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

Good morning. I'm Susan Katzke. I cover the large-cap banks at Crédit Suisse. Next up for the banks. We turn to Citizens Financial. I'm pleased to be joined by Head Consumer Banking, Brendan Coughlind, for an update on Citizen's pretty unique positioning and growth prospects in the broader consumer banking businesses. So let's get started. I'm going to turn it over to Brendan for some initial remarks a prepared presentation, and then we'll go to a short fireside chat after that. And by all means, if there are investor questions along the way, please do e-mail be able to try and get those in. So Brendan, you're going to start with the presentation. I'll turn it over to you. Brendan, you're muted.

Well, if there's nothing more 2020 and 2021, then you're on mute, I don't know what it is. So thanks for that, Susan. Well, thanks. I'm really pleased to be here today with you all. And one of these days, we'll get to be able to do one of these face-to-face again, but at least we get some video here today. So thanks very much for having me. As Susan said, I going to make some prepared remarks, and we'll go into some Q&A. So why don't we hop right in. All the relevant disclosures are here on Page 2. So I'll jump right into the content. So look, kicking off here, we've made enormous progress as a consumer bank since our IPO, and I'm going to share a little bit of that with you. I'll share a little bit about state of credit, which even pre-COVID were some common questions we're getting around the consumer bank, given our growth trajectory and distinctive asset mix. And then we put together what I believe is a very bold and transformative plan to position Citizens to win in the consumer space in a very, obviously, rapidly evolving digital backdrop. So I'm going to go through that, where we believe we've got some real distinctive capabilities and put ourselves on a path with a right to win in a variety of ways. So I will share some of that. But let's start here, which is really just a simple grounding slide on the profile of our consumer business. What I would like to point out here is that, which may not be as commonly known, we are more than just a super regional bank. When you look at our profile, we are very much turning into a national profile, national scale business with a very strong mix of customers that are outside of our brick-and-mortar footprint. So we've demonstrated the ability to grow and grow quite quickly without the benefit of density of brick-and-mortar, which is, as I get through my comments, that hopefully you'll realize is really positioning us quite well to sustain outsized growth in a digital-first world. And when I look at our capabilities down on the bottom left of the screen, we truly have some capabilities that I believe are distinctive and differentiated versus our peers, starting with our education finance business, which is rapidly growing and providing great fuel for high-quality customer growth throughout the franchise. There's very clearly been a lot of interest, and rightfully so, in Citizens Pay. I'll talk on that too, very innovative, very high growth and very disruptive capability that we have in the market. We've got our mortgage banking platform to scale, and we were a first mover in building a national digital bank with Citizens Access, which I'll talk about our plans on where we go from here. Let me ground everybody on just a simple slide here that shows the dramatic nature of our transformation on why we believe we've got such a strong foundation to launch from here. When you look at the consumer bank profile in 2015 versus today, it's dramatically different. And I won't go through every point on this slide, but I'll hit on a couple of important ones. Just the customer base. When we went public, we were flat to maybe even contracting in terms of our customer size. We are now achieving top quartile customer growth. So our platform is working. Customers are voting with their feet, and we're taking market share. Our customer experience, while still have room to grow and improve, is rapidly improving. So from a customer perspective, we've got a real position of strength. I just mentioned our footprint. 5 years ago, we were very much a regional-only traditional super regional bank. We're very much a digital leader and have a national platform today, so a very different framework. We went from our lending businesses being in start-up mode to being undersized to now really having it truly be one of the most distinctive parts of our franchise and a position of incredible strength, and I believe we're positioned for outsized loan growth in 2021, which is certainly different than what we're hearing from a handful of other banks. One of the most impressive transformations really has been on the deposit side. When we went public, we had a relatively high beta and we were highly dependent on interest-bearing deposits, and we have really repositioned our deposit mix quite significantly, and I'll share some stats on that. But we've had best-in-class DDA growth, which has really positioned ourselves down in terms of our cost of funds in a fairly dramatic way from where we were in the last surf environment. So we're very, very well-positioned for more moderate betas but when interest rates start ticking back up, which obviously, they have a bit over the last couple of