Citizens Financial Group, Inc. (CFG) Earnings Call Transcript & Summary

All right. Good morning, and thanks, everyone, for being here. It's our last presentation this morning before lunch. I'm -- it's my pleasure to have Citizens Financial Group here today. Citizens Financial is my best idea. I have not performed rating on the stock. So I guess, its ability to grow revenues faster than peers and to keep and protect against downside risk from those challenging rate environment we're in. Number two, also they have self-help levers, those top initiatives, which our guests will talk about a little bit today. And then third, you look at the stock's trading about half a multiple discount to the group, so I think it's got a very attractive valuation. So we're not going to talk about the stock rate here, but I think a lot of discussions I've had with investors over the last few years is technology and how can banks keep up with the bigger banks and spending and all those kind of things. So it's my pleasure to have with us today -- so Michael Ruttledge is here. He is the Chief Information Officer and Head of Technology. And it's been -- you've been with Citizens for a year, just over a year. He joined after being 20 years of experience in the business. He came from American Express. He brings a background with experience in infrastructure, engineering and engineering roles within the financial services industry. Michael has had a proven track record in leading application modernization initiatives and helping power growth through digital partnerships with fintech companies. So it kind of ties in with the fintech panels that you guys just listened to. So I'm going to stop talking and have you guys listen to our guest speaker here. So let me turn it over to Michael.

