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

This is Jason Goldberg, and I cover the U.S. large-cap bank stocks here at Barclays. And this is our 19th Annual Global Financial Services Conference. Next up, very pleased to have Citizens Financial. From the company, Chairman and CEO, Bruce Van Saun. Bruce. Good morning.

Hi Jason. How are you?

Good, thanks.

Great. Okay. So over to us. And I'd like to say good morning to everyone. Pleased to be able to present again at this great conference. And -- why don't we go to the next page, Doug, and let me just remind you to read our cautionary language at your convenience. So there's a few key messages that we'd like to focus on today. First off, we want to emphasize that our future success will be driven by what got us here today. So if you look at -- we've had strong experienced board with a great leadership team, and we've demonstrated proven execution ability since the IPO. And we've also done a lot of work to modernize and strengthen our technology capabilities, which gives us great positioning going forward. Secondly, we're also well positioned for differentiated growth. Both the consumer and commercial banking business have been dramatically repositioned, and they're focused on significant growth opportunities. We're trusted advisers to our customers. We have a very customer-centric culture that I think is distinctive among peers. And then growth is going to come through several modes. One is through innovation, next is through delivering on our strategic priorities, and then lastly, through smart acquisitions. We've been fairly active this year, having announced 4 acquisitions, which we think is a good use of our capital and puts us in a nice position to leverage those investments for growth. We also think they're relatively low execution risk and straightforward to integrate. The last point I'll make is I also feel that we're very well positioned to deliver consistent earnings growth and attractive returns. We maintain a very firm commitment to expense discipline and self-funding investments through our top programs. We're very focused on delivering the earnings growth and attractive returns. And we're also heavily committed to achieving our medium-term financial targets. So those will be the highlights. Let me first talk a little bit about our past and where we've come from to get to where we are today. But here, you can see some of the highlights and the progress -- significant progress we've made since the IPO. Again, we have the track record and ability to execute that gives us confidence in our future outlook. If you -- I won't go through the slide in significant detail, but we break down where we were from enterprise, from consumer and commercial standpoint and then show the picture today, a couple of things I'll highlight in today. I think we've poised for faster growth given our strategic initiatives, some of the innovation that you've seen from us, which is distinctive. Our continuing focus on improving the tech capabilities, moving to a digital business model, shifting to offense, the top programs all, I think, are distinctive and position us well for the future. We've on consumer built a differentiated, go back please -- we've built a differentiated national lending capabilities. We've invested in some new technologies and digitization. Commercial, what I'd highlight is we've strengthened the coverage model and focused on new industry verticals where we think there'll be lots of activity, revenue opportunity going forward, that we continue to focus on building out our corporate finance advisory capabilities largely through smart acquisitions. Over on the right, you can see, interestingly, we've gained some nice recognition. Euromoney's 2021 Best U.S. Bank. We certainly won't rest on those laurels, but it's nice to see the progress noted and then very steady progress across all customer satisfaction measures, both in consumer and commercial. Next slide. So to be successful, you need a very strong organizational health, committed colleague base. We're pleased that last year, in the fall, we did our annual organizational health survey and we moved into the top quartile, which is quite a significant accomplishment up from the third quartile at the time of the IPO. We've also demonstrated a significant lift in how we support our communities. You can see a number of measures at the bottom of the page, and we're up nicely across the board. Next slide. Just -- I mentioned technology. I'd say if you looked at pre-IPO, we were well behind in terms of our investment levels, and we needed to really focus on getting caught up. And I think we did that well through disciplined prioritization. We did a lot of self-funding through our top programs and also we recruited some great leaders, and you win with great leaders. You can see on this slide, all of the major platforms have been upgraded. We've added significant digital capabilities. Most of our front ends now are digital. And going forward, our priorities are to move towards the final phase of our next-gen tech initiative, keep maturing agile delivery, going forward, further digitizing the customer experience and then accelerating the use of advanced data analytics and AI for personalization. So these capabilities really are a prerequisite to compete successfully going forward, and we feel very good about where we are. Next. Financial performance has progressed very nicely over time, very consistently across measures like PPNR and ROTCE, which you can see on the left-hand side of the slide. We've been able to build a stronger and certainly more diversified business model over time. Some of the key elements that actually helped us accomplish that. We've made multiyear investments in our fee capabilities, including selective acquisitions, our top programs, our BSO efforts and then some really smart loan growth in attractive risk-adjusted return categories. Next slide. So one of the things -- let's just shift now towards the future and some of the things that we're excited about are the strategic initiatives that we have underway. And many of these are multiyear and they're kicking in at different time frames. But all add up to driving significant growth and profitability improvement over time. On the consumer side, there's 3 main initiatives, end-to-end digital transformation, national expansion, deepening relationships. Similarly, on commercial, there's 3 building broader solution sets and fee capabilities, expanding our geographic