Citizens Financial Group Inc (CFG) — Q4 2016 Earnings Call Transcript

Thanks so much, Brad, and hello everyone. We really appreciate you joining us on our call today. Our Chairman and CEO, Bruce Van Saun; and our Interim CFO, John Fawcett will begin by reviewing our fourth quarter and full year results and then we will open up the call for questions. We're also really proud to have here in the room with us today Brad Conner, Head of Consumer Banking; and Don McCree, Head of Commercial Banking. I'd like to remind you all that in addition to today's press release we have also provided presentation and financial supplements, and these materials are available at investor.citizensbank.com. And of course our comments today will include forward-looking statements which are subject to risks and uncertainties. We provide information about the factors that may cause our results to differ materially from the expectations in our SEC filings, including the Form 8-K we filed today. We also utilize non-GAAP financial measures and provide important information and a reconciliation of those measures to GAAP in our SEC filings and in our earnings materials. And with that, I will hand it over to you, Bruce.

Great. Thanks, Ellen and good morning everyone. Thanks for joining our call today. We are pleased to report another quarter of strong and improving results and a great finish to a year of significant progress and good execution. We continue to run the bank better every day, we are taking good care of our customers, and we enter 2017 with some nice momentum. The highlights of the quarter from my perspective was the continued delivery of good top line growth with 11% year-on-year revenue growth and robust positive operating leverage at 6%, while for the full year revenue growth was 8% and the operating leverage was 4.2% on an adjusted basis. The commitment to positive operating leverage has powered improvement in our key metrics. Our ROTCE hit 8.4% in Q4 and our efficiency ratio improved to 62%. We continue to execute well on our strategic initiatives and we're making progress on our customer, colleague and community stakeholder objectives, doing better for all of these key stakeholders. We also announced an increase in our Q1 dividend of 17% or $0.02 to $0.14 and we repurchased 180 million in common shares during Q4. As we look at 2017, we expect our agenda to be largely consistent with 2016. We have a great playbook and we're going to continue to execute against that playbook. We're hopeful that the macroeconomic environment may deliver some tailwinds but we will stay focused on execution and what we can control. I'm going to turn it over to John Fawcett, our interim CFO to review fourth quarter and full year 2016 results. I’ll then come back to discuss the outlook for 2017. First I'd like to personally thank John for shelving his vacation plans to step back in and cover the CFO duties for a couple of months as we transition CFOs. It's very much appreciated by me and by your colleagues John, and it's great to have you back with us during this period.