weeks. Our wealth business has got to some level of scale. We have more running room there. And then when you -- sort of the money part of the conversation, when you look at our financial profile on the bottom, it's night-and-day different. Almost triple the profitability of the business. Our efficiency ratio has dropped precipitously. The scale of the balance sheet has grown quite nicely, and our customers are highly engaged with the franchise. So for all those reasons, I feel like our jump-off point into a rapidly transforming business is quite strong. Let me talk a little bit about credit, and then I'll push the conversation into where we're going for the future. So you've seen this from us in the past, our portfolio is super prime in nature, high quality, and we've been growing at a relatively healthy clip on the consumer side with some of these niche businesses that we're really making a name for ourselves with education and point-of-sale leading the way. The HELOC industry has been in a state of decline. We have declined less than our peers and have #1 market share in originations. And the auto business was fuel for growth in the early days, and we've intentionally moderated that back as we found better uses of capital throughout the franchise. So we're very well-positioned. And my feeling in 2021 is given where we're at with student lending and the student loan refinance product, in particular, which booms a lot like mortgage and low rate environment, we will have outsized loan growth. In 2021, ex-PPP, we will grow faster in 2021 than we even did in 2020, and so that's a real point of distinction that we're using to play offense. When I look at credit performance, a couple of points I would share. And I know as the economy reopens, and we all have a little bit more confidence on the landing place of the health of the consumer, credit confidence is improving and no different at Citizens. You can see on the left side of the page, our forbearance portfolio is rapidly in a state of decline. 94% of our borrowers coming out of forbearance are landing on their feet and successful repayment, and our net charge-offs remain significantly depressed over prior levels. And my feeling is that we will have a return to normal on charge-offs. But at the moment, I'm not sure we're going to have a very significant peak over and above normal rates of charge-off given the health of the consumer. So we're not out of the woods. There's certainly some economic scenarios that could make that happen at a different pace. But I'm more and more feeling very confident in the pace of the economic recovery and the health of our consumer base, which skews super prime, and it skews affluent and mass affluent, which those customer bases have been less impacted by the economic depression than some other segments of our base. What I really wanted to spend a second on is the right side of the page. And prior to COVID, this was certainly a place of a lot of interest, and rightfully so. These are portfolio of student lending and point-of-sale that we're rapidly growing. They're different than what our peer set has in terms of makeup and questions around do we have our arms around quality. I hope this helps affirm that we've got great credit controls and the quality of the book is quite strong. So what you see here on student lending is that like the rest of the retail portfolio, forbearance is grinding down quite significantly. What is most interesting to me is, at the same time, our delinquency rates have also grinded down, depressed from pre-COVID levels. So a little counterintuitive as these customers that you think were a little bit riskier that went into forbearance came back into repayment, you might expect delinquency to go up a little bit, and what we're finding is that, that is not the case. And certainly supported by stimulus and other things in the environment. But it's a firming around the super prime dynamics of these portfolios that it's behaving as good, if not better, than the entire rest of the Citizens' consumer retail portfolio. The point-of-sale portfolio, I would say, is a similar story, but even better. Whereas this portfolio almost didn't even enter any state of material forbearance, and at the same time, delinquency rates went down materially. So when you look at this against, say, a credit card portfolio, the loss rate is materially lower than a credit card business, and the returns are consistent. So we're very proud of this portfolio. It's driving huge positive select, and the business is operating almost like there's no recession going on around it with delinquency at all-time lows and almost no customers in a state of forbearance. So just further affirming that the quality and the positive select of this portfolio is quite high, and I think it's affirming our bullishness on continuing to grow this business as a distinctive part of the franchise. Let me pivot a little bit to the future here. So one of the things that we tried to really do, and I think is a mark of great organizations, is when you're in tough times, you continue to invest in the franchise. And that's very much what we're doing. Investing in data analytics, aggressively investing in the right technologies to improve the franchise so we emerge as a leader in a digital world. We're continuing to broaden our capabilities, build on our -- the leads we have in the market with mortgage and