Thank you, Brian. I'm delighted to be here and talk to you about our technology modernization program and how it positions the Citizens franchise for success. But just before I do that, just to get the formal piece out of the way, I just want to point out the cautionary language on the third slide. Not that you can read it from back there probably, but I'm sure that you read it in our convenience. So what I want to talk about today is our aspiration to become a customer-focused, adaptable, secure, resilient technology organization. As you know, back in 2014, we split from RBS, and we become an independent company. And since that point, we've been modernizing and investing in our technologies, but now we're really at a point where we can really move to switch some of that investment from modernizing the core to really accelerating in the next generation of technologies. And I think we're well positioned to do that. We're instituting a major transformational program called our TOP 6, and I'll talk about that in more detail. But one of those big programs is changes in our technologies. We're planning on hiring engineering talent. We're growing our technical talent within the bank, all with an aim to improving our customer experience through new products and new secure and reliable platform. And I plan to go into more detail on some of those. But it all starts with talent. And we've got a really, really great leadership team with over 26 years of experience. We've actually -- since I joined, we've increased our engineering talent in-house at the bank by 30%. We've hired a new CIO for our consumer business who came from a tech start-up, from Ingenuity. He's actually brought with him a network, a very highly qualified software engineer. We've also tripled our architecture and engineering organization. We hired a guy from CVS who came in and he has really been hiring some top-notch architects with a lot of expertise. We've also established a training program internally for our engineers, and I'll talk a bit more about that and how we're upskilling our existing technology base. So I said, Citizens has gone through different phases along our tech journey. We were lagging in investment, frankly, on the RBS. We had limited tech investment due to some of the challenges with the parent company. Since then, we've moved to improve the stability and the compliance of all the systems. We've improved our outdated technology. And now we really can move to investing in the next generation of technologies and accelerating some of those new tech capabilities. And we're upgrading a lot of our core systems across the bank. And I'll talk a bit more in detail about what we're doing in the mobile and online banking space, in our branch network, transformation, ATM transformation and what we're also doing in the commercial business. So all of this is really about how do we really benefit our customers and improve efficiencies at the same time. As I said, we are growing in-house engineering power. We relied very heavily on outsourced resources. Now we're bringing more of that talent back in-house, and we're hiring software engineers in 4 hubs: Boston, Rhode Island, Nashville and Phoenix. We've established a training program across the bank. We partnered with Brown, and we're leveraging AI, a machine learning program, and we're continuously introducing new tools. We're also fundamentally changing the way that we deliver new capabilities. We're moving to an agile environment. So instead of projects taking typically 12 to 18 months, now we're able to deliver in weeks. And we've proven that, and I'm going to talk about some recent examples where we've literally done test and learn and brought out products to marketplace in under 3 weeks. We're digitizing the customer experience, and we're leveraging the data we have on our customers through our data lake, which is cloud, to really gain insights and deepen that relationship with the customers. And we're building technology in a new modern way. So we're moving to the cloud. And this is where I think we're able to leapfrog, frankly, where we are because we didn't invest in some of early additions that were available in the cloud. And now these offerings are much more robust, and we've been able to move to Amazon, to Azure, to well-tested environments in the cloud. And that really paid in good dividends for us. Let me talk about what we're doing in the consumer space. So I think as many of you are aware, we launched an innovative partnership with Apple refinance program, that's been very successful. And we're building on that program to extend that program to other merchants. So we just launched a partnership with Microsoft and ADT. And for financing products, once again, we're leveraging artificial intelligence to predict what our customers want to spend. So we have a very exciting customer agenda going forward. We've used -- also used AI to improve customer handling time and colleague experience. So it's reducing the amount of time customers spend on the phone and improving our contact center customer support. We've also insourced our unsecured loan servicing platform to improve customer service and drive efficiencies. As you can see, we partnered with many fintech companies, and this continues to be a goal of ours. So actually, back in 2017, we did a partnership with SigFig called SpeciFi, which provides robo services to our wealth management clients. But now we've partnered with Fundation from a commercial perspective. We launched Blend, which improved -- which is a fintech that specializes in UI/UX. And we've been able to improve the application time for our mortgages. And we've also partnered with HomeStory who provide end-to-end home-buying analytics, so that we can connect home shoppers to real estate agents. And that's been very successful. Our priorities going forward, we are replatforming our digital, mobile and online banking app. We're extending our digital reach. We've transformed the customer onboarding within our branches. As I mentioned, we've upgraded our mortgage business. And we're partnering, looking across that customer journeys. When you look at commercial, we made a very significant upgrade to our cash management platform at the end of last year. We partnered with a tech company called Bottomline, a fintech company, and we've rolled out this new cash management platform towards 30,000 users. And it's getting rave reviews. They're very excited about using it. And it's -- I think it really is a terrific leap forward. We were also the first bank to do -- one of the first U.S. banks to build real-time payments capabilities. And we formally went live last year as a receive bank. When you look, once again, in commercial space, we're also taking advantage of fintech partnerships. And the 3 listed here are nCino, Transactis and Finastra. So nCino is an extension to our sales force abilities, and so we're partnering with them to really improve end-to-end workflow for our commercial customers. And Finastra is a trade finance solution. We're also enhancing our digital offerings. And we've upgraded our mobile platform, and we're going to launch that later this year. It's in employee beta right now. We developed this mobile platform from the ground up ourselves. So with cloud native platform, it's based on microservices. We're able to reuse portions of it, and we've used our in-house engineering team to build this. We did partner with a fintech once again called Backbase, who are an accelerator, but about 70% of the code is in-house written. So really excited to launch that mobile app later this month. We also launched Citizens Access. So Citizens Access was -- we're one of the first superregional banks to launch a deposit -- sorry, a digital deposit bank. And we rolled that out with Citizens Access, in the first year, had over $5.8 billion in deposits. And we're partnering with our tech partner, FIS, on that. I already mentioned accessOPTIMA, which is our new commercial cash management platform. Once again, built with the latest modern technology. And we've also launched partnerships with Microsoft and ADT, in addition to Apple. So how did this fit -- we talked about the TOP 6 transformational programs. How does this all fit together? So the advanced next-gen technology program is about how do we modernize our infrastructure and platforms and how do we change our delivery approach. And we're changing our delivery approach, not just in technologies but across the bank. We are moving to an agile way of deployments. And this goes alongside our traditional TOP programs. We should look at reengineering, how can we look at things like customer end-to-end journeys and reduce costs, how can we launch more digital capabilities to reduce costs, how can we transform our retail network branches, once again, to look for efficiencies and also improve customer service. And we're leveraging some of the funds from this -- from these investments to fuel our strategic priorities. And we set out 3 strategic priorities that you can see at the bottom of the page. The first is expanding Citizens Access. So Citizens Access brings 100% digital banking capabilities to our customers our beyond market footprint. 