Yahoo Finance Citizens Financial Group Inc (CFG) Q1 2019 Earnings Call Transcript
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Citizens Financial Group Inc (NYSE: CFG)
Q1 2019 Earnings Call
April 18, 2019, 9:00 a.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Operator
Good morning, everyone and welcome to the Citizens Financial Group First Quarter 2019 Earnings Conference Call. My name is Brad, and I'll be your operator on the call today. Currently all participants are in listen-only mode. Following the presentation, we will conduct a brief question-and-answer session. As a reminder, this conference is being recorded.
Now, I'll turn the call over to Ellen Taylor, Head of Investor Relations. Ellen, you may begin.
Ellen A. Taylor -- Head, Investor Relations
Thanks so much, Brad. Hello everyone. We really appreciate you finding time to join us this morning. We're going to kick things off with our Chairman and CEO, Bruce Van Saun; and CFO, John Woods, reviewing our results and then we'll open the call for questions. We're really happy to have Brad Conner, Head of Consumer Banking and Don McCree, Head of Commercial Banking with us. Of course, I need to remind everyone that in addition to today's press release we've also provided a presentation and financial supplement. And you can find these materials at investor.citizensbank.com.
And 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 from expectations in our SEC filings including our 8-K that we filed today and then we utilize non-GAAP financial measures and we provide you information and reconciliation of those measures to GAAP in our SEC filings and earnings materials.
And with that, I'm handing it to Bruce.
Bruce Van Saun -- Chairman and Chief Executive Officer
Thanks, Ellen. Good morning, everyone and thanks for joining our call. We're pleased to announce strong quarterly results today. It's always great to get off to a good start to the year. But importantly, beyond the short-term results, I feel we're really doing a good job of staying focused on evolving our long-term strategy given the rapid changes in technology, customer expectations and the competitive dynamics that we face.
With change from the opportunity and risks that we seek to exploit opportunities that will strengthen our franchise while minimizing potential risks. We have a significant cross section of our leadership team engaged in these efforts and the key will be to make good decisions, to prioritize well and then go out and execute. Now balancing the long and short-term requires skill and I believe we're doing a good job overall at this.
Let me give you a few high level takes on the quarter before John gives you the full details. Now the quarter had some seasonal impacts so the year-over-year comparisons are the most meaningful. Our underlying earnings per share was up 19% year-over-year faced by strong operating leverage which was 3.2% and even more impressive than it was 5% excluding acquisitions.
What really stood out for me was strong fee income growth of ex percent, ex the acquisitions compared with only 2% expense growth ex-acquisitions. We consistently invested in our commercial key businesses and we're gaining real traction in deepening relationships. Our capital markets revenue hit a record in the quarter, up 38% as that our global markets business which is foreign exchange and interest rate products, where revenues were up 33%. We've assembled some great talent and we're able to compete highly effectively against the biggest banks than our peers.
And our TOP programs really are differentiating, allowing us to become more efficient while serving customers more effectively. We bumped up our TOP five estimated impact to $95 million to $105 million which is up $5 million and we're hard at work on TOP six which is expected to be bigger and potentially more transformational. Another highlight for the quarter was our strong year-over-year average loan growth of 6% along with sequential loan growth of 1.5%. We continued to focus on attractive areas to deploy capital and improve our risk adjusted returns.
On the deposit side, we grew average deposits 6% year-on-year and 2% sequential quarter. We brought the spot quarter end loan-to-deposit ratio down below 95% with some nice performance from Citizens Access which had $4.6 billion in deposits as of quarter end. Even with the strong deposit growth, our deposit costs were manageable and our NIM held steady. We now have some additional balance sheet flexibility as we look ahead. On balance sheet management overall, I'm pleased with our BSO efforts which provide us a razor sharp focus on enhancing our growth, our NIM and our return on capital.
We continue to deploy some great new technology to better serve customers and to run the Bank better. Slide 14 of our presentation provides you with some other color including four new FinTech partnerships in the quarter. Suffice it to say, we expect a big leap forward in our technology capability and delivery in 2019. To me, it is one of the keys to our year. So overall, we maintain a positive outlook for the balance of 2019, as we expect another year of good execution and further progress across the Board.
Let me stop there and turn it over to our CFO, John Woods.
John F. Woods -- Chief Financial Officer
Thanks, Bruce and good morning, everyone. We're pleased with solid first quarter results that highlights steady execution against our enterprise level initiatives with particular focus on robust positive operating leverage. We continued our momentum in delivering cost efficiencies, while making the long-term investments required for sustainable success. So let me kick off by covering several important highlights of the quarter.
So on Page four, we delivered EPS growth of 19% year-on-year with PPNR of 13%. A strong focus on growing the top line while being disciplined on expenses drove positive operating leverage of 5% before the impact of our recent acquisitions. Overall, our credit quality remains very good with a relatively stable net charge off ratio of 31 basis points and a decrease in the non-performing loans ratio.
Our consumer and commercial banking segments are delivering strong and prudent loan growth, 1.5% linked quarter and 6% year-over-year and we continue to gain traction in fee income with this quarter's results highlighted by record capital markets and FX and interest rate products fees. Deposit growth outpaced loan growth during the quarter in part due to ongoing momentum in Citizens Access and as a result we drove a nice improvement in our spot LDR to 94.9%. This puts us in a strong liquidity position as we head into the second quarter.
In addition, DDA was stable year-over-year as we continue to do a nice job of executing on our initiatives, together low cost deposits more efficiently and effectively. We also continue to actively manage our capital base, returning $349 million of capital to common shareholders through higher dividends and share repurchases. We delivered underlying ROTCE of 13.1% which is up 141 basis points year-over-year. And our tangible book value per share was up 9% year-over-year and 3% sequential quarter. We finished the quarter with a strong 10.5% CET 1 ratio.
Across both these business segments we continue to make significant investments in broadening our capabilities and strengthening the franchise as we balance delivering on our near-term objectives and executing against our long-term strategy. We have some exciting things to talk about this quarter and I'll expand on our strategic initiatives in a few minutes.
