SunTrust Banks, Inc. (NYSE:STI) Q4 2016 Earnings Conference Call January 20, 2017 8:00 AM ET
Ankur Vyas - Director of IR
Bill Rogers - Chairman and CEO
Aleem Gillani - CFO
Matt O'Connor - Deutsche Bank
Mike Mayo - CLSA
John McDonald - Bernstein
John Pancari - Evercore ISI
Stephen Scouten - Sandler O'Neill
Gerard Cassidy - RBC Capital Markets
Marty Mosby - Vining Sparks
Welcome to the SunTrust Fourth Quarter 2016 Earnings Conference Call. [Operator Instructions] This call is being recorded, if you have any objections, you may disconnect at this point.
Now, I will turn the meeting over to Ankur Vyas, Director of Investor Relations. Thank you, you may begin.
Thank you, Keno [ph]. Good morning and welcome to SunTrust fourth quarter 2016 earnings conference call. Thank you for joining us. In addition to today's press release, we've also provided a presentation that covers the topics we plan to address during our call. The press release, presentation and detailed financial schedules can be accessed at investors.suntrust.com. With me today, among other members of our Executive Management Team are Bill Rogers, our Chairman and Chief Executive Officer and Aleem Gillani, our Chief Financial Officer.
Before we get started, I need to remind you that our comments today may include forward-looking statements. These statements are subject to risks and uncertainty and actual results could differ materially. We list the factors that might cause actual results to differ materially in our SEC filings which are available on our website.
During the call, we will discuss non-GAAP financial measures when talking about the Company's performance. You can find the reconciliation of these measures to GAAP financial measures in our press release and on our website, investors.suntrust.com. Finally, SunTrust is not responsible for and does not edit, nor guarantee the accuracy of our earnings teleconference transcripts provided by third-parties. The only authorized live and archived webcasts are located on our website.
With that, I'll now turn the call over to Bill.
Thanks, Ankur and good morning everybody. We appreciate you joining us for our fourth quarter earnings call especially with the inauguration of our 45th President taking place later this morning. I’ll begin with a brief overview of the quarter then I'm going to turn it over to Aleem for additional details including our results at the business segment level. I’ll conclude with a review of our performance in 2016 as a whole, in addition to providing some forward-looking perspectives on our company's strategy and potential. We reported $0.90 of earnings this quarter, relatively stable compared to the prior quarter and prior year. Overall I'd characterize this quarter as a solid conclusion to a strong year for SunTrust. In 2016, we grew earnings per share, delivered further improvement and efficiency and grew capital returns all for the fifth consecutive year. Similarly, total return for shareholders once again exceeded the median of our peer group. These consistent improvements are what gives me confidence that the strategies we've put in place back in 2011 and the discipline we've instilled in the company have us on the right track to grow revenue, improve efficiency and deliver relative shareholder value.
So to get into the specifics of the quarter, net interest margin improved 4 basis points sequentially as the increase in short-term rates and our focus on optimizing the balance sheet continues to improve loan yields. This NIM expansion and our continued balance sheet growth resulted in a 3% sequential and a 7% year-over-year increase in net interest income. Average loans were stable sequentially in part due to the $1 billion auto loan sale in September, but average earning assets increased 1% as a result of growth in our securities portfolio for the new LTR requirements. Period in loans grew a solid 1% reflecting momentum across both consumer and wholesale banking. Deposit momentum continued in the fourth quarter with average client deposits up 2% sequentially, proof that we continue to have success in growing and strengthening client relationships. As anticipated non-interest income declined this quarter as a result of lower mortgage related income given both seasonal declines and market conditions, and lower capital markets related income relative to our record performance last quarter. On a year-over-year basis non-interest income increased a strong 7%.
Bigger picture, 2016 marked the ninth consecutive year of record investment banking performance, up 7% over 2015 and reflective of our strategic investments, the diversity within our wholesale banking platform and our successful one-team approach. Our tangible efficiency ratio improved 65 basis points to end the full year at 62%. Given the investments we've made, the revenue momentum in our business and the efficiency initiatives underway, I'm more confident in our ability to achieve our sub-60 goal and thus have accelerated the time frame in achieving this objective to full-year 2019 versus what was previously a longer term goal. We have a number of strategies in place to help us keep improving, many of which Aleem will detail later.
Overall, asset quality in the fourth quarter remained stable and we ended the full year with a net charge-off ratio of 34 basis points and a non-performing loan ratio of 59 basis points. I consider our portfolio’s asset quality to be strong, which is a testament of the solid economic conditions in our markets and businesses, the diversity of our portfolio and our continued underwriting discipline. Our capital position continues to be strong with our common equity tier 1 ratio estimated to be 9.5% on a fully phased-in basis. Tangible book value per share increased a solid 5% from the prior-year despite a 15% increase in capital return and the increase in long-term rates.
So with that as an overview, let me turn over Aleem who is going to provide little more details on this quarter's performance.
