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

Yes. I think the big area that we've been focused on in the real-time is efficiency in loan origination and processing, for lack of a better word, and processing sounds like a negative word. But the continuum from how we arm our sales force in the form of bankers with information and with tools to become more efficient as they kind of cull through the opportunities and figure out where they want to focus their time, all the way through our portfolio management and underwriting process, where we've actually significantly increased the size of our loan book and actually taken the number of people down while not jeopardizing kind of quality. And that's been through digitization of a lot of that process. And then now all the way in through the back office, the operations units, where we've had a dual goal of really, really strong client service, which is our client service scores and our ops units are off the charts right now, but also a lot of efficiency through digitization. And that's allowed us to take $10 million plus a year of cost out, and that continues. And then we take that, a lot of that, and we reinvest in the real high-value businesses. So it's back to that self-funding point that I've made. We've really been able to hold our expense base pretty flat.

And I would assume as revenue picks up both from loan growth and hopefully, higher short-term rates that there's a lot of operating leverage from those types of activities?

Yes. It feels like it. And it's really -- I think the trick, in my mind and what we're very focused on right now, is two things. One is like every institution like us, we have a whole bunch of low-returning clients on the books and moving those out. And we don't do that every year. We give them 3 or 4 years to mature. And we try to cross-sell, and we try to get an adequate return. But the 10% to 20% that don't hit those hurdles, you want to move them off your books, release that human capacity to go do something else. And then on the flip side of that -- and that kind of churns capital at the same time into higher-return areas. And then the flip side, when you're out in the field and you're thinking about prospecting, there's a kind of a tendency to call everybody your prospect, but getting really, really focused on the subset of companies where we really think we can add value, really think that there is an interest in doing business together and driving that new client acquisition and not wasting a lot of time on wish lists of companies that you might want to bring on the platform. So we brought on, I think -- I can't remember the exact number, 70 or so new clients in the first quarter this year, which a lot of -- a lot of -- which came out of kind of other banks not doing a great job during the pandemic. And there's another 30, 40 that we think are pretty close. So that new client acquisition engine and focusing on bankers on that rather than wasting time on things that are hopes and dreams is another capacity release.

And there's obviously a lot of ways to get to a reasonable level of profitability. But what's like the one product where if they take it, you know you're going to have them as a customer for a long time? Is it the treasury management with -- and talked about upgrading in recent years. Again, I realize there's a lot of ways to kind of skin the cat, but give us some thoughts on what's on what's that one product...

I don't really think about it as a product. What we talk about is how do you surround your client so that you actually really understand them and become their partner for whatever they're dealing with. So I go back to the -- we use the word -- you've heard us use the word trusted adviser, which is kind of a common word out there. But I don't know if you've heard me say this, but when the pandemic hit, we had an all division call kind of the third day in and said, "Okay, everybody, trusted adviser has just been redefined as helping our clients survive." And so we need to get all over our book. We need to understand current cash flows. We need to understand who needs liquidity injections, who needs forbearance, who needs to be taken to the capital markets. And that's our #1 mission right now, and a lot of it was tough love, helping management teams understand the predicament that they were going to be in because there's a tendency for people either to freeze or not take decisive enough action. And so that was our -- that was 2020's version of how do you serve a client. So our business model is we get very, very close to the Boards and the CEOs of our client base. And we have a capability set in the form of products to deliver whatever solution that they need whenever they need it. And we are just -- one of the things I'm super proud of is we also went into ultra communication mode. So we haven't missed a beat with the client base through this entire period of disruption. And we've been -- now we've been out calling and flying around and doing in-person meetings for a couple of months now. And the C-suites of our companies are in the office, and they want to see you, and so being there at the time. Now the question with them is where we started, which is where do you think I should go from here? Should I refinance my bank debt that's coming due next year? Is now the right time to do it? Or should I wait until there's more certainty in our business? And we have the conversation of, wow, it's really liquid markets right now. Banks are going to see through what was a 12-month disruption and give you credit for a recovery if you have a couple of months of good sales in your internal P&L. So it's really a close relationship, and then we try not to sell products. We actually try to be strong partners. And increasingly, it's very interesting. The things we're being asked about now are things like ESG or diversity and inclusion or how can -- we've got a brand-new -- well, I wouldn't call it brand new, it's 1.5 years, 2 years old now. We've got a very high-quality wealth capability now, which we're now co-marketing to our commercial clients. So think about that company that's preparing to sell themselves, and they could have a low basis in their company. So they have huge tax challenges and getting in there with our wealth team and really talking to the owners about how do you position yourself from a state tax or a company sales standpoint, it really all sings together. And one of the things that we're able to do because we're relatively a small group of people is we can stay really close in terms of conversations and co-marketing between the product teams and the banking teams. And it really is collaborative. It works very well.