On Page six, our net interest margin came in broadly stable for the quarter. Even though average LIBOR was less than the prior quarter and the long end of the curve was lower than anticipated. The December short-term rate rise drove higher loan yields. But this was tempered a bit by a robust growth and shift mix in deposits which put some upward pressure on deposit costs as well as by an increase in securities premium amortization due to the drop in long range.
Turning to fees on Page seven. We delivered very solid results despite some seasonal headwinds. As I mentioned earlier, we saw record results in both capital markets and in foreign exchange and interest rate products, reflecting continued benefits from invest -- investments in broadening and enhancing our capabilities as we are increasingly able to win lead left mandates against the larger national players.
This helped overcome expected seasonal headwinds in mortgage, service charges and card fees. Capital markets delivered a 38% increase in fees year-over-year with strengthened loans syndications, M&A and advisory fees and bond underwriting fees overcoming lower market volumes and loans indications which were down significantly. Results were up 20% linked quarter, largely tied to an increase in M&A and bond underwriting activity as market conditions improved from the fourth quarter which helped offset the impact of the typical seasonal decline in loans and this syndications.
In global markets, FX and interest rate products were up 33% year-over-year led by the IRT -- IRP team which was able to win some nice lead transactions and take advantage of the flat yield curve by restructuring existing client hedges. In FX, higher dollar volatility created the opportunity for favorable hedging across a number of currencies. Because of what we saw happening with the long end of the curve, we took the opportunity to lock in some securities gains and execute it on targeted asset dispositions which increased other income in the first quarter.
This helped offset headwinds in mortgage where Franklin's fees were down $14 million linked quarter largely as lower rates and an $11 million of MSR losses and wholesale origination levels dropped reflecting tough market conditions. The integration of Franklin is on track. And while the first quarter was challenging, we see an improving environment in 2Q and continue to believe this is an attractive and important customer business for us to be in over the long-term.
Turning to Page eight, expenses were up 3% linked quarter, reflecting seasonally higher salaries and employee benefits, partially offset by seasonally lower outside services costs. Year-over-year before the impact of acquisitions, non-interest expense was very well controlled of 2%, reflecting strong expense management and benefits from our TOP program.
We are identifying further opportunities to streamline our operations and activities across the organization to capitalize on the next level of efficiencies which include a strong focus on end-to-end automation across the front and back office. These activities will be critical to maintaining our operating objectives over time. As a result, we remain committed to self fund our growth initiatives and deliver compelling products and services to an increasingly digitally oriented customer base.
Let's move on and discuss the balance sheet. On Page nine, you can see we continue to grow our balance sheet and generating nice returns from the investments we've made in our geographic and industry verticals expansion strategies with strong progress and higher growth geographies like the Southeast and Texas. We are also seeing attractive risk adjusted return opportunities in commercial real estate with growth tied to high quality projects largely in office and multifamily. We remain disciplined around client selection where we are focused on larger MSAs.
On the retail side, we also continue to drive growth in innovative and attractive risk adjusted return categories like education refinance and unsecured, including our merchant partnerships. Overall, we grew loans by 1.5% linked quarter and 6% year-over-year. Despite the impact from the planned runoff, an auto non-core and leasing as well as some modest impact from asset dispositions tied to balance sheet optimization. Loan yields improved by 13 basis points in the first quarter, reflecting continued mix shift toward higher returning categories and a backdrop of higher short-term rates driven by the December rate increase.
As you can see on Page 10, we are doing a nice job of growing deposits which were up 2% linked quarter and 6% year-over-year with stable results in DDA, as we continue to do a nice job of executing on our initiatives together low cost deposits and capitalize on the inherent value of our franchise. Our total deposit costs were relatively well controlled given strong growth of 15 basis points linked quarter, reflecting the impact of higher rates and a shift in deposit mix, as we drove the new customer acquisition and manage down the LDR from 97.6% to 94.9% at the end of the quarter. Note that interest-bearing deposit costs grew 16 basis points sequential quarter.
We continue to make investments across Citizens Access digital platform where we are gaining share nationally in the mass affluent and affluent segments. This platform has contributed nicely to our funding diversification and optimization of deposit levels and costs. At the end of the first quarter, we reached $4.6 billion in Citizens Access deposits. Year-over-year, our asset yield expanded 49 basis points, reflecting the benefit of higher rates and the impact of our BSO initiatives. Our total cost of funds was up 48 basis points, reflecting a shift toward a more balanced mix of long-term and short-term funding and higher rates.
Next, let's move to Page 11 and cover credit, which continues to look quite good with the continued mix shift toward higher quality, lower risk retail loans and a relatively stable risk profile in our commercial book. The non-performing loan ratio improved to 66 basis points of loans this quarter down from 78 basis points a year ago. The net charge off rate of 31 basis points for the first quarter was relatively stable linked quarter and up modestly year-over-year from relatively low levels.
Overall, we feel good about the credit metrics and trends in the book including a downward shift in criticized asset levels. Provision for credit losses of $85 million was relatively stable with prior quarter and prior year levels. Our allowance for loans, coverage ratio remains relatively stable and in the quarter at 1.06%. And as we increase the mix of higher quality retail portfolios in our overall loan book. Then the NPL coverage ratio improved to 160% one as we saw improvement in NPLs and runoff on the non-core portfolio.
On Page 12, we maintained our strong capital and liquidity positions ending the quarter with a CET1 ratio of 10.5% which came down from 10.6% in the fourth quarter. Also this quarter we repurchased $200 million of common stock and returned a total of $349 million to common shareholders including dividends. Our plan glide path to reduce our CET1 ratio remains on track and we remain confident in our ability to drive improving finance -- financial performance and attractive returns to shareholders. Our current plan is to announce our buyback plans later in the second quarter. As a broad comment, we expect to meet expectations.
On Page 13, I want to highlight a few exciting things that are happening with our enterprisewide initiative. As we work on running the Bank better and improving our customer experience, we've launched a new digital mortgage -- application in home buying platforms that we are very excited about as it will drive cost efficiencies and an improved customer experience. Given our strong focus on strengthening our advice (ph) based model and consumer we recently opened a new banking and wealth center in downtown Boston. This approach allows us to deliver tailored advice, ideas and solutions to help our clients with all of their banking and investment needs.
