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

And it's going to be a big one.

One was a 2-year program, but so we really haven't missed a year. And there are certain areas that you can go mine. So your organizational design, having a flat organization is important. Vendor contracts is a big area. Your branch cost of distribution is a big area. So there's a number of kind of steady rocks that we go back to every time and try to figure out how to up our game there. We've added, I think, new stuff over time, which is -- I would probably refer to as fruit that's higher up in the tree. So what's happening in artificial intelligence, what can we automate, what can we make more efficient when we migrate the technology infrastructure to the cloud, can we do it in such a way that we actually can reduce the run cost of the bank, and we're in the process of that. So there's some really good stuff in there that we task ourselves. We're trying to come up with some of those ideas inside the house, but then we'll talk to the leading consulting firms to get kind of their best thinking on what's best-in-class across all sized banks, all over the world and bring us those ideas and let's figure out what's applicable here. So it takes a discipline and a rigor, but I have confidence we're just kind of putting a bow on top 7. And that will have a bigger run rate benefit this year. And then we're shooting for at least $100 million in top 8 with run rate by the end of the year, and that has a bigger run rate benefit into '24. So feel good about that.

And it doesn't sound like it will be done even after that [indiscernible]?

I'm hopeful that as long as I'm at the helm here, that we continue to do this because I think it's really good discipline. And the mindset is really kind of a mindset of continuous improvement and self-funding. So we want to continually run the bank better and more efficiently, so that we can self-fund the investments in offense. So we can have the more coverage bankers, so we can have more wealth advisers in our branches and some things like that. So if you look over time, we've probably out of 18,000 people when I got here, we probably exited maybe 4,000 due to these programs, but brought 4,000 other people back in, who either are customer-facing or their the skills we need for the future. The software engineers, the digital talent, some of the new marketing disciplines that we need. So it's been kind of continuing to say, if we want to make investments, what can we make more efficient in how we're running the bank, so we can self-fund that.

Got it. I guess maybe segueing to fee income. I think that's been another focus of yours. And we've done a few deals around that. Just give us a sense of the fee income strategy, like, from a client standpoint, what's the end game? And how do you see the momentum in the wealth management, and then maybe even the capital markets business?

Yes. Well, I'll probably start out with capital markets because I think we've done 10 to 12 acquisitions have all shapes and sizes since we have kind of got our life as a public company, most of those in the last 5 years and spent the first few years just putting the foundation in place. So we are ready to do stuff and probably half of that number was in capital markets place, where we had a good commercial bank, but it was limited geography, and it was limited in product capabilities. So we had to hire up a bunch of folks to have a capital markets group to replace what RBS had basically offered Citizens in terms of FX and interest rate hedging and stuff. So we had a lot of -- and just kind of self-investment, but then supplement that particularly around the M&A product, which was increasingly important to companies that are looking to sell, and private equity firms were looking to buy to provide that kind of matchmaking service has been really big for us and very powerful us. So we have -- now I think the right complement of M&A folks, and they're focused on the industry verticals, where we think they will be the most activity going forward. And so -- I don't -- we could be opportunistic if we do anything else in terms of acquisitions. I think we've built it out. But I'm very excited about kind of what we can deliver in fees in the capital market space. If I go back to the fourth quarter of '21, when the market conditions were really nice, we generated $184 million of capital market fees most of last year, every quarter, we probably were between 90 and 100, so call it 95 on average. So we're kind of operating at half of where we were when the market conditions were favorable. So I kind of take comfort that we're now at kind of high teens ROTCE, it's a little of that's AOCI fuel, but still roughly 16% if you back that out. So we've got the benefit of higher rates. The true value of our deposit franchise wasn't recognized in our returns until we got off the 0 bound. There's another leg to happen, which is when the kind of capital markets calm down, and then we can get that kind of bounce on the capital markets fees, and then also wealth -- is partly affected by asset levels, but part of that has just been a very long build to turn the old approach of how we had kind of a bank-owned brokerage offering to being a true wealth adviser. And I think we've turned the ship and we're starting to show some really great new sales numbers that will really start to come through, I think. So to me, the big bounce in fees is going to be led by capital markets and wealth is the kind of 1, 2. Mortgage, I'm not counting on. I've said that we're kind of bouncing near the bottom last quarter. And then in the fourth quarter, even drifted a little lower. But you're starting to see some early signs that, that fourth quarter probably was the bottom, and you're seeing margins start to reflate, people are getting out of the business, which is a positive activities in applications is ticking up a little bit, and the servicing book is pretty strong. So anyway, but I'm not counting on that, that's a big driver. Just it will be less of a drag, and it will start to help. And cards is another area that we've done some interesting things, and I think you'll start to see some growth in card revenue as well.