Thanks Bruce and good morning everyone. Since Bruce hit the highlights let me direct you to a few pages in our slide deck with some color on our financial results. On slide 6 on a GAAP basis we generated net income available to common stockholders of $282 million and EPS of $0.55 per share which was up 31% year-over-year driven by strong revenue growth of $131 million or 11% year-over-year. Our net interest margin increased 13 basis points while the efficiency ratio improved 3.5% from the fourth quarter of 2015 to 62%. On slide 7 we present the results on an adjusted basis. As a reminder third quarter results included $19 million of after-tax notable items that benefited our EPS by $0.04 in the third quarter. We grew EPS on an adjusted basis by 6% linked quarter and 31% in the fourth quarter of 2015. The strong focus on operating leverage delivered revenue growth of 11% year-over-year with expenses up just 5%. We improved the efficiency ratio by over 1% versus the prior quarter and 3.5% year-over-year. Our results also reflect $180 million in share repurchases. On slide 10 and 11, you can see the continued benefit of our efforts to grow our balance sheet and expand our net interest margin. We grew average loans 2% linked quarter and 8% year-over-year reflecting growth across commercial and in mortgage unsecured retail and student on the consumer side. Net interest margin was up 6 basis points in the quarter and 13 basis points year-over-year reflecting improved loan yields partially offset by higher deposit costs. We've done a nice job of improving our loan yields given our balance sheet optimization efforts, a loan with greater discipline on pricing. We also benefited from higher LIBOR during the quarter as the market anticipated the tightening by the Fed. On the funding side we held our cost flat to linked quarter despite a 1 basis point increase in deposit costs as we benefited from the runoff of paid fixed swaps. On a year-over-year basis deposit costs were up slightly and net borrowing costs remained relatively flat. We remain well positioned to capitalize on the rising rate environment with asset sensitivity to a gradual rise in rates at 5.9% as of quarter end. Next on slide 12 we cover non-interest income which on an adjusted basis was up $9 million in the quarter. Service charges and fees were slightly up and mortgage banking fees were up $3 million reflecting improved mortgage servicing rights valuation, partially offset by lower sales gains. Security gains were $3 million tied to portfolio adjustments. FX and letter of credit fees improved $2 million largely reflecting increased customer hedging activity given U.S. dollar volatility. Capital markets fees were strong and in line with record 3Q 2016 levels given continued good loan syndication activity. Let's take a closer look at expenses on slide 13. On an adjusted basis non-interest expense was up $16 million linked quarter reflecting higher vendor contract license and maintenance costs, outside services tied to consumer loan origination and servicing, and an increase in fraud legal and regulatory costs. Salaries and employee benefits expense remained stable on an adjusted basis as higher revenue-based incentives were largely offset by a reduction in benefits. Our headcount is down 75 year-over-year reflecting the impact of our efficiency initiatives which more than offset sales force and strategic hiring. We grew loans 8% annualized with nice performance in both consumer and commercial during the fourth quarter which you can see in more detail on pages 15 and 16. In consumer, growth was led by continued expansion in residential mortgages, student and other unsecured retail loans which were driven by our partnership with Apple and our new personal unsecured product. We have recently announced a new partnership with Vivint, a major security alarm company and expect to announce another program soon. We continue to do a nice job of re-pointing our growth to higher return categories as the yields in consumer expanded 5 basis points in the quarter. We also saw nice growth in commercial where we continued to execute well in mid-corporate and industry verticals and commercial real estate, which helped to offset the effect of $1.2 billion in loans and leases transferred to non-core. U.S. was up 11 basis points reflecting higher short-term LIBOR rates. Next let's move over to slide 18 and cover credit. Overall credit quality continued to improve reflecting our focus on growing high-quality, lower-risk retail loans compared with growth in the larger company segment of our commercial book which tends to be higher credit quality. Our non-performing loan ratio improved to 97 basis points of loans from 105 driven by a reduction in consumer real estate secured. The net charge off rate increased to 39 basis points. Our commercial net charge offs decreased $3 million from last quarter while retail net charge offs increased $24 million driven by lower recoveries in home equity from relatively high third quarter levels. We also saw a $7 million increase in the auto portfolio related to a one-time methodology change. Provision for credit losses of $102 million increased $16 million driven by a $14 million reduction in recoveries of prior period charge offs from relatively high third quarter levels. As we continue to grow at a higher quality retail portfolio and one of our non-core portfolios, our allowance to loans and leases ratio has moved down modestly to 1.15%. On slide 19 you can see that we continue to maintain strong capital liquidity positions. This quarter as part of our 2016 CCAR Plan we have repurchased $180 million in stock at an average price of $28.71 and returned $241 million to shareholders including dividends. As Bruce mentioned, we announced a 17% increase in the dividend. We ended the quarter with a common equity Tier One ratio of 11.2%. As a reminder our CCAR capital plan targets, the repurchase of up to $260 million dollars in shares throughout the first half of 2017. On slide 20 we show our progress against our strategic initiatives. We believe it's important to assess our progress against these initiatives each quarter. Importantly we continued to drive attractive loan growth across a number of areas. We have considerably made good progress over the past few quarters in mortgage ending the year with 538 loan officers ahead of our target. We fine-tuned our auto programs to enhance returns and we've seen really strong growth in our education refinance loan product which has attractive risk adjusted returns. In wealth we've had some near term revenue headwinds as our sales mix is shifting towards more fee-based business. But we have continued to add FCs and overall transaction volumes are up. Overall we are pleased with our results in commercial this year and we expect to continue to build on this strength. We launched our broker dealer this year which allows us to expand our capabilities and deepen relationships with existing customers. We've experienced strong growth in our mid corporate and industry verticals with particular success in healthcare and technology. We seek continued growth in our capital and global markets business given our strong loan syndication capabilities and enhanced interest rate product offerings.

