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

Very pleased to have another regional bank with us, this afternoon. We're in Citizens Financial, which has been a long time participant at this conference from their IPO, a little bunch of years ago. I think many of you know Bruce Van Saun was CFO RBS, of a time ago. And since its inception, the Chairman and CEO, at least since its public inception of Citizens Financial. Bruce?

All right, Jason. All right. It's great to be here and look forward to having a discussion about Citizens, and I'll do some slides, and then I think we'll do a little Q&A. So let's kick off here. I'll skip the cautionary language, which you can read at your convenience. And kind of my overriding comments are certainly not the year that we thought, it would be when we turned the calendar to January 1. So, a lot has changed in the environment. A lot of new challenges are out there. But I would say, headline here is that I think we're navigating well, through the challenging environment. As we saw in the pandemic era being resilient, being adaptable, is really, really important. And I think, we're demonstrating that again this year. The key to having success in these environments is you start out needing to play strong defense. So focused on risk appetite, maintaining strong capital, liquidity and funding position. But at the same time, you need to anticipate that the storm clouds dissipate, the sun comes out, you need to be continuing to invest in the initiatives that will kind of grow revenues, and position the franchise well for the future. So that's kind of the balance that we've been focused on this year. And we'll -- I'll show a few slides here, but we're very satisfied with our capital position. It's near the top of the super regional peer group. Very satisfied with the quality of the deposit franchise. About 70% is consumer or its insured/collateralized, and it's been stable since all the turmoil. And then, also really like our businesses. So I like what we've built out in consumer and commercial. I think, we're positioned for growth and success. And we're also well diversified, having strong positions in each. So just a little bit about Citizens for those of you who may not be that familiar with the story, but we have really a very strong position in the Northeast. And then, we also serve the rest of the country through the corporate bank and then through consumer with Citizens Access and with our national lending products. We have over $220 billion in footings and then $155 billion loans, $172 billion deposits. We do really focus on delighting customers. We try to have a mindset of a real effort to make sure that we're helping our customers on their life journey, if they're an individual or achieve their business goals, if they're a company. And we're at record highs, both in terms of our Net Promoter Score, J.D. Power score and consumer, and also customer sat in the commercial side. We have some nice growth statistics here. We have a very strong position in the league tables in commercial, when it comes to middle market. We're regularly able to win jump balls against the megabanks. And then, we're getting recognition for that. So you can see some of the recognition here at the bottom of the page, including the Banker Magazine designating us the U.S. Bank of the Year in 2022. Maybe, a few highlights what's going on in consumer. But we have really 5 major areas of emphasis in the consumer bank. I think a huge opportunity for us is building a leading New York City Metro and New Jersey area bank with the acquisitions of HSBC, East Coast branches as well as Investors Bank based in Short Hills, New Jersey. We've done a good job of integrating those 2 franchises, converting onto our platforms and the potential exists because the customer count per branch relative to Citizens in our core markets like Boston and Philly, we have about 40% of the size with the HSBC branches and about 20% to 25% of the size with the investors' branches. So there's an opportunity really to leverage our position 200 branch network in those markets to really scale up, and grow on the consumer side and the small business side. And then again, there's a lot of companies in that area. So it gives us the wherewithal to even grow our market share on the commercial side. In wealth, we've been working on pivoting the wealth business to be a much more fulsome wealth offering, offering advices to customers asset allocation, moving beyond traditional bank products like annuities. We have introduced a centralized financial planning group. So, we basically turned the business around into something that I think has a great profile. And there's huge potential here too, because if you look at our penetration of the customer base, we're, I think, 9 of 10 of the super regional peers. And if we got to median, we would double our fee revenues. So we're really, really focused on that opportunity. We see further opportunities with the National Bank. We've been focused on the technology platform. We moved to a new cloud-based platform. We put a new mobile app in place, and we're bringing products onto the platform. So this will ultimately be the platform for the future. We'll take the old core bank off of kind of the legacy platform, and we'll move it on to this digital platform, we're building out for Citizens Access. Citizens Pay continues to be, I think, a very attractive offering for us as well. We continue to sign up new merchants. And we're developing a kind of credit line in a pocket for consumers, where we go direct to consumers and give them another way to pay for things, which is pretty exciting. And then lastly, just on digitization. We're pushing hard to kind of digitize all the customer journeys front to back, introduce more self-service. One example that comes to mind here, is home equity line of credit is a great product, particularly in this environment. Mortgage rates are high. People have capable equity. They can borrow against their homes, but they always shied away from the product because it's a very cumbersome origination process. Average origination times in the industry are 55 days. We're now doing over 30% of our originations in under 20 days. And