We are full steam ahead on the integration of Clarfeld which is progressing ahead of schedule. We continue to gain traction on our merchant partnership platform where we recently signed agreements with several new partners, including ADT which should be announced later in Q2. In commercial we continue with the buildout of our Treasury Solutions business as we begin piling -- we began piloting accessOPTIMA, our new cash management platform which offers clients a comprehensive suite of online cash management resources and real time mobile capabilities.
We also launched real time payments to make customer payments more efficient and we have partnered with Worldpay to expand our international payment capabilities. These are just the latest examples of the significant investment, Citizens is making in the commercial banking technology and solutions in order to add -- in order to meet and exceed the ever changing financial management needs of our clients. Finally, we continue to exceed expectations in our TOP programs where we have now increased the expected benefit from our TOP five program by about $5 million with an expect -- estimated benefit in the range of $95 million to $105 million.
Our outlook for the second quarter is on Page 14, and it reflects continued momentum in both our top and bottom line results. We expect our linked quarter average loans to be up approximately 50 basis points and we are considering selling some loans in the quarters -- quarter as we seek to redeploy capital under our BSO initiative. We also expect net interest margins to be stable to down slightly due to continued, but decelerating deposit repricing that will abate over the back half of the year. The NIM should bottom out in the second quarter and gradually rise in the second half of the year, given less deposit pressure and the benefit of fixed loan and securities repricing at higher rates along with further balance sheet optimization impacts.
In non-interest income, we are expecting to see growth in the mid single-digits range given continuing strength in commercial and a seasonal uptick in consumer. We expect non-interest expense to be flat to up 1% as seasonal decreases are offset by higher revenue related expenses. We also continue to expect to deliver positive operating leverage and further efficiency ratio improvement. Additionally, we expect provision expense to be in the range of $95 million to $105 million. And finally, we expect our CET1 ratio to be broadly stable.
Overall, we expect our full year results to be broadly in line with our overall guidance. But there will be puts and takes with modestly lower net interest income offset by better fee income and expense performance. Also in response to the rapidly changing environment and a little less tailwind from rising rates, we've been doing some early -- work on a transformational expense program designed to boost efficiency and effectiveness.
This will provide additional capacity to invest more heavily in revenue producing capabilities while ensuring that we maintain strong financial performance into the future. Stay tuned for more details on our second quarter call. To sum up on Page 15, our results this quarter demonstrate our continuing strong performance as we execute against our strategic initiatives, carefully manage our expense base and improve how we run the Bank to drive underlying revenue growth.
Let me turn it back to Bruce.
Bruce Van Saun -- Chairman and Chief Executive Officer
Okay. Thanks very much, John. Brad, I think it's time to open it up for some questions.
Questions and Answers:
Operator
Thank you, Mr. Van Saun. We're now ready for the Q&A portion of the call. (Operator Instructions) And our first question in the queue will come from the line of John Pancari with Evercore. Please go ahead.
John Pancari -- Evercore ISI -- Analyst
Good morning. Just looking to get a little bit more color on the deposit efforts this quarter, in what areas, what types of deposits for you pushing, was there any broad-based increase in state of rate and then what's your outlook there. Is there a continued push beyond your existing national platform that you're going to continue to push the product and therefore deposit rates higher? Thanks.
John F. Woods -- Chief Financial Officer
Yeah, John how are you doing. It's John here. I'll go ahead and comment on that. So average deposit -- total deposits were up very strongly this quarter. We were very pleased to see the take up, it was driven primarily by term and savings. Those are the two drivers. I think we saw some good performance in the DDA area as well we were making lot -- lots of investments in that play -- in that space. So year-over-year DDA was relatively flat. We're very pleased with that. We had a strong 2018 and we look to continue that momentum going forward.
Citizens Access had an excellent quarter. That'll continue into the future. I'd say that strong deposit growth really drove the LDR down to around the 95% level as you heard earlier. I think looking forward, I think you could see that LDR level staying relatively stable into the second quarter and continuing to see growth looking forward in the term and savings space. But I think big picture, a big deceleration, I would say in interest-bearing deposit costs, the further where you get from the Fed rise in December is going to see that deceleration in the second quarter to where that solidifies in H2 which connects back to our NIM guide which we'll look to increase in the latter -- later part of the year.
Bruce Van Saun -- Chairman and Chief Executive Officer
I would just add a little color there is that, there's broader efforts just with the Access -- Citizens Access in and of itself is a huge success story. But on commercial, we've been investing in certain areas where we think we can gain some real traction in picking up a natural share of deposits with our pre-existing customers where we maybe didn't have the capabilities we talked about escrow, we talked about bankruptcy. So we're building those now, those don't turn on a dime. They build gradually with time. So we're pleased with how that's developing.
And then on the core consumer side, continuing to invest in data analytics and being a little sharper in our offerings and targeting them to different segments of the market, particularly mass affluent and affluent we're seeing traction there. So pretty good performance across the Board and very pleased the LDRs at a lower level now which gives us a lot of flexibility going forward.
John Pancari -- Evercore ISI -- Analyst
Got it. Thanks, Bruce. And then, separately just on what you just mentioned in your prepared remarks, transformational expense program that you're looking at. I know you said you'd be prepared to give us details in -- on the second quarter call, but how -- just in general, how do you view it being transformational and using that phrase I mean, is it more about how you're looking at your branches? Or is it a longer-term profitability change in terms of where you're operating on an efficiency ratio basis just a little bit more color there on how you view it as transformational? Thanks.
Bruce Van Saun -- Chairman and Chief Executive Officer
Sure. So I think what we've done for the five years prior has been really just work on ideas and coming up with deployment of different strategies around organizational design, standard layers, automating starting to look at process automation and robotics. I think what we're and also some branch thinning and the like. I think what we're after in this go around is something that's a little broader in scope. And so really deploying new technologies, artificial intelligence and the like to new strategies for technology development. So there's a lot around technology and operations and the costs of how we're running things. There's a lot in looking at processes end-to-end in terms of the transactions that we have customer-facing transactions and help on to improve those both in terms of their cost efficiency and their effectiveness and customer experience. So we have a fair amount there.
