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

All right. We're going to get started here. Up next is joining us for the tenth straight year. I think every year, they've been a public company. We're excited to have Citizens. Citizens had a busy year, continue to build out its private banking initiative, optimize its balance sheet and expand its franchise and private capital and the New York metro area amongst other things. And they appear well positioned to deliver best-in-class earnings expansion in the next few years. Here to tell us more about the path ahead is Chairman and CEO, Bruce Van Saun. Today's presentation is going to be a fireside chat. And I do believe that they have some slides out there for those who want to reference them. Bruce, thank you for being here once again.

My pleasure.

So maybe to kick it off. So it's been a busy year for the bank with lots of initiatives going on, all the things I referenced the Private Bank, Metro New York, Private Capital and a handful of others. So maybe just talk about the strategy behind all these initiatives? And how do you think the bank is positioned to succeed in '25? And kindly mute your phones.

So I think the way to simplify like what we're trying to do is we talk about a triangle of businesses. So we have our transformed consumer bank, our best positioned commercial bank and then we're aspiring to have the premier bank-owned Private Bank. And so the various initiatives that you laid out fall under each of those elements of the triangle. So if I start with consumer, we're very focused on kind of transforming that deposit base and kind of moving up market. So we're really targeted on mass affluent and affluent value propositions, and we've been steadily doing that over time. And you can see that actual deposit performance this cycle was kind of near the top 1/3 of our 10 bank peer group. And previously, we've been at the bottom. So we've made a lot of progress there. We're offering more advice to help people on their life journey. So there's a huge potential cross-sell over to wealth that we're positioned to capture. And then the last element in consumer has been geographically attacking that New York Metro opportunity. So if you want to be a strong Northeast bank, you can't just be in New England and it's pickup in Mid-Atlantic and avoid New York. So the play we made 3 years ago or so with HSBC's East Coast branches and Investors Bank giving us 200 branches in the New York Metro region, a million new customers. That was going to be a lot of work because both franchises -- legacy franchises had underserved their customers relative to our standard. But we're really making a great goal of it here in New York. We're growing households mid-single digits, growing deposits, high single digits, gaining market share in a tough market. So that's how I would kind of frame what we're doing in consumer. In commercial, we've spent years really just building up coverage and building out the product capabilities and focus specifically on sponsors and serving Private Capital. Initially, that was Private Equity. But as private credits come along, we have strategies to kind of serve the whole complex and help them be successful. And I'd say we didn't really get the full benefit of kind of the revenue productivity from those investments because the market was in a lull for most of '22 and '23. It started to come back nicely in '24. And I think our year-to-date capital markets revenues are up close to 50%. And the pipelines are strong, and I think there's going to be even more deal activity next year. So I kind of look at that build out to serve Private Equity who owns over half the middle market companies in the U.S. being a real strength of ours. Beyond that, though, we're kind of very focused on industry verticals and having good teams that help serve the kind of power alleys of the U.S. economy. And I think that's gone well. And then we've looked at to expand our middle market geographic coverage into important regions of the country like Florida and California. We've just added teams in the last 6 months to go into those states. So we feel very good about the commercial bank positioning. And then lastly, the Private Bank, we bid for all of First Republic, as you know, JPMorgan one. A lot of the folks didn't feel they fit into the way JPM runs the wealth business and looked for a new home and came over to us. We picked up teams in Boston, New York, Florida, 3 teams in the San Francisco Bay area. In the fourth quarter, we've added another team in Southern California. And so that business has gone very, very well, like we're kind of at or exceeding all of our targets around deposits, loans, a little softer with the high interest rates, but AUM as well. We're doing a bunch of lift-outs to help build up the wealth side of that. So you want to provide for wealthy, sophisticated people, entrepreneurs' business needs, personal needs on the banking side, but then also for their wealth needs as well. So anyway, we're -- our head is down. This has been a year to really drive execution and feel really good about how we're progressing.

So lots of things in there that we will get into Bruce. Maybe just as you look into the future, you've been targeting a 16% to 18% return. And while there's been some noise in the results from BSO to build out the Private Bank, the core bank is still putting up an 11% return in what has been a challenging backdrop. Maybe just talk about the path from getting from where you are operating today to 16% to 18%. What are the key drivers? And over what time frame do you think this can happen?

