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

Good morning, everyone, and thanks for joining. Delighted to introduce -- welcome you to our 36th Annual Strategic Decisions Conference, obviously the first virtual Strategic Decisions Conference, this is the second year we as Autonomous Research have been running the conference along with the broader Bernstein franchise. We have over 100 CEOs presenting over the next 3 days, including 20 within the financial sector. So we're really delighted to be able to bring this to you and hope you find the next 3 days valuable. To kick things off in the banks, we're delighted to have Bruce Van Saun from Citizens. He's the CEO of the company, led the company through a spinout and IPO, a little over 5 years, closer to 6 years ago. Over that time, he more than doubled the ROE, attracted a tremendous amount of leadership and talent to the bank and really expanded its presence and capabilities in several key areas. Obviously, COVID has changed things a little bit in 2020, but their bank is navigating things nicely, and we're delighted to have Bruce join us here this morning for the opening slot.

So Bruce, thank you for taking the time today. To start, obviously, there's been a ton of focus on credit quality at banks overall and Citizens in particular. The million-dollar question for all banks is how high will provisions go and how long will it last? I appreciate it's only been 5 or 6 weeks since you reported earnings, and this is an unprecedented situation for all of us. But maybe to start, can you share with us how things evolved, how are they trending versus your expectations? And anywhere you highlight that credit quality is maybe coming in better or worse than you initially anticipated?

Well, thank you, Brian, for that introduction. And I'm not surprised that credit is first up on your list of questions. But in any case, I think we made the best assumptions that we could at the time of earnings. So we went with a Moody's baseline scenario near the end of March, that had a fairly deep contraction in the second quarter, followed by a relatively fast recovery in the second half of the year. And I think that would go under the heading of a V-shaped recovery. I think by the time we got to earnings, there was some concern, the next Moody's forecast midmonth had been slightly deeper recession and then a slower recovery, which indicated that there may be a need for more provision build in the second quarter. What I'd say since then is that we've now seen -- started to see the reopening plans of the states. And we're seeing economic activity pick up. We have a chance to observe what the impact of the stimulus bill is and programs like PPP. And those were all things we had to estimate when we came up with a reserving at the end of the first quarter. So when I kind of step back and like where are we now, I'd say things that are positive, probably a bit on the consumer side that the programs that the government has put in place, enhanced unemployment insurance, the stimulus, direct checks to individuals, the PPP funding, I think, has been positive in terms of creating more income for consumers to get them through this rough patch. And then other aspects, such as increased use of forbearance and avoiding TDRs when you're working with your customers to get them through, I think that's also been positive. So I would say our consumer book for the moment, has been holding up, I'd say, a bit better than anticipated. A lot will depend on how long this lockdown phase continues and how fast we get to reopening and recovery. And so we could end up with a positive surprise there. But if things slow down, then maybe not. So I'd say, net-net, though, positive on the consumer side. And I'd say commercial is probably about the same. So we had done a very comprehensive analysis of the sectors that we lend to that would have the greatest impacts from COVID-19. We've done a comprehensive cash burn down analysis to look at what the liquidity picture was going to be for those companies. And what adjustments potentially needed to be made to their funding structures or their loan covenants and so we've been very proactive there and working with those borrowers to make sure they're on the front foot and they're finding a way to get through this tough period. And I'd say that's going about the way we expected it to go. So I'd say that's the picture overall. I think we'll learn a lot more in the next 30 days and see the pace of reopening and see the further evidence of how the stimulus program has impacted individuals and companies. And so when we get to the end of the quarter, I think we'll have a much clearer picture and a better ability to estimate the reserving that's necessary.

Maybe away from credit, preprovision earnings, revenues, less expenses, they held up very nicely in the first quarter. And you used the term on the conference call, I like saying the preprovision earnings are really your first-line of defense against a period of elevated losses. Maybe we can frame it the same way, it's only been a month or so. Obviously, a lot of volatility out there. But can you give us a sense of anywhere things are holding up a little better than maybe you expected or maybe a little bit more headwinds in terms of revenues and expenses.

