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

All right. Great. We're going to get started here. Up next joining us for the 11th straight year, we are once again excited to have Citizens. Citizens had another outstanding year posting margin expansion, operating efficiency gains, while succeeding and building out its fast-growing Private Bank, which I'm sure we will touch upon here. All these items have made it the best-performing regional bank in our coverage that was not acquired, by over 1,000 basis points, I'm sure that makes you happy to hear, Bruce. Here to tell us more about how he's going to repeat that in 2026 is Chairman and CEO, Bruce Van Saun. Welcome, Bruce.

Good to see you.

Good to see you, too. We won't talk about football today, given the state of our team. But maybe just to kick it off. It's been a busy year for the bank. Lots of different initiatives going on. I talked about success of the Private Bank, Metro New York Private Capital and more recently, which we'll get into reimagining the bank. Maybe just talk about the bank strategy and how you feel it's positioned to succeed as we move into 2026.

So I think we've really honed our strategy around -- we'd like to refer to it as a triangle or a 3-legged stool. But ultimately, having a good source of low-cost deposits and running a -- have a well-run consumer bank that offers advice to different segments of the market and can grow and grow with attractively priced deposits and then offer advice to those customers and penetrate the wealth opportunity more. We've made big inroads in that. And I think if you look at our deposit performance, through the up cycle and now the down cycle, you can see how much progress we've really made in the consumer bank. So I feel good about that, and I think there's more opportunity to reposition some of the branch network so that we can get even more growth and tick up that growth rate over the next -- over the medium term. The second leg of the strategy is really around the commercial bank, which we like to say, is the best positioned super regional commercial bank. We're not impartial in that, of course. But -- or we want to become the commercial bank of choice is another way we like to state it. But over time, we've invested in really great coverage bankers, and we've aligned them against the opportunities in the middle market. And then as we go into the mid-corporate space, we have industry vertical specialties that where we think there'll be a lot of activity. So been smart about how we've deployed the human resources. And we've also been -- had a big focus on private capital. So private equity firms that have morphed broader into private credit. We've covered them for a long time. We've built out the product set. So we add a lot of value to those relationships. So what is heartening to me is when you start to see the flywheel get going and you start to see more deal activity, we can capture that. And then what we've built, the quality of what we've built you can see how much upside we had in Q3, for example, in our revenues relative to what our peers caught in terms of that upside. So you haven't really seen the full power of that model. The market has been in the doldrums for 3 years and pretty much the first half of this year. But I think increasingly, what we've built will manifest itself and be distinctive, seen as being distinctive. And then the third leg of the stool, which is somewhat opportunistic and most recent was the attempt to go after all of First Republic and not be successful. JPMorgan got the whole business, but we got the talent, the Grade A people who put First Republic on the map and made them kind of noteworthy as the strongest premier private bank in the banking space. And so you win with great people. We took a big swing. We brought 150 people in 1 day in June of '23 which wasn't for the faint hearted because the environment was pretty choppy at that point. And basically, we said, look, we're going to start this up. We think we can leverage the platforms we have, and we can get the service levels up to white glove, which is what First Republic was offering. And it's been a great success. I'm really pleased how that's going. So we're over $12 billion in deposits and tracking well towards kind of $7 billion in loans and $10 billion in AUM. And we've expanded to now a head count of roughly 500. We've got teams now in Southern Cal. We started out just in Northern Cal and eyeing some more expansion in Florida. So things are going very well there. And the other thing I'd say is we're running this business profitably. So there's always tension between growth and profitability, but we've achieved a 24% year-to-date return on equity in the business, while it's growing leaps and bounds, which is not an easy thing to do. The upshot of that is we thought this year, we set some markers out and we'd be 5% accretive to the bottom line. It's gone so well that this is going to be 7% accretive to our bottom line. It's not because the rest of the bank grew less. It's just because this has outperformed and grown faster. And so it's pretty rare that like M&A is now the rage in the banking space and people are spending huge amounts of capital to find 7% accretion, we basically risked about $100 million in start-up cost capital to get it off the ground. And now we're -- I think that 7% is on its way to double digits easily by next year and could double in the not-so-distant future.