Thanks, John. On slide 24 we identify the key to a successful 2017. Achieving good loan and deposit growth, expanding the NIM, progress on our fee businesses, strong expense discipline, and further capital normalization are key objectives very similar to 2016. On slide 25 we detail the ambitious guidance that we gave last January for 2016 on the left side of the page and on the right side we show what we actually achieved. The good news here is that notwithstanding an adverse interest rate and GDP backdrop, we hit just about all of our targets. Very proud of the 4.2% positive operating leverage which is near best in peer group. The only miss was on fee growth which is taking somewhat longer than expected but we feel we are on the right track. On slide 26 and 27 we detail our guidance for 2017. Quite similarly you’ll see to 2016 with good top line growth, 3% to 5% positive operating leverage target, further efficiency ratio improvement, and capital normalization. A few points of color, first slightly slower loan growth in commercial given higher rates which is offset by higher securities portfolio growth. So, overall earning asset growth is about the same. Strong NIM improvement largely due to yield curve benefit that will be slightly less self-help benefit than in 2016. The provision continues to gradually normalize largely due to reserve build tied to loan growth. Credit quality is expected to remain very strong, and LDR is projected at 98%, CET1 ratio at 10.7 to 10.9 with solid growth in our dividends. Slide 28 provides some additional color on the NIM. We expect continued good discipline on how and where we play in the loan book and in raising deposits cost effectively. The rate curve as of December 31st delivers a benefit of slightly over $100 million to 2017 NIM assuming two hikes in 2017 and continued steepness in the yield curve. This obviously will move around on us, so we'll see how things will actually play out. On slide 29 you can see the NII walk, the top of the page is 2016 and the bottom of the page is the 2017 target. We expect slightly lower earning asset growth and slightly lower NIM expansion as deposit betas and borrowing costs rise but overall a very strong 8% to 9% growth outlook for 2017. On slide 30, we show the same format for expenses. The story again is very consistent from 2016 to 2017. Underlying expense growth of around 5% which includes merit and inflation increases as well as business growth spend supporting our strategic initiatives. This is partially offset by top efficiency initiatives of almost 2% bringing the net expense growth to around 3% to 3.5%. On slide 31, we provide our guidance for Q1 relative to Q4. This is typically a seasonally softer quarter for us given several factors including day count, seasonal activity levels, and the FICA taxes associated with incentive compensation. We also pay our preferred stock dividends in Q1 and Q3 of each year. That said we feel good about the year-on-year comparison relative to 2016. So to sum up on slide 32 we feel that we've delivered strong results in Q4 and for the full year of 2016. We will maintain our mindset of continuous improvement in 2017 and we will look to drive even more top program benefits. We also feel our balance sheet and capital and our credit position remained rock solid. So there's also lots of good stuff in the appendix in the supplemental materials which you can review at your convenience. So with that operator Brad, we're ready to open up for some Q&A.

Good morning.

Hi.

If I could just follow up on the loan growth, obviously you guys have had very strong loan growth and still solid outlook, a little bit less now than you've seen and you mentioned less commercial loan growth given higher rates. Maybe you can just elaborate on that and in the consumer side as we think about the drivers of growth there and maybe less drag from home equity, just walk us through what you think on the consumer side?

Yes sure, I'll start and then Don and Brad can chime in with some color. But I think we really hit the ball out of the park with loan growth this year and pleased with what we were able to accomplish on both sides on commercial and consumer. I think a fair amount of the activity that you've seen on the commercial side has been companies that are taking advantage of lower rates doing some refinancing, doing some recaps, taking out dividends and putting some leverage back into their companies. And you've seen commercial real estate very, very robust and so I think as rates move up a little bit you'll see a little less of that activity. Although I do think if you see that the growth come through that the market is expecting, that hopefully it is made up with loan demand that really is in support of a faster-growing real economy. So we'll wait and see how that plays out. I think we're just marking it down a little bit. But having said that I think we have the same coverage force out there taking market share, winning on the battlefield with good ideas. So we'll continue to follow that playbook and then maybe we'll see some upside there. On the consumer side I think there's also some rates impact that we would anticipate particularly around the mortgage areas or mortgage refi product. Obviously the opportunities there will be somewhat limited. Our hope is that with the bigger sales force that we've assembled that we can certainly make up for some of that and that the purchase market will stay strong during the year. We should also see a little bit of a shift towards more conforming products which also could crimp the mortgage growth on the balance sheet a little bit. But I think that's probably the main impact of the higher rates on the consumer side. There might be a little impact on education refi market but I still think many of the borrowers who are refinancing will still see it worthwhile to do that. And then I think on a personal unsecured product generally, people are coming off of very high-cost revolving credit card debt into something quite a bit less from an interest rate standpoint. So I think that will be very modest if any impacts on that. So in general I think we will be looking to follow the playbook that we followed this year and should see very strong growth in the same areas that we saw this year. But we're being, I think just appropriately a little cautious given the higher rates. I don't know guys, Don.