Thank Bill and good morning everybody. Thank you for joining us this morning. Moving on the Slide 4, net interest margin improved 4 basis points, driven by higher loan yields as a result of the increase in short-term rates and a steeper yield curve. I'm pleased that net interest income increased $35 million sequentially and $96 million year-over-year as a result of higher NIM, strong balance sheet growth and our continued focus on optimizing our loan portfolio. Looking ahead, we expect the net interest margin to expand further by 5 or 6 basis points in the first quarter. From there, NIM trends will be dependent on the interest rate environment. We will continue to manage to a moderately asset sensitive balance sheet while being cognizant of opportunities to add duration if the yield curve continues to steepen.
Moving on to Slide 5, you will see that non-interest income declined by $74 million sequentially primarily as a result of declines in mortgage. Mortgage production income declined by $40 million given lower refinancing activity due to the increase in long-term rates. Mortgage servicing income decreased by $24 million as a result of higher decay expense, which is recorded at loan closings and increased hedging costs given the more volatile rate environment in the fourth quarter. Assuming relatively stable rates in the first quarter, servicing income should return to a normalized run rate north of $50 million. Capital markets revenue also declined sequentially from our record performance in the third quarter. However was up a substantial 23% compared to the fourth quarter of last year. This is a reflection of the continued success we're having in expanding SunTrust Robinson Humphrey and meeting the capital needs of all wholesale banking clients. We also delivered a $41 million increase in other non-interest income which is primarily driven by higher client transaction activity within certain wholesale banking businesses notably structured real estate and SunTrust Community Capital. Lastly, we implemented our enhanced posting order process on November 1st, with actual results generally in line with our expectations.
Let's move on the Slide 6. Non-interest expense was modestly lower this quarter, driven primarily by lower personnel related expenses and lower operating losses. Outside processing and software costs were $16 million lower, which included contract renegotiations we executed with a key supplier. Compared to the prior year, our expense base grew 8% as a result of four primary factors. The investments we're making in driving growth, our improved business performance, investments we continue to make in technology, and lastly, increased regulatory and compliance costs. As a reminder, personnel expenses should increase by $75 million to $100 million in the first quarter do the typical seasonal increase in 401K and FICA expenses, and also return to more normal accrual rates on certain incentive and benefits costs. Big picture, our philosophy is not to avoid expense growth if those investments can generate positive returns either from revenue growth or future expense reductions. For this reason, we believe the metric that is most representative of our discipline and focus on smart growth is not our absolute dollar expense level, but rather our full-year tangible efficiency ratio, which as you can see on Slide 7 declined a full 65 basis points relative to 2015 and more notably makes 2016, the fifth consecutive year of efficiency ratio improvement for SunTrust. Congratulations to all our teammates for their significant contribution to this ongoing success.
Despite this improvement, we cannot rest while our task is still incomplete. Going forward, we are executing a number of tragedies to continue to make the company more effective and efficient. To be specific, first, in December, Bill outlined our plan to reduce the size of our branch network by approximately 10% over the next two years. We are accelerating this initiative. And will now execute the first 7% of that planned reduction by June 30th of this year. These savings will fund key investments in talent and technology for our clients. Second, we will look to realize returns from technology investments we have made in new loan origination platforms, particularly wholesale and mortgage, end to end operations, overall process automation, and cloud-based computing, so that our teammates are better equipped with the tools they need to increase productivity and we're able to reduce cost in certain areas. Third, we remain highly focused on managing our supplier relationships. As I mentioned earlier, we renegotiated a contract with a key supplier in the fourth quarter which drove a reduction in outside processing and we're looking for additional opportunities like this.
Each of our businesses is highly focused on optimizing their supply relationships and making adjustments where the returns don't merit the expenditures or where we can bring the processes in house. And four, given the anticipated slowdown in mortgage production, expenses within this business will decline. Though this won't match up perfectly quarter to quarter as there is a bit of a lag effect. This set of strategies and activities combined with the positive momentum we have seen and should continue to see on the revenue side gives us increased confidence in our ability to achieve our sub-60% tangible efficiency ratio goal in 2019. Meeting this target does assume that the forward rate path will generally follow the current market expectation. But irrespective of rates, we're working diligently towards our goal of becoming more effective and efficient each year. For 2017 specifically, we expect a sixth consecutive year of improvement. This will require us to achieve an efficiency ratio between 61% and 62%, with where we land in the range somewhat dependent on the economy and interest rates. This improvement relative to 2016 is even more meaningful when considering that posting order changes, higher FDIC assessments and the acquisition of pillar are already known efficiency related headwinds for the year.