Got it. A lot of great stuff in there, and then I'm sure we'll touch on a lot of them. So maybe to dig in a couple of things, Bruce. I guess, as you go out and meet with clients, what does sentiment look like out there and out there on both commercial and corporate side and how is it impacting your thinking into 2026?

I'd say most of our corporate clients have had pretty good years, pretty solid performance. And the first half of the year had an incredible uncertainty in the rollout of tariffs and things, which I think gave people pause. But if the last 5 years has proven anything, it's that companies have to be resilient and adaptable. And so their expense bases are pretty lean, their business models are more digital, their supply chain has if they're a goods business, not a service business, they've got diversification in the supply chain. So anyway, people have hung in there. And then I think as we got to the second half of the year and then the worst-case outcomes on tariffs were off the table, the big beautiful bill passed, the deregulation push passed -- is moving ahead, pro-energy policies are moving ahead, being beneficial. I think it's a new normal. We're going to have some choppiness and some uncertainty, but there's starting to be a sense that the economy is strengthening and the outlook for '26 is pretty positive. So I would expect to see more investment. Right now, the whole investment is carried on the backs of the hyperscalers and the AI investment that's taking place, which is probably adding 0.5% to GDP, but I think that you can start to see that broaden out and companies have to figure out how much investment are they going to make in utilizing AI and the use cases. And so we would expect to see that pick up over the course of the year. And then on the consumer side, certainly, people at the higher end of the wealth spectrum are benefiting from seeing the stock price -- stock market going up consistently and housing prices very firm and strong. And so they're spending and buying second homes. There's a lot of momentum at the high end of the market. And I'd say even though there's some concern at the lower end, people have exhausted some of the liquidity they built up through the pandemic. And they're feeling the pinch a little bit of inflation still being persistent and the labor market softening a little bit. Generally, people are in good shape. So we don't really see anything in the credit books on the consumer side that gives us pause. Now we pitch a little higher than kind of the subprime and the very bottom end. But anyway, we think the consumer is holding in, making some choices about I used to spend some money on this discretionary, I better hunker down and spend it over here and be a little more watchful about kind of what kind of groceries you buy, where we shop and things like that. So anyway, but people are adapting. I think it's okay.

Got it. So it sounds like a pretty upbeat outlook into next year. So maybe as we're looking ahead, you've obviously been targeting a 16% to 18% return. Bank posted greater than a 12% return in the most recent quarter. Maybe just talk about the path to getting from where you are today to that to 16% to 18% over time? What are the key drivers? And how do you get there over the medium term?

Sure. I think the pretty unique aspect to our story is we've put a spotlight on what we call time-based benefits, which has been the combination of terminated swaps rolling off as well and the drag from that, which just goes away with time, plus noncore rundown. We've achieved a lot of the noncore rundown. So it kind of falls more on just the swaps benefit. But that's still from where the ROE is today, at least 300 basis points positive. So we don't have to go out and execute, but we can see ourselves go from the 12% towards 15%. I think we have other positive dynamics around NII that supplement that such as front book, back book and the like. So there's a little more to squeeze out of that. And then I look at the initiatives around the triangle that I just mentioned what we're doing in consumer and commercial and continued maturation and growth in the private bank, and that adds, you pick a number, 200 to 300 basis points, normalization of credit as the kind of losses are tied to the CRE office space come down, then we get kind of from high 40s charge-off rate down to low to mid-30s. And so there's a lot of things there that kind of you just add them up and do a waterfall and you can easily see yourself getting to the 16% to 18%. The AOCI benefit, which is a perverse benefit that kind of impact to capital will shrink over time. So that works as a bit of a counterweight, but you're offsetting to some extent with share repurchase. So anyway, we think it's quite visible. We've laid out the chart. I think investors see it and believe it.

So maybe to dig into some things on the operational side. So loan growth obviously showing signs of improvement. You guys were shrinking for a while. You've had 2 straight quarters of growth, including 3 in a row on the commercial side. I guess based on your comments from earlier, I guess, what are your expectations for loan demand on both the commercial and the consumer side? And do you think we can continue to see it improve from here? .