No, I think mark down is the right word. And we saw a little bit of deceleration on the commercial side as we got to the back end of the year for exactly the reasons that we have cited. We're hopeful if the economy starts to take off that we will see good loan demand but we're just not seeing it in the pipelines yet. The other thing that’s happening in some portions of the portfolio is we're getting a little disintermediation as people hit the capital markets with the expectation that rates are going to go up. That's helping our fee lines a little bit so capturing...

Pipelines for fees Don.

Pipeline for fees, so we're seeing a toggle between NII and the fee line a little bit, I think you characterized it correctly.

Bruce, I think you cover it very well and the consumer side. The only thing I would add to it is we probably will see slowing growth in auto because we’re intentionally taping the brakes on auto. So and we've talked about this in previous quarters which is the pressure continues to be there in terms of the margin returns on that business. So that the growth we’re getting in the other asset classes in a little bit better risk adjusted returns are intentionally going back on the growth in auto. Okay.

Okay, that’s good color. Thank you very much.

Good morning, everyone. This quarter showed a strong margin performance, and we anticipate benefits from high rates. Bruce, I’m curious about your thoughts on deposit costs as we enter a higher rate environment. It seems like the main difference for you is starting with a higher loan-to-deposit ratio, but I’m eager to hear your overall insights on what you’re currently seeing and what you expect in the future.

I’ll start off and anyone here can add their thoughts, but I believe we’ve effectively improved our deposit cost management. During our shrink phase in RBS, we largely moved away from higher-cost commercial deposits. On the consumer side, we also reduced our term and time deposits. As we’ve begun to grow our balance sheet, our loan growth has been about twice that of our peers. We need to increase deposits at twice the rate of our peers due to the relatively high loan-to-deposit ratio following the sale in the Chicago region. It’s crucial for us to enhance our efforts in the commercial sector with strategies aimed at attracting deposits, enabling us to balance the industries we serve and attract cash-rich companies for deposits. On the consumer side, we are focused on improving our segmentation and making targeted offers to various customer segments, rather than applying a one-size-fits-all rate that affects our entire back book. We’ve made significant progress in this area. If we examine our overall borrowing costs this year, they’ve remained fairly stable with slight increases in deposit costs. We’ve also retired higher-cost subordinated debt and replaced it with senior debt through FHLB borrowings, and I think we’ve managed our overall borrowing costs well. This strategy must continue. If we aim to grow loans at a good pace in 2017, we need to remain sharp in our strategies and grow our deposits cost-effectively, which I believe we can achieve. So, John, Don, Brad, do you have any insights on this?

I think in the short time I've been here and since the first time we did the road show with the public offering it's always been very clear that we're going to fund loan growth with customer deposits from the time that I have been back. It's very obvious that there are dedicated programs and disciplines in place to make sure that continues to happen. I think it happened this year with 9% loan growth. That was a steep hill to climb and I think it was achieved in my sense is in the first quarter. We are doing just as well and deposit gathering is job one, so feels good.

Okay, perfect, I appreciate the thoughts. Thank you.

Okay, Scott.

Yes, good morning. You mentioned earlier that there's slightly going to be a toggle between fee growth this year versus NII and I am wondering if you could give us a little bit more color in terms of your confidence in hitting that 3% to 5% non-interest income growth target for the year and sort of what line should we look forward to in terms of more contribution for this year?