the point-of-sale and education finance and Citizens Access. But all the while with a mindset of continuous improvement and self-funding our journey, by finding opportunities to extract expenses from other parts of the business and optimize our balance sheet, and redeploy capital in a way that improves the return profile of the business. This is what I would describe as our 3 big initiatives to reposition the consumer bank, to be fit-for-purpose to win in the future and to drive our financial performance from where it is today to truly top quartile amongst our peer group. Number one is a full end-to-end digitization of our platform. And while this may not be distinctive in 3 or 4 years' time, and really truly will ultimately be table stakes in our industry, it's a critical important -- it's critically important that we execute really, really well on this, and we're putting an enormous amount of energy. So we've designed this program to reengineer 18 customer journeys, which is principally the majority of our customer experience design in the bank over 2 to 3 years' time to really accelerate our position as a digital leader and make the bank really a digital-first, end-to-end platform. So an enormous amount of work there. Largely, these financials are covered in our project top program and in our medium-term guidance. But this is -- and what we're doing is we're really prioritizing those journeys that are expense-focused first to self-fund the rest of the journey and the tech development and investment that we will need over the next couple of years. Strategy number two is capitalizing on our lead on our national expansion to drive a truly digital-first national bank and national footprint. Unlike, I think, some of our peers, we really have a running start here versus a standing start with a significant amount of our revenues already coming from out of footprint and a number of really strong businesses competing well by themselves. And so I'll talk a little bit about that in a minute. And last but not least, really pivoting our mindset from independent growth of products and verticals to a horizontal view of our bank to really drive deepening and significant cross sell, particularly in our mass affluent and affluent segments, which we outsize our mix with our customer base. Our base SKUs affluent, which really provides a significant competitive advantage to us, where we've got brand-engaged customers with lower cost of acquisition to drive things like mortgage and home equity and wealth over the next 1 to 3 years. So I'll talk a little bit more about that. Let me page through a little bit more detail on each of these initiatives. So this is -- so what we've seen in 2020 around our digital agenda, probably not a lot surprising here to you. We have seen our digital engagement with our customers through COVID accelerate materially. When we have digitally engaged customers, the profitability goes up a lot and our transaction mix for the first time in the history of the company is more led by non face-to-face channels versus face-to-face channel. So our customers are very much engaging in this digital-first world, which provides us a lot of backdrop to reposition our network and invest in digital for the future. And while we were in COVID, we weren't just hunkering down. We've made some very significant investments to position ourselves for the future. You may have seen our new mobile app, which was about 18 months in development, launched in Q4 and then in early in Q1 with Apple, and we've already seen our star rating go up to 4.5 in the App Store. So very significant improvement, very foundational, and it's cloud-based and it positions us for a significant acceleration of digital development and capability in 2021 and beyond. Going to what we're doing about it here, this is our end-to-end digitization effort. As I mentioned before, we're teeing up 18 customer journeys starting with the ones that are most expense-intensive. So the first few journeys that we're reengineering are loan servicing, deposit operations, the call center and wealth. And so we're going to spend a lot of time thinking front to back, investing in technology, fully reframing the customer experience, and you can see some of the metrics below that we're expecting to grow, and we already have pretty material momentum in a handful of these metrics throughout the bank. So those journeys will generally take 6 to 12 months to put into production, and then we'll go on to the next 4 or 5, and then the next 4 or 5. So we believe this to be a 2 to 3-year effort to reframe the operating platform of the bank to be truly digital-first. So -- and as you've seen from us, we've communicated at least the early 2-year benefits as part of project top and the upsizing we did a number of quarters ago. As the quarters go on, we'll see that momentum build even further as we go into the out years, but you start to see a framing of the potential of this program and how important it is for the self-funding dynamic of the investments that we're making for the future. Tied to that is our brick-and-mortar strategy. So what we've done since 2015 pre-COVID is contract our branch network by about 20% since 2015, and you can see that, the head count going from 8,000 to 6,000. At the same time, the points of presence have reduced. The square footage has reduced as we reposition the brick-and-mortar network to