Yes. So you left out private bank. So there's 1 thing that we have kind of that's unique to us is that as they kind of pull over their books of business and really start to grow that, that I think there's a built-in driver of private bank loan growth, unique to us, which I think we've been able to count on every quarter this year, which will continue into next year. With respect to consumer, I think the bright spot that we've seen this year has been HELOCs where it may surprise people, but we're the biggest HELOC originator in the country, and we only originate in 14 states, but we've really carved out a niche for ourselves. It's a great product for mass affluent households, which is where we target the consumer bank and we've made huge investments in the overall experience. And we've got origination times down to like 10 to 14 days, and the industry average is like 45 days. So anyway, if you need a HELOC, talk to Citizens. But any case, we do -- we do a great job with that. And there's other things like mortgage continues to grow a little bit, and we've launched a new card family of products, and we think we'll get some more growth out of that. But I would expect consumer to be a steady grower, but not a dramatic grower. I think where there's more upside, ultimately is in commercial, both in the traditional middle market and mid-corporate business plus the way we serve the private capital complex. I think it has picked up a bad connotation NDFI lending, but is very safe lending, and it's investment grade. And so we have subscription line demand. We have securitization demand from private credit and asset-backed finance demand. And so that should continue to grow. So you really have kind of 2 cylinders. One is the direct lending from corporate C&I borrowers. And then the other is this category of serving the sponsor community and private credit.

So last quarter, you started talking about reimagining the bank, which will get further details, I believe, in January. And it's supposed to deliver run rate benefits of more than $400 million with the benefits in '27 and I guess, accelerating in '28. And you've also talked about minimizing some of the onetime costs and the capital investment upfront. So can you maybe just expand on these thoughts, talk about what the goals initiative is? How do you foresee this making Citizens a better bank over time?

Sure. So -- so that was the tease, I guess, in the third quarter was everybody wanted to know, well, how big is the program going to be and what is it going to take you off your trajectory to the medium-term objectives and it's really in the first year, we said there's a lot of start-up costs to the program, consultant costs and investment costs and you start to see some people coming out in redundancy costs. And so the goal is that we can try to accelerate as many benefits as we can into '26 so that we have kind of a good run rate of benefits at the year-end, which kind of offsets any drag from those onetime start-up costs. And then as you get into '27 that you start to see the onetime costs fall off a little bit and the benefits really start to accelerate, and that continues into '28. So that's kind of the contour. I guess what we're looking for in the program and the reason we call it reimagined is we don't want it to be just another top program that's incremental, which has been great. I mean that's allowed us to self-fund the investments we need to get Citizens moving in the position that we needed to go. So -- but now you're at a point in time where with the kind of innovation that we're seeing in technology, in AI, gen AI, large language models becoming more sophisticated Agentic AI, there's opportunities to just say, hey, in 3 to 5 years, like how do we want our call centers to be interacting with our customers? How do we want the fraud process to work? How do we want to be onboarding our customers? How much self-service can we offer to our customers, and they can solve their problems without handoffs from 1 department to the next. There's, I think, a lot of good work that's been done around that. So not only should there be financial benefits, but I think the customer experience is the prize here is to boost Net Promoter Scores and have happier customers and the attrition goes down and the deep relationships deepen because they're really happy to be banking here. So anyway, that's the path that we're on. And so we've now broke that into like 50 work streams. So each business and functional area like technology has been working on this. We've taken like 25 senior people to work on this program with outside consultants since the summer. And we're getting to the point where we can really get it fully going, and we have a transformation office that will sit on top of it and make sure that all the things that have to happen so that we can deliver this are happening.

And you still feel good about the financial metrics that you teased out.

Yes.

Awesome. So we talked a little bit about the private bank before, which has obviously been a huge success. You're over 7% accretive. You talked about it doubling over the next few years with 20-plus percent returns. Maybe just talk about what has gone well, what are the challenges? And really what's left for you achieving your goals in this business in terms of seeing their earnings double from this?