reach and enhancing the coverage model. Down on the bottom, there's a number of enterprise-wide initiatives. We call those enablers that really support the overall bank and our positioning for the future. I mentioned next-gen tech, our modern operating model, which is moving to agile ways of working, investments in culture, leadership and talent, enterprise-wide payments, data analytics and AI and then we have a Chief Innovation Officer and lots of work going on innovation. So pretty full plate, but exciting. Let me just move forward here, talk a little in more depth about consumer and commercial. First off, with consumer, we aim to build a leading digital first bank with differentiated capabilities. The consumer business, as everybody knows, has been going through massive change. I feel that we're adapting very well. Our vision is to build out Citizens Access. You can see the time line here on the top of the page to be the digital bank of the future. And then we're going to converge the platforms and product capabilities with our legacy business, and that's one way we can migrate to a new core platform. We have 3 main initiatives in consumer, as I mentioned, which I'll cover here in a little more detail, but first off is end-to-end digitization efforts. That was part of TOP 6, you may remember. So we're digitizing our customer experience through key customer journeys, national expansion led by digital capabilities. I think the highlights there are what I mentioned about leveraging Citizens Access. We're bringing the [ blending ] products and offering a checking product, which in the process of bringing over to Citizens Access, and we'll bring the HSBC online platform together with Citizens Access when we closed that deal, which is exciting. We're focused on mass affluent value proposition for our national push. We have to be a focused niche player. It's hard to take on all comers. But I think if you focus on a niche like that where we do well in our core footprint, we should be successful. And then Citizens Pay gives us a very differentiated offering in a fast-growing point-of-sale market, which I'll talk a little more about on the next slide or 2. And then deepening also, again, focused on that mass affluent value proposition, leveraging student products and then also focusing on growth in severely underpenetrated state, I would say that we're in today, where the sky is the limit if we can really push ahead with penetrating the customer base on the wealth opportunity. Next slide. So I mentioned that our real focus here at Citizens has been on digital and moving to digital channels more rapidly, certainly a lesson we learned from the pandemic. You can see some of the stats here, digital metrics year-on-year, but digital banking logins, for example, up 28%, digital booked sales up 61%. Over on the right, mobile active users up 29%. So certainly, very strong performance and strong relatively and absolutely, I would add. The picture down at the bottom of the page shows how we think about consumer distribution. Over time, there'll be more convergence of platforms and product, as I mentioned. But we basically see a dense branch footprint, which is our core regional footprint, but we'll have a light branch footprint, some of the areas that we inherited from HSBC, Washington and South Florida are attractive to us there, but you can see us move into some other cities where we have density and see opportunity. And then we'll have the rest of the country covered with the pure national digital bank. And so I think over time, as you're seeing with other banks, there will be some experimentation there, but we feel like we're really -- we've thought it through and we're in a very good position to grow. Shifting to Citizens Pay. We've -- we're early movers in point-of-sale finance. I think we've built a very strong position there. To date, we've originated $8 billion in volume. We serve 6 million customers, which is a strong position. And our efforts over time from starting with the Apple partnership in 2015 have followed a very steady migration. We've added industry verticals, and we haven't gone after the mass market. We've stayed very focused on marquee partners. You can see some of the great names of our partners in the box at the bottom of the page. And so we have a strong set of current customers here and partners. And we also continue to have very strong pipelines going forward. Let me add a few more thoughts here because you hear so much these days about point-of-sale finance and buy now, pay later but we feel that we're very distinctive and well positioned to win. And so kind of in a nutshell, we'd like to say that we combine FinTech agility with the strength of the bank. You can look at some of the factors here why we think we're positioned to win. But they're listed on the left, more payment options, longer terms, better pricing, real-time fraud and credit analytics. We're able to onboard merchants quickly with low incremental cost. We have taken a strategic partner approach, offer tailored solutions. We have a 100% digital end-to-end platform offering a frictional customer experience, omnichannel capabilities. We create customer loyalty with line of credit offering to enable repeat purchases. So really distinctive overall. Next, I'd like to shift to commercial priorities, and we brought in our capabilities here over time. We've added some great talent to the organization, both on the coverage side as well as on the product side. You can see the time line here. And most recently, we announced the acquisition of JMP Group, which I'll talk about in a minute. I think our success in building and scaling up this business is that we really want to be the trusted adviser to our clients. We want to add value in terms of thought leadership, help them be more successful. So that's been the hallmark and the foundation of our success. We've invested in building out fee capabilities. We're able to do more for our customers. We're able to call higher up at the customer with CEO and CFO level capabilities, not just traditional bank capabilities. And we've also invested significantly in our Treasury Solutions business with a great cash management platform and really focused on growing low-cost deposits. So a lot of progress. On the coverage side, we've focused on several industry verticals where we think there'll be significant opportunities to -- for growth and for consolidation at the same time and offering us ability to help our customers navigate whatever