more of an advisory network. In 2020, we launched a new program to upskill and reposition our people to be fit-for-purpose to win in an advisory-based world. We cut 850 head count in 2020 and repositioned a whole bunch of job families and upskilled them for advisory-based discussions. And what you can expect from us from here is about a doubling of the pace of closures between now and 2025. And we expect our sort of destination state in the medium-term outlook to be 750 to 850 branches that are fully repositioned as advisory centers. as we extract the transactional-based volume and push that digitally and reposition the network to be fit-for-purpose to have much more sophisticated conversations with customers like events, wealth events, retirement conversations. So we're very, very excited about that. We're well on our way and we're accelerating our activities in this regard, which is a big part of our self-funding dynamic of putting some of these savings back into marketing, back into digital investment and technology investment. Pivoting to national. As I said, we've got a very strong foundation nationally with 6.6 million customers nationwide, including almost 3 million outside of our footprint. What I would say is we were competing effectively but in a very silo-ed way. So having a lot of success in auto, a lot of success in student, a lot of success in Citizens Access. And we've got a real early mover advantage in many of those places, whereas some of our peers are really starting to think about how do you now get into some of these businesses to put together a full-service national digital business. We actually have all the raw materials already built, which really should mitigate the J-curve of investment here for the franchise. So where are we headed? Well, we want to bring together all of these capabilities under a single digital value prop umbrella. Our intention is to find a niche where we can compete to win and where we already have the right to win, and we believe that segment is the young professional segment. Our advantage in student lending and student loan refinancing, in particular, our advantage in Citizens Access, our advantage in point-of-sale lending all leads us to leading capabilities around this segment. So we're integrating those together under one umbrella, one banking platform to blend in a digital-first way. And so what you can expect from us here in the first half of the year is we're making a major investment in Citizens Access to pivot it to a cloud-based modern operating core that really positions us for a leading technology platform of the future for the bank. From there in the second half of the year, we expect to integrate a variety of lending platforms onto this bank. We -- hopefully, by the end of the year, we'll have a checking capability built into the bank and really start to put together a full-service value proposition for this young professional segment. In 2022 and beyond, we'd like to bring our wealth capabilities in, integrate our Citizens Pay capabilities into the same platform, ultimately building a comprehensive offering for this customer segment, fit-for-purpose. So question mark on whether or not ultimately a [ FIN ] network would be helpful to this. We'll cross that bridge when we get there in 2022, 2023, but we're very excited and confident that our plans will have all of our independent pieces and components put together and have an acceleration effect as we bring together the full nature of the bank to this customer segment. A lot of interest in Citizens Pay. So let me hit a few points here. We think this is a very attractive and very exciting market. I would say that there are a variety of ways to compete here. The credit card buy now pay later is one. That's not where we're necessarily competing. We're competing in a place that drives incredible positive select on customers. And you've seen that with the credit slides I just showed a second ago, and you can see it again with the quality of the customer down on the bottom right, with the average income and credit profile here. We have been growing quite quickly, top right chart, and we expect that to continue into the medium-term outlook. When I look at the value proposition here, it's really around responsible credit, particularly with the younger demographic. They don't particularly love the credit card proposition of potentially being overleveraged and making minimum payments for quite some time. And so the way this product is structured is a very modern way to think about compartmentalizing your spending behavior and paying it off much quicker. And so we're very excited about this. It's clearly resonating with the market. It's clearly taking share from the credit card providers, and we're uniquely positioned to win here. And we don't really have -- one of the benefits of having a sub-sized credit card business is we don't have a lot to cannibalize. So we're playing offense here and going after the card industry in a much more responsible way, in a much more innovative way to serve this client base in the way they manage their day-to-day spending behavior. And so where are we winning? There's a variety of places to play. I would say looking at the top of the page, we've got a decent amount of scale in this business, 5 million customers reached since we launched the program, $8 billion in originations. So this is meaningful. And tying