Moving on the Slide 8. Overall asset quality remains very good and we made significant progress this quarter and working through our problem energy credits, which drove the 8 basis point reduction in the non-performing loan ratio and the 3 basis point increase in the net charge-off ratio. Net charge-offs were also modestly impacted by higher losses in auto and CRE. Some of which was due to normalization, while some was idiosyncratic and market specific. In aggregate, we have now taken approximately $160 million of charge-offs related to energy over the past five quarters, which is the vast majority of our total expectation. The ALLL ratio decreased 4 basis points from the prior quarter, primarily due to the resolution of energy credits. Provision expense remains stable as the decline in the energy ALLL was offset by higher long growth and the modest increase in non-energy charge-offs. Looking into 2017, we would expect the net charge-off ratio to remain within a range of 30 to 40 basis points for the full year as lower energy charge-offs may be offset by some normalization in other asset classes. With regard to the allowance, we expect a relatively stable allowance ratio, which should result in a provision expense that approximates net charge-offs, although there will always be some quarterly variability.
Taking a look at loans on Slide 9. Period end loans increased a solid 1% from the prior quarter, primarily due to growth in consumer lending and C&I. As a reminder, we completed a $1 billion auto loan sale in the latter part of the third quarter which suppressed average loan growth. On a year-over-year basis, average performing loans grew $7 billion or 5% driven by consumer direct which is the result of our targeted efforts to grow LightStream, credit card and our other initiatives. We continue to see good success which not only drive loan growth but also improve the return profile of the company. D&I and commercial construction were also key drivers of our year-over-year growth reflecting generally positive momentum across our wholesale banking business. Overall, we're pleased with the solid 5% long growth we produced in 2016. Going forward, if economic growth does accelerate, we believe we have good relative opportunity given the investments we've made in our businesses combined with the above average growth profile of our Southeast and Mid-Atlantic footprint.
Let's take a look at deposit. Our deposit momentum continued this quarter with average client deposits increasing 2% sequentially and 7% year over year, primarily due to growth in NOW and DDA accounts. More importantly, our growth is broad based across both CPWM and wholesale banking, which reflects the company wide focus on and success in depending client relationships. Rates paid on deposits were stable sequentially and up 4 basis points year-over-year, given the increase in short-term rates over the past year and a modest shift towards wholesale banking versus consumer banking clients. Looking to 2017, we remain highly focused on maintaining our deposit growth momentum while also ensuring that our approach towards deposit pricing focuses on maximizing the value proposition for our clients outside of the rate paid.
Moving to Slide 11. Our estimated Basel III common equity tier-1 ratio on a fully phased-in basis was 9.5%, down 20 basis points from the prior quarter as we successfully deployed excess capital to our clients in the form of increased loan growth, closed on the acquisition of Pillar Financial and incurred the impact of a larger MSR asset. Tangible book value per share declined by 4% this quarter as the increase in long-term rates drove a decline in AOCI. Despite this, tangible book value per share still increased by 5% year-over-year given solid growth in retained earnings. Lastly, we grew the security portfolio by $1 billion on a net basis in the fourth quarter to ensure that our LCR stayed above the new 100% regulatory requirement. Going forward, the securities portfolio will generally only grow in line with the overall balance sheet.
Moving to the segment overviews, I’ll begin with consumer banking and private wealth management on Slide 12. Net income decreased $18 million sequentially and $45 million compared to the full-year 2015, primarily due to a higher provision expense as a result of lower reserve releases related to our home equity portfolio. Revenue momentum in the segment has been solid. Most notably, net interest income was up 2% sequentially and 5% for the full year benefiting from strong loan and deposit growth and our balance sheet optimization efforts. LightStream in particular continues to be a tremendous success, growing approximately 70% compared to the prior year. Our clients continue to appreciate the simplicity, speed and convenience of LightStream, which has created high satisfaction rates resulting in good repeat and referral business. More broadly, our investments in digital continue to payoff, with self-service deposits, mobile usage, and digital sales all continuing to track upward. This progress combined with changes in branch traffic and our already strong and dense market position gives us further opportunity to optimize our network.
Specifically by June 30th, we plan to close 99 branches and open eight new branches. So that on a net basis, our branch network should decline by almost 7%. This is even more notable when considering that over the past five years, we had already reduced the size of our network by 17%. Nonetheless, the branch system will continue to play a very important role in our delivery model both with regard to maintaining and building our brand and meeting the more complex needs of our clients. The latter of which is evidenced by the fact that almost three quarters of consumer needs are still met in the branches. Non-interest income declined 2% for the full year entirely due to lower wealth management related income, both as a result of lower trust and investment management income, which was negatively impacted by choppy market conditions in the first half of the year and lower retail investment income as we continue to make the strategic shift from more transaction-oriented business to managed money solutions for our clients.
As we've said in the past, while this is a negative for near-term retail investment income growth, it is positive for clients and the long-term health of our business. Assuming reasonably stable market conditions, we would expect wealth management related revenue in 2017 to build from 2016. Expenses in CPWM increased 4% for the full year due to continued investments in our branch network and associated optimization efforts. Increased investments in technology and our growth businesses such as LightStream and higher operating losses. Bigger picture, CPWM made significant progress this year in optimizing the balance sheet, meeting more client needs, and advancing our omni-channel strategy. The savings generated from optimizing our branch network will allow us to invest in increased talent and technology thereby delivering more value for our clients, while also being a critical component of achieving our company's efficiency goals. Overall, we're optimistic about CPWM's ability to increase the financial confidence of our clients and communities, improve effectiveness and efficiency, and thus deliver further value to our shareholders.