Sure. So we're down at 10% or 11%. We've laid out an important slide in our last earnings deck that shows that return is suppressed by actions that we took when rates were low and folks either invested in securities or put on swaps to hedge the downside of rates coming down quickly, which didn't happen. So in hindsight now, you've got a drag on your returns from some of those swap positions. If you just look at kind of the runoff of the accounting hit once you terminate, we terminated a lot of swaps, the expense get amortized into the future. That, combined with our noncore runoff, which is pretty much like clockwork, it's auto loans to just pay off, really pops about 300 or 400 basis points to ROTCE without us having to do anything. It's all time based. So that is a nice step up. We have some other swaps, and then we have other dynamics around the balance sheet, front book, back book that probably is another couple of hundred basis points. So you can get up into that kind of 15% or 16% just from those balance sheet dynamics alone. Then you look at driving the successful execution of Private Bank and the other initiatives I just talked about, that's a couple 200, 300 basis points and then probably credit is we're overproviding today versus piece time pick up a little on that. And then offsetting that a little bit will be the AOCI drag will normalize. That's helping ROTCE today in a strange way. But anyway, if you take that off, then you're solidly in that 16% to 18%. So I think we feel extremely confident that we'll be able to migrate up to that. And kind of hit that in kind of maybe '26, '27 as those -- we execute well and some of those time-based benefits kick in.

Maybe let's spend a minute on the economy. So post the election, there seems to be a lot of excitement that we'll have an administration that's pro business. I know you're out in the market a lot of talking to commercial clients. Maybe just talk a little bit about how are they feeling about their business post the election?

Yes. I'd say folks are like they're happy the uncertainties behind them. So uncertainty is always a dampener in terms of investing sentiment and people figuring out like their game plans for next year. So I'd say one of the advantages we have is that we saw Trump 1.0, so now we have Trump 2.0, and there'll be some differences versus that. But it's generally going to be pro business, pro energy kind of less taxes, less regulation, which generally creates a more conducive business environment for companies to invest. And so I'd say there's cautious optimism here about things going forward. And also that deal activity that we've had a lot of extra scrutiny on transactions, not just in the banking industry, but across all industries and kind of a bias against bigness, which I think that will dissipate to a significant degree. So I do think that certainly, Private Equity, when you look at the deals that they're kind of working on and they're in the pipeline, I think you'll just start to see much more activity as we get into '25 and '26.

Got you. Makes a lot of sense. So one of the things that transpired over the years, obviously, loan growth has been somewhat just disappointing, given all the uncertainty that you talked about waiting on the election, what the Fed is going to do with rates. I'm just curious, based on your conversations that what you're seeing and hearing, what are your expectations for loan demand, both on the commercial side and consumer? And how long do you think it's going to take for us to start to see more meaningful core loan growth to pick up?

Yes. Well, the economy, people were worried for a good part of this year as to whether we would have a soft landing or go into a recession. And so I think that kind of held back kind of borrowing and investing, which I think now the view is going to be more positive that we likely to see not a gangbusters growth in '25, but certainly, we can take recession off the table, and it looks like we'll have a nice environment, which I think will allow companies to play more offense, make more CapEx investment, do more deals. So we'll start to see the return of new money transactions, which a lot of the past year or 2 has been a lot of refinancing transactions, either inside the BSL market or going out to the bond market. So I think that playing offense translates into more loan demand. And that can come in new facilities. It can also come in higher line utilization, both for traditional corporates and for subscription lines and other ways that the Private Capital complex borrows money. So I think that's the kind of thing that will change. It's not going to turn on a dime. I think it's still not here yet. And I think -- but as we go through '25, particularly get into the middle to the back of the year, I think that should start to pick up and be meaningful. We have another driver as we're standing up the Private Bank, and they bring over new companies and new individuals and rates come down. I think there's also opportunities for us to see nice growth in private banking. And then I'd say in consumer, you'll see traditional areas like mortgage and HELOC and card, you'll see some modest growth going forward as well.