it back into the national strategy, we're not paying marketing costs to acquire these customers. So success in national in a lot of ways. The question is, how are you going to build your brand? How much money do you need to spend to get customer scale? Well, we already have it here, we have brand engaged customers that we didn't need to pay an enormous amount of marketing to get. So it's an incredible competitive advantage for us to lever this business, to grow our national platform without needing to make an outsized investment in brand and marketing. Now brand and marketing will still be important but this is very much an accelerator and a mitigator of the J-curve investment needed to be a successful national player. But what you'll see here is our niche is the premier brands in the U.S. And so some of our competitive set here is the fintechs. They are playing down market with the smaller merchants, and they're having some success. We chose to compete with the premier brands, and we're equally having success here. Given that we have a balance sheet, given that our bank leads us to more innovation here, more customization around how we think about competing, how we put together programs for the Microsofts or the Apples or the BJs of the world, that has given us a distinct competitive advantage against the one-size-fits-all approach by some of the fintechs, and we're winning. And these major brands are selecting us on that basis. And so we think that is a real niche for us to continue to win and position as our differentiated platform kind of takes hold in the market. And we're very proud to be associated with these brands. I think it's flattering for our brand as well, and they're proud to be associated with us. And together, we're creating a great business and a great customer base to accelerate our national strategy. Lastly, let me talk for a second about deepening, and then we can go to Susan for some questions. I would say we've repositioned the bank quite significantly to help get us to a place where we have confidence in our ability to deepen. And the left side of the page shows you a bit of what we've done with our deposit base. We're growing households quickly. Our gap to peers for cost of funds is going down and our mix of DDA is going up. Well, that's very interesting from a financial perspective and quite important from a financial perspective. But as important from my perspective, this is a bellwether on the health of the franchise and what drives this is deep primary relationships with your customers. So that drives the deposit financial improvement. But what it also does is it positions you exceptionally well for deepening and cross-sell in nondeposit products of the business. And so we've got a number of things underway in the first half of the year to capitalize on this, including launching brand-new value propositions for our mass affluent and our affluent businesses to drive deepening with a particular lead in wealth, but also mortgage and some other lending products. Our customer base is uniquely positioned to be supportive here of an acceleration of revenue. We over-index on mass affluent and affluent customers. You can see that on the top left. More than half of our customer base is highly affluent, and you've seen the success we've had below in the wealth business. While we have running room left to go to grow our wealth business, we've grown it very nicely. We still have -- we're still undersized and we still have to make up some ground here, and our customer base positions us well to do that. And so we're capitalizing on that in a variety of ways, as I said, new value propositions launched. We're going to reposition our adviser base quite significantly to capitalize on this opportunity, building real planning capabilities for our customer base, and we're upskilling our branch colleagues at scale and repositioning them to more effectively go after the mass affluent segment and be less transactionally focused. So we've got a lot of confidence in the opportunity. And equally, we've got a lot of confidence in our ability to execute. So just wrapping here, I would just say the story of Citizens, particularly in the consumer bank, has been quite strong, quite differentiated, leading ourselves to this place. We feel like the foundation is very, very strong looking forward. As you can see, credit has held up well. We expect that to continue. We believe we have a very focused and transformative agenda with some very unique points of differentiation and some very unique points of step off strength that allow us to compete and win in a way that will truly be differentiated versus peers. So we're excited about it. We're confident in our ability to execute. We've got a lot to do over the next 2 years, but we're off to the races. So thanks very much. And Susan, over to you.

Thank you for that presentation. You covered a lot of ground here. So let's fill in a little bit. You expressed significant confidence in the pace of recovery and the health of the consumer. Let's talk a little bit about -- most people are not seeing much in the way of consumer loan demand. Some of that has been the impact of fiscal stimulus. What do you think the pace of loan growth is in your portfolio as we move throughout the year? Is it pretty consistent and you're seeing growth now? What's the impact of another wave of fiscal stimulus on all of this?

