Citizens Financial Group, Inc. Q2 FY2026 earnings call

### Core Financial Performance Highlights - Delivered outstanding Q2 results with strong momentum across all core businesses, with 4% sequential and 6.4% year-on-year positive operating leverage, exceeding consensus expectations for revenue and fee growth. - Credit trends are favorable: the firm continues to shift originations to lower-risk, relationship-driven portfolios while running down non-core and CRE holdings. Net charge-offs fell sequentially, non-accrual loans declined 4% quarter-over-quarter, and the ACL coverage ratio held steady at 1.48%. The balance sheet remains robust across capital, liquidity, and funding metrics. - DFAS stress loss results were positive, with management anticipating further improvement under new Fed models.

### Strategic Initiative Progress - **Private Bank Expansion**: The private bank has reached 10 offices with the opening of a new location in West Palm Beach, and continues to attract top-tier wealth and banking talent. Growth is on track to reach 15-16 offices by end-2027, with planned densification in existing markets including California, Florida, the Northeast, and Philadelphia. The business maintains its target of disciplined, profitable growth with consistent returns. - **Reimagine the Bank (RTB)**: The technology and efficiency transformation program is progressing on track. It expects minimal net cost for 2026 as quick wins offset implementation costs, and targets $100 million in annualized pre-tax benefits by end-2026, doubling to $200 million by end-2027, and reaching $450 million by end-2028. - **NEXT (Branch Optimization Initiative)**: The long-term branch optimization program plans to close 100-120 in-store branches, add standalone advisory/business banking branches, and selectively upgrade and consolidate existing locations. It will add specialist talent focused on small business and wealth in high-opportunity branches, with a goal of accelerating low-cost consumer deposit and household growth over time. The program is self-funded and will not impact the path to the firm's medium-term ROTCE target. Net branch count is expected to remain near 1,000 over the next 5-7 years.

Shareholder Returns - Returned $422 million to shareholders in Q2 2026 ($197 million in dividends, $225 million in share repurchases), bringing total H1 2026 shareholder returns to $920 million.

Overall Q2 2026 results: EPS of $1.30, up 15% sequentially and 41% year-on-year; ROTCE improved to 13.9% from 12.2% in Q1 2026. Net Interest Income (NII) was up 4.4% sequentially and 14% year-on-year, with net interest margin (NIM) expanding 3 basis points sequentially for a 10 basis point increase through H1 2026. Non-interest income (fee revenue) was up 8% sequentially and 9% year-on-year. Expenses rose ~1% sequentially, bringing the efficiency ratio to 61%. Net charge-offs were 37 basis points, down from 39 basis points in Q1. CET1 ratio ended the quarter at 10.4%.

1. **Private Bank**: Contributed 11.5% of Citizens' pre-tax income and 11.5% of total EPS, with an ROE of ~25%. Ended Q2 with $17.8 billion in deposits, $9.7 billion in loans, and $11.2 billion in total client assets. Period-end loans grew $1.9 billion sequentially, while deposits grew to a new record. Net loan-over-deposit spread remains stable at ~4%.

2. **Commercial Banking (ex-Private Bank)**: Spot commercial loans (ex-Private Bank) grew $1.5 billion (2%) sequentially, driven by net new originations in corporate banking and higher line utilization across corporate and sponsor businesses, partially offset by planned reductions in non-core commercial real estate (CRE). Capital markets delivered its strongest Q2 ever, with fees up 14% sequentially and 46% year-on-year, driven by loan syndications and bond underwriting, ranking 2nd among middle market-sponsored book runners by deal count and volume. Wealth delivered a record quarter, with fees up 2% sequentially and 16% year-on-year. Service charges and fees grew $5 million, while card fees grew $6 million on seasonal purchase volume improvements.

3. **Consumer Banking**: Retail loans (ex-non-core) grew ~$800 million, led by real estate secured products, partially offset by a $400 million runoff of the non-core auto portfolio. Consumer deposits represent 64% of total Citizens deposits, steady from prior quarters and above the peer average of ~56%.

