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

We're very pleased to have Citizens' Financial with us. From the company, we have Bruce Van Saun, Chairman and CEO. Bruce has been a very long supporter of this conference as CFO of Bank of New York Mellon; CFO of Royal Bank of Scotland; and for many, many years, Citizens Financial Group, where he is Chairman and CEO. So Bruce, thank you so much for joining us this morning.

Always a pleasure.

Maybe the best place to start is I remember back, this is many years ago when Royal Bank of Scotland was about to spin out Citizens breakfast at the Barclays headquarter building. And it's just -- it's amazing the progress you've undertaken to transform the franchise and is one to where it is today. Just maybe update us in terms of how you're feeling about the current positioning?

Sure. So yes, it's been quite a journey, and it's a transformation that few have been able to successfully achieve. So we feel good about the fact that we put the foundation in place and built a great team and worked on a vision for how citizens could be distinctive and really focused on areas where we have a right to win. So today, our strategy I'd like to describe as a tripod that we have a very strong consumer bank, and we've spent kind of many, many years in moving from transaction-based bank to advice based, moving to digital and investing in data and then actually kind of move more upmarket to go after mass affluent and affluent customers and transform the value proposition we offer. So I think what we started with was more rate-led collection of thrifts and savings banks. And over time, we now have kind of a very strong performing consumer bank. And ultimately, that's the kind of lifeblood of a bank is to have low-cost, attractive deposits that you can grow on a consistent basis. And so I think we've achieved that. We did make a investment in the New York Metro region. So you can see around town here, our branches. And I think that was always something we had a gleam in our eye to find a way in because if you're going to be a strong Northeastern based bank, you have to figure out how to get into New York City, but buying HSBCs, East Coast branches and Investors Bank having roughly 200 branches in this region and then kind of bringing our style of banking into an already highly competitive market, that's gone extremely well. So right now, that's our fastest-growing region, mid-single-digit household growth, high single-digit deposit growth last year. So the consumer bank, I think, is poised, and there's still a very significant wealth cross-sell. We're not fully penetrated yet. And so there's some big upside if we can keep making progress there. The second element of the strategy really was to scale up and expand the capabilities of our commercial bank. And I think we feel really good about that. So we've covered middle market companies. We cover mid-corporate companies. We move more upmarket, mid-corporate companies, need more industry expertise. And so we've had to bring in new coverage bankers. We brought in corporate finance types and M&A specialists to really go after some of these attractive industry verticals. We saw the opportunity early on to really dig in and cover sponsors because they were eventually going to own more and more of middle market America. And then as they've broadened out and become private capital, they have private credit, they have other asset management activities we've been growing with them to help them be successful. So we now cover the full product gamut, and we have attractive coverage profile. And so what you haven't seen really over the last 3 years since we've been in a lull in capital markets activity is the full power of what we've assembled. And I think that's starting to change now that the conditions are improving. I think you're going to see the capital markets revenues really expand and start to demonstrate that we've built a great business. And then the third aspect is really trying to figure out how to get into the high-end wealth business beyond just the branches. We had made an acquisition several years ago, Clarfeld up in Tarrytown, New York. That was a really good franchise, but not really at scale, the scale that we desired. And so we made the play for First Republic. We didn't get it, but a lot of the talent decided that this would be a good place for them to come over to Citizens, and they could build a First Republic 2.0 with even kind of, I think, more sophistication, broader product set, et cetera, and couldn't be more pleased how that's going. So we're hitting and exceeding all of our markers in terms of deposits, loans, AUM. The cultural fit has been great. We're working really hard to get service levels to the level that First Republic was at, but very excited about the potential for that business and the impact that it can have kind of on our overall valuation.

That's helpful. We're going to go up the first ARS question. We've been asking these in all the rooms. But Bruce, why they do that? Maybe we'll start big picture and then delve into a lot of what you talked about. You talked to the 16% to 18% ROTCE in the medium term. You just highlighted a lot of different strategies that could potentially maybe get us there, but you're only 11% in the second quarter. So maybe just help us bridge that gap, and if you can offer kind of any thoughts on when you think you can get back to that level?