So it's a broader look. And typically in the TOP programs up to now, we'd look for very quick payback. So we didn't look at having significant technology investments and we wanted things that would pay back within 18 months. And so in this version, we'll look at things a little more broader that might require some technology and might pay back over two years or three years. But I do think we'll be able to move the needle on the efficiency ratio with the payback from these efforts.
So we're quite excited, it's early days. We're working through some ideas. The thing I would also emphasize here, John is that, we want to hear that with efforts that are going on for finding new revenue growth and finding different (technical difficulty) serve customers to create new products and services potentially have been disruptive. There's a huge effort that we're undertaking now to really focus on how can we differentiate ourselves and similar to how we grew the education refinance business or redo the affluent relationship in that having a very strong point of sale financing offering.
We want to drive forward, so we can have more revenue growth than our peer set and actually keep the top line going and then create a virtuous circle where we've got a good top line, we can afford the investment, et cetera. So it's really a one two punch. So part of it is, let's really go after the cost base and transformational. And some of that will drop to the bottom line, but some of that will help fund these investments to really drive future revenue growth.
John Pancari -- Evercore ISI -- Analyst
Got it. Okay. Thank you.
Bruce Van Saun -- Chairman and Chief Executive Officer
Yeah.
Operator
And our next question will come from Saul Martinez with UBS. Please go ahead.
Saul Martinez -- UBS -- Analyst
Hey, guys. Good morning. A couple of questions. First, can you give a little surprise with the outlook that you've actually see NIMs ratcheting up a bit in the second half? And you gave some broad strokes as to why that if you could, John give us a little bit more detail on what's underlying -- what kind of assumptions you are underlying that outlook I assume you still expect some -- deposit costs creep. How much of it's being driven by balance sheet optimization? What kind of balance sheet optimization? And also were you expecting securities yield to gravitate up as well in that assumption?
John F. Woods -- Chief Financial Officer
Yeah. So I'll jump on on that. So the -- I think that if I take them in two pieces, I mean I think if you look at what we expect in 2Q and then how those forces expect to unfold over the second half of the year. I think we're as we mentioned, stable to down slightly in 2Q. The real driver there is rates. I mean I think when you look at where LIBOR is expected to be in 2Q, all of the other drivers which I'll cover in a second basically offset and you're left with short-term rates being potentially down a couple of basis points which has an impact on our floating loan portfolio.
The other drivers that all seemed to offset or expected to offset in the second quarter is all of those front book, back book with dynamics. So you've got loan front book -- and loan and securities front book backlog which is positive in the second -- it's positive in the first quarter, it's positive in the second quarter, will be positive for the rest of the year although possibly diminishing a bit as -- if run rates stay where they are. But that's been offsetting the front book, back book dynamic on the deposit side.
And so I think you'll see as I mentioned in my remarks, a significant abatement of deposit costs increases, the farther away you get from the Fed rate rise in December. And so then, so a combination of that front book back book plus our balance sheet optimization initiatives is offsetting those other forces on the deposit side in 2Q and all you're left with is rates. So when you get out of the second quarter as rates stabilize, both on the short and the long end, you see deposit costs stabilizing and therefore you're left with front book, back book on our fixed portfolio driving some uplift. And I think those are the dynamics that we see at the moment in terms of the back half of 2019.
Saul Martinez -- UBS -- Analyst
Okay. So even if rates remain where they're at long end and rates remain where they're at, the Fed funds remain where it's at. You still have positive new money yields over portfolio yields on your loan and your securities approach right now?
John F. Woods -- Chief Financial Officer
We do. So in the first quarter that was 80 basis points or so in terms of that net difference in the first quarter for investments as an example, variety of our loan book are you could call it when you're ranging from 25 basis points all the way up to 150 basis points, but basically almost every category has a positive front book, back book in the -- across all of our earning assets. And as if rates stay where they are it's possible that will shrink a bit over time but at all and maybe a portfolio or two will eventually convert to something more neutral as you get later in the year but all in our overall portfolio has a positive front book dynamic. 50% of our loans are fixed and so that momentum continues through the rest of the year as a positive dynamic.
Saul Martinez -- UBS -- Analyst
Got it. That's helpful. If I could change gears on credit. I think John in various forms recently and in the past you've talked about the challenging environment in the casual dining space and can you just comment a little bit about where -- what you're seeing there. Is that a concern and what the size of the book is and just -- then just more broadly what you're seeing in terms of credit and what drove the uptick in your loan loss provisioning guidance for 2Q, is that just your -- just normal -- the fact that it is so low and you're seeing some normal seasoning on the book?
John F. Woods -- Chief Financial Officer
So it's -- I'll mention casual dining it's a relatively small portion of the book and it's actually coming down a little bit. So we're working through that which we flagged a couple of quarters ago. We've really slowed down, if not see certain segments of our franchisee and restaurant origination. So we don't see large lost content that's not reflected in provisions already. So we feel like we've got our hands around that book and I'll just mention we had a charge off this quarter which was in our real estate book which is -- was reasonably significant. It's a kind of 2013 vintage origination, so it's quite old and we've been working it through our workout groups for about four years or five years now. So it kind of went a little sideways. So we charged it off this quarter and almost...
Bruce Van Saun -- Chairman and Chief Executive Officer
It's really idiosyncratic too, John I would add Bruce. But I think that was one that was a unique bubble wrap and it kind of cornered over and so we don't see any read across anything else in commercial real estate.
John F. Woods -- Chief Financial Officer
And -- I agree, and that's true of the overall book. What we've seen as problems over the last five quarters or six quarters have been very idiosyncratic. We feel very good about the overall book and the condition of the economy and what we're seeing in terms of performance by our underlying credits.
Bruce Van Saun -- Chairman and Chief Executive Officer
I would also add that thrift class came down again...
John F. Woods -- Chief Financial Officer
And all the credit ratios are very historically low and we don't see those changing.
Bruce Van Saun -- Chairman and Chief Executive Officer
Yeah.
John F. Woods -- Chief Financial Officer
And I'd say just the outlook for 2Q being up a bit I mean I think we've historically had a significant amount of recoveries that come through the book and credit has been excellent. And so -- and the outlook there remains so. But possibly recoveries moderating a bit and naturally. Yeah -- exactly. So that's really the reason for that.