Yes. So we do see loan growth as a strength, and we actually see it accelerating over and above our 2020 levels x PPP. So remember, our student loan refinance business booms a lot like mortgage does in low rates, which is a bit different than peers. And so we're seeing record months and quarters of originations in student loan refinancing, which is super prime quality and a great customer to acquire into the franchise. We talked about Citizens Pay as well. I mentioned auto briefly, where we were intentionally flatlining that for a while. And we're now putting that back into mild growth mode given the opportunity of the returns that we're seeing in that industry. And then given our undersized credit card book, that's certainly delevering. Like the rest of the industry as the stimulus comes in and customers are paying down their credit card, but the impact on citizens is much more muted than others. And so when you add all that up, we think we're going to see actually a meaningful acceleration in loan growth. A point -- another point here is that we made -- as everybody did, we made some credit tightenings during COVID, and we've unwound a lot of those. We've got confidence that our customer base, which skews mass affluent and affluent, is landing on their feet. And so while we still -- we're still cautiously optimistic about the economic recovery, in some cases, we found the ability to unwind some of those tightenings. And in some cases, we've locked them. But in some cases, we've unwound them, and we've started reinvesting into marketing, which I think is the combination of credit, marketing and the health of the consumer is leading us to optimism on loan growth. And this is not a second half of the year. Hopefully, the economy recoveries then. We're already seeing it here and now in the first half of the year. So we've got real confidence that can continue throughout the year.

Okay. Well, that's a pretty unique position based on what we've been hearing thus far. Just to make sure I've got kind of a wrap-up around your credit commentary because the numbers you showed us, I hate to ask the question of when consumer credit costs peak because -- for losses, it's because losses peak, because they actually seem to be coming down and you've expressed confidence that maybe we actually don't see much of a peak from here. But let's clarify, if you would.

Yes. So yes, it's a big question, and there's obviously a lot of dependency on the economic recovery. What I would say is, as the months have gone on, the sort of peak, if you will, continues to feel like it's pushing out. And so as I can see it right now with the delinquency inventory, the health of the consumer, I don't expect a material tick-up in losses throughout the first half of the year. And as my slide showed, we're operating at a pretty depressed level of charge-offs right now. So the question is with the customers left in forbearance, you end up with a little bit of a blip. And having sort of the rat goes into [ sneak ] -- if you will, and having some losses in the second half of the year. Or does the combination of all the stimulus and the quality of the economic recovery end up not making that true and you just see a smoothing out and a return to normal? And I would say that's a little TBD, but what we're seeing now gives me more encouragement that it's highly possible that you don't have what you'd otherwise think of as a peak, and you just see sort of a slow burn-up and return to normal through the end of the year. And this peak loss fear actually goes away instead of gets delayed by all the impacts of the stimulus and the speed of the vaccination rollout. So obviously, there's a lot of underlying assumptions you would need to believe for that to happen. But in a worst-case scenario right now, based on the range of what seems to be reasonable assumptions around the economic recovery, we don't see a dramatic peak in losses. If there is a peak in losses that's higher than normalized losses, I think it's going to be relatively muted and in the second half of the year. But it's very possible that we just see a return to normalization of credit.

Okay. So let's just shift gears into the competitive landscape, and you've had one merger announced in your footprint this week with M&T-People's. And within your competitive -- within your landscape, obviously with the national digital franchise, you're competing with fintech, you're competing with large national banks. Where do you see optimal scale? And do you feel scale across these businesses given the digitization that you pursued?

Yes. Look, I think scale is always helpful, but I'm not sure it's required. If you're really a digital leader, and I think you're seeing Citizens demonstrate that. We're winning and we're competing nationally at the scale that we have quite effectively through innovation and distinctive products and services. And so we're quite confident, independent of us doing any sort of large-sized deal, that we can compete and win nationally with our digital capabilities and the distinctive capabilities that we have, particularly with Citizens Pay and student. And so we're really, really focused there. I think from an M&A perspective, in the consumer bank, I would love to see us figure out how to get some inorganic scale in wealth. Those deals have been trading away at pretty high premiums, and we've maintained a lot of financial discipline, but we're certainly scouring the landscape to supplement our successful organic growth with inorganic and wealth. And TBD on any large sort of traditional bank deals. We're a financially disciplined company. We don't feel like it's required and certainly don't have a gun through our head. We're having plenty of success growing on our own, and so we wait for the right discipline. If something came along, we'd look at it. But I think right now, we're focused on the success that we're having in getting scale on our own.