Moving on the wholesale banking on Slide 13. We had record revenue per both the quarter and full year due to strong execution across all lines of business. Specifically, revenue was up 4% both sequentially and for the full year due to growth in both non-interest income and net interest income. Net interest income was up 5% sequentially and 3% for the full year, as positive loan growth was partially offset by margin compression. Our 10% deposit growth is reflective of the success that our corporate liquidity product specialists are having in strengthening client relationships. Non-interest income increased 2% sequentially and 5% for the full year, primarily due to strengthen our capital markets business and more favorable economic conditions. Investment banking income was up 7% compared to 2015, evidence that we continue to see the results of our consistent focus on expanding and deepening client relationships and meeting the capital market needs of all wholesale banking clients.
More specifically, our M&A and equity-related businesses, which have been key areas of investment for us continue to grow faster than the rest of the platform, another proof point that our clients increasingly view us as a trusted strategic adviser. Further research rankings from institutional investors continue to improve giving us a larger share of investors trading commissions, validating investment and talent in this business. Lastly, capital markets income from non-CIB clients was up 24% compared to last year as we are working better together as one team to become the preferred advisor to our commercial, CRE and private wealth climes. Net income was down 9% for the full year entirely due to the higher provision expense for energy, a trend that began to abate in the fourth quarter. Lastly, we closed on our acquisition of Pillar Financial in December, and as a reminder Pillar will increase wholesale’s annual revenue by roughly $90 million beginning this year. Pillar’s efficiency ratio is roughly 80% to 85% and while this will be dilutive to the overall efficiency ratio, the acquisition of Pillar will be accretive to our capabilities, net income and ROE. Welcome to our teammates at Pillar and we look forward to partnering with you to drive continued success for our clients. In conclusion, while market conditions can drive quarterly variability, our differentiated business model and wholesale banking continues to deliver strong results and we expect to see further growth in 2017, particularly if economic growth accelerates and client sentiment remains strong.
Moving onto mortgage, unsurprisingly revenue in the quarter was down 23% compared to third quarter as higher interest rates created a more challenging backdrop for the business. Mortgage production income declined 40% sequentially as application volume declined 30% and gain on sale margins compressed given the more competitive environment. As a reminder, the majority of our production income is recorded at [indiscernible]. Servicing income also declined as decay expense which is recorded as loans pay off increased, and the more volatile rate environment made hedging more expensive in the quarter. However, as I noted earlier, both of these trends are somewhat temporary and servicing income should bounce back in the first quarter as rate volatility abates. For the full year, total revenue increased 7% as increases in both production and servicing income more than offset slight decreases in net interest income. We grew our servicing portfolio by 7% year over year as a result of portfolio acquisitions. In the fourth quarter, we acquired another $9 billion of UPB of servicing, $3 billion of which was reflected in our year-end servicing portfolio and $6 billion of which will transfer in the first quarter.
Net income was down $32 million sequentially and $104 million compared to the full-year 2015. In both cases a higher provision expense contributed to the decline. While the asset quality of the mortgage portfolio continues to be strong, reserve releases are abating. Overall in 2016, the mortgage business benefited from its investments in improving the client experience, smart market share growth across production and servicing and lower rates creating value for our clients and contributing to the bottom line performance of the company. While the higher interest rate environment will create challenges for this business looking into 2017, growth in our servicing business, targeted market share gains, and reduced expenses will help to partially mitigate the decline in market refinance volumes.
With that I'll turn it over to Bill for concluding remarks.
Okay, thanks Aleem. So to conclude I'll point to Slide 15 which highlights how this year's performance aligns with our overall investment thesis, but more notably also highlights the further opportunity we have across each of these fronts. So first, we have an attractive franchise with great diversity and growth opportunities across each business. This diversity help drive 7% revenue growth compared to 2015. Going forward our opportunity set continues to be significant. Wholesale banking has opportunity across its entire middle market and mid-corporate client spectrum. Consumer banking and private wealth has further opportunities to build financial confidence and deepen client relationships and our consumer lending businesses are in the very early stages of their growth cycle. Mortgages focus on growing its servicing portfolio in recent years was also an intentional strategy to grow intra business diversity and it will pay dividends in a higher rate environment.
Second, we have demonstrated consistent expense discipline and have become more efficiency and return focused in everything we do. Aleem provided details on a number of strategies we're executing to get even more efficient. Some of these are continuation of long-term strategies, while others are an acceleration or will require heightened investment and focus. These strategies combined with the revenue momentum we're continuing to build has given me increased confidence in our ability to achieve our 60% - sub-60% efficiency target in a shorter more defined timeframe. And last but not least, our strong capital position allowed us to increase our capital return by 15% in 2016 and still affords us an opportunity to both grow our business and increase capital returns to shareholders, particularly as the regulatory landscape for industry evolves to a more closely match each bank's risk profile and complexity. This is a particular benefit for SunTrust given our consistently strong CCAR performance and our simple domestically focused regional bank business model.