Sure. Well, I'd say we're under-earning really the potential of the franchise now. We do have the legacy swap portfolio. We have kind of the drag from the noncore that we're running off as aggressively as we can. If you look at kind of what we refer to as time-based benefits, there's probably 4% there over time. And we don't really have to work for it. It's kind of the cake is baked on that. So that gets you up closer to 15%. And then the initiatives that we have, private bank going from start-up to being significantly profitable, making 20% to 25% return on equity, which it will do this year, by the way. And it will scale -- continue to scale and continue to sustain that level of return, plus the commercial bank investments should coming in with more activity, and what we've invested in, in the payments business. I think there's easily another 2% to 3% ROTCE improvement from the initiatives, I would say. We're still over providing on credit, given some of the CRE office book that we've been working through. But ultimately, if we're kind of slightly below 50 basis points charge-off ratio. I think that through the cycle number, as we continue to refocus on kind of safer lending areas should be 30% to 35%. And so there's a tailwind, I think, coming from credit as we work through the CRE. And I'd say, one of the offsets is you're benefiting from the drag in AOCI, which is compressing your equity. So that moves a little bit the other way, although you'll be repurchasing shares. And so anyway, we show a walk in our earnings material that lays all that out. I feel very confident in our ability to deliver that. And I think -- I don't think the market necessarily is fully bought into the out years, '26, '27 because it is a lot of growth. But if you attribute a lot of that to NII and NIM and then it's not a big leap to execute the rest of it.

Got it. And maybe just pull up for a moment and just talk to kind of what you're hearing from clients on the commercial side and just how clients -- how is clients' sentiment just given the tariffs and all the stuff we keep on reading about?

I'd say on the corporate side, our clients are in very good position. So one thing that companies got good at over the last, call it, 5 years has been to become adaptable and resilient. And so getting through COVID, the high inflation, the tariffs, I think businesses have become good at doing different scenario planning and making sure they have alternative ways to run their business in terms of supply chains and things like that. So I'd say most of our companies are having very strong years, good cash flow, but they're not fully leaning forward. So that's the thing that there's still a fair amount of uncertainty, the way the tariffs have rolled out the way they change on a fairly regular basis, I think, has people just holding their position and not fully leaning in yet, although I think there's less uncertainty now than there was at the beginning of the year, the liberation Day worst-case outcomes for quite anxiety producing. I think we'll probably not see the worst-case outcomes. We have the tax bill, which has a lot of incentive for people to get off the sidelines and start investing. You have regulatory appointments, folks are being confirmed. And there's a big deregulatory agenda, too, that's very positive. And now it's likely the Fed is going to start cutting here this month. And so there's a number of tailwinds, both on the fiscal side. I think what we did last year is we started running ahead, and we're very disciplined, as you know. If we put targets out there, we want to hit them. So we said that we'd be breakeven in the second half of last year, but we were -- we had that kind of in the bag. So we said, what market do we want to go to next to make some investments? What's -- and so we decided Southern Cal was where we needed to be. We had a very big presence in Northern Cal. And what happens when you hire private banking teams is there's a J curve. So all the cost comes day 1 and then eventually the customers migrate over, and they start to build their book. And so we thought we had enough room to actually make that step and expand in that important market. I would say, again, we're running at a very good clip this year. So you could see us start to think about similar things. Are there -- should we densify some of the markets that we're in. One of the markets that's interesting to us is Florida. We're in Palm Beach, and I've been advised that West Palm Beach is a completely different market, even though I can look from our office and see the building they want to be in, in West Palm. But anyway, First Republic had very good presence in particular, Southeast Florida from Jupiter down to Fort Lauderdale. So we have our eye on certain things, and we'll just continue to calibrate that to scale it up, but maintain the discipline around profitability and returns. We're also hiring a number of wealth teams. So lift-outs of folks that are on either broker platforms, RIA platforms. We've now got 8 teams have come on board. And the big draw for these teams is the caliber of the private bankers and the ability to get referrals from us and then also the ability to use the balance sheet to solve client needs, which they can't get many times if they're on other platforms or pure RIA platforms without access to balance sheet. So we have a lot of inbounds of folks who like to get on our platform. And so I think we can be selective. We're trying to bring those private wealth teams in close proximity to the private banking team so we can do joint calling and actually really dominate those markets. And so those are a little different because when the team -- those teams come over, they're usually in the broker protocol, and they can bring their clients day 1. So the kind of payback on that is quicker than on a full-scale private banking team. So anyway, I'd say where do we go with this? I think we'll easily do the 5% this year. And if you play this out on the trajectory that we're on, I could see us in the not-too-distant future getting to a double-digit contribution.