In the capital markets like the markets have had a strong start to the year. Like would you say it's tracking better than you expected?

Yes. I don't like to give updates like 1-month the results into the quarter. But yes, I think, as I said, the tone is better in the market, and the pipelines are all good. And so it's very possible that, that could be the outcome here already. But I would say when we gave our guide for the year a few weeks back, we said it will probably build over the course of the year and probably get to pretty good levels in the second half. But maybe we can pull some of that forward and start to see some of that in the first half as well.

And maybe and a lot of that probably obviously comes under customer sentiment and being ready to do things. When you look at from your outlook for loan growth for the year, clearly, there's a little bit of a remixing of the loan book going on. Just talk to us in terms of the philosophically, why you're doing that? And then just from organic growth opportunities, like where do you see the best opportunities? And how is the customer segment sort of holding up given the macro uncertainty?

Yes. So I think our -- part of our view here is we really want to focus on deepening relationships and certain portfolios like auto were somewhat expedient. When they had -- they offered the opportunity for us to grow and relever in relatively safe short duration assets and the spreads were okay, but not great. It was an okay thing to do. But now that we have other opportunities, and there's more pressure on deposits, we kind of need to go back and look like what's state of the different loan portfolios we have. So we've put auto now on a pretty hard glide path down, should run that down $3 billion this year. We already ramped down a couple of billion last year, and we'll run it down again in '24. So that's kind of baked in. We're being more disciplined and selective around mortgage. So the stuff that we're doing kind of out of footprint that wasn't for core customers, we're kind of starting to cut loose some of those loan officers, and really tighten that, which makes room for things like HELOC and Citizens Pay, which I think are kind of the opportunities to have deeper relationships with some of our core customers in the footprint. And then similarly, on the corporate bank. We, I think, have over time been very good at trying to gain entry into kind of mid-corporate syndicates. Maybe we go in as the #3 bank. We're trying to get to be the #1 bank. You get to the #1 bank; you get a lot more cross-sell and economics over time. And if that's not happening, if you were wrong, then you just extract your capital and move on and go to the next opportunity. And so I think we're -- we would expect commercial to net grow, but we're exhibiting the same kind of discipline of making sure if we're going to provide capital to our customers that we're getting rewarded for them.

That's fair. And I think maybe tied to the loan book, when you think about credit quality, clearly, no one's seeing any real credit stress at the moment, you mentioned CRE office earlier. Would it within your loan book, where do you think the stress will appear if and when we get to a downturn? Like -- and what do you anticipate will be the driver of the loss content within that?

Yes. It's a little hard to say right now because again, the consumer is so healthy, and we're not much of a lender to subprime, maybe we had a few prime that migrated to subprime, but we aren't targeting subprime for originations. So I think that's where the stress happens first. Unfortunately, we're not really exposed to that in a material way. So I feel good broadly about the consumer book is just moving back to pre-pandemic levels in an orderly way. And so I don't really see a big upside risk in terms of charge-offs there in the consumer book. Commercial, again, there's good diversification across industries. Our leveraged loan book is very well diversified, and the average hold position is $12 million. So even if you ended up in a tough situation with a company, it's not big like some of the things you've read about with the big banks and all the hung paper at the end of the year. We're not in that game. And so it really goes back to the CRE and multifamilies in good shape and industrial distribution stuff is in good shape. There's not much retail exposure that we worry about. So it's just keeping our eye at this point on office.

Okay. And maybe moving to capital, I think at the end of last quarter, the capital ratios move towards the higher end of where you've been targeting. Just remind us of the capital deployment priorities, and how you're thinking about buybacks in the context of the capital ratios are and the macro sort of uncertainty?

Yes. So I think when you're again, preparing for a potential storm you want to run at high levels. So we have a range, which is probably a little more than our peers, 9.5 to 10. I think it's good to be conservative in your capital ratios. And we're operating at 10 at the end of the year. The guide that we gave for this year is that we'll have most likely about 100% return of capital to shareholders. So it's important to keep a good dividend on the stock. And then we would fund, I'd say, organic growth, and then look at acquisitions and buybacks as kind of the absorption of the remainder. And what I said back on the call was we're generating lots of capital with that high return on equity these days. We -- net-net, don't see a lot of incremental spot loan growth with the rundown of auto. So that's not going to be something that absorbs capital. We don't have a big M&A pipeline. We're being very selective on looking at deals. We want to make sure we get the deals that are in flight like the New York Metro play executed well. So again, that wouldn't be, at this point, seen as a big absorber of capital. So that freeze up the capital to buy back our stock. And for everybody in the room, we think our stock is a very attractive purchase at this point because if you look at kind of where PE ratios are and where multiples to book are for a bank that's got a target to deliver 16% to 8% ROTCE, you're trading well below where through the cycle levels should be. So being able to -- this is the time that we think let's back up the truck and buy back some stock.