So we've been focused on mostly the volume side of things. As we switch and think about spreads, a lot of concern about commercial loan spreads, how tight are they right now, given what's happening in the capital markets where they're very tight? And then your thoughts on when loan growth picks up, how will spreads react? I spoke to one bank last week, and they're basically like the loan growth picks up, everyone's going to want a piece because the industry is flush with capital, the industry is flush with deposits. So how concerned are you about spreads tightening even further? Did we freeze up there?

So spreads are -- it's super competitive out there right now. And as you said, there's just a lot of liquidity. So think about the liquidity that's sitting on banks' balance sheet in the form of excess deposits, which is pretty significant still. You got it? Yes, there's a little bit of a delay going on. So what I was saying is there's still a lot of excess deposits in the system. Good news there is they provide a little bit of a cushion. They provide a little bit of a cushion against pressure on loan spreads because we continue to be able to take down deposit costs, and we've made a significant amount of progress on that. Secondly, you've got the wide-open capital markets, as you say, so companies who have access to the capital markets. A lot of people have availed themselves to that option as opposed to on-balance sheet borrowing with banks. We've definitely seen spread compression. It's held up okay. We -- our NIM performed pretty well in the first quarter, and really, it's a choice. Every time a client comes to us and says, "I want to refinance." And we look at terms and conditions, which are aggressive, and sometimes we don't go there because the terms and conditions or the credit is not what we want it to be. Sometimes we don't go there because the spread is not where we want it to be. But again, we think about this over a multiyear period. If we've got a good full wallet relationship or a relationship where we do bond offerings and equity offerings and have the treasury services business, it might do some hedging in our capital markets, and they're looking for a discount of 20 basis points on their loan spread, we'll probably stick with that client because we make a decent overall return. So it really depends on the overall client return, that's how we'll determine what we do with different loan spreads. But we want to keep those clients. And to your real question, Matt, if you get some continued vibrancy in the economy, if you get some uptake of the excess liquidity, I think you'll see some of the pressure come off loan spreads a little bit. And you'll probably see short-term -- we're very short-term indexed in terms of our floating rate LIBOR book. So if you get some uptick on short-term rates, you might get some relief there also in overall returns.

That's helpful. So maybe just step back and talk a bit about how important the branch network is to your side of the business. You obviously announced a branch deal last week. You're picking up, I think, it's an extra $7 billion of net deposits, which I'm sure is very helpful to fund the loan growth that you're hoping for. But how important is the physical presence for your business?

It's important in the small end of the middle market and getting -- and probably getting less important just because everything is going digital. And you really don't have the need for a company to walk into a branch and have a depository relationship. But for a small subset of the clients, it's definitely something that they continue to use. The thing that I actually like about the branch network is less the physical presence, and this goes to Brendan's strategy of becoming more national. Also is it perpetuates the brand. So where we have branches and a big consumer activity, we tend to move marketing and advertising dollars into those markets. And it lets the Citizens name become more widely known. So I've always been a view -- of the view on the commercial business and the corporate banking business that your brand is really word-of-mouth. How you serve your clients, what references do you have and how will they tell other clients that you do a great job for them, what you do in the marketplace. You can point to transactions that you've done and difficult executions that you've done a very good job on. That's the real brand builder for me. But if we're throwing advertising dollars into a market and where we have a baseball stadium like in Philadelphia, people just know the name. So when you walk in, your story has already been told or people are aware of you. And that's one -- other than the deal is a great deal for -- with the HSBC network. That's one of the things that I'm excited about for my business in terms of growing. And there'll be some commercial opportunities that come out of those locations also.

I also thought the branch deal made a lot of sense for the consumer bank and the firm overall. What about in your world in terms of M&A opportunities?

So I am constantly on the lookout, and we looked at enormous number of companies. Last year, we bought one, which was Trinity Capital. So we've now bought 3 M&A boutiques. You should expect us to do more on that front. I don't need general M&A capacity. We've got what we need there. But we've taken our M&A business from nothing to -- it should be in a year close to $100 million in fees. So it's growing significantly. The -- if we can find great M&A firms that have industry specialization with real ownership of those subsectors, that will be a logical extension of our industry coverage efforts. And we're talking to several all the time. And then we're also looking for additions to our annuity revenue businesses. So we'd like to add on the annuity side, and there's a number of different ways that we think we can do that. So I don't -- we won't do any kind of, I think, big, huge merger deals in my sector, but I think you'll continue to see us do the tuck-ins that actually give us differentiated client service and/or a revenue pop in the areas that we're trying to grow.