Sure. And I do think PPNR is key here, and I really like what I see in terms of the first quarter performance, where we were pretty stable with the fourth quarter. And then the guidance we gave for the second quarter was to actually be stable to slightly up and a positive outlook for the year on PPNR. So what's going on to deliver that result, effectively has been very strong fee performance which is really led by our mortgage business. And so we had a very strong first quarter in the mortgage business. And I would say, so far into the second quarter, we anticipated continued strength, but we're seeing probably even some upside there in terms of the performance in our mortgage business. I'd say most of the other categories are about where we thought maybe the transactional-related fees and consumer a little softer. But we also have a pickup on our interest rate hedging revenues on the corporate side. And so net-net, I'd say, fees will be a little better than we had anticipated. At the same time, we -- I'd say, NII will be a little softer than we anticipated for 2 reasons. One is the LIBOR-OIS spread compressed faster than we anticipated. And then line draws, paydowns have been a little faster than we anticipated. But these, again, these are relatively modest impacts. And so when I step back and I look at revenues, I'd say slightly better on fees, maybe slightly lower on net interest income. But the revenue picture holding up very nicely. And we always do a good job on expenses. And so I don't think there's any surprises there. So again, I think PPNR is really important. We've demonstrated that over time, we've been able to diversify our business model. And so we passed the baton if these conditions are creating headwinds for one business, they often create a tailwind for another business. And so that resilience in the PPNR has really, really been important.

Let's shift gears to funding. We've seen some extraordinary moves in the industry balance sheet data for banks. And probably the one that stands up the most right now in recent data is just the level of deposit growth we're seeing on the order of 75% annualized over the past 2 months. I wonder, could you share with us, is Citizen seeing that kind of uptick, any thoughts as you look at your customers and talk to them, where is the money coming from? And is this a short-term boost or some money that would stick around for the longer term?

Well, it's a complex question. There's a lot of aspects to it. But I would say, broadly, yes, I think we've seen very strong levels of deposit growth and attractive sourcing of deposits as well. And I'd say it starts with the Fed opening the spigots and providing a lot of liquidity into the system, and that has to go somewhere. And so we're capturing our fair share of that. Some of the programs that have been designed like PPP, put money into company's pockets that money gets deposited and then it gets drawn down and spent. So some of that will be temporal. I think the line draws we captured a high percentage of those deposits. And then some of that will be either paid off or used in the business, and that will trapes down a little bit with time. But I think there's also a flight to quality that you're seeing. So banks are a safe place to deposit funds. Folks may not have as much confidence in money funds, you can pick other alternative investments for corporate treasurers. But I think the cash flow into the bank from corporates has been really, really strong. So I do think there's certainly legs to the growth in deposits. And then I think our LDR has held up extremely well, and will continue to do so.

You mentioned the PPP program a couple of times, Paycheck Protection Program, the government funding for small businesses. I wonder if you could touch on it from 2 aspects. One, how has it gone for customers? Do you think it had the intended effect? Has it helped them bridge the gap and stay in business? And then two, it does have the potential to cause some volatility in banks reported financials, in particularly, the net interest margin. So any thoughts on what we should expect there?

Yes, sure. So I think there were some growing pains with getting through the process. And so there was a lot of anxiety on the part of small businesses about whether the pot would run dry and whether they would be able to access that financing, which really, in effect, is a grant. And so small businesses don't need to carry more debt. They need an equity infusion to get to the other side. And so I think that was well conceived. And I think once the SBA and the banks work through some of the growing pains, we achieved the desired result. And so that fair amount of money was distributed to small businesses. I think they really needed it. And I think it's going to help many of the businesses survive and get through to the other side. I think there's -- the conversation taking place in Washington about having a longer time frame to potentially spend that money or spend it on some different things if payroll isn't their biggest obligation, I think those make sense. I would like to see that bipartisan legislation go into effect. And I think that would also really help businesses survive this period. So we're watching that carefully. Initially, the forgiveness was on an 8-week time frame. And so that would have resulted in a fairly big income recognition in the third quarter. I think if we end up with a push out in terms of the timing to use the money and then seek forgiveness later in the year that could, in effect, level out the income recognition more between Q3 and Q4 and maybe see some slight spillage into Q1 of 2021. So we're watching that. And if I were a betting man, I'd say those -- that legislation will make it through. And therefore, you'll see maybe a bit more in Q3 and Q4, but you'll see things smooth out a little bit between -- over the second half of the year.