One thing to note, Erika, is that in our Q4 results, we experienced a 4% increase year-on-year. As the year progressed, we observed strong performance in the commercial area, particularly in capital markets, as we've expanded our overall relationships. We're getting more opportunities and have developed strong capabilities in capital markets, especially in loan syndications. We're also adding new capabilities over time, so I feel optimistic about that. In terms of global markets, we've separated our interest rate and FX risk management products from RBS and established our own platform. This change allows us to operate more effectively than when we relied on RBS for everything. We're well-positioned for continued growth, bolstered by the market volatility following Brexit and the shift in Washington. While I don't wish for excessive volatility in 2017, we should anticipate some, which is encouraging. On the cash management side, we have strong product capabilities and are continually enhancing our core offerings. Our card products and payables are performing well and showing good growth. Overall, we're doing well in commercial banking, although the consumer side presents more challenges. However, we are seeing positive momentum in mortgages, and the recent hiring gives us confidence for solid performance in 2017. In wealth management, while we've added staff, there's been a shift towards more fee-based products, which is beneficial for the long-term but affects short-term revenue as it replaces transaction-based sales. Eventually, we expect to see growth in wealth management as our larger sales force comes into play. Additionally, we anticipate modest growth in service charges on deposit accounts, and maintaining low single-digit growth in this significant category would be helpful. These are the key areas to watch, and you should see some progress in the year-over-year Q4 numbers.

Got it and my second question is speaking of volatility, if we do get some form of regulatory relief this year or next year, specifically as it relates to the definition of SIFI, a domestic SIFI in United States, how would you approach capital returns differently if at all and what is your view on the potential trajectory of regulatory related expenses over the next year or two?

Sure, I think we have to wait and see how things play out. Our life pass down in terms of managing our capital position to peer levels has been I think well thought out and well telegraphed and so we've been coming down 40 or 50 basis points a year. We've pretty much been able to have our cake and eat it too, that we are funding very robust loan growth at almost 100% returns of capital to shareholders. And what we're trying to do obviously is get the ROTCE up to levels that are self-sustaining so we can do that in balance as opposed to meeting the draw down on that surplus capital account. I'm comfortable with that. I don't think that the being de-designated as a SIFI as the level goes up to 250. Obviously we will see what the peers are doing and whether they move down. We certainly are trying to move towards the peer so there might be some potential there. But I feel quite comfortable with the strategy that we've laid out and that we're executing against. With respect to cost there could be potentially a little bit of a dividend there depending on whether you can do things I guess with a little less exactitude and the robustness that goes into the current requirements. I think a lot of the whole process is very worthwhile and we'll continue to do that. So I think there might be a small dividend but I wouldn't put it as something that really should move estimates to a material degree.

Got it, thank you.

Hi, couple of things. Tax rate, Bruce you’ll give an outlook of 32% I know in Top 3 that’s one that you're working on, given that does that 32% in corporate debt benefit and if so why no change from 2016 to 2017?

Well we're growing income as you can see so, this year we grew our net income around 20% and we have again some very robust if you look at the midrange of the guidance you have very robust net income growth again. And so if the statutory rate stays high where it is for 2017 which I think most people anticipate, some of the credit program investments that we're making, the low income housing, or the wind farms and things like that you're doing those things just to kind of keep the rates where it is with the growth in income. So we'll keep looking for opportunities. I think the big event on the horizon would be corporate tax reform because clearly if something gets done this year and it's effective in 2018 with our tax rate at 32%, we could have a real meaningful benefit overall to the bottom line and to EPS and the growth fee. So we'll keep our eye on that. We'll keep working on this but, anyway I think that's probably reasonable guidance given the strong net income performance that we anticipate.

Different question, capital account, you obviously had a nice jump in 2016 CCAR. At what point can we start to think about accelerating that to over 100% capital return?

Yeah well I think I just answered that in the last question. And we'll keep our eye on kind of where the peer group is going from an absolute level and where we think the requests of our couple banks that went over 100 in this last cycle but broadly speaking we like our derived path as we're still improving our growth fee in demonstrating that we are running the bank better and better. I think that gives us more confidence just to keep bringing it down but I think we’ll take that under advisement and see what's happening with the peers.

