Release Date: July 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Significant transaction: Sale of mortgage servicing businesses and third-party origination platform to Mr. Cooper, enhancing liquidity and capital ratios.
- Strong deposit growth: Deposits grew by 5.6% in the quarter, driven by both private and retail banking.
- Board transformation: Completed Board transformation with the addition of nine senior executives, enhancing governance and strategic oversight.
- Improved capital ratios: Strategic sales added 130 basis points to CET1 ratio, pro forma CET1 at 11.2%, above peers.
- Positive momentum in C&I franchise: Focus on growing C&I assets to $30 billion to $35 billion in the next three to five years, with experienced hires to drive growth.
Negative Points
- High provision expense: Recorded $390 million in provision expense for the quarter, with expectations of $900 million to $1 billion for the year.
- Increased non-accrual loans: Non-accrual loans rose to just shy of $2 billion, a significant increase from the previous quarter.
- High-cost deposits: The sale of mortgage servicing business will result in the loss of $3.7 billion in high-cost deposits.
- Potential future credit risk: Continued focus on identifying and managing problem loans, with 75% of the CRE portfolio reviewed and 80% of office and multifamily loans reviewed.
- Expense reduction challenges: Targeting $300 million in net cost takeouts, but also facing cost builds in risk infrastructure and C&I growth.
Q & A Highlights
Q: Can you provide an outlook for provisioning and where the reserves are for the commercial real estate (CRE) book?
A: We expect our provision expense for the year to be between $900 million and $1 billion. We have made significant progress in reviewing our CRE portfolio, with 75% of it reviewed, including 80% of the multifamily and office portfolios. We are holding customers to the rate options in their loan agreements, which is pushing them to look for other opportunities in the market. We are also seeing payoffs, particularly in the multifamily sector, which helps reduce our CRE exposure.
Q: Are there any plans to sell parts of the performing loan portfolio to shrink the asset size below $100 billion?
A: While we are focused on reducing non-accrual loans through sales, we are not currently planning to sell significant parts of the performing loan portfolio. We are seeing a natural reduction through payoffs, particularly in the CRE portfolio, and we are focused on reducing substandard and non-accrual loans between now and the end of the year.
Q: What is driving the significant increase in net interest margin (NIM) in 2026?
A: About three-fourths of the margin lift is coming from the repricing of loans. For example, $5 billion in the multifamily portfolio will reprice from around 3.5% to 7.5%-8%, which will significantly lift our margin. Additionally, redeployment into new lending at more current market rates will also contribute to the increase in NIM.
Q: Can you provide more details on the expense reductions and how they will progress?
A: We expect about $750 million in expense reductions over the forecast period, with $400 million coming from the exit of the mortgage business. The remaining $300 million to $350 million will come from cost reductions across the organization. We are focused on achieving these reductions by the end of the year to enter 2025 with a leaner cost structure.
Q: What is the impact of the mortgage servicing sale on deposits?
A: The mortgage servicing sale will result in the transfer of about $3.7 billion in deposits. However, we will receive $1.3 billion in cash from the sale, resulting in a net liquidity impact of around $2.5 billion. These deposits are high-cost, so their departure will not significantly impact our funding costs.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