Maybe we can broaden out from the PPP program specifically. When you look at all the programs, the Fed's enacted and more broadly, the government treasury, everything that's been done. What stood out to you as the most positive, the most helpful? And conversely, is there any way where you see gaps or additional measures you'd still like to see?

Well, I certainly, at this point, would give the Fed an A+ for assessing the situation correctly, designing a plan that was very comprehensive and very forceful and bringing stability to financial markets, which I think in the early days when people saw what was happening and that we were going to have a severe lockdown across the country and put the economy in a coma. I don't think people quite understood what that would do in terms of inducing some panic and illiquidity in the market. So the fed arrived and kind of with a very comprehensive, powerful plan, I do think things like stabilizing the money market area was important, the corporate bond market was important, and we're seeing a lot of the fruits of those programs in terms of high-grade issuance, opening up, and then now noninvestment-grade issuance for better companies has opened up. Money market funds are behaving well. So there's really been a great deal of thoughtfulness and proactivity on the part of the Fed that should be called out as being very positive. I'd say the one program that is still a little up in the air at this point is the Main Street lending program. So we understand the need that's there. It's been designed in such a way that I think gives companies different avenues to pursue funding but this is not a grant program. This is just going to be putting more debt in place on companies to maintain solvency and liquidity and get them through to the other side. There are some tough conditions that go with taking that money. So I think many companies will seek other funding from banks or from asset-based lenders if they can achieve that. And so I think if the -- if the situation stays tough or worsens, then I think you'll see more companies avail themselves of Main Street lending. But if, in fact, we are in a V-shape and economies are opening up and the markets and the bank's willingness to lend stays where it is, then you might not see that much take up on Main Street lending.

Maybe let's shift back to running the bank. You've talked about the need for Citizens to become more efficient for a long time. And you've made steady progress on that front for several years in a row, in particular, with your TOPs program, tapping our potential program as you've dubbed it. Can you give us an update on how the latest one, TOP 6 is progressing, and also any additional levers or changes to how you think about approaching expenses over the next year or so as we manage through this COVID condition?

Yes, sure. So first off, TOP 6 is going very well. So we had launched the program in the middle of last year, and we had a number of work streams and leaders responsible for delivering on those work streams. And so we already had made -- had a fair amount of momentum when COVID-19 and the lockdowns hit. So it makes me even more pleased with the benefit of 2020 hindsight that we designed and scripted the program when we did and launched the program. I think we're taking certain actions in terms of workforce reductions that we're delaying during this period when the economy is in lockdown just because I think it's the right thing to do. We're trying to find some other cost savings to make up for that. But I think we're still on track in terms of achieving those by the end of this year. So we'll still -- we'll be fully caught up easily in the second half of the year is the current thinking. I do think you're right to say that we've got to go back again and look for even more because clearly, we didn't anticipate that the Fed was going to go back to [ surp ] and so that will create more pressure on the top line on revenues, and therefore, you've got to keep looking at your expense base. And I think through this whole COVID-19 and lockdown period, we've learned a lot. So we've learned that customers are much more willing to embrace digital channels, embrace, virtual interactions with advisers. And so we can -- I think the next frontier of what we're looking at would relate to that is how can we expand the digital -- the digitization of the bank with the front end tools, rethinking distribution, end-to-end digitization of our processes to streamline operations, technology, become more efficient, while also delivering better customer experience. So I think there's a big prize in that. We're stepping back to study that what's involved, how much do we have to spend? What's the timing for when we can deliver that. The use of virtual advisers and maybe taking people out of physical locations and hubbing them so that they can have a place where they can regularly interact with customers virtually. I think we have ideas around a war on paper. We still produce a lot of paper. So we're starting to work on an expansion of that program. And you'll just have to stay tuned as we develop that, we'll share that with investors.