Saul Martinez -- UBS -- Analyst
Do you disclose the size of the casual dining book?
John F. Woods -- Chief Financial Officer
No. No I don't think we do.
Saul Martinez -- UBS -- Analyst
Okay. All right. Fair enough. Thanks a lot.
Operator
Next question will come from Ken Zerbe with Morgan Stanley. Please go ahead.
Kenneth Zerbe -- Morgan Stanley -- Analyst
Okay, thanks. Good morning. I was actually wondering can you just talk just a little bit how your plans around your balance sheet optimization are changing now that the Fed may be done raising rates this year?
John F. Woods -- Chief Financial Officer
Yeah I'll go ahead and start on that. I'd say I'm not sure they change very much. I mean we've been talking about the broad strokes of that program primarily on the deposit side where you would focus on all of the things you've heard from Bruce earlier. In commercial, news -- new interesting, I think ways to fund our loan growth in the escrow space and in consumer a lot of the data analytics and efforts around customer experience that are driving DDA take up. So I mean I think all of that remains just as important in a world where the Fed's not raising rates as it is in a world where they are. So that continues in that direction.
On the asset side, similar. I mean when you look at our rotation into, we call it, the asset categories that have really solved this return profiles for us like such a student or unsecured or an investments we want to make in our commercial business to get more swings at the bad with respect to our customers. All of that is not meaningfully impacted by the Fed going on hold. I think that continues and it's really something you would do with or without, I think the best.
Bruce Van Saun -- Chairman and Chief Executive Officer
I'd say that the one thing there where we might be pivoting a little bit is the mortgage growth that we've had. We'd like to taper that off a little bit and naturally we could consider some sales of mortgages that we have on the balance sheet. So back in a low rate environment putting 30-year fixed on your books is a great trade.
And so we think we can offset that. We've been talking for a while about how we're going to leverage our point of sale offering to some new partners what are the things we're quite pleased about is that we've now signed several important new partners, including one which we can mention today is (inaudible) the press releases will be out shortly on that. But there's several other significant ones that will come out over the next several weeks.
John F. Woods -- Chief Financial Officer
We got a good -- just to say we've got a very good pipeline. We felt like we built a very unique value proposition with the affluent program and there's tremendous interest in the marketplace and we've got a really strong pipeline and I think there'll be more news after ADT and really excited about the ADT.
Kenneth Zerbe -- Morgan Stanley -- Analyst
Got it. Okay, perfect. And then your capital markets business held up really well this quarter, especially relative to peers. Looks like some of that was due to bond underwriting. Can you just remind us how your capital markets business or the business mix may differ from some of your peers?
John F. Woods -- Chief Financial Officer
So why don't I take that. So first of all we really have a very small equity business. So if you broadly talk about capital markets, it's equity we do a little bit of equity in the REIT space with a partner who does the equity underwriting. Our business is really three-fold. It's bond underwriting with a -- with both high yield and investment grade. It's syndicated financing which is largely leveraged syndicated financing aimed at the mid-mark -- market sponsor community. And thirdly, it's M&A. So this quarter we're benefited from bond underwriting particularly high yield bond underwriting as things recovered from the weak market last year. And there were some pent up demand. So a lot of our clients issued in the high yield market and then we saw Western Reserve in particular kick in and we had a quite a strong M&A quarter and that we expect to continue through the end of the year both with Western Reserve and with the Bowstring which was our latest acquisition.
And the way I think about M&A is, it took two quarters or three quarters to have the capabilities on our platform to begin to see deal origination and so our win rates are very high on the M&A side. Our client base is very active. We did have quite a weak quarter in our syndicated financing business and that should be bouncing back as we go through the balance of the year. So what I like about the mix of our capital markets businesses is a far more diversified than it was in terms of different fee streams a couple of quarters or a couple of years ago. So we're getting nice degrees of offset based on different markets being active.
Bruce Van Saun -- Chairman and Chief Executive Officer
Yeah. And that's what I would also add to that Bruce -- Ken is, I think that what John and his team have been able to do very effectively is marry the solution set by having our coverage officers work very closely with these enhanced product capabilities. And so when we go out and call on clients, we show up with value added ideas we're able to with a jump walls against very significant competition out there. We do a really good job of that. We start to see the traction, we hit records of capital markets fees, we hit records FX and interest rates. So coming up with good ideas on how to hit risks is also something that I think we got huge traction and so very pleased to see the maturation of a model and a very strong team approach in terms of how we're covering points.
John F. Woods -- Chief Financial Officer
I'll just add to that, Ken. We're very disciplined as we add new clients around capital deployment, against opportunities where we will -- where we do think they'll be good cross-sell. So I think our new business process of several years now is beginning to yield flow based on where we've deployed capital and added clients on a net basis.
Kenneth Zerbe -- Morgan Stanley -- Analyst
All right. Perfect. Thank you very much.
Operator
And our next question will come from Erika Najarian from Bank of America.
Erika Najarian -- Bank of America Merrill Lynch -- Analyst
Hi, good morning. Just on a follow up question on the comments in capital return. I think there was some confusion on how to treat your press when investors were putting in your financials in the Fed template? And John, just wanted to clarify you said that capital return would likely meet expectations. I have a consensus of about $2.15 billion right now for capital return. Is that the bar that you're looking to potentially meet?
John F. Woods -- Chief Financial Officer
Without necessarily commenting on a particular number, we've seen a range of estimates externally where I think we're broadly in line with where the market expects our buyback capacity to be. We have that flexibility, I mean the Fed template as you know where category forge for a firm where we're subject to the Fed template this year. We overall have a glide path that Fed template allows us to continue to execute against and we have a dividend return expectation over time of 35% to 40%. We talked about our expectation of getting the CET1 ratio down to about 10.2% by the end of the year. So I think the main message is number one, the Fed template allows us the flexibility to execute against what we want to do. And we think that we'll deliver against -- deliver broadly against what the market expects for buybacks in the window.
Bruce Van Saun -- Chairman and Chief Executive Officer
And so that they tend to projection for the CET1 that year end is still in projection.