they face. And with JMP, we can add more verticals as well. But as you move up market into the mid-corporate space, it's important that you have that industry expertise. And so we've steadily added that both organically and inorganically. Let me talk just a little bit about JMP. It's an exciting new acquisition for us, further accelerates the scaling up of the commercial bank. We included a short slide deck when we made the announcement last week. These are a couple of slides that came from that deck, but I'll just highlight a couple of points. What's very attractive here is that it gives us scale in key verticals, health care, technology, financials and real estate has been their focus area. And those are, I think, very meaty segments of the U.S. economy with lots of growth potential going forward. We also gained an equity capital markets franchise with some very focused research on emerging growth companies who need equity to grow their business. So I see that as very complementary and filling out the product flywheel, if you will. We also like the fact that their culture is very well aligned. So all of these deals you put through the prism of doesn't meet your strategy, can you get a good financial transaction and is the cultural fit good, and we think, in this case, we tick all those boxes. And then Mark Lehmann is a very strong CEO of the business, who will come over and lead the business after the close. The next slide, you can just see how we think about JMP complementing kind of the current capabilities that we have, both in terms of industry expertise and then in terms of product breadth. And the thing that really excites us about the JMP acquisition is there's multiple avenues for revenue synergies, which we listed at the bottom of the page, but it's 2 ways. It's things they can do for our customer base and then additional things that we can do for their customer base. Next slide here, we've been busy, as I mentioned, in terms of acquisitions. So we've announced the 2 depository acquisitions also over the course of the spring, second into third quarter. HSBC and investors here. If you just look at that map, we had a gap in the footprint between our New England franchise and where our Mid-Atlantic franchise picks up in Greater Philadelphia region. So that was long a kind of glimmer in our eye, wouldn't it be great if we could do something in New York Metro that could help connect the franchise. And so this certainly gives us a 200 branch presence, a significant deposit base, top 10 deposit base in the New York region and really a launch pad hopefully to do what we've done in Boston and Philadelphia in the New York metro market over time. So we're very excited about that opportunity. In addition, we gained further heft to our digital bank. So we gained HSBC's online customer base, and we gained some access to attractive new markets, physical presence in the greater D.C. and South Florida region. And it brings in another 1 million customers, which I think we can certainly demonstrate we have a broader product capability, and so we can do more for those customers that either HSBC or investors was doing in the past. So just a follow-up here is what comes over $24 billion in loans, $29 billion in deposits. So an attractive LDR when you combine the 2 million customers, over 200 branches, as I indicated. We're -- we've built into the deal model, we need to certainly introduce our brand to New York Metro. So we've thought about how we're going to do that with a localized flavor but excited by that opportunity. And then I think having our brand active in New York Metro is just important to Citizens' overall recognition and our overall brand. And I think it will create more opportunities for commercial banking to leverage in the region. I'd be remiss if I didn't come back to focusing on top. So even though we were excited in playing offense this year with our strategic initiatives and these acquisitions, a bedrock of the -- of Citizens' story has been our ability to continually look for opportunities to run the bank better, gain efficiencies and then reinvest those efficiencies where we can to serve customers better, just overall improvement. So TOP 6 is in its final stages. We will achieve those targeted numbers. Everything is on track, so we feel good about that. That sets the stage for us to launch a TOP 7 program, which we're working through the details on that. You'll have to stay tuned for more specifics. But you can see some of the areas that we're focused on that will become part of that program when we launch and announce it. We remain committed to hitting our medium-term financial targets. And that would be with a kind of [ astros ] with normalized credit provisioning. So currently, we're over earning this, but there's a lot of credit provision release. But we think we'll be able to get there. And importantly, I think these initiatives certainly land us there, help get us there when we execute and integrate and get the synergies that puts us in that range. We're not waiting for interest rates to help push us there. So we feel really good about our positioning in terms of achieving these medium-term targets. So let me just sum up here. Again, we believe that we're positioned to deliver earnings growth and attractive returns. We built a very strong foundation. And I think the net result of this is we're positioned for stronger and differentiated growth versus our peers. Our diversified business model, commitment to operating leverage and strong execution certainly stand out and give us confidence. Our growth will come from innovation from delivering on the strategic priorities and smart acquisitions. The TOP program is about to launch. We're operating from a position of strength with a very robust CET1 ratio, a very strong balance sheet. From a credit standpoint, feel really good about where we're positioned from a credit risk standpoint with trends very favorable. And then we're poised to deliver some nice earnings growth and attractive returns going forward. I think our track record gives us the confidence that we can tackle this ambitious agenda and really put the company in position to augment our long-term franchise value. But I'd be remiss if I didn't say that we understand the need to deliver continued short-term progress and good financial metrics in the short term while taking these actions that really strengthen the company for the long term. So those are my remarks, Jason, and I'm happy to open it up to your questions.