Each of these successes and opportunities are made possible because our purpose of [indiscernible] of financial wellbeing which is at the center of everything we're do. Our onUp Movement which we launched in early 2016 is an extension of this purpose by providing tools and resources to help all Americans move from financial stress to financial confidence. I'm very proud to announce that our onUp Movement has already reached over a million participants, well ahead of our first year goals. In addition to our clients, we also increased investments in our teammates and provided them with more opportunities to improve their own financial wellbeing. For our local communities, we continue to support economic growth through purposeful investments and active partnerships. Notably, our 2016 United Way campaign was the most successful in the company's history with our teammates donating $6.5 million to help our communities.
So to conclude, I want to thank our teammates. It is because of your hard work and commitment to our purpose that we were able to deliver these successes of 2016. I look forward to partnering with you in 2017 to generate even more value for our clients and shareholders.
So with that, I’ll turn the call back over to Ankur and we’ll start the Q&A.
We’re now ready to begin the Q&A portion of the call. As we do so, I’d like to ask participants to please limit yourselves to one primary question and one follow-up, so that we can accommodate as many of you as possible today.
[Operator Instructions] Our first question is from Matt O'Connor with Deutsche Bank. Your line is now open. Please go ahead.
Good morning. If we look at your NIM performance this quarter and the 1Q outlook, I think it was about 10 basis point increase versus the 3Q level, which I think is more than most expected. So I guess the question is, are you more levered to rising rates or is there something else that's going on that's driving them?
Well, rising rates are obviously helping. That's a positive and what's a little bit different this time compared to the rising rates we saw a year ago was that this time, we've got rising short and long-term rates. And so both of those are helping us because we’re relatively balanced in our exposure across the rate curve, but along with that, we also got some nice loan growth. We've had a little bit of mix change across our loan portfolio. That's helping us particularly well and because we're able to provide our clients I think with really good value across our product mix, we're able -- we've been able to manage deposit rates and showing clients value across the relationship outside of rate paid. And so we’ve been able to manage to pay them relatively well also. So I think all of those things have been helping our NIM, Matt.
And the follow-up, if you do get another, let's just call it parallel 25 or 50 basis point move in rates, what would be the NIM sensitivity to that?
Our overall sensitivity is about 2% and so for $5 billion of interest income, you're looking at about $100 million per 1% increase. So a quarter of that for 25 basis points, but remember we model our beta on our asset sensitivity using a beta of around 50. If your view of beta for the next 25 is substantially lower, our -- then you would model asset sensitivity rates higher than that. Let me give you just a quick rule of thumb if that will be helpful to you. For every ten points of beta below our modeling, our asset sensitivity goes up about another 2%. So we’re 2% at around 50. We’re 4% at around 40. We’re 6% at about 30. Does that help?
Yeah. Very helpful. Love the rule of thumbs. Thanks.
Thank you. Our next question is from [indiscernible]. Your line is now open. Please go ahead.
Thanks. Good morning, Bill and good morning, Aleem. On the balance sheet side, you guys had a 5% average performing loans this year, even with some cleanup, some loan sales, some securitization. So I'm just wondering how you're thinking about just the pace of growth, as you look ahead and what's already kind of in the cake based on your pipelines and what do you think could potentially come out of a -- for a growth type of outcome if it happens post-election.
Ken, it’s Bill. We don’t really manage the loan growth, we’ve sort of talked about that, but I think you’ve really asked all the right questions as sort of what's happening in terms of pipelines and what's happening in terms of momentum and what do we see going forward. And if we look at the things that are sort of harbingers of growth, our core commercial for example was up 5% from last quarter to this quarter. So that's pretty good indication of sort of middle market kind of good core basic growth and health of our markets and health of our businesses and production was up about 10% this quarter. So our ability to produce.
Now that being said, revolver utilization was slightly down, I mean it was flat to slightly down and as soon as we got to balance all those things and paydowns, we're sort of relatively flat. So I think we lean towards the things that we're investing in, things like consumer lending, things like our wholesale growth and we're positive about the opportunities to continue to not only grow NIM, but to grow absolute net interest income and loan growth.
Great. And then just a follow up. You did mention kind of on the bottom one of the slides that you think about perhaps having opportunities and access to capital consider more acquisitions and I'm just wondering as you think about what you just said on the loan side, where would you see opportunities to continue to add to production capabilities that you either don't have or would still like more of?
Well, the great thing is we like what we have. So in terms of the ability to scale different, different things, we like where we've invested, we like the things we've invested in and they have dials on scale. The consumer lending, we talked about, it’s up 70% in the LightStream specifically. We can work with those scales. We expect that continue to grow, won’t grow at 70% forever, but it’s scalable. Similarly, the investments we've made in our commercial business to create industry specialist, the investments we've made in corporate banking to have a more national platform, those are all things that are imminently scalable. So we felt like we had more confidence, we felt like the economy was growing at a faster pace, we don't have to go buy something or do something different. We can just sort of put more fuel on the fire that's already burning.