Maybe to dig into some of the initiatives you just referenced, growth in the Private Bank. You've been building it out. You reached a milestone in the third quarter with breakeven, despite I think you just referenced for loan growth has been a little softer. Talk about how the build-out has been progressing? What have been some of the lessons learned? And how do you feel about some of the key financial targets that you had laid out regarding this?

Well, I think the lesson that is almost a universal lesson is you win with great people. So we had an opportunity to bring over the A team of the folks who built private banking at First Republic, and we weren't going to swing and miss on that, that was a huge opportunity. And because they're so talented and their customers really respect them and want to continue to bank with them, we've seen kind of a huge inflow of customers. We actually, during parts of the year, we've had to add extra shifts to just keep up with all the account opening, which is a nice problem to have. So I couldn't be more pleased with how they have kind of migrated into the Citizens environment and their customer obsessed, we're customer obsessed. They're learning some things from us. We're learning some things from them. I do think one of the things they sold was white glove service and taking the pain out of the banking experience. And there's a lot that goes into that, that First Republic had years to build. We have all the core systems, but to actually kind of get the user experience in terms of very sophisticated single sign-on and things like that for a complex banking array and wealth array, we're running hard to try to get those things in place. But I think we're getting there. We're making substantive progress. And when we nail some of those things, I think there's some -- we're building it in a way that can help the rest of the bank and how we serve the broader customer base as well. So -- anyways, so I think it's going well. I think we're tracking to exceed on deposits, exceed on AUM, a little lag on loans when we get to the end of the year. But if you're growing deposits $1 billion to $1.5 billion a quarter consistently, that's some very nice growth. And the other thing to point out is that the composition of that deposit growth is very attractive. So our demand accounts are kind of in the mid-30s. And the spread on loans versus deposits is very accretive to our net interest margin. So it's good business that we're putting on the books.

Maybe the -- shift gears, a little talk about the Private Capital, an area where you've had tremendous success, #1 in sponsored middle market book runner and been building a host of other capabilities. Parts of the business have been held back by higher rates. So maybe just talk about where you're investing within that ecosystem? What are the best opportunities in that business? How are you working with private credit? And do you view this as an opportunity or a threat?

Sure. Well, on the Private Equity side, we've been there for a long time, and I think we have, over time, added to our coverage banking force, and we're covering more firms. We probably started out with 75 middle market-focused sponsors, and we're probably up to, say, 175. And client selection is very important there. You want folks who appreciate what a bank like us can do for them and that treats their banks well historically. So you don't have credit -- undue credit risk. But anyway, I think we're very well positioned in the fact that we also have 4,500 traditional middle market and mid-corporate companies that we service and a certain number of them are going to put themselves up for sale every year, and that's merchandised that we can show some of these PE firms is an extra edge that, that's the #1 thing they want is how do I put my money to work, how do I get good opportunities to invest. So I think we run the whole gamut of providing the financing solutions showing deal flow, et cetera. Similarly, on private credit, they need to find opportunities where can they invest their funds. And so they can be a customer of ours. At times, they could be a competitor to us, but it's typically on more leverage structures. And so we've kind of -- we've looked at the T account, so to speak, of over the last 2 years, have we lost more revenues or gained more revenues since private credit is in the ascendancy? And it's actually gained more by a fairly meaningful amount. We're -- one of the things those private credit funds need is leverage. So they typically will own in a portfolio, say, 100 credits, they put that into securitization structure and want the banks to have a very low LTV loan against that with certain rights that make it very safe lending. But that interestingly turns individual lending to one of their -- a leveraged company, which can be, say, a B+ risk at a certain spread. In these securitization structures, you can lend -- the diversification effect takes you up a notch to say, a, or A+, and you're still making very attractive spreads and good risk-adjusted returns. So you just have to be smart, you have to be adaptable. The world is always going to change. We've seen it for how many years we've been in the business, 30, 40 years, and you try to turn threats into opportunities, minimize the threat aspect and look for opportunities to serve that as a new customer base.

Let's shift gears and talk about some financial things. So you put out a medium-term target for a 3.25% to 3.40% NIM. You've laid out some of the factors for swaps, noncore runoff, improving balance sheet mix and obviously, the strength of the deposit base, which has been an ongoing project. And I think this included reaching 3% in '25. However, I think some people walked away from last quarter's EPS call thinking that it was more back-end loaded. And since earnings, we've obviously seen the rate curve move around a bit. So can you maybe square what the margin message you're trying to get across? And what will it take to reach that targeted level?