Appreciate that, Bruce. And for those who are listening in to the Barclays [indiscernible], remember in the top right-hand corner of the screen is few buttons, one of them is ask a question, so simply type in your question, click in the button, type your question, we have time, we'll get to those. And also, there's a survey, please click on that as we're tabulating those results, and we'll publish them this evening. Bruce definitely appreciate that strategic view that you provided. I mean there's just a lot going on, right? You have all these kind of organic growth opportunities that you highlighted. Now you have these inorganic opportunities with HSBC, ISB -- ISCB -- ISBC, JMP. And now you have this upcoming TOP 7 program. I mean just how do you kind of manage all that? And is it almost too much?

Yes. Well, we thought long and hard about that, Jason. And I -- what I would say is that I've assembled a great team that's been together for a while now. And we've been able to work through an ambitious agenda previously. This probably steps it up another notch, but you kind of earn the right to take it to the next level. And I think this team, we all feel confident that we can manage this. We've got -- we've built a lot of talent in the organization who, I think, can step up and work on some of these integrations in some of these projects. So our view was the pandemic was the time when you had to take care of customers, colleagues, you're playing a bit of defense. You come out of that, economy is recovering. Now is the time to play offense. And I think we have the horses to be able to do that well.

Got it. And you put up the medium-term target slide, again, 14% to 16% ROTCE. But you kind of -- when you laid those out, you had -- I think you had a vision for these organic opportunities, obviously, the inorganic opportunity is a bit newer. I think ISBC is supposed to add 100 bps to ROTCE. When that deal closes, I mean, is 15% to 17%, maybe a better place to think about? Or is 14% to 16% still what you're thinking, particularly kind of maybe given where rates are?

Yes. I think right now, we need to bed them in and pull through the synergies and that will take a little while, and we're still in a low rate environment. So I think just landing in that 14% to 16% makes sense. But as you've seen in the past, when we did the IPO, we started out with 10% plus. And then we're willing to raise it as we make progress as an organization. So if we saw that we pulled through these initiatives well and the acquisitions well and the Fed starts to move or the curve starts to steepen, certainly, we're prepared to raise those targets again.