I like the war on paper. I can certainly go with a little less. Before I go to the next question, I apologize, the programming note, I should have mentioned at the beginning, everyone following along should see 2 links on the left, one for Q&A pigeon hole system. So you can submit questions via that. We'll go to that in a few minutes. And the second is for our Procensus survey that you can take during or after the presentation with a couple of questions on your views on Citizens stocks. And those links will be at every meeting. So as you go through the day, you can use those to submit questions and/or submit your views on the company. Let's spend a moment on capital. When the market is in a bad mood, people asking whether banks need to raise capital or cut the dividend. When the market is in a good move, they ask me when the buybacks can turn on. So maybe let's start with the bad mood question. For people who may be worried about the share count or dividend at Citizens, what metrics, whether it's your internal stress test or others can you share to reassure them?

Yes. So look, I think we've been very clear that under all the scenarios that we've looked at, we believe that the dividend at the current level is secure. And so we have a high degree of confidence we can sustain that. Not sure exactly what the Fed is looking at in terms of additional stress on their scenarios. And so we'll just wait and see how that plays out. But we think there can be quite a bit more stress before you'd have to actually take a hard look at the dividend. With respect to the buybacks, I think our view has been that if the economic scenario that we described on the first quarter call is close to where we are then we should be building capital over the balance of this year back towards our targeted range of 9.75 to 10. So we printed 9.4 at the end of the first quarter. We had the big line draws in that, and we put away a big reserve build. But now we've suspended share repurchases through the end of the year. So -- and we think our PPNR and profitability is going to hold up nicely. So we could see the scenario where we're building back towards that 9.75 to 10 range. I think once you got there and you were in that range, and you saw that the worst was behind us. And looking forward, you feel that the economy is getting back on solid footing. And we've dealt with the current pandemic, and maybe there's a vaccine. But in general, the outlook for 2021 looks positive, then I think you could start to contemplate to introduce some degree of buyback into the equation.

And oftentimes, it's tempting to think about capital as kind of a one-dimensional equation, just the numerator, do you have enough, et cetera. There are a lot of different levers involved. I think you mentioned on the risk-weighted asset side, the denominator side, maybe the corporate line draws were starting to reverse out a little quicker than you expected. I believe you have securities gains excluded from capital. So maybe that's an avenue available. Can you just talk through some of the maybe other levers on capital that people don't necessarily think about as much that are available to the bank.

Yes. I mean one thing, Brian, that we're constantly thinking about is moving to an originate-to-distribute model, for example, with some of our consumer assets. And so you've seen us sell some mortgages. We've had an ability to really generate significant mortgage originations. And if you're originating them at the right pricing, then you can move those off your balance sheet and retain the servicing. So that's one thing that we've started, but we've also looked at auto, and we've looked at student loans. And I think we have a very strong origination engine in both areas. But if we move to originate to distribute, we can ultimately pick up more fee income. We could pick up gain on sale income and servicing income. So those are some of the things that we're looking at. So BSO, in general, our balance sheet optimization effort is looking at that as to how do we optimize what we retain on our balance sheet and the risk of adjusted returns we make on the balance sheet while really optimizing the capital. And if we free up that capital, what would we do with that capital, what are the best uses of that, obviously, supporting loan growth that's attractive to us and building out the customer base of the company, so we can continue to deepen relationship. That's attractive, looking for more bullet-size acquisitions on the fee-based side, so we can continue to up the fee percentage to total revenue and do more for our customers, that's attractive and buying back stock at the depressed valuations, that's attractive, too. So we'll be working that denominator as part of our broader efforts.

Maybe let's turn to your clients for a second. When you talk to your commercial customer base, can you share us -- what are you hearing from peer CEOs in industrial and other areas? Are they in hunker down moment -- hunker-down mode still, is there starting to be a little bit more optimism on the recovery. Any thoughts you can share there in terms of your client sentiment right now?

Yes, sure. So I think it varies. There's some industries that haven't really suffered mightily under this current situation. And then there's other industries that have, I think, for the industries that have job one was survival. And so I think in the early days, those management teams were really, really focused on bolstering their liquidity and making sure they had sufficient liquidity to get to the other side of the river here in terms of whenever this thing ends and working with their banks and other financing partners to really bolster that position. I think every CEO, whether it's in the companies affected or the companies less affected is trying to step back now and say, how has the world changed? What is the new normal? What are the mega trends that are going to come out of this period? And then how do I position my company to take advantage of that so I can come out stronger and I can be better positioned overall than my peers, my competitors. And that's something that we're doing, too. I think the banks are all. We've gone through a period of making sure that we're helping customers and the banks on a very solid footing. And then getting back to taking the time to think long term, go through your strategic planning process and identify opportunities for investment. And so you can continue to drive that top line growth and actually come out stronger from the silver lining from going through a tough period is you learn some things. And then hopefully, you can put that to good use and come out stronger on the other side.