That sounds good. And just on the ROTCE, the 16% to 18%. So we talked about the NIM and defensibility against lower rates. You talked about fee revenue. Is it correct in concluding that you'd think that the 16% lower bound in your ROTCE target should be sustainable in different rate fee revenue backdrops?

Yes. So that's one of the reasons that we've been very focused on hedging the downside so that we don't see NIM fall off a cliff, which would certainly potentially hurt that floor in terms of that 16% of the range that we're targeting. I think as deposit pressures ease, which they will, the Fed's going through QT and there's other factors that are impacting that -- and the rate moves are impacting kind of deposit growth. But if you look historically, you've always -- you really haven't had a sustained period of deposit outflows from the banking system. So I think that will support more loan growth going forward. So even if you had a little bit of correction as the Fed moves down and you move to the lower side of the 320 to 340, you can potentially make up for some of that with volume. And then I think fees is the story that I mentioned. When rates go down, we saw the mortgage business came to life, and we made -- we coined money in that business in a down rate environment. And capital markets tends to do well too in lower rates environment. So I think the ability to kind of look out and say, "Can we get revenue growth? And can we keep our expense growth under the revenue growth." that's been the hallmark of Citizens since the IPO. That's what's allowed us to take 5% ROTCE and get it to where it is today, combined with the kind of moving off the 0 bound on rates, those 2 things have really helped deliver that. And I think -- that will continue to be the mantra inside the company is be disciplined on expenses and kind of keep that growth rate below kind of where your revenue growth is. The other thing is we -- there shouldn't be any catch-up on credit costs. Like if you look out over the medium-term, we're already by building reserves, we're providing a 40 basis points in 2022. So you kind of have a normal load built into your P&L, even though your charge-offs are only 22 basis points in the fourth quarter. The amount that we're putting away in terms of reserve build is much higher than that. So anyway, I feel pretty confident that we would -- obviously wouldn't put out the target if we think we could deliver it. But the outlook to me is pretty confident on that.

And on capital, anything from the stress test scenario that came out last week that was particularly jumped out?

Yes. No. There's always puts and takes every time they come out with a new scenario. So there's, I think, a big residential correction and higher unemployment. So there's -- but then there's other things that kind of go the other way. So net-net, I've tried to read everything that all you guys write, and different pundits and it looks like people think it's slightly more challenging than the year before. Having said that, we have operating at the target range we have wherever that SCB comes out. We've got massive cushion over that. And so I don't think that -- I think we'll get a good result. But either way, I don't think it's going to affect our capital plans that we have built into both '23 and for the medium-term.

Understood. I know we have 2 minutes. I just wanted to see if anyone in the room had question. If you want to raise your hand if you have a question. But if not, one last question, I guess, I'll go ahead with it, is -- so you've been resourceful in terms of M&A on the fee revenue side. I mean banks clearly are focused on it. One, is the pool of like fee revenue M&A rich today, if you -- and if so, would it be again within capital markets and wealth management? Or are there other areas that you're looking at?

I'd say, there's 2 areas that we've spoken about previously. Wealth has been kind of a longstanding area of interest. The problem is it's been a seller's market. And so finding someone that is a strategic fit, a cultural fit and at a price that we like has been the challenge. We got 1 deal done, Clarfeld, which has been a home run, and it has allowed us to cover the top end of the wealth pyramid, the ultra-high net worth business owner who sells their business or does a leverage recap and commercial and we can capture the assets and the planning opportunity for those business owners. So that's -- we got massive cross-sell and it's doing very, very well. There's other things within our strategy that we'd like to fill out, but we haven't found those ability to transact there. It's not -- we're certainly going to keep trying. So the other area has been really looking hard at the payment space and all the innovation that's happening in payments, and the tools that we can bring to help our customers just manage their cash flows and their working capital better. We have a number of fintech partnerships there. So you don't always have to buy. You can kind of partner and rent and build those into your offerings. But there's some interesting plays around payments capabilities that come with deposits, deposit platforms. Clearly, in this environment, deposits is a good thing. Some wealth firms come with deposits. And so if you can get a 2 for, if you can add wealth capabilities and it comes with some deposits or payments capabilities and it comes with some deposits, those are interesting things that we're focused on.

I know with that; we've run out of time. So Bruce, thank you so much for [indiscernible].

Okay.

Thank you.