Erika Najarian -- Bank of America Merrill Lynch -- Analyst
Got it. And just to follow up, Bruce in terms of the TOP six program that you're looking to now and as we think about the potential impact, right now with the consensus is expecting something like a 57% efficiency ratio for your Company this year, that's about in line with peers. Should we expect that TOP six could bring you to a position that's better than peers let's say in the mid 50s from a natural efficiency standpoint?
Bruce Van Saun -- Chairman and Chief Executive Officer
Yeah. So we have a stated medium-term objective to bring that down to 54%. And so I think TOP six like program is going to be required to accomplish that. So I do think it's important particularly if the Fed is done raising rates and maybe on hold for a while here you get less NIM tailwinds than we've had previously. So I think you have to go back and look at what are some of the offsets that you can deliver certainly control of your expense base is one, but doing it smartly, doing it in ways that actually provide the funding capacity is still play offense. So that's what we're all about and (technical difficulty)
Ellen A. Taylor -- Head, Investor Relations
Operator, can you mute that please?
Operator
Okay. Please go ahead.
Bruce Van Saun -- Chairman and Chief Executive Officer
Yeah, and another area that we're really focused on is the growth in the fee based businesses where I think we have gotten off to a great start on the commercial side in Q1 and the outlook remained strong for the year. We got off to a little bit of a rough start on the consumer side, but the outlook for Q2 is quite good on the consumer side. So I'd expect to see some bounce back in mortgage and then also bounce back in wealth. So things move around. There's puts and takes. But I think the expense base is going to be important and also driving that -- the growth.
Operator
And our next question in queue will come from Ken Usdin with Jefferies. Please go ahead.
Kenneth Usdin -- Jefferies -- Analyst
Hi. Good morning, guys. On a follow-up on the capital structure question, nice to hear that guide plan to 10.2% is intact. And your long-term target you talked about in January to get to 10 CET1. Some peers are distinct. We are talking about much lower than that at this point and then given the tailoring and the category for that you just talked about how do you evaluate? At what point you might be able to run the Company even lower than 10? And then how do you also evaluate the choice of how you choose to get there, was it just a buyback or just leaving room for balance sheet growth? Thanks guys.
Bruce Van Saun -- Chairman and Chief Executive Officer
Sure. So I'll go first. John you can chime in. But I think we're gradually bringing it down to 10 and we don't really face a decision node until we get there. And then I think we need to look at a number of considerations, including where our peers was the regulatory and rating agency comfort with operating at a lower number, including our own importantly comfort with being there.
I think there's no reason structurally or from a business standpoint that we should maintain a ratio that's above peers are a kind of business risk profile, certainly is in line with peers in fact, I think we're slightly on the prudent size. If you look at how we model the distressed scenarios, we come out quite robust and even in the Fed modeling certainly on credit losses were medium and slightly better than medium.
So I think we'll have that flexibility. When we think about how we deploy our capital, obviously if we can deploy it smart -- smartly to further organic growth, that's kind of our mission one. So if we can get loan growth then we can do some of these accretive small acquisitions that run in our capabilities so we can get more from our relationships on a commercial side and the consumer side. Those are things that we're continuing to put on the list ahead of buybacks I think, frankly. But again, if we certainly don't want to add capital lying around, so we'll try to keep that ratio sharp and relative to inline of peers.
John F. Woods -- Chief Financial Officer
Yeah I mean I would just say just to emphasize the last point I think given where we are in our life cycle, I think of the opportunities to deploy capital organically and in strategic initiatives including fee based bolt-ons that we've been doing remain and into the future, so that's job one is to put that capital to work on behalf of our shareholders in an accretive way.
And then we monitor all the other sources and uses -- the outlook for earnings, et cetera organic loan growth and then we take it from there. I think we also have another lever which is our capital stack is a little bit more oriented toward CET1 and some others and most peers have more preferreds outstanding than we do. So that's another level we can look at over time that provides benefits as well. So just some really solid -- strength in the capital positioning.
Bruce Van Saun -- Chairman and Chief Executive Officer
It gives us a lot of flexibility.
John F. Woods -- Chief Financial Officer
Yeah.
Kenneth Usdin -- Jefferies -- Analyst
Yeah, thanks and my follow up on that, John you just hit on it was going to be just you did -- have done a couple of those preferreds to start to move the capital stack toward that more efficient place you're only about halfway there, so is that something we should expect over time as you continue to bring CET1 down, we logically see that preferred stack that went underneath it?
John F. Woods -- Chief Financial Officer
Yeah I think that's logical over time. I mean we're not going to commit to an exact execution date on that. But I mean I think that we've done this in the right way. I mean as our ROTCE has improved over the years it becomes much more appropriate to consider the repositioning of the capital stack such that if preferred -- the cost of preferreds are attractive and they are versus ROTCE and we find a good execution point, we'll consider that but that's a nice bit of flexibility as you heard earlier in terms of our ability to reallocate and remix our capital profile.
Kenneth Usdin -- Jefferies -- Analyst
Okay. Got it. Thanks guys. Appreciate it.
Operator
And our next question will come from Peter Winter with Wedbush Securities. Please go ahead.
Peter Winter -- Wedbush Securities -- Analyst
Good morning. In the prepared remarks you mentioned that net interest income was coming in a little bit lower for the full year. Is that mostly driven by less margin expansion than you originally thought?
Bruce Van Saun -- Chairman and Chief Executive Officer
Yeah. So we broadly reaffirmed the full year outlook. And I think whenever you start moving through the year there's going to be some modest puts and takes. I think when you look at NII, the volume side of that equation is solid. So I think we're still looking to be solidly in the long road range that we set out to achieve. I think that NIM given the flatness of the curve and some of what we've experienced here early on in the year will be -- maybe a couple basis points lower than what we anticipate is still positive in terms of NIM for the year -- year-on-year but maybe there's a little leakage there. I'd say where we'll make that up is, I think a more robust view on fees and a better performance on expenses. So our ability here to protect PPNR, I think is pretty solid. And then we've had beats in the past couple of years on credit. So we'll see how that plays out. I feel pretty good right now where we sit in terms of the credit outlook. So that gives us the confidence that broadly reaffirm the outlook, Peter.