Any loan portfolio or businesses that you'd be interested in? One of your peers did a small ticket leasing business last year. They don't seem to come up too often, but every once in a while, they see something interesting, at least from my perspective. Any interest in adding capabilities that way?

We've looked at a couple of leasing businesses. And we have a -- we have an existing leasing business, which we've actually been shrinking. So if something came in that we thought matched our client base, we may take a look. But it's more on the -- we think we need to grow our fees as a percentage of revenues is where we're really focused.

And in the last few minutes here, maybe I'll weave in a few questions on commercial real estate. I think the consensus view on the broader C&I is quite positive. It's just a matter of when the loan growth picks up. A lot of, obviously, optimism on credit quality. But in commercial real estate, still really two concerns. One, will we see credit losses and when? And then just the loan balances, how long is it going to take for them to kind of bottom out and start to grow again? So maybe first on credit quality. What are you seeing there? Will losses materialize? Or could it be like consumer where you just kind of don't see it?

We feel pretty good, Matt, in terms of credit losses on the CRE book. We took a couple big write-downs in the middle of last year on a couple of mall exposures. So that's kind of behind us, and we feel like we have line of sight into any future CRE losses. You can always have a surprise, but we think things are stabilizing pretty nicely. And we're pretty reserved up and don't think we're going to have significant incremental real estate hits. We've been -- so all along, I think what we saw and what a number of people saw was if you have your client selection right and you're with the right sponsors, which is really our focus, we've seen those sponsors actually feeding their real estate loans to allow them to stay current through most of the pandemic. And I saw something very significant happen in kind of the February, March time frame when it became apparent that the vaccinations were going to be much faster than people thought. You saw people kind of really begin to say, "Hey, this is a 3- to 6-month bridging event for me if I own a real estate project, and I've lived through the last year. So I'm going to do whatever I can to make sure my project survives this." And we saw even more constructiveness around the sponsors of our real estate portfolio. The different parts of the book, obviously, retail and hospitality, which is relatively small for us, is the slowest to kind of pull out of this. But I read this morning that there was a lot of hotels were at 100% capacity over the weekend, which is pretty darn encouraging. And we don't have a lot of specialty hotels. We have kind of some of the big chains with support from some of the big brands. The one place we're watching, which is just because we don't know yet, is office. We've got a reasonably sized office portfolio, I think $4.5 billion or something like that. It's all performing pretty well with very little delinquency and very little stress. But I think the national office vacancy rate is somewhere in the neighborhood of 17%, 18% right now, where leases aren't being paid, but most of ours are big company kind of office building, purpose-built office buildings. And all the leases are pretty much current because companies are still paying. There will be this back-to-work question, and people will adjust their portfolios over time, but that's going to be a 2-, 3-year renegotiation cycle on some of the different properties. And you're going to have other companies growing significantly. So that's the one wildcard. We're not worried about it, but everything else in the portfolio feels pretty good, and we feel like we have line of sight. In terms of the growth, it's beginning to come back. There's areas of the real estate market that people want to bank, just like C&I. It's very competitive. And terms and conditions are getting very unattractive very quickly in places like warehousing, data centers, industrial, but -- and there's other places where people really aren't stepping in quite yet like multifamily or hospitality and leisure. So a more narrow corridor and pretty competitive. But our pipeline is up materially from where it was at the end of last year.

Do you think in the CRE book, with all the puts and takes, do you get net growth at some point this year?

I would think it's probably flattish, if I had to guess. I haven't looked at construction projects and the rate with which they're going to complete. Obviously, those have slowed down, and the borrowings have slowed down a little bit given some of the supply chain backups, particularly in lumber and steel and all that type of things. And so some of it will be how quickly things fund up and complete and then how quickly things get refinanced into the more permanent financing markets. But we could have some growth, but I think I would guess it's kind of flattish, in my mind.

Well, if we get to C&I growth, that will be a good combination. We're out of time, but Don, thanks so much. And you can see I'm back in the office because people walking by here in the background. But appreciate your time and joining the conference, and very much hope to see you in person soon.