80% of our customers are actually outside of our core markets. And we're also -- we initially launched in 9 months on the FIS Profile 7 platform. We're upgrading to what they call the modern banking platform, or Profile 8, which is a completely cloud-based native application that's being built from the ground-up by FIS. And we're partnering with them. We will build the user experience, layer around that, but the core digital bank is being provided by FIS. So -- and so we're very excited about that platform. We'll be able to leverage the cloud containerization. And we really think we'll be able to add new products and capabilities beyond the current deposits that we have today. So we're going to launch checking. We're going to launch a small business. And we're going to launch commercial later on this year. The second strategic priority is around the business banking gateway. And this is going to be a suite of features that will help our small and middle-market customers extract value beyond the traditional value that they get today. And once again, it's a next-generation modern platform we've built in-house. In fact, the first pilot we launched in 8 weeks, and we took it out to 10 middle-market customers. And we're able to demonstrate it to them, and we're able to get their input, and then we're able to adjust that very, very rapidly. We're able to change some of the features, and then we're going to launch the first release later on this year. And then middle market towards the back end of this year, end of next year. So these are the type of capabilities that I think really allow us to test and learn in the marketplace and will allow us to improve our revenues. The third one is around point-of-sale lending. So since the launch with Apple, we've built our capability where we're able to onboard merchants very quickly and drive a compelling, real-time experience without changing the customer experience at the point of sale. So we're bringing our new ideas to life with an in-market prototype that will help us test and learn. And it's given us valuable insights into the concepts and experiences that will make the offering more compelling for our customers in the bank. Once again, we're leveraging our internal engineering team to develop these capabilities, but we've also partnered with an external design and experimentation firm to rapidly prototype this in the field. The solution is being built with low fidelity support experimentation, but at the same time, the robustness and security and compliance expected from a bank. So really excited about those 3 strategic revenue initiatives. And they're all underpinned by our focus on the next-generation technology strategy. And there are 4 business aspirations as part of this: faster, lower-cost product delivery; personalized products and service offerings, a seamless customer experience; an increased leverage of cutting-edge technology. And we're enabling this through 5 strategic pillars. Number one, again, and I keep emphasizing this, but I know it's so important is enhanced engineering talent and tools. We're moving company-wide to a new agile operating model, and we're moving to a modern technology stack, leveraging the cloud, leveraging APIs. As part of that, we're going to transform our cost structure. We're going to pivot from predominantly spending on protect to making sure we spend more money on growth for the company. And at the same time, we are a bank. So we have to make sure we are protected, we are secure and protect the core. So we've also got power, investments and availability, security, resilience. Let me go into each of these in a little more detail. How are we attracting talent? And how are we training our existing talent? So as I said at the beginning, we're pivoting from an outsourced model where we largely were dependent on vendors to do our engineering, and we were overseeing that, so having more engineering capabilities within Citizens. And to do that with 2 tracks. One, we've hired externally, and we've been very successful hiring externally in the marketplace. And secondly, we've initiated in-house engineering training programs. So we actually initiated what we call an incubator program where it took our first 10 engineers and put them in the hands-on lab, and they basically developed effects of code in that 10 weeks that we're able to launch to market. So it wasn't just university learning. It was actual hands-on coding upskilling. Because what happened in the past is a lot of these people have the technical skills, they have Computer Science degrees, but they haven't been performing that work. They've actually been overseeing, frankly, outsourced resources in India. So now we brought that back in-house. We're upskilling those engineers and giving them -- and they actually love it. They love rolling their sleeves up and getting back to the coding. So it's exciting. At the same time, we've also brought in a considerable number of external hires. And they're bringing in and sharing some of the best practices on modern technology. We're also giving them the tools they need to do their jobs. So if you're a modern engineer, you want to develop on a Mac computer. So this is Mac, Apple Macs for our engineers. You want collaboration tools that you can use. So we've rolled out Slack to over 700 of our engineers. And Slack is a collaboration tool that allows engineers to share code, to share information, to leverage open-source code in the marketplace, so that they can crowdsource and really improve the development of our engineers. Second is the agile operating model. And as I mentioned earlier, this is a bigger change for the company as it is in technology. So about a year ago, we initiated an agile programming technology, and we've been moving and we've been developing strong teams in technologies. But as part of the TOP 6 program, there's another -- there's a parallel program called the modern operating model. And as part of that, we're fundamentally redesigning the way the business operates. So the business is moving to agile. We've actually trained 800 colleagues in the bank in agile development methods. We've launched our first set of pilot pods, and we've seeing a significant improvements with them. So we made enhancements to our VR capabilities that led to consumers being authenticated 33% faster for automated calls. And that project took less than 8 weeks. I think it would have taken over a year in a current waterfall methodology where we did all the requirements, waited for the design to be set off, and handing it over to an offshore team in India, got it back, tested it, et cetera. So much faster delivery time. Also what's enabling us to develop faster is we're leveraging the latest in automated tools. So our testing times have gone down, in some instances, from 3 weeks to 1 week, in our real-time payments on the systems I talked about earlier. In our core lending systems, we reduced testing times from 10 days to 2 days, and that's because it's automated. And it's not only faster, but we're able to cover more than traditional testing, where, frankly, we were just -- we were throwing bodies at it rather than automating it. So I think moving to agile is going to make a significant difference to the bank. We're going to be able to generate new products. We're going to be able to implement new features much more quickly in the marketplace. Third is how are we doing this. So as I mentioned earlier, we're building everything on the cloud. So we're leveraging AWS, Azure. We have a hybrid cloud strategy, which means we can deploy in multiple clouds. We also have a private cloud within the bank that we will use. All of this will increase speed to market and reduce our costs. And at the same time, we've delivered a set of productivity tools for our engineers. So there's a "Platform-as-a-Service", which is essentially, as I said, a tool that allows our engineers to build code very, very fast. And we're doing that, leveraging modern APIs. Think of these as building blocks that you can build upon. And once you build once, you can use this code across different aspects of the bank. And so we're using that as we modernize our application footprint and as we retire some of the legacy systems. It also facilitates easier integration with fintechs because fintechs can easily talk to us through our APIs. We've seen already about 30% faster deployment of our products and services that we've moved to this new way of developing code. Next is our cost structure. So the -- we have about 500 applications across the bank. Our goal is to rationalize that at about 20%. So we want to reduce the number of applications that we have with the bank. And once again, we want to move to a more modern platform where we're able to reuse services across different aspects of the bank. So services that we built for our consumer business, we can leverage across our commercial business, our wealth business, et cetera. And we're moving those applications to the cloud. Within the cloud, it will be significantly cheaper than our current environment. We're able to take advantage of the scale of the cloud. We're able to pay by the drink rather than have expensive compute sitting at our own data centers. We've also done a number, as you know, there are a number of acquisitions. With acquisitions comes technologies, comes different data centers. So we're also migrating all the data centers -- to consolidating all of our data centers, there's 7 of them altogether, into 2 data centers, plus the cloud. And therefore, we see that will really help us reduce the current legacy costs of our infrastructure. And we're continuing to look for opportunities to insource work. So we insource our network business. We're seeing higher levels of quality and reduced costs. Finally, the fifth pillar is around protecting the core, and this is all about how do we make sure that systems availability stays high, how are we protecting ourselves from cyberattacks, how are we making sure the environment is current and how are we simplifying the overall infrastructure. And we've seen significant improvements over the last year through some of these initiatives in our overall stability at the bank. So I think we are moving from laggard to leader. And I'm really energized by the leadership team we have in place. I think we will continue to have strong partnerships with fintechs, but we're also going to be developing a lot more inside the bank. I think we've done a really good job of hitting the mark so far. This is a multiyear program, so we still got some ways to go. We're at the beginning of the journey, but I think technology capabilities will be a key strength of the bank going forward. Thank you.