And maybe sticking with that same line of thought, your footprint does stand -- span, sorry, quite a few different states. And some of those have done better or worse with COVID infection rates, some of them have been more or less aggressive on lockdowns. Are you seeing a meaningful difference geographically either in the performance of credit quality or early signs of a recovery?

Yes. I wouldn't say not big geographical differences in credit quality at this point. Certainly, with consumers. As I said, the government stimulus plus forbearance has kept that picture in decent shape. And I'd say, it's more industry-specific than geographic-specific with respect to the companies, the corporates that are experiencing the most challenges. But in general, our view is that the states are going to open up on their own pace with their own measures. And we need to be ready to support that. And so our own offices, we have folks in Southern states, in Mid-Atlantic and New England and the Midwest. And so we have a plan that allows us to reopen with the states as the states are reopening. And we want to do that. We want to do our part to bring people back into the office. And I think there is still value in working in an office environment. There's a lot of positives that come with that. But obviously, we have to do that in a safe fashion. But we'll be ready to do our part. And it's interesting to see, like the Southern states have opened up earlier. And so we've already got some of our teams back into to the office and they feel -- most people feel good about that. But that gives us a little bit of knowledge so then when the Northeastern states open up over the next couple of weeks, we can put some of those learnings to work.

Maybe shifting gears to one specific initiative, merchant point-of-sale finance. When you started this journey a couple of years ago, I don't think you would have predicted social distancing, the explosion of e-commerce, certainly not at this speed. But when you step back and you've built the capability to finance things like phones, like video games, do it digitally, a lot of things that have suddenly become super valuable in this environment. Are there any trends that you're seeing in that business right now that you could share? And maybe longer term, what are some of your ambitions going forward for those capabilities?

Yes. That's a really interesting question. And I think we designed a really great solution with Apple around their iPhone upgrade program, which was really the foundation for this broader initiative into the merchant point-of-sale financing. We've been able to lever that into great relationships with security alarm companies like ADT and now with Microsoft around Xbox. And I do think companies looking to increase their sales targeted distribution to certain customer sets and make the financing part of that equation very attractive. I think that really resonates, and there's some tailwind around that. Today, you've got to get the stores open in some cases if the sales go through stores, but a lot of those sales actually happen through online and virtual channels. So I'd say, we expect the year to turn out well, obviously picking up more towards the back end of the year. There's a lot of seasonality in the fourth quarter with some of these products that we're financing. But still have a great outlook around that. And I think one of the -- that's one of the 3 strategic initiatives that we have is to really figure out how to take this to the next level. And I do think that point-of-sale is ripe for disruption, particularly the way people purchase on credit cards is not often a good experience for the consumer or for the merchant. And so coming up with new solutions about how to help merchants finance their sales to me is a ripe opportunity. And I think we're really well positioned for that. And then the second angle to that is actually to go directly to consumers and give them a financing capability that they can either keep on their smartphone, and they can look at how to pay for things wisely. So they don't end up caught in the hole of significant revolving credit, where they're paying very high interest financing charges. And so we're also developing that side of it. So part of it is working with merchants. And then part of it is to go directly to consumers. But as I said, that's one of the 3 big strategic initiatives that we linked with the TOP program. We're continuing to fund those in this period because I really think it's important if you've got these good ideas and they have some tailwind and momentum, you want to come out of this period stronger than your peers and competitors. And so we're not looking to defer those initiatives and save a couple of cents of EPS. Most of the models have EPS weigh down this year. So making back $0.05 and deferring these things and then slowing your kind of recovery phase over the medium-term to me doesn't make a huge amount of sense. We'll double down on digitization and other ways to find efficiencies, but we're going to protect that investing for the future.