we've really just used data and digitization to take the pain out of that. So as a result, we originated more HELOCs than anybody in the country, even though we stick to our 14-state footprint. So a lot of good things happening in consumer. Move on to commercial. Again, it's been an effort over the years to build out the coverage organization while also building out the products in sync. And I'd say today, we're very pleased with the quality of the coverage bankers we have, where they're targeted. So, we've expanded around the country geographically. We've hired for the bigger companies in the mid-corporate space. We've hired industry expertise, both in the coverage bankers and the corporate finance and M&A chops, so that we're very competitive there. And then we've also, through JMP, focused on some of the higher growth industries in technology and health care and fintech. So we have a really great focus on coverage. And then on the product side, we now have everything we can go soup to nuts on beyond just traditional bank products like loan syndications and FX and interest rate hedging and cash management, but we can access the debt markets, the equity markets offer M&A services. So pretty excited by that. The last thing I'd say, too, is that increasingly private equity firms are buying up kind of the middle market companies in the U.S. I think they probably have over half the ownership at this point. And, we've targeted strong coverage of the private equity players who focus on that segment. And we can do a lot for them. We can show them deal flow, we can finance the deals. We can provide subscription line financing. We can provide all the banking services for their portfolio companies. So I think, we're playing that trend better than anybody in the super regional space at this point. Just a few additional words on New York Metro, but the conversions have gone very well. And, it's great when things go flawlessly and there's no noise and customers are pleased with the migration. So really, I think we did a nice job of that and we're hitting the ground running. So, if you look at some of the stats, the sales stats, customer acquisition, both at investors and at HSBC, since they're kind of on our platform, their growth rate should be -- given that lower base that I mentioned, their growth rate should be a lot higher than the more mature rest of the system, and it's living up to the billing and certainly exceeding, what we put into the deal model. We actually didn't show the financials from the revenues into the deal model, but we had our own estimates as to how we would progress and that's going very well. We're also building the brand in the New York Metro region. We have some great kind of launch aspects, when we first came to New York in the fall, had an immersive experience, but now we're the official bank of the New York Football Giants and the New Jersey Hockey Devils, which is really raising our visibility, which is important because New York is a crowded market, but we own some good assets through the acquisition of investors. Let me talk a little bit about what's on everybody's minds these days. But I'd say it's been a rough ride. The regional bank stock price is not where anybody would like to see them, those of you who own them, and me who owns them as well. But, I do think there's opportunity here to pick up quality franchises at deeply discounted valuations. And when, I look at the things that are worrying investors starting with the strength of the capital base. Our capital levels, we've maintained strength in capital all along. We never levered the capital base. We always kept a little premium, over the rest of the peer group. And I think that served us very well. So we're kind of right at the top, probably #2 in the CET1 ratio. And then adjusted for marks, we always ran a slightly smaller securities book. And so, very strong adjusted CET1 ratio and then also TCE and adjusted TCE ratio. Deposit franchise, as I mentioned, a lot of consumer deposits, a lot of primary accounts too. 2/3 of the corporations view us, as their primary bank and similarly, in consumer about the same percentage also consider us their primary bank. 68% of deposits are either insured or secured. So that's a relatively high percentage as well. And then, we've been able to maintain and stable deposit levels after the SVB through the First Republic, we're actually through the end of April, I'll have a slide here, we were up slightly in our deposits. We also have focused on holding significant liquidity. We maintain an LCR ratio that would be category 3 compliant, as of today. Another area of focus for investors has been the CRE sector. And clearly, companies are going to -- banks are going to take losses in their CRE books, particularly in the office space. And it all, at the end, boils down to quality of the borrowers, quality of the assets that you're lending against. And there, we like the profile of how we've played basically. So, we have a high percentage of suburban relative to Central Business District. CBD is more prone to work return -- lagging return to office trends. We have a high percentage of Class A buildings as well and the geography is relatively dispersed and relatively strong markets. So clearly, criticized assets are going up, workouts are going up. But it's very manageable in a way because all of these loans, for the most part, are current and paying. But then you get to a maturity and then you have to -- the borrower and the lender have to make a decision, as to are we going to extend a loan, and on what terms. And in some cases, you'll have agreements where the borrower sees value in the building, and we'll put equity in. And for that, the lender will extend the term of the loan. Or, if there's a workout and there's not enough cash flow, the lender can create an A and B note structure. A loan becomes performing, the B becomes a charge-off, but represents a warrant if things get better down the road. So there's a playbook that banks have used over time, that everybody is dusting off and putting more people into this area, but it's a fairly manageable process because you have visibility into what the maturities are, and you can start working with