Maybe the next ARS question is on your recently announced reimagining the bank initiative. I recall back at 2019 at this very conference, you announced your transformational Top 6 program. I know it's $300 million to $325 million in pretax benefits. Maybe you can indulge us again just more detail on this reimagining a bank initiative you kind of hinted at on the July earnings call. It sounds like it's a multiyear transformational top program. You kind of hinted that some AI bend to it. But just talk about maybe some of the investments needed for the program, and just how this plays into the 16% to 18% ROE objective we talked about.

So I'm extremely excited about this. So I don't think you can do kind of a major transformational top program every year. So the top programs that we've had through top 10 have mostly been more tactical finding ways to run the bank a little better or deploy some new technology, grow certain customer revenue streams, but they haven't been a huge lift in terms of rearchitecting technology or databases or things like that. And and kind of going to really dramatic change in terms of the technology capabilities that we have. I think with GenAI and Agentic AI there's fresh ways to think about how the bank operates. And can you have -- for example, in Agentic AI, can you have human and bot teams like our contact centers have human and offshore call center teams. Can you replace your offshore call centers over time? And just have bots and have your well-trained agents here in the U.S., handle the more sophisticated questions. And obviously, you want to start at the source and try to to take out as many questions as you can. So the focus is on improving customer experience and rearchitecting journeys and offering more self-service. But the kind of nomenclature reimagine the bank was to try to get the people inside the company to not just do things incrementally, but step back and say, what could -- what would we like the future to be in 3 years or 5 years and then kind of paint that vision and then work backwards and say, this is what we need to do in order to make that vision become reality. As you know, we're very financially disciplined. And so I think there might be some murmuring out there, gosh, is this going to require huge investments, are the expenses going to lead the PPNR benefits from this program. And I would say we're architecting it in such a way that, that would not be the case that we will pull benefits in, and some of it may be a little more tactical because we still have tactical things we can do in order to be able to self-fund some of the initial investments that really deliver a very strong payback when you look out 2 years, 3 years down the road. And so to me, this is from a financial sense, it's more icing on the cake. I can -- we can get to the 16% to 18%, and we will. And if we can really have a big impact from reimagining the bank, I think that can kind of be a game changer in terms of taking those numbers even higher.

Got it. And I guess, Brendan, is leading this initiative, but you hired a new CFO recently, who I know pretty well, both from State Street where he was the Chief Transformation Officer at Barclays. He co-led our investment banking simplification initiative. Just how does that impact that program?

So this fellow, Aunoy Banerjee, who's our new CFO starting October 24, that was 1 of the appeals. We had huge interest in the position. And I think what stood out was the depth of transformation experience he had in addition to ticking the boxes on all the financial stuff. And so we have a mini ExCo that works with Brendan to drive the program. So when Aunoy gets here, he'll be on that team that kind of oversees the program, and I look forward to getting his insights into some of the things that he's done at previous pit stops.

Got it. Now we're halfway markers, you know it's coming, guidance. We're going to go through it in detail, but maybe big picture.

You know what my answer is going to be.

