Citizens Financial Group, Inc. ($CFG)

Today, we have Citizens Financial Group with us, $25 billion market cap company. Total assets of about $226 billion, over 960 branches in the United States here, predominantly on the East Coast, Northeast in particular. And I'm very pleased to have 2 folks from Citizens with us. To my immediate left is Brendan Coughlin. He's the President of Citizens Financial Group. Brendan has been there for over 20 years and has been responsible for a lot of the Consumer Banking businesses as well as now the private banking and wealth management areas. And then Aunoy Banerjee. He joined as Chief Financial Officer 5 months ago. And prior to that, he was the CFO of Barclays Bank PLC. And so thank you, gentlemen, for joining us today for the discussion about what's going on for Citizens.

Thanks for having us.

Maybe, Brendan, we'll start with you. What's your take on the current environment? When you look at the economy, we hear a lot of cross currents on what's going on with the consumer. Obviously, we have the geopolitical risks now and tariffs. So maybe from your vantage point, the K-shaped recovery and what you guys are seeing generally?

Yes. Obviously, here recently bias in the last 2 weeks, all eyes are on the Middle East and implications there, how quickly that gets resolved. Notwithstanding that, we see the economy still as broadly resilient. There's some mixed signals that you have to really pay attention to, but broadly resilient. When you look at on the consumer side and that translates to some other -- some macroeconomic kind of worry beads, you'd look at consumer confidence still bouncing around at lows over the last couple of years. Inflation worries, that are still on folks' mind. Unemployment has ticked up a little bit. But I'd sort of describe all those as relatively range-bound, which is leading us to a level of still confidence and resiliency, presuming a Middle East resolution. On the consumer side, yes, that's a tale of 2 cities here with the different types of customers. So we've got -- if you look at it through a deposit lens, the top 30% of the U.S. still has a material amount of excess liquidity from pre-COVID, even adjusted for inflation, call it 30%, 40% more liquidity. And when you look at the bottom 20% or 30% of the economy, they're sort of back to where they were pre-COVID where you could argue a post-inflation adjustment. They're actually in a worse spot than pre-COVID. So you're seeing some economic pressure on the bottom. Having said all that, we don't view that has any sizable long-term economic worry for us at the moment. Number one, our business model isn't oriented that way. Just in general, it's not presenting itself in material credit risk, material liquidity risk for banks. So we're pretty relaxed about it, even though there's -- we're acknowledging some stress, and we're working with our clients that we do have down there. And on the corporate side, obviously, they're looking overseas for the next couple of weeks, but notwithstanding that, again, we think the economy is pretty constructive. There's positive sentiment with our middle market companies. They're investing in their business. We see strong loan demand. And so we're not seeing any signs of material pullback. So assuming we get a Middle East resolution here soon, it feels like despite some mixed signals, we're still broadly set up for a couple of year run of positive business conditions.

Yes. What's interesting with Citizens is, obviously, you've got the 3-pronged strategy, the transformed consumer bank, the private wealth area, the private bank and then, of course, the regional -- super regional commercial bank. Can you kind of share with us for a moment and take us back to the IPO in 2014 and just what you guys have been able to accomplish? And many folks may not realize, but when the Citizens was hold by the Royal Bank of Scotland for years, it was primarily a savings bank. So the transformation has been pretty remarkable compared to what it looked like 20 years ago.