the borrowers to get ahead of things. The last thing I'd say that has been -- on folks' minds has been the potential regulatory changes. And I think, there's a general fear that the cure could be worse than the disease when it comes to things that the Fed is mulling over. And I'd say on that, there's a very active dialogue with the industry, with the folks in the Congress and with the regulators and the policymakers and the administration about trying to avoid that, to try to be really judicious and kind of what was the situation with these banks. And they were idiosyncratic. They grew too fast. They have management failures, supervisory failures, doesn't look like lack of regulation was the root of the problem. So we'll see how it plays out. I think I'm hopeful that, in general, people like the structure of the U.S. banking landscape with almost 5,000 banks of all shapes and sizes. So, we have community banks, small regionals, large regionals, megabanks who kind of provide different levels of service and provide plenty of credit to all players in the economy, including small business can get access to lots of credit. And so, if the kind of reaction from the policymakers is much more regulation, that could certainly disturb that landscape that has served our economy and our country so well. So anyway, we're having those dialogues. I think, if things do change. The good news is the proposals go out for comment and review, it takes a while, and then any fixes they put in place usually burn in over time. So I think the industry will have the opportunity to adjust to that. So, just a few slides to kind of follow that up, but I mentioned that we're kind of high on the capital stack ranking. So you can see our CET1 ratio at March 31. And if you then back off the unrealized losses, we're in the second there at 8.7%. If you look at the TCE ratio, second at 6.6%. And then, if you adjust for the HTM marks, we're again strong at 6.4%. So, we consciously decided when we saw the world getting a little choppy that we wouldn't push on loan growth as much, and we would work to preserve our capital and I think that's proving to have been a sound decision. We're also -- we're still very profitable. So we're making kind of mid-teens ROTCE, which allows us to generate 25 basis points of TCE. So we started a good point, and we're kind of a cash capital generative, which is also very positive. And, we have the wherewithal to do share repurchases. We bought $400 million in the first quarter. And we would look to still buy stock over the course of the year, but certainly, we're going to be a little cautious and watch, what's happening in the external environment. I mentioned deposit base here, but you can see that it's very diversified across business. It's diversified across product mix. The consumer deposits are 67% insured -- 68%. And DDA as a percentage of the total is holding in pretty well. So 29%, 27%, that is still 26% kind of at the end of the first quarter. And then, this slide shows kind of going back to the middle of last year, which is just after we had closed the Investors Bank transaction. If you look at our deposit trajectory, we were actually aggressive in building deposits, over the back half of the year and industry was actually losing deposits and our peers were losing deposits. In the first quarter, we kind of made the call that we weren't going to see as much loan growth, and we wanted to kind of focus on sequential beta performance and our NIM performance. And we led a little more kind of runoff in the quarter, than our peers did. But having said that, we were still kind of spot on to the H8 and the peer performance, if you look at the 3 quarters taken as a whole. And then, in the month of April, our deposits were slightly up. So the good news is from the Silicon Valley weekend to the end of March, we were flat and then were slightly up in April. And I think our outlook for the rest of the year is that we'll make back some of those deposits, and that we should be able to grow deposit absence some additional new factors that cause more turbulence. But, we have some really strong efforts underway, both in consumer and commercial that we have a lot of confidence in because we've seen them working up to now, as we've transformed the deposit base. So some of these are already in motion, and they have momentum. And then others are new initiatives that we're really leaning into. I think the agenda in any bank these days is not loans, it's deposits, deposits, deposits. So we're very focused on driving these various initiatives forward. One thing that we, I think, have distinguished ourselves upon is our commitment to running the bank efficiently. We have something called Project Top, tapping our potential, which I started in the kind of just -- in the run-up to the IPO, we had our first TOP program. You can see TOP 1 $200 million, and they've kind of been in the $100 million plus range year in and year out, we took a 2-year effort and made a very big TOP 6 program, that leaned heavily into technology. But TOP 8 is something that we announced at the end of last year that's progressing very nicely. We indicated on the first quarter call that we were looking for opportunities to upsize that and so stay tuned on that front. But I think, If you go into the year and you think about the outlook, lot of things are hanging in as expected, but clearly, what you're paying for your funding cost is going to be more expensive. So that's going to lower your net interest margin and your NII. And I think, we need to stay focused on how do we drive some offsets to that through the expense line. And there's some exciting new things there, too, the capacity of AI to kind of change certain job families. It's a little bit in the early stages, but we're pretty excited about what could come from that. So anyway, I'll stop there and just say kind of to sum up. I think, we built a very strong franchise. We're navigating the current environment and challenge as well. And we're positioned for continued growth and attractive returns over the medium term. So, we'll just be resilient, get through current turbulence and continue on building a great bank agenda. So I will stop there. Jason?