I know, but I got to try. You have 3Q guidance out there, full year 2025 guidance out there. I know there's always some puts and takes. Maybe any kind of update you want to provide?

Yes. No, I feel really good about how we're tracking both for the quarter and for the full year. And the trajectory that we have going into '26. So if you look at the sequential quarter earnings jumps from kind of Q1 to Q2, what's in for Q2 to Q3 and then Q3 to Q4. That's kind of bringing our profitability back to levels that is really nice to see. And I think with the NII lift really driving that and fees being very robust in conditions, particularly favoring capital markets and wealth. I think we're in very good position on the revenue side of the equation, and you can count on us always to do a really good job on expenses. And I think credit is behaving as expected, so relatively benign.

Maybe -- you can kind of maybe run through some of the key drivers, starting with loan growth. But you were talking kind of low single-digit loan growth at the start of the year. Maybe talk about what areas of portfolio are most optimistic about and give us some more flavor?

Yes, I'd say 1 thing that we have going for at Citizens is this buildup of the private bank. And so as the bankers bring their back book customers over or attract new customers, that's really idiosyncratic to us that we can grow deposits and grow loans, that really isn't market reliant. And so it's just taking market share. And so that, to me, is a foundation block for the projections around spot loan growth and spot deposit growth, that will lead the way really in the second half of the year. The nice thing in the second quarter was that we actually saw consumer have net loan growth and commercial have net loan growth in addition to the private bank. And so some of the activity that we've had to kind of optimize the balance sheet in terms of -- in commercial, we've been kind of running off low-yield single product relationship where we thought we'd get more cross-sell, and we didn't or we're running down commercial real estate from the wake of the investors acquisition is let's bring ourselves back to scale in commercial real estate. We actually now are seeing that we can grow, notwithstanding the continued drag from some of that cleansing. But the good news is I think that is starting to subside. And so the growth is kicking in and the growth -- a lot of the growth is around nonbank or non-depository financial institutions, so subscription lines, securitization lines. Line utilization is going up. So we already have the lines out there, that's been helpful. And we're seeing a little bit of line utilization benefit on the corporate side and some of the new business wins that we've been able to pick up in the middle market. We've expanded teams into the New York Metro region, into Florida and California, and that's starting to pick up the growth a little bit on the corporate side. And then in consumer, steady as she goes, but we have a nice HELOC business and product offering and our mortgage business is solid and -- so those have been growing at a decent clip. We have some aspirations at our Card business could grow. We just launched 5 segmented cards last quarter, and we're seeing nice pick up on that. So again, as the noncore division, which really was consumer loans, kind of starts to wane. It's kind of dropping off, then you'll see less drag from that noncore runoff, and you'll see the consumer loan growth eclipsing that as well. So top of the house, I think we should continue to see some growth across all 3 as we look out in future quarters.

Got it. And at what point do you think we stopped talking about noncore?

Well, at the end of this year, we should be down to about $2.5 billion from [ '14, ] by the way. So that's quite a lot of progress in a relatively short period of time. And then that should be about $1 billion by the end of '26. So whether we continue to report it at the end of next year or just pulled it and collapse it, and we can make that call later next year.

Got it. Maybe turning to deposits. Maybe talk about the competitive environment for both consumer commercial deposits level mix, pricing, what you're seeing?

Yes, it's always competitive out there on deposits, but I'd say, again, the Private Bank has nice growth as they expand their book of business. That's been good to see. And I think our targeting, the way we manage deposit pricing and the offers that we make to attract deposits in consumer, I would put it right up there with anybody, so I think we're quite good at that. So I -- these are manageable pressures, they've always been there, and I think we can achieve our spot loan growth and deposit growth objectives and keep our kind of LDR relatively stable in the high 70s.

Maybe throw up the next ARS question is on NIM. But, Bruce, rate expectations, you mentioned that potentially cutting next week. Maybe just update us in terms of how you're positioned from an asset liability perspective. You've talked to this 3.25%, 3.50% NIM for 2027. Just maybe some of the drivers that kind of low end versus high end when you...