Got it. And one of the big questions we're getting from investors at the moment, just around loan growth. Maybe just talk to your, I think, somewhat constructive on the outlook for consumer on the second quarter earnings call, commercial, obviously, maybe a bit more [indiscernible]. Can you maybe just talk to kind of what you're seeing on each in the current backdrop?

Sure. So I think it's about where we thought that consumer is a bit stronger than commercial. Commercial, certainly line utilization has stabilized and there's some very significant activity in terms of new originations. We're still seeing payoffs and disintermediation to capital markets, which mutes the growth at this point. But I think as the economy recovers, we'll start to see line utilization pick up and hopefully some net growth there on the commercial side. Consumer is the areas that you would expect to see. So mortgage has been strong, auto strong, point of sales, student loan refinancing, those all feel pretty good. So when we think about the second half of the year here, we feel it will be consumer led and the spot loan growth continues to seem pretty good, maybe coming in slightly slower, which will affect the average, but I think we'll have a solid print [ here ] in the quarter in terms of spot loan growth, both pre-PPP forgiveness and then post PPP forgiveness.

I think you talked about previously average loans up slightly in the quarter. Spot loans up 2% to 3%. So maybe a bit shy of that 2% to 3% but continued growth from there.

Yes. I think that's about right. So pre the PPP, probably, call it, 2.5%, maybe 1.5% post PPP on a spot basis and average probably slightly lower than expected. But still poised with that spot growth that we should see that pick up in the fourth quarter.

Makes sense. I guess while we're on the topic, I guess, any other kind of puts and takes when you kind of think about the third quarter guidance.

Yes. I'd say we feel very good about the PPNR outlook that we'll be able to deliver the PPNR that's expected from us. Puts and takes would be a tad light on NII, but certainly covering that with a beat on fees and a bit better performance on expenses. So PPNR is in good shape and then credit is in great shape. We continue to see very favorable credit terms. And I think net charge-offs should be certainly at the low end of the range or better as we look at the quarter.

So if I do some quick math, it feels like we should still see PPNR growth in the back half of the year, along with positive operating leverage?

Yes. Certainly, for Q3, I think it will be fairly strong.

And then I guess you mentioned fee income a bit better than expected. Can you maybe just talk to some areas of strength. I know mortgage had some kind of [ mark ] last quarter, maybe how that's trending and just kind of maybe where you're seeing some of the upside?

Yes. I think it's pretty broad based, Jason. So mortgage took a couple of unusual hits in the quarter -- in the second quarter. So the absence of that in the third quarter is a net positive. So I think you'll have a bit of a bounce back in mortgage. Capital markets typically seasonally is a little softer in Q3, but I think it's still having a good quarter. And then some of the consumer areas are continuing to see recovery, consumer fee categories as the economy strengthens. So pretty broad-based overall.

Right. Helpful. And then I guess on the fee income topic, we had a question come in. What actions are you considering in light of greater scrutiny and overdraft fees?

Yes. So obviously, that's something very much in focus, and we are working on some adjustments to our policies. We already have some good policies in place, such as $5 overdraft pass. So if you incur an overdraft that puts you into a negative balance by up to $5, we don't charge an overdraft. But there's a number of other opportunities for us, I think, to be even more helpful to our customers. And we anticipate that we would announce those probably over the next 30 days, and those would be staged over the fourth quarter into the first quarter. I think the net benefit of that is certainly improved customer experience and kind of account retention goes up. You give up a little bit in your fees, which I would view almost as an opportunity cost that we were willing to not see the overdraft fees bounce back to what they were pre-pandemic and make that an investment in just doing better for our customers in this area, which I think when we do the math on that, we probably see the lines cross in terms of improved revenues from retention and lower calls to contact center and complaints and things. Those lines probably cost -- would close within 3 years. So I think it's a good move to take, and we're -- you'll stay tuned, you'll hear an announcement from us shortly.

Got it. And I guess a couple of other questions coming in. I guess now that Citizens is a more active bank acquirer, once the 2 pending transactions are completed, what's your appetite for future bank deals?