Thanks, Bruce. I appreciate that. You touched on it, a couple of times. So maybe if you could just give us kind of your -- kind of take on the recent regional bank stock volatility. In your presentation, you talked about growing deposits, strong capital, good credit quality, and a lot of kind of good organic growth opportunities, yet we see these 15%, 20% drops in regional banks down prices yours included kind of what you're taking all this?

Yes. So I think like every bad thing, it seems like is priced in. And so the worry list that I went through is, is there existential threat to the funding base? And what's the implications for earnings power? Is the regulatory changes kind of lower long-term structural ROEs? I think, there's those kinds of things as the credit loss, if we -- how bad is the recession going to be or banks going to get clocked in their CRE exposure. . So I think there's a lot of worry beads that people say, I'm just -- I'm not going to hang around here, or why would fresh money come in, even though, it looks like a screaming buying opportunity when you can buy these banks at tangible book or even below a little bit. Historically, you've made a killing. That should restore itself. You put in your notes about how the relative valuation to the S&P is kind of at an all-time low. If you go back 100 years, it's probably as low as it's ever been. So I think, what we need to focus on is just focus on what we can control in building a great bank and playing the defense and making the offensive investments and the stock will take care of itself. I do think there's another wild card out there is that the shorts have really piled into the regional bank space. And one of my concerns is -- and other CEOs, not just me, is it seems like a perfect short because if the whole group is a little wobbly, and they start trying to drive the stock price down, stock price can be connected to deposit outflows. So some banks running itself fine, but then a depositor sees the stock price goes down and says, "I wonder if my money is safe, maybe I should diversify then the bank reports deposit outflows and the whole vicious cycle kicks in." And so the shorts can kind of make a fair amount of money here. I don't -- I think the policymakers in Washington are very vigilant about this. There could be a market manipulation. We'll see, if they take any action on that. But in any case, it's just, I think, another contributing factor besides just the fundamentals.

