I'll turn the call over to Mr. Van Saun for closing remarks.
Bruce Winfield Van Saun
Okay. Thanks again for dialing in today. We certainly appreciate your interest and support. Have a great day. Thank you very much.
Operator
Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T teleconference. You may now disconnect.