Sure. Well, again, getting into that range on the back of time-based benefits, it's not a Herculean effort to see the NIM continue to go kind of consistently higher. And so we have that working for us. I think we still have some kind of the active swap portfolio, providing some benefit. And then we have front book, back book dynamics providing some benefit. So I think the ability to achieve that 3.25% to 3.50% is, I'd say, pretty assured. I'd say there's always external factors there, but we feel confident in our ability to get there. We have hedged kind of the forward -- the path for forward rates that kind of locks in that low end of the come, 3.25% to 3.50%, provided the Fed rates stay kind of 2.75% or higher. So -- and we'll continually reevaluate. And we're kind of hedged through '26 and halfway through '27, and we'll we're hedging kind of out in '27, '28 and '29, and we have a buy box and a discipline about how we do that. So anyway, that feels good. The things away from just where rates move would be our own trajectory on deposit growth and the mix between noninterest-bearing and interest-bearing. And so there's some execution around kind of how do deposits grow, what is loan growth, et cetera, that can impact that NIM trajectory. But again, I think we've proven that we're pretty good at managing that. I'd say our beta performance this cycle in the up cycle, we were #4 of 10 in our super regional peer group. So I think we've transformed that deposit base, and we're quite good at how we price and manage balances.

I guess as we start to think about 2026, 2027, just how you're thinking about the trajectory of NII?

Yes. So I think NII is going to grow nicely based on the NIM kind of continued extension and expansion. And then I think the economy will be strong enough that the areas that I described around loan growth and then less drag from kind of runoff and balance sheet optimization should facilitate attractive NII growth. And again, I think we're -- we haven't been in a strong fee backdrop environment for some time, and we're starting to see that this year. And I think that potentially could extend well into '26 and '27 and businesses like capital markets and wealth and some of the investments we're making in payments can actually continue to sustain a relatively good level of growth in our fee businesses.

Yes. Capital markets and payments have been good, I guess, fee drivers. Mortgage is an area we haven't really talked a lot about. Rates have seemed to be coming down more recently. Can you maybe update us in terms of what you're seeing there?

Yes. So we don't have the same scale of business as we did like when we crushed it after we bought Franklin, and we work still in the wholesale business, and I think got fee revenues up to 900, only to revert back to 300 2 years later. But I think we're targeting the use of our balance sheet. A lot of these mortgage producers stay on bank platforms because they want to do nonconforming business. And we're making sure that those producers are linked into serving bank customers are bringing new customers to the bank who are going to be full wallet customers. And so I think we've ring-fenced the business a little bit to be more strategic and less just being in the mortgage business for being in the mortgage business and get going after scale. So I'd say that's not a business that I'm counting on to see significant growth. I'd rather just keep my bets on capital markets and keep it on wealth and payments.

And then on the expense side, you were talking about 4% expense growth this year, maybe closer to 3% ex to private bank build-out. Just talk to how you're approaching the 2026 budgeting process? Where you see the efficiency ratio going over time? And I think you mentioned positive operating leverage earlier, just how your thoughts around that?

Well, I think when you have an opportunity in front of you, like we do with the private bank, we can't artificially constrain the level of expense investment and then miss the opportunity because there's a void where First Republic was operating, and we want to get there and grab that. And so taking -- adding a 1.5% expense growth rate on top of like 2.5% to get to 4%, like we did this year, is, I think, very prudent. And you'll see the revenue benefit that comes from that. You're already seeing it. So I think when we look at next year, the lift on revenues is going to continue to be very significant, driven by NII and continued good fee performance. So that gives us the wherewithal to keep investing in and keep that flywheel going. You're -- we're going to be just as disciplined as always on expenses. We've got reimagine the bank, teed up to continue to get more efficient. But then you can make purposeful investments that actually drive the positioning of a very important business and drive future PPNR. So that's how we think about it.