So, again, I said you win with great people. So we brought in great people as the nucleus and we've expanded that out, which I feel really good about. I'd say we're still -- we're maybe in the seventh inning of getting to white glove service. So we've made a lot of investment and progress but -- and the business itself has a high Net Promoter Score. But I think there's still room to go to conclude that. And the bar always is going to go higher. But anyway, that's kind of still on the road map of things that are high on our priority list. The other thing is that we started out with the private bankers, and we had Clarfeld as the wealth -- private wealth arm, that wasn't going to be big enough and scalable enough to service all the private banking teams that came over. So we've been in the process of doing lift-outs of teams, some from the old First Republic platform, but many from other platforms. And so we've just hit our -- announced our 10th lift out last week. And so making sure that we have wealth teams that are co-located with the banking team so that we can jointly call on our customers and have smooth interaction with the customers has been an important stage 2 after getting the bankers, let's get -- make sure we get the wealth people and keep -- make sure they're really high quality. So I'd say, again, there, we're pretty far down the track, but there's still kind of more to do. So expect to see us do a handful of additional lift-outs next year.

And rounding out on some of the initiatives, I wanted to talk a little bit about the private capital business. There's been significant growth across loans, capital markets, other things. And I guess, just given the push of private credit, which has obviously been a big focus for the industry, but it feels like you guys are well positioned to capitalize on this trend. So talk about the opportunity set for Citizens, where is your strategy positioning you to win? And what do you foresee as the competitive threat?

Yes. So as I mentioned, we've covered sponsors who focus on the middle market for over a decade. And I think we've developed the tools to help make them successful in terms of M&A flow and execution and financing -- leveraged financing capabilities and then services to the company itself, subscription lines, et cetera. So we have really thick relationships there and good dialogues across what the kind of complex itself needs and then also what their portfolio companies need. And so it's been natural as they've kind of extended the remit to be not just equity sponsors, but getting into private credit. We know how they think, we understand their strategies. And so we can help provide deal flow to them because they need to put money to work. We can help provide additional leverage through the securitization structures. So we haven't really felt the need to commit our own capital and go competing against some of these private credit. I think that's another thing that we've seen as distinctive is if there's opportunities to go do deals and we have kind of a club of these private credit firms that we're really close to, we can effectively use their balance sheets, offer them the opportunities, which is very valuable to them. So we're staying fairly nonaligned, but close to key players in the industry, and I think that's been a good strategy.

Maybe switching to the near term. We're 2 months through the quarter, you gave guidance on a handful of items, NII up 2.5% to 3.5%, continued margin expansion, stable fees. You know all the things. Maybe just give us an update on how the quarter is progressing. Any trends that you're seeing in the market? And maybe anything that's better or worse than expected?

Yes. So I'd say, just stepping back for a second. We feel really good about the year and how we've executed through a lot of uncertainty. So we're on track to deliver our initial year guide. I take pride in that every year at the end of the year, I show here's what we guided, and then here's what we did, which most banks don't do that. But anyway, we're tracking well again this year. And I'd say the same thing about the fourth quarter is we're feeling good about delivering the guide. There's always puts and takes. And so I'd say the market is very focused on kind of NII growth and NIM is particularly for us, the story of seeing that steady 5 basis point expansion quarter in and quarter out and feel good about that. I'd say the only slight wrinkle we have, we're having an extremely strong capital markets quarter, but we guided to a superlative quarter. And because of the government shutdown, we'll likely see a few deals push out into the first quarter, which we'll be able to offset, I think, with the other kind of puts and takes, the other benefits across NII expenses or other fee categories. But anyway, we saw that a little bit in the second quarter when because of the uncertainty we had a little push out in the Q3, and it resulted in a very strong Q3 in terms of capital markets. So whatever doesn't close in Q4 builds to a nice Q1. I'd say the important thing there is that we're still getting hired and none of the deals are evaporating.

Yes, they're Just being pushed.

And so you control the things you can control and government shutting down is something that's out of our control.

Got you. No, super helpful. Bruce, you brought up the market's focus on NII and the net interest margin. You guys have had a target of 3.25% to 3.5%, that incorporates the Fed funds going below 3%, even maybe as low as 2.5%. So given all the drivers that you've talked about, not to rehash all of them, just talk to us about, one, your confidence in reaching this 3.25% to 3.50%. How much is in the bag? And how would you assess sort of the risk and opportunities of not only getting there, but where you end up in the range?

