Bruce Van Saun: Yes. I would say part of it is just the philosophy of liking to have a strong balance sheet. And so I think 9.5% to 10% is a strong ratio. You’ve seen over time that we’ve originally had a target of 10% to 10.5%, and we’ve been kind of sliding that down as we — our profitability goes up. And I think the stakeholders gain more confidence that we have a good strategy, and we’re executing well. So it wouldn’t surprise me at some point where we start to manage down in that range. I think the time of 2023 today, we’re looking at a potential recession to be at the top end of that range makes sense. But once we get to the other side of that to start to move that down and maybe manage that closer to the bottom end of that range will provide more leverage.
And then at that point, I think we could step back and say, do we still need 9.5% to 10% or can we skinny that down a little bit? So I think that’s all in front of us, we thought at this point, given the dynamics around 2023, it wouldn’t make sense to actually move that target range down.
Unidentified Analyst: Okay. And just a — second question is just on loans. So the $3 billion auto runoff will offset growth in other areas this year. What are your expectations for other loan categories in 2023 coming off of a strong 2022?
John Woods : Yes. I’ll go ahead and start there and others can chime in. But I mean, I think when you look out into 2023, we still see very, very strong opportunities in the commercial space and within C&I. And I think something to always keep in mind is our utilization is well below where historical levels would imply we should be. And so as you get into the later part of the year, you see some recovery in investments, in inventories and CapEx and possibly M&A, which actually provides financing opportunities. We see lots of opportunities across commercial. And that’s really one of the main drivers. When you get into consumer, we’re looking at home equity being a place that a place that we like and card and Citizens Pay would contribute as well.
So that wraps up to a stable year-over-year loans and back to the point around that being taking that otherwise RWA that would have been deployed against auto and some other categories with lower risk-adjusted returns and giving that back to shareholders.
Operator: Your next question comes from the line of Manan Gosalia with Morgan Stanley.
Manan Gosalia : I just wanted to follow up on the NIM line of questioning. I think you brought down the floor for NIM from 3.25% to 3.2%. Is that also a function of what you mentioned on the DDA migration and the curve and also the fact that you pushed out the forward swaps. Is the biggest variable on that number, mostly the cost of funding side? Or I guess would there be any changes to that 3.2% number, the Fed cuts rates sooner?
Bruce Van Saun : Yes, I’ll start and flip to John. It’s Bruce. But I think the two numbers are tethered together. So if the 3.50% is now seen to be 3.40%, then your floor is going to also commensurately move lower. The good news is, in a way, is that we’ve tightened the bottom side of that range. So previously, it was 3.50% down to 3.20%, 3.25%. So it was 25 basis points and now it’s 3.40% to 3.20%. So it’s 20 basis points. So anyway, I think we — certainly, John’s initial answer on the movement down has been focused more on migration, the DDA and low-cost migration, but then also some of the impact from the yield curve on front book back book has been the other dynamic. So those are the things that we’re watching. But John, you can out from there.
John Woods : Yes. I’d say the only thing I’d add, just to remember, we constructed — we modeled that 3.20% and there’s a lot of assumptions that go into that with respect to what the mix of the balance sheet would be, et cetera. And what we’re assuming is a 200 basis point gradual decline in 2024 that would get you down to that 3.20%. And given that we are still asset sensitive and we haven’t closed out that position, that’s really what you’re seeing in terms of the decline in net interest margin. So as and when we continue to look at ways to lock in protection against down rates, you could see that 3.20% move around based on hedging activities as well as updated views on what the mix of the balance sheet is likely to be in the context of what’s the Fed…
Bruce Van Saun : It’s a very dynamic process. So we look and see where the forward day rates are going to be. We have our own view of that. We see what the valuations we can get in the hedge market are. And you can be assured, I think we played our hand quite well so far, and we’ll continue to stay really focused on.
Manan Gosalia : I appreciate that. And then separately, just on the program. Can you unpack some of the drivers there of the $100 million in pre-tax benefits and maybe how quickly those can come out from the expense base over the course of the year?
John Woods : Yes, I’ll go and cover that. I’d say the one dynamic to keep in mind is that we tend to form these programs and generate a year-end run rate benefit that will contribute for each of them. Mostly on the one hand, the $100 million will build throughout ’23 so that it gets to a run rate when you get to the fourth quarter of ’23. But keep in mind, we did the same thing with TOP 7. So there’s a full year effect of TOP 7 that comes in. And so when the programs are reasonably similarly sized, you can almost use that as an estimate of what the contribution is in any given year. And so you have maybe a combined $100 million plus contribution from the full year effect of TOP 7 hitting ’23 and the in-year effective TOP 8 hitting ’23.
And so the big drivers of that really you’ve got the traditional areas that we focus on, which is third-party costs and vendor cost management, which is an area that’s been contributing over the years as well as continue to optimize the branch network. And just being really careful about ensuring that our organizational approach is fit for purpose with respect to what we’re trying to accomplish in ’23. So those are more traditional areas. The other places we’re looking at that have been more recent include maturing our Agile delivery model away from a waterfall approach to agile and next-gen technology initiatives continue to contribute as well. We’re working towards a data center exit in 2025. We’re looking to migrate to the cloud from our internal applications, and that’s contributing in ’23 as well.
But there’s a lot of very strategic sort of initiatives that are built within the TOP 8 program and we’re excited about it. It’s part of who we are, and we’re looking forward to deliver against that next year.