Good morning, thanks for taking my question. Bruce I just want to dive into a couple of the comments that you've already made. One is on slide 20 with sort of the where you stand relative to most of your efforts across the bank to drive better performance. I guess I'm just curious in terms of the commercial of the mid-market businesses that signaled as being not quite fully where you wanted to be. Given the position of the bank as being a mid market bank, what do you need to do to fully color in that slide I guess for lack of a better phrase in 2017?

I'm going to start, and John can share his thoughts afterward. What we've observed in the middle market, which comprises companies with revenues between 25 million and 500 million, is that they haven't experienced much growth in recent years. These companies have been cautious and haven't shown the same level of loan demand as larger firms. Conversely, we've seen significant growth in the mid corporate segment, encompassing companies with revenues from 500 million to 2.5 billion. We're hopeful that the change in administration and an increased focus on growth may inspire more loan demand from that sector, as indicated by investors. We believe we've successfully strengthened our client relationships in the middle market, and we're seeing some modest growth in our market share. We've managed to retain clients effectively and are increasing our share of their business by offering capital markets and risk management products. While there are positive developments, it’s important to note that this segment of the market hasn't been experiencing robust growth. So, John, why don’t you take it from here?

Yes, so I think that's exactly right. It's been all about loan demand in the middle market and I think particularly the regulatory environment over the last several years has been very constraining in terms of mid-market companies just engaging in any kind of expansion or M&A activity. We have had very strong fee growth and very strong deposit growth in our middle market business. And I think as Bruce said, as we turn into 2017 we begin to get some expansion in the economy. The early indicators coming out of the management teams and the Boards of the middle market companies is much more bullish in terms of where they want to take their businesses. One of the results of the slack on demand in the middle market has been incredible in terms of competition and a very, very, very tough pricing environment. So we've been disciplined in terms of where we do want to play and we've seen a little bit of a downward calibration of loan growth because of that. The other thing we're doing and I think people may have seen it is we've hired a team down in the Southeast to expand our business. Geographically it will be aimed slightly higher than the middle market at the outset because we're focused on credit quality as we move into a new region. But we are anticipating significant client account growth as we go into 2017 and the years beyond. So we are more optimistic than we were this time last year in terms of the environment that we are operating in and we are confident that our products and services are resonating well with our clients.

Okay, and then for the second question I am just curious, you mentioned the higher rates potentially affecting demand on the commercial side for loan growth, looking on the consumer side presumably the consumer would be a little bit less affected by a 25 or 50 basis point increase in rates over the next year or so. But at what level of rates do you think consumers might begin to rethink the incremental dollar of debt that they put on to their balance sheet are we ways away from that or perhaps not so much?

This is Brad. I think that really depends on the asset class is the answer. I think you're close to that point in mortgage because there's been a lot of momentum taken out of the mortgage refi market over the last year or so. So you are probably close to that point in mortgage. I think there's quite a bit of runway left on the education refi loan now. Certainly there will tranches to that. Most of what we refinanced in education loans were refi people out of fixed rate loans. So you kind of look at tranche over that but there's an enormous untapped market. So I think we're still quite a ways away from taking a significant piece of the market away. But those are really the two areas with mortgage refinance and student refinance where we see we might see some dampening as rates rise.

I would also note that regarding credit card debt, it seems to be more influenced by people's outlook than by sensitivity to interest rates. If individuals feel optimistic about a higher growth rate in the coming years and low unemployment levels that are likely to decline further, their confidence in making purchases and sometimes using revolving debt increases, even if the overall cost of borrowing fluctuates.

I completely agree with Bruce and by the way I would say that same thing holds true in the small business space. So we have seen very limited demand for small business loans over the last year mainly from a confidence perspective and if that comes back they are probably less sensitive to interest rate and we might see some loan demand that comes from this improved confidence.

Thanks for the color.

Good morning.

Hi.

I am sorry if I missed the comment on this at all earlier in the call but when it comes to the tax reform that could be coming under the Trump regime can you just give us your thoughts on how much you think could ultimately accrete to the bottom line at Citizens whether it be through any tax benefit or tax advantage investments that go away or if you're going to spend any of that potential benefit? Thanks.