Yes. So I think, again, that slide lays out that a lot of this is time based, and we had kind of the time-based contributing 18 basis points to '25. It goes up to 33, so another 15 in '26 and then gets to 40 in '27. So actually, it isn't really that back-end loaded. There's some elements of kind of the rest of the balance sheet management, some of the active swaps that we have and some of the front book, back book dynamics that will even that out. But we're looking for a nice benefit next year, a bounce back year in terms of our EPS. And that will be fueled by that NIM kind of lifting and kind of getting back towards something if you added the 18 basis points to our guide of 2.82%, you're getting close to a 3% NIM. And so the nice thing about NII is you don't need a lot of people. It's not -- there's not a high cost of goods sold. It's just kind of drops through, and it is very beneficial to your operating leverage. So I'd say we look out, we see that. We see, I think, good fee growth opportunities based on how the capital markets business is positioned. And so we think 2025 will be a real bounce back year for us.

So Bruce, earlier on, you referenced the transformation of the deposit base. So last cycle, you're on the upper end of peers when it came to deposit cost increases. This time, you were one of the best. And there have been a handful of things driving this, right, growing low-cost branch-based deposits. I think it was a 7% CAGR from '18 to '23. Obviously, Metro New York customer acquisition. Talk about what drove this improvement this cycle? And how does that position you for the next leg of the rate cycle?

Yes, I think it's -- you have to look -- go back to our heritage and how RBS assembled Citizens with acquisitions of a number of trips and savings and loans that really was a rate-led value proposition and over time, moving away from that to be kind of advice-led and service-led value proposition. And so I think we've been very astute at segmenting the customer base in the mass, mass affluent, affluent using data and analytics to help personalize the offerings to people as we try to grow those attractive mass affluent, affluent segments. And so that really was, I think, the key on the consumer side of the house. And I'd say in commercial, getting into certain areas that we didn't have significant capabilities serving escrow needs, bankruptcy accounts and broader services, investing in our cash management platform to really make them kind of best-in-class in our regional bank space. Those are things that help drive that. And then the added element, we have the Private Bank now, which is actually bringing in very attractive deposits, and they're not being utilized fully in the private banking -- funding private banking loans. So that excess allows us to pay off less attractive sources of funding like FHLB borrowings like brokered deposits. And so the balance sheet continues to clean up. We're kind of -- we're not focused on growth at the moment. It's let's run off now that deposits are more scarce and everybody was caught up in growth when the Fed was going through quantitative easing. Let's look at what we have on the balance sheet kind of where our loan capital is allocated, rejigger things. Let's get out of the auto business, let's get out of our flow agreements. Let's start to run down CRE and let's really focus on growing the things like C&I and some of the attractive consumer classes. So we're doing that. And we're doing the same thing on the right side of the balance sheet, which is let's make sure we really have a stable cadre of low-cost deposits spread across our businesses and that we can kind of continue to grow that at a decent whole speed. So you can grow that 3%, 4%, 5% every year.

So maybe more near term, Bruce, so we're 2 months into the quarter. You've given a handful of items for 4Q. I think it was NII up 1.5% to 2.5%, the margin up 5%, fees up mid- to high single, cost up 2% and stable charge-offs. Maybe just give us an update on how the quarter is progressing and any trends that you're seeing in the market?

Yes. So we feel really good about the guide in the quarter. I think it starts with revenues and so I think we're feeling good about the NII guide, good about the fee guide. The NIM was something we called out that we thought we could grow 5 basis points sequentially. I think there was maybe a little head scratching on that. But we kind of had some things built in. We can see the progression of last quarter that as the months went on, we were getting already closer to kind of the destination, and we thought we'd do a really good job on managing deposit betas as the Fed was cutting rates, and we've done that. So we thought we could get the deposit betas to 40%. And I think that clearly is in hand at this point. So it starts with that. It starts with your revenue outlook. Feel good about that. We want to have a good jump-off point as we go into 2025. There's no surprises on credit or capital expenses we're managing. I mentioned, we're taking opportunities to invest a little bit in adding that team in Southern Cal and adding the bankers -- middle market bankers in Florida and California. So when your revenues are coming in, you can invest a little bit more, but we're still disciplined as you would expect on the expense side as well.