Got it. And then -- yes, sure.

Sorry.

Go, go.

Sorry. Because to me, the way to rationalize your capital slide, to core Tier 1 of 10%, that sounds good. But ex-AOCI, that's 8.7%. And on the right side of the page is a ratio that I don't quite understand, it's more like 6%. So the question is, is it the right level? And where is the goal post going? Like will you need to be at 8%, 9% core Tier 1 in the future? And ex-AOCI and ex -- I think that's a debate the way you rationalize it.

The point that we're making on a relative basis here we have a strong position at 8.7%. Our SCB that we get from the Fed and when we go through the stress test process is 7.9%. So we have a buffer already today without the need for any phase-in relative to what the SCB would say. The other thing about the adjusted number is that it cures itself over time because the mature -- the security is mature. So a lot of that will accrete back. So you're not kind of today at kind of the current rate environment, you're at 8.7%, but that number will be well into the 9s, if we don't take any action just by those securities maturing. So I think we have sufficient capital. And I think, even if the regulators increase the capital requirements, we're in much better shape than most of the peers who have -- generally, they start with a more leveraged CET1 ratio. And they have much bigger AOCI marks and some of them, it will take a number of years to get back to kind of 10% level if that becomes the new gold post.

Maybe just taking a step back and wondering, what you see as the regulatory change. And then, seeing how citizens might be able to meet that over time?

On capital or on anything?

On anything. How do you see as we think how should we targeted? So I wonder, what do you think they should target?

Yes. So I think what they're focused on now is kind of the LCR, which is a liquidity stress kind of regime and ratio. And one of the things I mentioned is that we've held a lot of liquidity. So we're Category 3 compliance. So if they kind of push things down, Category 3 standards apply to 4 and 2 applies to 3. We have, I think, a strong position without having to make significant adjustments. Although there could be changes that -- for example, in how you run your stress test, if all of a sudden, based on the recent experience, the corporate deposit outflow assumption is twice as fast as what it was before. So if it was 20% under stress and now it's 40%, then the amount that you can lend against that deposit is lower. And you have to hold more cash in securities. And so, that's one thing that particularly when it comes to the category for banks, we provide 45% of the corporate lending in the country and our LDRs tend to start with an 8%. And if you look at the mega banks, and they're kind of down around 50%. So to me, that's a big question is if they start to change the frameworks and the outflow assumptions and force banks in our kind of category to hold more liquidity. That means we have less room on the balance sheet to make loans which has lots of second-order consequences who's going to pick up the slack. Does that move to the nonbank sector? Or is there just less credit available in the country? And what's the impact on the economy? So these are the kind of debates that are taking place, Vasco, is like there's no free lunches in any of this, if the decision is that you've got a be more bulletproof from these deposit runs than you're making less loans and that changes the business model that can change structurally the ROEs, but it could also impact the economy. So to me, that's the one that we're most focused on. I think, the capital stuff is manageable, particularly for us, but we'll see how it plays out.

Yes, Bruce, you mentioned deposits up slightly in April. Maybe just give us a little more context in terms of what's driving that? Is it driven by price? Is it driven by time brokered, or just kind of maybe just more content we sent kind of how you see it progressing for the rest of the year?

So kind of what was interesting is after we announced our results in mid-April, we saw some money come back. So frankly, I think there were -- some of your bigger depositors are doing a little diversification. So, we're getting some in and we're getting some out, but we kind of saw, okay, this picture looks pretty good. So that was good. And then, we've had some campaigns to attract fresh money on the consumer side, which you're paying up for. So I think it's a combination of just continuing to have our coverage bankers focus on deposits, the importance of deposits, making sure that people we extend credit to are bringing the deposits in, and anybody who diversified bring it back, stick it here. And then on the consumer side, just being competitive with the rates that are being offered in the market.