Our next question is from Mike Mayo with CLSA. Your line is now open. Please go ahead.
Oh, hi. I’ve put this question in the category of no good deed goes unpunished, in terms of improving efficiency, I think you said this will be the sixth year of better efficiency and the efficiencies should improve from 62%, 61% to 62% and why not even more for 2017, I guess you mentioned the acquisition which is efficiency dilutive, so what do you think efficiency improves on a core basis and how many rate hikes are you assuming for your efficiency targets in 2017 and for your new 2019 goals?
Yeah. Well, thanks for how you led the question, Mike. I appreciate that to start with. So a couple of things. One is let’s start from the bottom and we’re assuming sort of the normal projected, so two rate hikes in ’17, ’18 and one in ’19. So nothing that’s abnormal or nothing that’s in excess of what the market currently projects. As it relates to ‘17 specifically, the speed of how we achieve efficiency, we also have to be sensitive to our client experience and our team mate engagement and all the other factors that go into that and we've maintained really high client experience and really high teammate engagement, while reducing our efficiency ratio and we keep those things in pretty close parallel to make sure that we're not doing things that impair both of those, because they have long term impacts that are hard to recover from.
But we also have more confidence to say, let's actually set this up the efficiency ratio and put a date line on it. And we said full year 2019 might we in any one quarter cross 60 and the efficiency ratio of the next two years, I think it's likely that we would. We hit sixty last year one particular quarter, but we're saying sort of from a full tape, I mean for the full year 2019 have it fundamentally in what we do, have it sustainable and that’s the exercise, not do we cross the tape and declare victory in any one quarter.
Yeah. Michael, let me add to that also, as Bill said on the rate curve, we're just assuming the forward curve, so that right now when you look at market expectations for ’17, the forward curve picks up two rate hikes, June and December, the December one doesn't really help us much obviously. So it's really basically only the one in June. And as you pointed out, headwinds in ’17, the ones we’ve noted are pillar and FDIC expenses in terms of the expense side. On the revenue side, we've got the full year posting order and the decline in mortgage business across the country. So we've got, we know we've got expense headwinds, we know we've got revenue headwinds, but despite all of that, we still think we can make the company more efficient knowing what we know.
Thank you. Our next question is from John McDonald with Bernstein. Your line is now open. Please go ahead.
Hi. Good morning, guys. I wanted to ask about capital and capital returns. With the capital ratios probably higher than where you need to be at 9.5, what do you target longer-term for capital and how does that influence your thinking about capital return aspirations for 2017 and 2018, particularly with some elements of CCAR potentially getting easier for banks under 250 billion?
Thank you, John. So from a capital ratio perspective, what we've said in the past is that we think, given our relatively low risk profile, which continues to show up in CCAR after CCAR after CCAR in the Fed numbers, we think we can operate the company with a common equity tier 1 ratio that starts with an 8, somewhere in the 8. If you look at us today at 9.5, I think that does give us capacity to deploy capital, whether that is via increased production doing more client business, as you saw, this quarter, a little bit of it went toward the acquisition of Pillar, which will be helpful for ROE and net income growth going forward. So we think we can deploy some capital, but we think we can also return capital. And when you look at us over the last several years, you've seen a pretty steady increase from SunTrust, both in dividend and buybacks year after year. We expect that in ’17, we'll be able to do that again.
In context of your comment about CCAR ’17 and ’18 and what might happen, we are waiting right now on the instructions to come for CCAR ’17. So until those come and hopefully those will come very soon, until those come, we won't know exactly what the instructions are and what CCAR looks like and how much of the improvement can show up in ’17 or ’18, but over the course of the next two years, I do expect that banks our size with our relatively simple business model, we will be able to continue to increase the repatriation of capital toward our owners.
Okay. Thanks, Aleem. And just to follow up for Bill, a question on the investment bank, you've had a few years of very strong secular growth in the investment bank as you've built that out, how do you measure further opportunity and open runway to keep growing an investment bank, whether it's market share or just untapped opportunities.
Well, I mean it starts with, we have a pretty low market share. So we've got tremendous opportunity in terms of, in terms of upside and we continue to gain share at pretty high percentages of share gain, which still keeps us as a low share relative. What we've done is ensure that investment banking is totally implicated into the company and we've given examples of what the business is outside of CIB generate in terms of increased fees, in terms of investment banking and that was up about another 25%.
So the opportunity, we continue to find places not only sort of market opportunity, but also intra-bank opportunity, places like commercial real estate, commercial banking, where we’ve continued to expand things that we've invested in, create more opportunities. We’ve had great gain shares and equity sales and trading. We’re, Aleem mentioned, we’ve sort of got a couple of recognitions. We're sort of top 25 research provider in a lot of different places. That sort of builds on itself, the size of the average fee continues to go up. So the scalability of the platform increases as we move from right side to left side, in particular deals. So the fact that we continue to be confident that we can, that we can have sort of high single digit continued improvement in investment banking, which is predicated on the investments we've made, the things we have and the runway that we see in front of us.