That's great. Before -- we've got about 15 minutes for investor Q&A. And again, there's the Pigeonhole link on the left-hand side of your screen, if you'd like to submit a question or vote on ones that are there and bringing to the top of the list. There is one question we're asking all CEOs, all 100 CEOs presenting at this conference across industries. It dovetails very much with that last comment you just made about wanting to continue to invest. For the sake of completion, as you think through and beyond the pandemic, how do you expect your priorities to shift, especially as they relate to either cutting costs or increasing levels of investment?

Yes. So I think it's a lot of what I just covered, Brian. So we need to work faster towards a digital future. We need to be alert for opportunities to do more for customers or grow our customer base. And so we're, I think, looking for ways to do all of that and do it faster. So one thing I'd say more broadly that we've learned through the pandemic is clock speed matters and being able to work very quickly and effectively matters. I mean you look at the PPP program and the effort that went into getting that launched and it's taking in 25,000 applications in a 2-week period and kind of building from scratch. It just took an incredible effort and collaboration across the company and agile ways of working. And so the path that we're heading down towards our next-generation technology and new operating model in terms of agile approach for change are things that really resonate and prove themselves out through this period. So we're going to keep investing. We're going to do that in ways that we can get there faster than we have in the past, but then it's important to self-fund those initiatives. So I think the market, clearly, with headwinds on revenues with the Fed low rate environment is not going to tolerate. Well, I just want to go invest. So let's go -- if we build it, they will come, and investors will have patience. They won't have patience to step up and do a lot of investing. They're going to say, you have to go to work on your own cost base and find those efficiencies so that you can self-fund the things for the future that are going to keep you strong for the future. And the good news there is, I think, for Citizens Bank, that's been our MO. That's the way we've had to operate since we were owned by RBS, and we spun out and went public. Nobody handed us anything. We knew we needed to make a lot of investment, but we really worked hard in rearchitecting the expense base of the company, created those efficiencies and then invested that money wisely and that's what we're going to continue to do going forward.

So turning to the questions that got submitted here. I mean I guess I'll group them in a couple of different topics. One is some follow-up comments on some of your revenue trend commentary. Two is some follow-ups on credit. And then third is your thoughts on the stock and valuation. So maybe let's first on the revenue side. You mentioned mortgage was an area of strength. And this is something we're seeing kind of broadly, purchase mortgage applications this morning came in up 8% year-over-year. I don't think I would have predicted that with 20% unemployment. Real estate viewings in many states are up double digits now. Everyone's going out to try to buy a house. Any specific thoughts on the near-term trends you're seeing in mortgage, but maybe more broadly, are you surprised by the strength on the purchase side? Does it feel sustainable to you? Anything you're feeling more broadly on housing would be helpful.

Sure. Well, a lot of the momentum that we've had has been around refis, which have moved up from historically being 35% of the market to almost double that over the past couple of quarters. And so I think there's still kind of juice in the lemon on that whole trend, and we're seeing that play out through the second quarter. I do think also that some of the nonbank lenders, participants in the mortgage market have had to cut back, have had some liquidity constraints or servicing constraints in terms of volumes. Fortunately, we've invested in our digital front end and in improving our efficiency. And so we've been able to keep up with pace with those volumes and actually gain market share during this period. And we've seen because of some of the issues with some market participants, margins have widened, which is really gravy because that's profitability without expense that comes with it. So those are some of the drivers that have played up to now. I think if the purchase market is rebounding, and that's something that we're watching. If that has legs, that, I think, could continue to sustain this farther into the year. Typically, you'd get seasonal bounce. Many people move house in the summer months between the school seasons, and that would be nice to see. There is, I think, a general kind of trend towards folks living in big cities saying, is it still safe? I like a lot of things about city living, but if I have a family or I have a preexisting health condition, I might be better off moving to the suburbs. And so I think particularly around the New York metro area, you're seeing a pickup in Connecticut rentals, for example, are through the roof. And I think purchase volumes are up in general in this tristate area around New York. I think you'll potentially see some things in Boston area as well. So anytime there's that shift in mentality, any kind of volatility there creates opportunities to -- for financing, which should be positive for the business. So in general, I think the business outlook for the entire year continues to be very positive.