Well, there's a number of factors that go into arriving at that destination. People immediately think about, well, where is the Fed funds rate, and it's as simple as that. But that's the 1 variable equation and so that is important, clearly. And so we've tried to make sure we've protected that cone from the Fed funds moving a bit lower or higher than where our expectations are. And I think we've been disciplined about that, and I feel good about where we sit there. I mean the other things that matter is the progression of the balance sheet and just making sure that we're kind of growing deposits to keep up with the LDR where as loans grow, we need to keep growing deposits and make sure they're growing cost effectively and in the right mix between noninterest-bearing and interest-bearing and if you look at the progression this year, we've been able to be rock solid in terms of kind of keeping the noninterest-bearing percentage in the low 20s. And some of our peers, we've seen that continue to migrate down, but we've held that steady. Part of that is the private bank has been bringing in very attractive relationships with a good mix of noninterest-bearing deposits. So that would be the other thing to call out as you're making assumptions around your loan growth and your deposit growth and the composition of that. But we feel really good about that. You can't -- the historical trends are not necessarily indicative of future but when we look out in our crystal ball, we think we should continue on the path that we've been on.

Just sort of building on the discussion regarding deposits. You saw more change in the last rising rate cycle than any other bank relative to the prior. You guys have had tremendous success in bringing down deposit costs as we've kind of moved through this cycle despite better performance on the way up, I would add. So what has changed to drive this success? What are your expectations for the next leg of the cycle? And just given everyone is talking about a lot of competition, how do you balance strong beta with continuing to fund what [indiscernible] loan growth?

It's really important to have that muscle. And I would say earlier in the company -- I mean the company is almost 200 years old, but I kind of think of it as like a 10-year-old company because there was a lot that we had to instill in the company. And so in the early days, we had to move away from kind of rate-led value proposition, which is what we inherited to on the consumer side to really focusing on segmenting the market and then kind of being someone's trusted adviser on their life journey and uptiering in the market, mass affluent, affluent accounts, leave bigger checking balances, et cetera. And so -- and then invest in all the analytics, like how do you make sure you're bringing in balances that are off us into Citizens and so I just think we've gotten really good at that. We've focused on that. We have a great team that focuses on that. And then in the commercial space, we had to build out a lot of capabilities that weren't present like escrow services in places where commercial banks go hunt for deposits, we didn't have the full pallet of capability. So I'd say it's a combination of investing in the tools, the people, the talent, refining the strategy. And I think now we're quite good at that.

For many years, Citizens posted industry-leading positive operating leverage. And you've talked about improving operating leverage into next year. You've committed to deliver over the next few years, given improving revenue growth while controlling costs. We recognize we'll get formal guidance in January. But maybe just talk about the key building blocks to improving operating leverage? And how are you thinking about costs as we move into next year?

Yes. So that's been the secret of how we took a 5% ROTCE earner and my team got here. We've been as high as 16%. We kind of fell back and now we're on our way back, but making sure you're running the place with discipline, you're self-funding your investment needs to the greatest extent you can, and you're investing in areas where you have a right to win, where you can actually achieve some revenue growth. So I would say for -- up until the pandemic, we probably were growing revenues 6% or 7%, and our expense growth was maybe 3%, and there was a lot of catch-up investing that went into that. The top program has probably knocked 1% to 1.5% off the absolute growth rate. So we were self-funding that, it became more challenging when we got into the pandemic and then the Fed raising rates, but we're back. I think last quarter, we had 3% positive operating leverage, and we'll have positive operating leverage again this quarter. And when we look out into next year, that lift in the top line, particularly around NII, should be, I think, peer-leading revenue growth is what we would anticipate next year. And then the question is how much of that do you flow through to the bottom line. I think the prescription this year was we'll try to grow the core bank expenses at 2.5% to 3% and then we want to invest in the private bank. It's such a great investment opportunity that those investments at that pace will raise the overall growth rate by 1.5% to 2%. So we kind of end up in a 4% to 4.5% expense overall position. I see an opportunity to continue that. And eventually, we can bring it down. We won't be investing at as heavy a clip when you think out into the late 2020s in the private bank and reimagine the bank will potentially bring down that growth rate in the core bank. But I'd be -- I think we could have massive positive operating leverage and still grow the expenses smartly and prudently in that 4% to 4.5% range again next year.