Great. Maybe to build on one point, you noted that you talked about a 40% near-term beta, you're having success and maybe something similar on the way down as you have on the way up, so maybe low 50s. Obviously, the environment has shifted a little bit. We've heard from some other banks good near-term success, but maybe a little bit slower than they had thought just given the less rate cut. How are you thinking about overall your ability, given that, as you just said, you're in optimization mode on the deposit side. How does that, along with the shifting rate curve impact your ability to bring down rate over time?

Yes. I mean, I would look at it when -- if you go back to that slide that we used that showed that cone from 3.25% to 3.40%, because we're still modestly asset sensitive that actually -- if the Fed goes on a softer glide path than a hard one, it actually pushes up higher on that range. So anyway, I think we'll wait and see how that plays out. But most banks, including ourselves, are close to neutral, but we still are a bit asset-sensitive, which should be a benefit.

So you referenced it earlier, but obviously, post the election markets have become optimistic regarding capital markets, which I've enjoyed to see. Can you maybe just talk about what you're hearing from clients in terms of willingness to transact? What do you think capital market activity looks like, not only in '25 and over the next few years? And what are the other best opportunities to grow fees looking ahead?

Yes. So clearly, capital markets, I'd keep at the top of the list. We've just built kind of great capabilities across helping our clients access the capital markets, access the loan markets or do M&A. And so I think there was a concern across a number of fronts, but regulatory was one of them, is that people, I think, were reluctant to go through these kind of long approval processes with uncertain outcomes. And so I think if we're back to the game on, we can do deals. I think that's helpful. I also think rates coming down, particularly for levered players is going to be helpful. So anyway, we see lots of conversations. We're in the middle of a lot of things, and pipelines are strong. And I think that will kind of come in for 2025. I'd say the other big opportunity for us is in wealth, where if we had to be self-critical 10 years on, what did we get right and what -- where are we behind where we hope to be, wealth would be one area that we would say we were behind, not for lack of trying. We've made a lot of progress, but it's hard yards. But the real wealth opportunity, I think, is at the higher end of the pyramid. And now with the Private Bank and bringing -- doing these lift-outs and building out our Private Wealth capabilities, I think there's an opportunity to really step up and grow wealth fees and the lower end of that in serving the branch customers for affluent and mass affluent customers also I think we have a lot of momentum right now. We have great new leadership and things are going quite well there. So I would say capital markets, wealth, we're doing solid growth in card fees. So there's kind of all through the global markets, which covers our interest rate, FX and commodities hedging. I would say, had a softer year than we expected due to the lack of volatility and lots of uncertainty. I would expect that to also rebound somewhat next year as well.

And when you think about investing into next year, you've obviously committed to positive operating leverage in '25 and for the next few years. When you think about investing in the franchise, are we back to more normal -- obviously, 2024 was a very successful year on the cost front. Are we back to more normal years where we have some headline expense growth that's a little bit more elevated, and we use top to get back to more normal run rate?

Yes, I think that's what you would expect. It all starts with your revenue outlook. And again, the confidence that we have that the NII is suppressed today and when the swap drag burns off and some of the other things we're doing kick in, we should see healthy revenue outlook across '25, '26 and '27. It actually builds in '26 and '27. So then you kind of start to look at how much do I want to invest in some of the things where I have a strong franchise, and I want to keep growing it. I think this year, you didn't get to do a lot of that because you were suppressing your expenses because you knew it was going to be a tougher revenue year. So I don't think it's -- there's a bounce back that is just automatically going to happen, I think we'll continue to stay disciplined on the core expenses of running the bank. I think AI will help there. But I do think discretion -- from a discretionary standpoint, there's a lot of really interesting things for us to look at, starting with building the Private Bank and Private Wealth out further, building the coverage in the Commercial Bank out further, investing in our payments capabilities. There's a huge opportunity around payments to turn that from a threat into an opportunity, like I said, in embedded finance. There's a lot of fintechs who are kind of looking to upgrade from small banks as their partner to bigger banks like us. And so there's just some really great things to think about, which you kind of have to ratchet down when you get in a year like '24 that you can start to think about again, but still maintaining those guardrails that you want to run with positive operating leverage, which is what drives up your ROTCE.