- **Q3 2026 Guidance**: Expects NII to increase 2.5-3.5% sequentially, driven by continued NIM expansion and earning asset growth. Non-interest income is projected to grow ~1%, led by capital markets and wealth. Expenses are expected to be stable to slightly up, while net charge-offs are expected to be stable to slightly down. CET1 is projected to end Q3 at ~10.5%, including ~$125 million in planned share repurchases. - **Full Year 2026 Guidance**: Full year 2026 revenue is trending above the firm's initial guidance range, with fee revenue also expected to come in at the high end of its guidance range. Full year positive operating leverage is on track to exceed 600 basis points. Full year average loan growth is expected to be slightly ahead of the January 2026 guidance, driven by stronger-than-expected H1 loan growth. - **Medium-Term Guidance (End of 2027)**: Reaffirms the target ROTCE range of 16-18%. Reaffirms the target mid-50s efficiency ratio, down from 61% in Q2 2026. Projects 4Q2026 NIM in the 3.22-3.27% range, and 4Q2027 NIM in the 3.30-3.50% range. Fixed asset repricing benefits are expected to continue through 2027 and 2028, with volume of repricing declining gradually by 2028. Maintains the CET1 target range of 10-10.5%, with potential for a gradual drift lower within the range over time as profitability improves and CRE workouts progress.

- Continued market volatility tied to heightened geopolitical tensions could pressure fee revenue and capital markets activity. - Unexpected changes to the Fed interest rate path could impact net interest margin, deposit costs, and loan demand. - Intense competition for top wealth and private banking talent could slow private bank expansion or increase compensation costs. - Commercial real estate (specifically general office) continues to require planned run-off, and unexpected credit deterioration in this portfolio could pressure results. - Proposed risk-weighted asset (RWA) regulatory adjustments could change required capital levels and impact capital management strategy. - Intense competition for deposits could increase deposit costs faster than expected, pressuring net interest margin.

Q: Given Q2's slight deposit cost uptick, what are your deposit cost and NIM trajectory expectations from here, and how does this align with your year-end and long-term targets? / A: Management notes the Q2 uptick was driven by seasonal factors and stronger-than-expected loan growth, and is not seen as a concerning trend. Cumulative deposit beta of 48% has met expectations, and management expects deposit betas to remain stable with the Fed holding rates steady. The firm already achieved 10 basis points of NIM expansion in H1 2026, with 9 additional basis points of expansion already locked in for H2 2026 from terminated swap impacts and front/back book dynamics. Management maintains confidence in low-cost DDA growth accelerating in H2 2026, and holds to its projected NIM ranges for year-end 2026 and 2027.

Q: How do you respond to media coverage of executive succession, and what is your plan for expanding private bank presence amid competitive labor markets? / A: Management confirmed it is conducting a deliberate, gradual succession planning process: CEO Bruce Van Saun is not planning to retire imminently, but has broadened President Brendan Coughlin's responsibilities to prepare him for potential future leadership, with the process focused on building a sustainable leadership team for the next 5-10 years. For the private bank, the business has built significant momentum after a deliberate, slow initial build to validate the model, and will continue expansion at a steady pace, with 15-16 offices planned by end-2027. Competitive pressure for talent is offset by the private bank's strong existing momentum and attractive open platform, which is drawing talent from larger firms looking for more autonomy, leaving net growth on track.

Q: With the strong Q2 capital markets performance, is there additional upside to full-year and medium-term fee revenue? / A: Management noted that trailing 12-month capital markets revenue is ~$600 million, with upside potential supported by continued capability build-out (including recent acquisitions of boutique advisory firms DH Capital and Matrix Capital Partners), ongoing talent inflow from other banks shifting their strategies, and a strengthening M&A pipeline. Management reports that middle market M&A activity is starting to pick up after multi years of slow activity, and there is still upside even after the strong Q2 performance if market conditions remain stable. The firm is well-positioned to capture this upside relative to peers given its focused middle market strategy.

Q: Is 2026 full-year PPNR likely to be upgraded, and what is the firm's strategy for using FHLB funding vs. competing for deposits? / A: Management confirms PPNR is likely to move modestly higher than prior guidance, with any slight expense increase tied to incentive compensation for higher-than-expected revenue, which still results in higher full-year positive operating leverage. The temporary increase in FHLB borrowing in Q2 was driven by seasonal lulls in commercial deposit growth, and management expects stronger deposit growth (particularly in Q4 2026) will reduce FHLB balances. The firm maintains strong underlying low-cost deposit growth across consumer and private bank, and remains slightly asset sensitive, so any unexpected rate hike would act as a tailwind to NII by 2027 as hedges amortize.