I think most of it falls through actually John, we're operating with the Federal rate of 35 and if you got to something like 25 or 20 that would be a meaningful benefit to I think the whole regional banking group since we're all hovered around maybe 28 to 32 as our tax rate. There's little global allocation of resources that we have going on. So what we're left with is really investing in Federal tax credit programs or State tax planning and it really doesn't move the needle down that far from the Federal rates. So the big benefit is to get that Federal rate lower and I don't think the Federal credit programs since they're generally seen to promote investing in something's that are socially good such as alternative energy or low-income housing. I'm not sure they're going to be negatively impacted but we'll have to wait and see how that plays out.

Okay, got it, thanks Bruce and related to that though, I feel like a broken record asking this on lots of these calls but it's important to get your take. Do you think that in that benefit that you do expect to accrete to the bottom line ends up getting competed away by the industry at all?

I don't know I mean John I’ll ask your view on this but I have seen some folks say that if you went into a credit relationship for example with a corporate you would try to get an after-tax rate of return. If the tax rate goes down then you can offer the credit at lower spreads. I don't think that's the way the world works because I think the credit right now is offered very thin in terms of returns and the only way you can justify extending the credit is by having an overall broader relationship where you’re getting a cash management or you're getting to participate in their capital market needs or other needs. And so I think the industry would hopefully hold their discipline there and say gosh, this is good. We're going to see an overall improvement on the return on these relationships. John?

I think that's exactly right and as we compete on the credit side every day we're competing in the public market with the non-bank and other banks and as Bruce said I think pricing is very thin in terms of where margins hit today. So I don't think you’re going to see any kind of tax-effective change in the returns we generated.

Hello, good morning. Thanks for taking the questions. On the partnerships that adding Apple being one but I know there are a few offers, what are you watching there to make sure that you don't run into credit issues down the line, what are the kind of early indicators that you can focus on to make sure if you do one of those partnerships and it doesn't work out, you pay it back pretty quickly?

Yeah, I think the answer to that is the traditional credit measures metrics, right. So, the first is through the door of credit quality so we were at that income ratio, the FICO score through the credit metrics which look extraordinary and then we are incredibly diligent around looking at the early loss emergence curves. So, what these early stage delinquencies look like if any we have the early loss emergence curves look like, we can get a feel for the loss emergence current versus what we priced for then in three to four months of the origination and I would say we just feel very good about that up until this point in time. We've got over a year under our belt now with the Apple program. So we are starting to get a really good feel for how these things mature and develop over time and they are relatively short-term assets. So you get a pretty good feel really on.

Yeah and I would just add some color that it seems hard that you can achieve this. But we're achieving it. It's almost what I would refer to as the hat trick for two years. But we are you know focused on improving our asset yields, improving the risk-adjusted returns on these portfolios, and actually seeing if our stress losses picture can improve and we've actually achieved that. And it's partly because we've run off some of the higher-risk stuff and we’re replacing it with better quality stuff. And so that’s been really impactful on the consumer side to be able to achieve that.

Just one more thing to add to Bruce, our standard model calls for risk sharing with our partner as well, so there's a vested interest in our partner in and through the quality which is a big factor in these programs.

And just to follow up on that, there is only one Apple and there are lots of banks out there. So when you're competing for this sort of partnership, what is it that sets you apart, there must be something that you are doing different or better or pitching better that means they want to partner with you rather than somebody else so...?

I believe that providing an exceptional customer experience is fundamental. Particularly with Apple, all of our partners expect this to be a value-added program, and they anticipate a level of customer service that aligns with their brand and their expectations. We have successfully met those expectations, and our partners have given us positive feedback on our performance. I believe that's crucial, along with our understanding of the credit risk involved.

I believe our approach to business and how we align with customer objectives has been effective. Given our size, these important relationships matter greatly to us, and we invest significant effort to ensure we perform well.

Thanks my questions have been asked and answered. Thank you.

Okay.

So, great. Very much appreciate everybody dialing in today. We do appreciate your interest and we look forward to another year of focused execution. So, have a great day.