Sure. So shifting to capital. So banks have a very strong capital position. I think [ 10.6 ], which is above the target, one of the strongest adjusted capital ratios without needing to raise capital or do anything strategic. And you've been buying back stock consistently with the $200 million to $300 million a quarter clip. When you -- thinking ahead, like -- maybe give us some updated thoughts on capital allocation, are you planning on getting more aggressive in returning capital? Are you holding dry powder for the return of loan growth? How are you thinking about capital allocation?

Yes. I think we've been comfortable operating where we are just above the high end of the range given some of the uncertainty. And I'd say we were able to buy back a lot of stock this year given that there wasn't a lot of loan demand. We actually were shrinking loans when you consider noncore net-net. And we still were making a good return. So it gave us the wherewithal to buy the stock. And it was nice to buy back the stock when it was quite a bit lower than it is today. Usually, companies in the tougher times, they don't have the wherewithal to buy back their stock, but we were able to do that, which was great. I think when we look out to next year, I think there'll be more loan growth. And so that's always been the top priority. So depending on the amount of the loan growth, after you pay your dividend, the next thing up is a good attractive loan growth, let's do that and kind of the buyback then slides down in terms of your priorities. So if the loan growth doesn't come through, you'll continue to buy back a decent amount of stock. If the loan growth comes through, you'll just buy back less stock.

I noticed you didn't make any reference to inorganic activity there, Bruce. The bank has not been interested in M&A for a variety of factors, the balance sheet marks and the other items. Do you think the shifting political and regulatory environment changes the way you think about acquisitions, whether traditional bank or even nonbank acquisitions?

Yes. I'd say we have a lot of growth that's built into just executing what's on our plate, and I really want to focus on that primarily. So let's make sure this Private Bank is getting across the river to the promised land. That is worth a huge amount of potential accretion to our bottom line. If you think about we said in 2025, when we launched the Private Bank, it should be 5% accretive to the bottom line, which it easily should be. But if I go back and think about the deal metrics when we bought Investors Bank, roughly $30 billion, it was a little more than that, but not a whole lot different than that in that time frame. So we can get a lot through these organic investments. Having said that, there'll be more, I think, bolt-ons that attract these, wealth lift-outs are somewhat like acquisitions. As we build out our industry verticals, do we need M&A capabilities in a certain vertical. Those are pretty small, easy to digest things in the payment space, which I think is really interesting and a lot of great innovation is taking place. Is there something to buy as opposed to partner? Those are the things that would kind of be at the top of our list. I think you'll start to see deals flow again with rates coming down and the regulatory posture changing, but I think it will probably tend to be more at the lower end where there's a need for more consolidation. It will be interesting to see if kind of folks in our size category get active. And we'll kind of just -- we'll be in a good position to play if something beautiful comes down the pike. But I'm not prioritizing that as something that we have to do.

Maybe just one last question to end on, Bruce. You touched on credit a couple of times, we're running around 50 basis points. You noted that maybe that's elevated where you expect to be. At earnings, you had some positive comments near the Beacon NPA and criticized. Maybe just give a quick rundown how you're feeling in credit over the medium term and maybe separating it out office versus everything else?

Sure. So I'd say, ultimately, we'd like to get back down to kind of low 30s, mid-30s, kind of what the composition of the kind of consumer and C&I and commercial real estate should deliver on a more through-the-cycle basis. We actually -- I think, it's improved from where it had been historically, as we exit the auto business, that was one of the higher charge-off portfolios in consumer. So in any case, I feel like we should be able to operate in that and the thing that's kept us elevated up around 50% to 55% right now is CRE. And it's CRE office in particular. So that continues to be the pig going through the python and I think there's a few more quarters of that before that starts to come down, but we're very heavily reserved on that. And I don't see it getting any worse. I think it's tracking to kind of what we expected. And maybe there's a possibility it gets a little better, but I wouldn't make that call at this point.

Great. Well, please thank me in joining Citizens.