I own a home in Brooklyn Heights, and I really like your answer right up till the end there. Anyone's looking to move to Brooklyn right now, call me. We've got a couple of follow-ups here on your net interest income commentary. Maybe one way to frame it is you mentioned things like LIBOR normalizing a little quicker than expected, line draw starting to pay down a little quicker than expected. As 2Q comes in a little softer on NII, are you just getting to where you expect it to be in 3Q, but getting there faster? Or is kind of the trajectory also a little bit lower?

Yes. No, I think that's probably right that we were on a glide path down with NIM, and I think we're just getting there a little faster. And as I said, the good news there is that with the strength in fees, it's not really going to hurt us in Q2.

Okay. In the earnings deck, switching to credit, one follow-up I've gotten here. You and other banks broke out your COVID loans of concern or industries of concern. Your disclosure added up to about 11% of loans. In regards to that 11%, where do you stand on the safety of those loans? Any industries that are trending better or worse within that? And what is the risk they pose to potentially rising your overall level of commercial reserves?

Yes. That's a great question. I think it's a little early to say that there's any major change in that. I think there's a couple of positives. The oil price looks a little firmer than it was and casino venues have started to open and are seeing good visitation. So maybe there's a couple of bright spots. Some of the restaurants, the fast food numbers have been held up pretty well. So I'd say on the balance, maybe there's a few kernels for optimism there. But I'd say it's a little -- it's a little early in general to say whether that's trending positive or trending negative, I'd say broadly, it's about where we thought it would be.

One, I'm sure that's near and dear to your heart. Why do you think the company has lagged here on a price to tangible book basis? What can you share with investors on why the company might warrant a higher multiple versus what the market is currently giving a credit for?

Yes. Well, it's a tough one. I think consistently since the IPO, we've been growing our earnings near the top of the peer group. And I think we're doing that in a very prudent fashion. We had to relever the balance sheet. We had to invest in our fee-based businesses. We've had to really be disciplined on expenses and improve the efficiency of how we're running things. And so I think our track record of execution and having a good strategy is very, very solid. I think the market in risk-off mode, stay invested on banks that maybe are -- had a better -- a good crisis the last time around or a little bigger, more diversified, higher fee percentage. And so I think the kind of market looks at the fixer uppers, that kind of -- there's a little bit of a have and I want to have grouping that we're kind of in that fixer up or that second bucket. It tends to trade at an exacerbated discount to the safer group which I think, over time, when things move back towards risk on and positive and who's going to grow their earnings and who's got a strong team and who's got a good plan, I think we will see the stock recover and recover nicely. We've seen that historically in the past as well. I do think we're in a proven ground right now around credit. I think one of the concerns was that we relevered the balance sheet where we're taking undue risk and I used to have folks on my team, say, "Gosh, what we need is a good recession, and then we can prove how prudent and conservative we've been. And I said, no, you really don't want to have a recession to prove it. I'd like to go my whole career without having another recession." But here we are. We're right in the midst of one. And so I think it's really, really important. And everybody understands that we have an obligation to help our borrowers make through, to not be fast on charging things off, but to really put our brains around how to make sure companies get through this. And I think in that process, it will demonstrate that we've been prudent, and we'll -- when any exercise we do, any CCAR exercise the Fed runs, shows that our credit losses should be slightly better than the median of peers, and we need to prove that out. And I think that will go a long way. I think showing the resilience in PPNR and also the diversification in our fees is and the continued growth and buildup in our fee businesses. I think that will work to continue to not only demonstrate resilience, but just show, I think, a higher returning business model over time. So there's things that we have to do that we still have to execute on to kind of merit getting into that have group. But I think we're fully capable of doing that. It's just going to take a bit more time.

It's a great point that how you did last recession isn't always predictive. Sadly, somewhere there's a report with my name on it saying how great M&I Bank was because they hardly had any losses in '01/'02, and it didn't work out so well for me or for them in '08/'09. Maybe a couple of ones before we finish up here. We've got 3 or 4 minutes left. M&A, obviously, it was -- I think last year at this conference, I was asking about MOEs. Maybe you can take it any way you want. But as people think both about potential acquisitions and potential partnerships as it relates to Citizens, how would you answer the M&A question?

