We’re around neutral now. So going becoming a bit more asset sensitivity over time is some of the underlying forces there that I would say are in place, and we’ll decide as the environment plays out, whether how and whether to moderate that. And again, the liquidity build is NII neutral. So it’s really not a driver. And it’s something that, again, at the NII guide of down 2% is really driven by basically having a — the ex liquidity build NIM decline is really the driver of that and it equates to the 2% that you’re seeing in the guide. So that’s the way to pull it all together for 4Q.
Operator: Your next question comes from the line of Matt Connor from Deutsche Bank.
Matthew O’Connor : A lot of talk earlier in the call in terms of net interest income trajectory for next year and all the puts and takes. But I just wanted to circle back on that. In a stable rate environment to kind of higher for longer when and around what level does the interest income dollars start to bottom?
John Woods: Yes, I mean we’re still working through our 2024 outlook, right? So we’re going to be much more, I would say, transparent about what our expectations are for ’24 as you get into planning season here and completing that. And of course, we do that in January. With that said, we — broadly, as you look at the swap trajectory for us into ’24, we have a swap portfolio growing right around the time that the forwards would indicate the Fed would begin to cut. As a matter of fact, and as I mentioned earlier, there’s — you could actually see deviation around that. And we happen to have a view that that it’s likely that it will actually come in a little lower than where the forwards have it coming in at the end of ’24. So that will be a mitigant.
And as I mentioned, the Non-Core rundown is a mitigant. And Private Bank as that grows is, of course, accretive. The other thing I’ll mention, I mean, if you get the on ’24 and you look at what’s happening in the ’25 through ’27 timeframes, it’s certainly more consistent with a more neutral Fed posture that would represent, regardless of what the transition is in ’24, that would represent a significant tailwind getting into ’25 through ’27, as you see the swap portfolio being more of a neutral impact to net interest margin and NII. And so working our way through ’24, we get some really nice tailwinds. And that’s just on the Acosta portfolio. We also have a locked in and baked in tailwind from the terminated swaps which run off, as you can see on our slide, in a significant way over ’25 to ’27.
So I would call ’24 a transition year while the Fed normalizes rates and our balance sheet optimization takes hold with Non-Core and creates a lot of momentum as you look out into ’25 and beyond.
Bruce Van Saun: Yes. I would just add a little color here, Matt, to you and Erika’s question. I think Erika was looking for John to say, are you still holding a 3% in the fourth quarter this year and the fourth quarter next year. I think the reluctance to draw a line in the sand on 3% is the amount of the liquidity build and that — some of the cards from the regulators on new liquidity regulations aren’t turned over yet. So just putting that aside, if you just say that’s a bit of an unknown — do we still have an ambition to have our exit rate at the end of ’23 be roughly the exit rate at the end of ’24. Yes, that would still be the ambition. We have to go through the work, as John said, to go through kind of the budget process for next year, but that’s still where we’d be hoping to arrive.
Matthew O’Connor : And then just in terms of the impact of rate cuts versus higher for longer scenario, what’s — what does hire for longer do versus the rate cuts? Because it sounds like you’re still a little asset sensitive, but the roll-on of the swaps would obviously benefit from rate cuts, so what’s the net impact if rates are stable versus what the forward curve has for next year? Is it better or worse?
John Woods: Yes. I’d say that where we’re positioned, we’re right around neutral. A small increase in rates is actually positive to our platform. A large — we tend to calculate this stuff using the 100 basis point and 200 basis point gradual rises, we’re relatively neutral in those kinds of calculations, which you’ll see disclosures on in our 10-Q. But when it comes to just another hike, or — and those kinds of conversations, meaning we tend to — in those environments continue to make money and have a positive impact to NII. The other — so generally, the forward curve is favorable to us. I think we like the tracking of the forward curve. We start getting cuts at the end of ’24 and that allows the continued front book, back book.
We like the long end being more anchored a little higher. That helps, too, in terms of our originations on our fixed rate loan book. So again, and it also provides opportunities to later on lock in higher rates to the extent that, that’s desirable. So the forward curve is, I think, constructive for us, plus or minus is fine. I think large moves either way is where we would say it starts to kind of create potential headwinds. But other than that, we’re feeling — we would feel okay with it.
Matthew O’Connor : Okay. So to summarize, steeper is better as a good rule of thumb?
John Woods: I’d say forward curve is better and plus or minus is not going to move the needle very much. So having some cuts at a slow — I mean in general, over the long term, banks do better we’re maturity — were maturity intermediary, when rate — when we have an upward sloping yield curve. So the short rates are at 5.50. We think that it’s more constructive to see short rates around 3.00 to 3.50 over the long term. We also think it’s constructive to have a 10-year that’s north of 4% in that same environment. So therefore, a gradual decline from 5.50 down to about 3.00 to 3.50 over the next two years, we think it’s not only good for us, but good for the industry and allow us to get back to an upward sloping yield curve. And I think that, that’s the environment where we would be performing in a very good way.
That said, we pivot and manage to the extent that the rate environment migrates differently than that. But that’s the one that I would say works out the best for us and the industry as a whole.
Operator: Your next question comes from the line of Vivek Juneja from JPMorgan.
Vivek Juneja : I guess I have a couple of clarifications given all the discussions going on. John, when you said — let’s start with expenses. You talked about underlying expenses to be flat next year. But then you also said that includes Private Bank and Non-Core. Non-Core is not included in the way you define underlying expenses. So are you saying both underlying, which is core and reported expenses are both going to be flat next year?
John Woods: No, I’d say underlying expenses at the top of the house will be flat next year, ’24 versus ’23. Underlying includes Private Bank, it includes Non-Core overall CFG expenses will be flat in ’24 versus ’23.
Bruce Van Saun: Underlying does not exclude those things today, the back that includes those things.