Thank you. Our next question is from John Pancari with Evercore ISI. Your line is now open. Please go ahead.
Good morning. Just want to follow-up on the rate side quickly, how much of the margin benefit was from lower premium amortization. I know you indicated that the steeper curve helped you this time as well. So guessing that could have been through the bond portfolio yield. And then separately, in terms of your margin expectation beyond the first quarter, executing the impact of rate hikes, wondering what the trajectory would be just organically without or should I say without any influence from rates? Thanks.
Well, the difference in premium and this quarter relative to last quarter was $3 million, slightly less premium and the effect that that had on NIM for us this quarter was one basis point. So we got 1 basis point advantage in NIM Q4 versus Q3 with rates moving a little bit higher in Q1, we might get a little bit more benefit in premium in Q1 also. In terms of the rest of the year, what you see from us and I expect kind of the same pattern this year relative to last year, when there is a rate hike, you see NIM for us improved and then in the quarters where there is a rate hike, as liability rates catch up, as beta catches up and as our portfolio, just new loans roll off, old loans roll off, you see NIM grind down a couple of basis points. And that’s kind of the pattern I would expect to see for us again, a rate, a NIM increase in the quarter, we get a rate hike and a grind down in the quarters where we don't.
Got it. All right. Thanks. And then separately, just when -- on the cost side, just wondering if you're seeing any increased pressure around, I know you flagged I believe regulatory compliance either in your press release or deck and I'm curious if that, it is at all related to anything BSA/AML related. I know you had a subpoena a little while back to around money laundering at one of your borrowers. And then separately, your headcount was up about 2% this quarter. It's the first linked quarter increase in headcount in a while at your company. So just curious on that. Thanks.
Well, we obviously do continue to invest in all regulatory and compliance costs and I expect that we will continue to do so in ‘17. So I think that cost curve is just going to continue to go up generally for the industry. We're not going to be any different in that base relative to anybody else. And in terms of headcount overall, we did have a little bit of a headcount increase in Q4, but remember that the Pillar acquisition closed in December. And so a substantial number of that headcount increase that we get in Q4 was actually as a result of growth, which is going to help us in revenue in 2017.
Thank you. Our next question is from Stephen Scouten with Sandler O'Neill. Your line is now open. Please go ahead.
Yeah. Good morning. Thanks guys. I had a quick question on the year-over-year asset sensitivity. It looks like that’s declined from around 3% to a little under 2%, an up 100 basis point scenario and I was just curious as to kind of how that reduction came about, if that was an intentional strategy or just related to the composition of the balance sheet and kind of how you're thinking about that move going forward?
Yeah. That’s a little bit of the composition of the balance sheet. When you have a negatively convex balance sheet with mortgages on it, what will happen as rates climb is you will become a little bit less asset sensitive, just as a result of the math in the models, which is certainly what we're seeing. What's interesting though is because this is just math, it doesn't consider as much sort of human behavior as we actually see in reality. So if the economy does better and our clients feel better about those prospects and they move up or they trade up, the asset sensitivity that we're showing that comes out of just the math model as a result of rates, we’ll be understated. So that change you see is primarily rate related, but I think if -- it can be offset by improvements in GDP and consumer confidence.
Okay. That's great. So no real changes in like swaps hedging, anything like that?
Overall, we manage our swap portfolio kind of between $15 billion and $20 billion of notional. And remember that portfolio is there, basically, just the hedge against our floating rate commercial loans, so that our balance sheet doesn't get too short. And notional, we're still sitting between $15 billion and $20 billion. No dramatic changes in that overall book or view.
We are modestly asset sensitive. We expect to stay modestly asset sensitive.
Thank you. Our next question is from Gerard Cassidy with RBC Capital Markets. Your line is now open. Please go ahead.
Thank you. Good morning, Bill. Good morning, Aleem. A question, Aleem, mean you've had real success in reducing the branch count, you've accelerated that this year. Can you guys give us some color on the deposit retention that you've seen in the branches that you've closed? And second as part of that, in a rising interest rate environment, where invariably betas probably will go higher, do you think that would affect your deposits more so than it has been in the past in the branches that you've closed?
Good question, Gerard. Thank you. So on the first one, we've actually had really good success in deposit retention historically at SunTrust. Think about deposit retention, north of 90%, 12 months in. So 12 months after we close the branch, as those clients move to a different one, we’re still able to retain greater than 90% of those deposits. And we feel pretty good about our ability to do that this time around. And in terms of rate rises and how that affects client behavior, I think the real question, sub-question there is how fast they come. If rate rises come very fast, i.e., we get four this year, that actually has the potential to affect client behavior somewhat I think. But if rate rises come at a very measured pace, as [indiscernible] has signaled, and we get only 1 or 2 per year, I think that client behavior doesn't change that much in that type of environment.