Peter Winter -- Wedbush Securities -- Analyst
Thanks, Bruce. And then just on credit, I'm wondering can you make any comments on how you're thinking about CSEL (ph)?
John F. Woods -- Chief Financial Officer
Yeah, I'll go ahead and cover that. I mean, as you saw we, the regional bank had some commentary that we were engaging with regulators and the FAS beyond and just more recently that has been adjudicated to result in moving forward full steam ahead with executing on CSEL. We never really stopped our programs. We are launching data related pilots for the pipes and plumbing in the first quarter here and full dress rehearsals as you get into the second and third quarter on CSEL just from a process standpoint.
Later in the year, we'll have some more views about what that will do and how that might impact the day one capital impact of adopting CSEL. But in general as you know longer dated loans will have a bigger impact than some other categories. We do think that CSEL is pro-cyclical which is not exactly what we think is the right way to portray exposures going into to downturns. And it's very sensitive to your outlook of the economy going forward. So we're on track for our internal program -- we'll talk to you a little -- talk to you more about this later in the year in terms of the impacts but we do think that our capital glide path and our ability to execute against that is not at risk as a result of CSEL.
Peter Winter -- Wedbush Securities -- Analyst
Thanks very much.
Operator
And our next question in queue comes from the line of Gerard Cassidy with RBC. Please go ahead.
Gerard Cassidy -- RBC Capital Markets -- Analyst
Thank you. Good morning Bruce and John.
Bruce Van Saun -- Chairman and Chief Executive Officer
Hey.
John F. Woods -- Chief Financial Officer
Good morning.
Gerard Cassidy -- RBC Capital Markets -- Analyst
Can you guys share with us clearly the direct -- the digital deposit program has gathered a good amount of deposits. Can you share with us, are you hoping to develop deeper relationships with those customers aside from just the savings product that they're using right now. And if so, are there going to be some metrics that we can look at as outsiders to see the success of deepening those relationships?
Bruce Van Saun -- Chairman and Chief Executive Officer
So let me start, Bruce and then I'll flip it over to Brad for more color. But I would have to say that this has been a tremendous success. This development of Citizens Access launch. I described in all of these goals. So what's our goal today is gathering deposits in this environment, gathering new customers. We have $4.6 billion in deposits. We have over 60,000 new households that are customers in Citizens Bank. And we have developed digital capabilities and the ability to use data that I think puts us at the vanguard of our peer group and that's cold as well.
So a lot of real positives coming out of this. I think that the next phase now that this is up and running, we certainly want to fine-tune the offerings to make sure we're gathering those departments cost effectively while meeting customer expectations. But if you have 60,000 customers what else can you do with them. And so that's really a phase two project that we've kicked off. And if you think about it, through our behalf roughly 60% of our consumer loan products today are digitally originated.
So there's some possibility. There's a -- potential. We have a digital robot advisory service that we can also marry with that ability to Skype a person with a little break here. So there's a hybrid, there's a pure digital and there's a hybrid person's last digital offering that also could work through that channel. So there's some really interesting things to think about. But I think it's going to take us a while to actually bring that to market now. Turn it over to Brad.
Brad L. Conner -- Vice Chairman, Consumer Banking
Yeah. Bruce, I think you covered it really well. There are some immediate things we're doing to enhance the platform, including the fact that we're adding trust accounts which we launched without trust accounts. But we see tremendous opportunity. It's a perfect client base for us. It hits right in our target customer segment of mass affluent and affluent customers, digitally savvy. As you mentioned, we built specify which is one of the first digital advisory capabilities in the market. We think that's a perfect complement to this customer base and then several lending opportunities and lending products. So we're working on all of those and what are the next steps for continuing to enhance the relationships.
Gerard Cassidy -- RBC Capital Markets -- Analyst
Very good. And then pivoting to the loan growth which again was strong for the quarter as you guys pointed out. And I think you guys highlighted that in the commercial real estate area, you saw some growth in the office and multi-family. Can you give us some color on the geography where are you guys seeing the best growth geographically in your footprint and outside the footprint?
John F. Woods -- Chief Financial Officer
I think it's -- we were -- our real estate business is national. And it's really, I would say it moves quarter-to-quarter. So I'll give you two examples of expansion we've actually moved people into Texas and -- people into Los Angeles, where we have seen growth over the past few quarters so that's both be active on the existing book of business but also do some origination. But it's really across the southeast and growth areas of the country where we're seeing the highest levels of growth.
I'd say our real estate business in general, the growth will slow down over the balance of the year and that's strategic. Because we're focusing on the better end of the opportunity set that we see. So we have to originate a fair amount just to replace what's on our books already, but I just think you should expect to see our real estate growth on a gross basis be a little slower than it's been in the past from a strategic standpoint.
Bruce Van Saun -- Chairman and Chief Executive Officer
And I would also say there's still attractive opportunities in the footprint in Boston and the Court District for example. So it's a combination of things that are in the traditional footprints from these growth markets as I mentioned. And when it comes to office, we typically focus on owner occupied. So there's low risk with the type of projects that we're financing.
John F. Woods -- Chief Financial Officer
And what's flat-lining is really multi-family and anything retail. We're really not growing those with any kind of significance.
Gerard Cassidy -- RBC Capital Markets -- Analyst
Thank you.
Operator
And our next question here will come from Marty Mosby with Vining Sparks. Please go ahead.
Marlin Mosby -- Vining Sparks -- Analyst
Thanks for taking the questions. Got kind of a rapid fire here of about three or four questions. Your mortgage hedging this quarter was a negative. Was that just unusual some basis risk in there? Or you just not as hedged or as a percent of the portfolio? Or you make any adjustment? So is this going to be unusual? Or should this be something we expect as rates go up and down have positives and negatives?
John F. Woods -- Chief Financial Officer
Yeah, Marlin. I'll take that. This is John. So I mean I think that you're going to have when you have an asset of that -- of this size that is $600 million, $700 million depend upon we have a split between fair value and low comp. But it's a large asset, it's a complex asset to hedge. And you're going to have some variability from quarter-to-quarter. Last quarter, we had a $2 million net positive, MSR valuation, net of hedge. This quarter we had $2 million negative, MSR valuation net of hedge. So quarter-over-quarter, that's $4 million. There were other rate impacts as well. When you look at outside of just the straight hedging piece, you also have to estimate what your amortization is, just in the main servicing P&L. And we had an increase of $7 million from $25 million to 30 -- $32 million in amortization that was largely rate related as well. So all in, quarter-over-quarter you had a $11 million of largely rate-driven, MSR related valuation and impacts. So hopefully that gives you some contexts.