Let's shift and talk a little bit about -- no, that's super helpful. Let's shift and talk about capital. You're still in a strong capital position, almost 11% reported, mid-9s adjusted. And obviously, we've started to see SCBs coming down across the industry, which I think is something, hopefully, we'll be talking about when we're sitting here next year. But...

We expect a big benefit when it starts getting done more smartly.

Absolutely. And maybe just as you look ahead, provide thoughts on capital allocation and how do you think about potentially managing the capital down over time?

So I think our priorities have been consistent over the years is you have to have a good dividend on a bank stock and so making sure we just raised the dividend in Q3 that we can have regular dividend increases to keep a good yield on the stock is important. And then the next thing is if we can find attractive organic growth. So if we're adding new customers to the bank, and we make loans to those customers, we need to provide the capital to growth. And so those would be the top 2. And then right after that, the best alternative generally is to buy back a lot of your stock. And I think we've been consistent in that. One of the things I would point out is we always ran our capital structure a little conservative. We were relatively new bank and unproven in the eyes of some. So when we got to periods like the pandemic and the S hit the fan, it was nice to have that stronger capital ratio, which effectively allowed us to go into the market and buy back our stock. So all the bank stocks were off pretty dramatically. What you often see is that companies in good times, they announce a big buyback and they're buying back their stock high. We had that extra capital cushion, so we could buy in our stock when it was low, and it was retiring more shares. It was very efficient to do that. So anyway, we'll continue this year. We bought back a fair amount of stock. That will be in the plan for next year. And so -- and then M&A, like you look at M&A as an alternative to buying back your stock. Are there things you can do that are strategic that position the company for growth further down the track. But again, if you think your stock is good value here, which we do, then you lean in that direction.

So we're approaching the 2-minute warning, which is usually when our football team fumbles a game, but you seem to be on point today. So I'm not worried about that. But maybe just to pick up on the last comment that you made, your message has been pretty consistent in M&A. You haven't been too interested. But given all the success of the firm, the currency has finally started to improve. I'm sure you're going to tell me it's not where it should be. But we've obviously started to see improvement. And I'm just curious, given the improvement -- the activity we're seeing in the sector, more favorable regulatory backdrop, has your stance changed at all? And if not, what would cause it to change?

Yes. I'd say I've been very consistent on this all throughout the year that we did our M&A, which effectively was the start-up of the private bank, and we're getting 7% accretion from that, and it's very capital efficient, the way we went about that. And so what I often hear from investors is like really double down on that. And we doubled down on reimagining the bank, which is another capital-light way to grow your EPS faster and don't get distracted because are there really any attractive deals out there that change the dynamic for Citizens. And at this point, we are focused on organic growth. I think we have the best organic growth outlook of anyone in our peer group, and that's going to continue to be the focus.

Anything on credit that you're paying closer attention to? Obviously, losses have been coming down. You've talked about getting back into the 30s over time. What are the areas of focus? And what gets us to that more normal level?

I'd say the 1 thing that's been outsized over the last 2 years has been the losses coming through on CRE Office, which I don't know, back in March of '23, everybody thought the sky is falling. It's going to be a colossal impact to bank's capital and we never thought that would be the case that it was something we could ring fence and we could put good worked out people on it and it would take time to kind of get through that. And you can see every year, like '23, '24, '25, the amount of charge-offs that we're incurring as that portfolio shrinks and things get worked out continues to go down. And then if you look at the rest of the business, Private Bank, we haven't had $1 of credit loss in 2 years of being in business. So that's a very pristine activity. And I think in commercial, we kind of continue to lend more to higher grade companies. And so we don't see any adverse trends there, and that should actually, over time, continue to improve in terms of credit quality and the same thing in consumer, we're pitching upmarket at superprime and high-prime customers. So anyway, I think we're on that glide path to get that down into the low to mid-30s. I think we'll make a big step in that direction next year. And again, that's all positive towards our return on equity.

And I guess we're sort of out of time here, but I guess just as we look forward to '26, any closing thoughts you want to leave us with in terms of how the bank is positioned?

We've been working really hard for a decade to build a top-performing bank, and it feels good, like I'm never complacent, but it feels like our ship is coming in, which that's a good feeling for the team and for me.

Awesome. Well, please join me in thanking Bruce.