Yes. So I mentioned in my prepared remarks that we had always a gleam in our eye around New York Metro. There's really no gleams in our eyes remaining at this point. So it's not something that we've long panted after. But we would simply just be opportunistic, I think, to see if there's some attractive deals that make sense strategically, we can get good financial metrics from them as a good opportunity to deploy capital, we'd certainly be open to that. But I don't think that becomes part of who Citizens is, it certainly doesn't define us that we're going for scale and we're going to keep starting to be a roll-up machine and we want to keep doing these things. So in any case, the job one is to bed this down, make it really successful, keep doing the bolt-ons, keep driving the organic growth. And then again, we'll be opportunistic if things present themselves that makes sense, we'd consider them, but we're not driven down that path.

Got you. And another question. Other student lenders have noted headwinds in student loan originations from excess liquidity stimulus and emergency relief on student loans. You recently pointed to student lending as a pillar for 3Q loan growth. Has anything changed as you went through the college year beginning, student loan rates also seem to be declining. Any update there or just reflection of lenders trying to fill origination pipelines?

Yes. So typically, there's a seasonal lift in student lending in the third quarter as kids returned to school. So that's -- that in-school portion of our book is seeing growth, which you would expect. I do agree that it's competitive there. And so we're seeing a little pressure on the spreads, but they're holding in overall pretty well. The continued extension in forbearance by the federal government is also, I think, crimping a little bit to education refinance opportunity because a lot of folks who have the federal loans will convert over to a private loan when they do the refinancing. So when that lapses in January, which is expected to lapse, I think that could turbocharge some pent-up demand for the education refinance product.

Got it. And then you already talk to -- a few years ago, you obviously came out with Citizens Access and kind of talked a lot about digital and why you think about the deposits that way. And now you're kind of going out and buying a lot of branches. How do you kind of manage the 2 conflicts? And do they complement each other? Just how you're thinking about that? Or is it just different strategies for different markets?

Yes. Well, we showed that one slide there, Jason, that shows how they stitch together. But I think branches still are important and folks to really have a primary banking relationship having branches make sense. I don't think we could attack the New York Metro market with having -- without having a significant branch presence. So that's the impetus for doing that. But certainly, with our digital bank, we can move around the country and then identify opportunities where we're relatively well known or we have snowbird customers, for example, in Florida, where we can start opening de novo branches. We've already done that in Florida. We opened a wealth-oriented center in Palm Beach and another one is opening in Naples, we'll take one of the Miami-based HSBC branches, turn that into a wealth center. So we can start to experiment now with the digital offering and then putting a small number of branches in some of those key markets. There are some other cities that we have our eye on as well. So I think you're seeing that from our peers. I don't think the final script is written on what the best approach is. So we'll have a core dense footprint, and then we'll have a national effort that will sprinkle in some branches, which also then solidify your position in those markets.

Got it. We have about 2 minutes remaining. I'll go to maybe one last question from the audience. But in the near term, you talked about the NIM up low to mid-single digits. Is that still achievable? And looking out what are the puts and takes in terms of the outlook for NIM?

Yes. I think NIM is certainly tricky these days. Because from a headwind standpoint, you have lots and lots of liquidity. So you've got deposits that are sticking around longer than expected. And so that puts a downward pressure on the reported NIM. We try to show the number kind of what it is underlying and then strip out what we view as excess cash, but that's certainly a factor. On a positive note, as PPP forgiveness accelerates, you get a little bit of a kick up from a time standpoint, although I would say PPP forgiveness income will be about the same in the first half as it is in the second half and then the drop-off really occurs next year. The good news there is with all that liquidity, we expect to see loan growth kick in and we could deploy that into securities to offset the impact of the PPP revenue that we achieved this year. So -- and then you have the curve. You have the curve, which we saw the 10-year move up to around 170 is back down, reached down to 125. And so it's moving around in that range. And so that's another factor that certainly influences your ability to reinvest cash flow. So I'd say we're managing that NIM well. Our focus really is on NII, let's get the loan growth, let's do smart hedging and take advantage of opportunities when rates flex up a little bit and then let's get that cash to work, that would certainly drive NII growth, which we would expect to see certainly kick in, in earnest over the course of 2022.

Sounds like a plan. Bruce, thank you so much for joining us today and look forward to speaking again soon.

All right. Great, Jason. Take care.