Remember a couple of things about our branch network as well as that, we're primarily concentrated in high growth urban markets. So closing 20 branches of 100 in an urban market is very different than closing 2 branches in, when you have 10 total in a non-urban market. So, the flexibility and the ability of clients to interact and move into different locations and then we've had really good mobile and digital adoption by our clients. Now, 67% of our clients have had some type of mobile or online experience with us.
And in the fourth quarter, 23% of our needs met were done in a mobile or digital channel and that's 50% higher than it was in the fourth quarter of last year. So we're seeing really good adoption in the investments that we've made on the digital side. Our clients have reacted real positively, although saying that urban concentration and the digital adoption really are the things that give us more confidence in rationalizing our branch network in a faster pace and retaining a very, very high percent of our clients.
That is very helpful. Obviously, you guys have had good success here. Second question is with your available for sale portfolio, could you share with us what the duration is? And then second, as you look at in answering an earlier question about that efficiency ratio falling below 60% in ’19, assuming the futures curve goes the way it should go, what will that possibly do to the negative mark in AOCI in that portfolio, since obviously it swung to a negative number this quarter from the third quarter?
Thank you. So the duration in our overall securities portfolio right now is only about four years or so. And we kind of typically keep it in that 2.5 to 4.5 range most of the time. So we're in the upper part of that range right now and I wouldn't expect it to change much from here. We actually were able to take advantage of the higher rates we saw in the latter part of the quarter as we invested into that portfolio and grew it for LCR purposes to get higher yields from the new investments we made. So overall, we feel pretty good about that portfolio right now, Gerard.
In terms of AOCI and the effect that’s going to have on the portfolio, yeah, as rates go up, absolutely. The unrealized gain turns into an unrealized loss. Those securities sit there and the result of that is simply that we end up getting a higher NIM overtime as opposed to realizing it upfront. So I’m not expecting much of a change in overall capital ratios as a result of this and even if there is a 10th or 2, here or there, it's really not going to make a difference in terms of our overall capital strategy, Gerard, if that's where you’re headed, because we're still substantially above where we think we need to be in terms of operating the company.
Keano, we have time for one more question.
Yes, sir. Our last question is from Marty Mosby with Vining Sparks. Your line is now open. Please go ahead.
Thank you. We’ll wrap it up with a brain teaser here, Bill. So let's go back to what you said on capital in the sense of, you're in the nines and you could be somewhere in the eights percentages. If you were to get a clean slate in a sense of the threshold gets pushed above you and you can now do whatever you want in capital, how would you look at taking that, let’s just call it 100 basis points of excess capital and think about giving it back to the shareholders, considering that you've already got growth allocated for, you've already got all your risk allocated for, this is pure excess that we're talking about and I'm not trying to put the number around it. Let’s just call it X. Would you give it back to the shareholders immediately, because now you can or do you sit on that and wait to see what happens in the future?
Yeah. I mean the immediacy thing sort of is a tricky question, right, and the concepts that are immediate things like special dividends, they haven't been particularly receptive vehicles in the CCAR process. So we would go through what I consider be the top three, as we get through the process growth is going to be number one and so we might take strategies and say, we would do things to grow a little faster, grow the assets of the company a little bit faster. If we had more confident, we could do that and economy was better and we saw the opportunity. Second would be dividends, the spirit would be as you can crash through the 30% and you could increase the level and percentage of dividends and then the third would be share repurchase. So I don't think we've changed the sort of the programmatic one, two, three in terms of how we think about it. We just might accelerate them at different paces based on the scenario, which you drew up which is quite exciting to think about.
I guess what I was kind of pushing at was you could increase your dividend payout ratio and you could fund growth with your annual earnings. So what's already on your balance sheet is kind of sitting there and if you don't take that and just kind of push it back to shareholders, it kind of gets trapped up in there. So that's trapped now because regulatory pressures, if we can imagine that feeling kind of getting released, I was really trying to imagine that you could really push that back to the shareholders sooner and repurchase versus the other two, which you can fund manually?
Marty, look, you're completely right about that. We were pleased to see Governor Tarullo’s speech at Yale and the kind of comments he made about opening up capacity for relatively smaller and relatively simpler bank like SunTrust, given our business model. So we're pleased to hear that. I think we've got the capacity to do exactly as you say. We do have the capacity to do all of those three things that Bill noticed. We think we can grow. We know we can and so we've got capacity to do that. We would certainly like to be able to increase dividends and increase buybacks. We've got a really good history of doing that over the last several years. We've heard from our shareholders as to what their preferences are and we continue to elicit feedback from them as to how they like to do it. And I think over the next couple of years, you can expect to see us do all of those things. One, grow; two, increase dividends and three, increase buybacks.
Thanks. I know it’s pushing the curve, because again I could see the rule has actually changed, but I think you're well positioned because you really don't look at bank acquisitions is really the strategic mode. So that really then allows you to do a little more aggressive on that excess capital when the time comes. Thanks.
Okay. Thanks, everyone. This concludes your call. Thank you for joining us today. If you have any further questions, please feel free to contact myself or Quint.
Thank you, speakers. That concludes today's conference. Thank you for participating. You may now disconnect.
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