Yes. So I'd I've consistently had the view that we have sufficient size. If you take the line draws, about $170 billion. I think we are a nice size that allows us to have enough scale to do the technology investing we want to do and -- but we're also manageable. And so we can be nimble and flexible and innovative. So I think we don't have to bulk up. We don't need additional scale to compete effectively. So a lot of it is, do we choose the right places to play? Are we really sharpen our focus? Or we continue to be innovative, those to me are the keys. Having said all of that, if there's opportunities to acquire another bank, the same way, Bill Demchak is talking about. There's distressed situations that arise sometimes in these situations, you need to be alert to that. If there's opportunities to partner on favorable terms you'd always need to consider that. But for now, I'd say the most likely course is that we're just focused on executing our plan, innovating, being nimble, driving our strategic initiatives and then looking for fee-based acquisitions like the ones that we've done up to now. We've done a couple of M&A boutiques. We've done a very smart wealth deal. And then we got Franklin American, which, frankly, has been a godsend through this period and given us a fair amount of diversification as we head into a lower rate environment. So anyway that's what I think is the likely scenario.

We've got about 2, 3 minutes left here. I'll try to take 2 more questions. One, again, on credit. You mentioned consumer trends maybe in line to a little better than you expected so far, commercial may be more in line. As we think through 3Q and beyond and the Moody's forecast that you and other banks use, what's the relative weighting or importance? Is the provision trends going to be more driven by your observed performance? Or is that last published forecast at the end of the quarter? And what is GDP and what is unemployment still a risk we need to be cognizant of.

Yes. That's a great question. I would say this whole reserving process is more of an art than a science that requires a lot of judgment. There's many, many, many, many factors that go into this. And so you start with an economic forecast. But if the unemployment, if the GDP contraction and the unemployment numbers are worse than what they were when the first quarter reserve was put away, you still have to observe what you're seeing, what is the impact of the mitigants such as the government programs, what are you seeing in terms of customer behavior, what's interesting, many of the folks who've applied for forbearance, I think around 40% of the folks on the -- in the mortgage forbearance are still current and paying on their mortgage. So why is that? Was it really just something that was the sleep-at-night factor, just in case I need it, I'm going to ask for it. Is it that the government programs have provided enough financing to give people staying power, and they don't want to fall behind. But I think you have to look at all of those things. And then kind of look at how fast things are going to recover because many of these programs and many of the financing structures that companies have put in place are designed for a kind of date certain that if this thing lasts 6 months and then I'm employed again or if this thing -- if I'm a company, this thing last 6 months and my doors are open and people are coming back to -- and my customer demand is there, then I'll be fine. That's the other thing you have to look at is what's the pace of that recovery. So I think the chances that there'll be a reserve build in the second quarter are high across the industry. I don't think, in general, they'd be as high as the first quarter based on where we sit today. And we'll just -- as I said, we'll learn more over the balance of the quarter, and then we'll see how that turns out.

One last one in the final minute we have here. Work from home, some people say it worked for a little while, but it doesn't change the way we work going forward. Some people say it's a big seminal shift. As you look at your business, do you think the work from home is temporary or permanent?

I think there'll be expanded use of work from home. So I think that's a given. There's many folks who've demonstrated they can work effectively from home. But I don't think there were many companies you go back 5 years ago, Yahoo, IBM, many companies who had moved primarily to remote work, decided it wasn't that effective at the end because having people together in an office setting delivers a lot of positives. It helps strengthen your culture, helps you better collaboration, better development of leaders and talent and mentoring. So there's a lot of positives to having people in the office setting. So I think we'll still have -- we'll be happy to get people back into the office. People are social animals. They like to associate with other folks. They enjoy other people's company. So I think that will always be in the equation. But for example, if we need more social distancing then some folks may come in 3 days and be at home 2 days and the other group may be in 2 days and off 3 days. And so I think we'll be flexible in terms of how we think about that. So I think you'll see a hybrid solution with more work from home, but the office continuing to be important to banks like ourselves.

Bruce, I want to thank you for taking the time today. It was a great discussion, and we always greatly appreciate your insights.

Okay. Brian, my pleasure. Great to catch up with you.

Thanks, everyone.