And then maybe on credit quality. You mentioned the office portfolio earlier. So maybe update us in terms of what you're seeing there? And just any other portfolios you're kind of keeping an eye on, any other sectors of note, particularly against this evolving backdrop?

Yes. Look, we've passed the halfway mark. I don't know if we're already at the seventh inning stretch on office. But it feels like it's been a slog. And maybe we need to shorten the pitch block on this thing. But the game has been going for a while. We're working through. We're not seeing any surprises, and we're not seeing any new flow, we haven't for over a year of new credits coming in to be worked out. And so this is really just a passage of time. I think, this year, the quarterly charge-off rate on CRE is lower than last year. And next year, it will be kind of lower again. So that's 1 that I wish we didn't have it, but I feel it's contained, and it's going away, which is really good. And then outside of that, you look at C&I, C&I is clean and consumers clean in terms of our delinquency trends and NPA trends, et cetera. So feel quite positive about credit. No real flashpoints that we're really worried about.

Got it. Maybe put up the next ARS question. CET1 ex AOCI was 9.1% in the second quarter. You talked about share repurchase of $75 million for the third quarter, down from $200 million in a second. Maybe just talk to how you think about capital return given your comments on loan growth. You also haven't raised the dividend in like 10 quarters. So I'd love to hear your thoughts on that.

Yes. So our kind of first priority has been to back organic growth and loan growth. And so with the past couple of years with the kind of running off the noncore book and commercial real estate running that down a bit, we had plenty of capital, so we're still making decent profits, and we were freeing up capital. So we bought back a lot of stock, especially last year. And I look back on that, what's interesting is a lot of banks will -- or companies in general, will buy their stock when times are good and the stock price is high. We bought a lot of stock when the stock price was low, which is smart. Now that we're seeing loan growth pick back up, you shouldn't be surprised the first half loan growth was a bit subdued. So we bought back more stock. Now loan growth is picking up. So we'll buy back less stock. But in any case, I think that's a good discipline to be regularly in the market buying your stock that you can gauge it based on the need for capital to support loan growth and also where your stock is trading. On the dividend, I would say, stay tuned. I mean, we're aware that investors like to see consistent dividend increases, all banks saw their profitability drop after the Fed raised rates and impact on NII and profitability is being restored. And so we're pretty close to where we'd like to be to in terms of payout ratio to take a step there.

Got it. And then bank consolidation has certainly been a recurring theme we get asked about a lot. You mentioned HSBC and investors earlier as being additive. JMP has been additive in the capital market space. You've proven to be a good -- you mentioned Franklin earlier in the mortgage space. So you've proven to be a good acquirer, just how you thinking about consolidation in general?

So not surprisingly, you're seeing some deals start to pop even a couple of banks in our peer group doing relatively modest-sized transactions. And so I think there's a lot of pressure at the smaller end community banks and smaller regionals, just in terms of keeping up with all the things going on in technology and security and digitization, there's regulation, frankly. And there really wasn't a market to consolidate in the -- kind of under the Biden administration. There's a lot of sand in the gears of doing deals. And so I think you'll see some of that pent-up need or desire to start to loosen and people see a window here. And so you should expect to see a decent amount of M&A activity in the bank space. I think most of it will be at the smaller end. I'm not sure there's a meaningful amount of sellers at the higher end. And so that may be why you see a Huntington or a PNC going dipping down sub $30 billion to get a deal done. And then maybe if you were hoping to do something at $100 billion, you buy 3 at $30 billion, and you can -- they're more manageable if they're smaller and less complex to integrate. So from our standpoint, I think -- yes, I think we did a really good job on HSBC and investors, and I have confidence in my team's ability to execute if we see something. But right now, we have so much organic growth, and the private bank is so important to us getting that right and capturing that opportunity that it would be a pretty high bar to go do something and avoid -- I think we want to avoid being distracted. So that's what I think about it today.

Clear enough. On that note, please join me in thanking Bruce for his time today.

Thank you.