Marlin Mosby -- Vining Sparks -- Analyst
It helps. And I really appreciate your guidance, so this is kind of a statement as well as a question. When you talked about the front book versus the back book. That's really what we've been trying to outline for investors as the fact that you have this historical spread between what's still in the market even though rates have come down versus what's on the books just because rates were still low for so long. And that over time that's kind of a grind up as you kind of just see that coming through. And in relation to that you mentioned some balance sheet flexibility, I just didn't know if that was liquidity-wise because your loan to deposit ratio would come down or there were some other flexibility that you were talking about there?
John F. Woods -- Chief Financial Officer
Yeah I think that we have some flexibility primarily due to the fact that we had a really strong deposit quarter after several prior quarters that were strong. But our first quarter was particularly strong and led the LDRs come down to around 95%, I mean that provides some flexibility. We have the -- we've demonstrated the ability to grow deposits at least as quickly as we grow loans.
When you think about the -- is a good example, when you think about the big impact that growth has on the increase in interest-bearing deposit costs, ours was 16 basis points in the quarter, approximately half of that was driven by just deposit growth. So if you get ahead of things a little bit then and you can fund your growth without necessarily having to grow a lot in future quarters, that has a beneficial impact and underpinning of net interest margin going forward.
Bruce Van Saun -- Chairman and Chief Executive Officer
The other thing so, John's describing the flexibility on the deposit side that we have, we had some nice flexibility on the asset side as well. So we've been well positioned to have an origination and both on the commercial side and the consumer side that is pretty robust. That gives us the wherewithal to then look into the back book and make asset sales and we made approximately $300 million of sales in the first quarter. And so we can look to do that as we go through the year and still report net loan growth. So that's all part of BSA, BSR it's working for us on the deposit side but it's also working for us on the assets side.
Marlin Mosby -- Vining Sparks -- Analyst
And then just two bigger picture questions. You've been the easiest Bank to kind of estimate was going to beat market consensus every quarter. Just wanted to get you to kind of think about why and this maybe highlight for us, because you all do ask for our models every quarter So I know you're tracking what everybody is putting out there. But what are the earnings surprises that people just aren't catching up to. And then, Bruce I just want you to give us a little bit of a thought given some of the other transformational let's call mergers or placements of banks in the country. How does Citizens fit into this competitive landscape? I mean, how do you see the Bank being able to evolve over the last five years really talking about how you're competing a lot with everybody around you, but just wanted to kind of get your thought on how you fit in there?
Bruce Van Saun -- Chairman and Chief Executive Officer
Yeah, sure. So with respect to the consistent track record of being able to beat pretty much every quarter that we've been a public Company, I just think it's a reflection of our very strong focus on execution and we're all I think very aligned on where we're trying to take the Bank and what the key drivers of the successful turnaround were and what the next phase is going to require to become the top performing bank. So I think we've got great people, great leadership team and we had good alignment through the organization that people know is what expected of them. They're empowered and then we hold them accountable. And they've been doing a great job. So hats off to our colleagues here at Citizens.
With respect to where we fit into the landscape, I do think we have really come a long way from where we started. So foreign ownership, our parent had a bunch of difficulties and left us with a strong potential franchise, but had accumulated some baggage, some lack of investment in key areas like technology and our people program and our risk capabilities that builds business model wasn't fully built out to really serve customers on an integrated way both on the commercial side and the consumer side. Balance sheet had shrunk -- to a position where our profitability was really emasculated.
So we had a lot of work to do and I think we've now certainly made our way back into the fact and in many cases, I feel that we're doing better than our results indicate and certainly better than our stock price would indicate. But I'll leave that as that for another day. But certainly on the commercial side I'm so pleased that what Don and his folks have put together that level of talent that we have, people who worked in big banks who are covering the middle market and the mid corporate clients so well and then we can go out and we can lead deals. We can have a Money Center Banks on the right of us. We can go out and compete for an interest rate hedge and win it against Money Center Banks which we did several times in the first quarter. We've got really, really good talent and we're well positioned. And then on the consumer side, some of the things that Brad talked about the Citizens Access and our FinTech partnerships and thinking about end-to-end customer experiences and the customer satisfaction moving up nicely. I think we're doing a really good job there too.
So I think we have a strategy and a capability to continue to drive this Company forward and become a great thing. But I certainly would have to say, as you look around the landscape and people who are making stale arguments, you always keep an open mind about those things if there's opportunities to benefit our shareholders, we have an open mind toward that. But I think the more important news is that, we're well positioned to continue on the path that we're on today.
Marlin Mosby -- Vining Sparks -- Analyst
Thanks.
Bruce Van Saun -- Chairman and Chief Executive Officer
Okay.
Operator
And that does conclude the -- questions for today.
Bruce Van Saun -- Chairman and Chief Executive Officer
Okay. Well great. I know it's a busy morning for you all. You probably have to hop to do the next call, but certainly appreciate that devolving today. And we appreciate your interest and support. Have a great day.
Operator
Thank you. And that does conclude today's conference call. Thanks for your participation. You may now disconnect.
Duration: 66 minutes
Call participants:
Ellen A. Taylor -- Head, Investor Relations
Bruce Van Saun -- Chairman and Chief Executive Officer
John F. Woods -- Chief Financial Officer
John Pancari -- Evercore ISI -- Analyst
Saul Martinez -- UBS -- Analyst
Kenneth Zerbe -- Morgan Stanley -- Analyst
Erika Najarian -- Bank of America Merrill Lynch -- Analyst
Kenneth Usdin -- Jefferies -- Analyst
Peter Winter -- Wedbush Securities -- Analyst
Gerard Cassidy -- RBC Capital Markets -- Analyst
Brad L. Conner -- Vice Chairman, Consumer Banking
Marlin Mosby -- Vining Sparks -- Analyst
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