Thank you, Michael. And we're going to take a little time and go through some a little fireside chat kind of conversation, and we can open it up, if we've got time left for today.

Sounds good.

I think what's interesting, just to think about everything that's happened with Citizens since the IPO, it's been just over a year since you've been there. So maybe you can just start by telling us what attracted you to Citizens in the first place.

Yes. So I -- first off, I was searching for -- to be a CIO role. So I was 1 of 4 divisional CIOs in American Express. And I've really done works in the infrastructure, had works in engineering, I've been CTO. So I've done a lot of different roles across American Express, but I haven't done the role, the Head of Technology Services. So I was really looking for that CIO role. And then secondly, when I think of the culture at Citizens, it's actually very similar to American Express. So it's very customer experience-focused, has a big focus on brand, so -- and on driving results. So when -- it seemed a really good fit. And frankly, I was very impressed also by the leadership team. Bruce has a very strong vision of how we can leverage technologies. And I think the rest of the leadership team that he put in place since the IPO is very, very strong. So I was very impressed with the leadership team. And I sit on the ex-co, which is the Operating Committee of the Board with them, so I have a lot of interaction with them.

Sure. Sure. Good. I know, again, it's somewhat early, it's in the first year. But I guess is there anything you can talk about as far as any wins or successes that you can highlight for us?

Yes. I think as I look back over the course of the last year, we really made a big turnaround with stability of the platform. So I'll just give you 1 data point. In Q4 of 2019, we had 16 significant outages that impacted our customer platforms. Move that forward to Q4 of last year, we got 4. Year-to-date, I know it's only the middle of April, so it's 1 -- we've had 1. So we've made some big strides in improving stability in the bank. We started the year on -- when we did have an incident, our mean time to recovery was 9 hours. Now it's an average 2.5 hours. And we're bringing that down. Our goal is to get it under 2 hours. So I think there's been some sort of -- I really put a lot of focus on making sure that our systems are protected from -- whether it's denial-of-service attacks and cyber, whether it's the resiliencies there in the applications, whether we have the right monitoring in place. So it's really been a core focus for us, and I think we've really seen terrific results.

Yes. I think some of the things you just mentioned, right, are -- I think about the challenges then. You talked about some of the successes. I guess what are some of the challenges that you've seen in the last year?

Obviously, the key challenge is always talent. So how do we move our colleague base from what was a mode of overseeing engineering to doing engineering? And then how do we attract the right talent to the bank? And frankly, we've been successful doing that by moving outside. We're still focused on hiring in Boston and in Rhode Island, but we've also looked at some other tech centers. So we're hiring in Charlotte, in Nashville and in Phoenix, Arizona. And we're being able to tap into some really great talent there. But keeping hold of these people is a challenge. You've got to have the right structure in place. You've got to give them the right tools. You've got to give them the right type of fun work, that sort of, and I think we're doing that.

And actually, that's what I was going to ask you next. I mean part of the things you highlighted is attracting the right people and your ability to do that. Obviously, banks don't have the history of being the most exciting technology places to work for versus these fintechs and other start-ups.

They don't?