It's really been quite remarkable. And Aunoy and I here sit next to each other with opposite levels of tenure with us kicked off. So I've been around for the journey. And it's been remarkable what Bruce has led for this company. And we took over a bank that was 4.5%, 5% ROTCE and now have built it back to look peer like, but I would argue with outsized and differentiated momentum long term. And I won't go too far into the history books, but we invested a lot in technology. We invested a lot in bringing the capabilities of the franchise up integration of our customer experiences. We've done some smart acquisitions, whether it was HSBC and ISBC to build out the Metro New York market, whether it was a bunch of bolt-ons that we did in commercial capital markets to build what we think is the best positioned Commercial Bank and best positioned capital markets business in the super regional space and done a tremendous deposit transformation, which we can unpack a little bit here over the last decade. But as we sit here today, I'd say, we've got a transformed foundation, well positioned for the future. We've got a restocked and reloaded management team, and we've got our strategy that has positioned us to have outsized forward-looking EPS growth, outsized forward-looking return improvement for the franchise and outsized organic growth. So when you can get strong growth, high quality that's also driving high return improvement, that's kind of where you want to be and we see that and we've got real confidence on it. And at a high level, I'll mention each of the 3 legs of the businesses that you said, and we can unpack them as we get through the conversation. But really, the bedrock of the franchise is the Consumer business. It's 65% to 70% of our deposits. It's really the rocket fuel that allows us to make our offensive bets in other parts of the franchise. We've gone through a tremendous profitability overhaul in that business, going from the thrift roll-up that you described post RBS now to a thriving franchise that's relationship-oriented, durable, sticky revenues. We were worst-in-class in the last rate up cycle in 2014 and '15 in our deposit betas. And now we've positioned ourselves in the top third of the U.S. That's pretty remarkable for less than a decade. It takes a long time for deposit transformation. So that's a positive. Our lending book has been totally repositioned as we repatriate capital from the rundown of the noncore business into the private bank and into things like HELOC and otherwise. So we feel great about the foundation of the Consumer business and then expansionary measures in Metro New York, which is our fastest-growing market. The private bank and private wealth story is equally remarkable for us, and we're very excited about that. As you probably know, that business was sort of birthed in 2023 with the West Coast bank failures. We had the fortune of attracting at the time 150 of First Republic's top talent. And we really believe that while there were flaws in some of those business models that failed, there was real white space for us to enter in and create long-term profitable growth really oriented around the high net worth customer and wealth management. And so since that time, we took a $0.11 hit in EPS in 2023. Here we are fast forward to 2025, and it was 7% of our EPS for 2025 and running between a 20% and 25% ROE profile of the business. We concluded the year with $14.5 billion in deposits. So it's been growing quite well. We see it as tremendous white space that's still open and fuel for long-term organic growth. It's really our version of M&A. And then when you turn to the Commercial Bank, it's been a real transformation towards middle market banking. We look at our growth coming from great bankers serving the middle market. We've got outsized capabilities in private credit, which we've taken advantage of. And then we've built really a tremendous capital markets business and seeing that in some of our results, but I would argue that the full potential of that part of the franchise still hasn't totally been realized because the market has been fairly choppy. And as that settles out and hopefully, we get the positive conditions that we think will happen. You'll start to really see the full strength of that franchise pulling forward. So look, we feel great about the history of the bank, but I feel even better about how we're positioned going forward.

Great. Aunoy, you've been there again in about 5 months. Maybe you could share with us your first impressions of what you've seen and how you've been spending your time? And I know you're probably saying you get the best boss in the world now.

Yes, I'll start with that, the best boss in the world. But look, yes, 5 months in, it's been fascinating. It's been busy, but it has been extremely rewarding, I would say. The areas where I'm focused on, I would say are 4 of them following. First is really spending time with our client-facing organizations, so whether Brendan talked about the branches, our commercial teams, our capital markets teams, our contact centers, really thinking about what we do for our clients day-to-day and really thinking about why so many people have us as the #1 choice, so really understanding that. Second, with our business and our functional heads, really understanding how capital is allocated, how resources are managed and how we, as a finance team can do better in that as well. So I think that's there. Third, I have the great privilege of talking to our various stakeholders, so whether our investors, whether our regulators, our community advocates, our Board of Directors. I think over the last 10 years, as Brendan mentioned, how we have grown and getting their perspectives has been invaluable in many sense. And lastly, we'll talk about transformation, like transformation is close to both our hearts here. And we believe we are absolutely committed in delivering the financial goals of our transformation, which we have done over the last 10 years. But with the advent of new technology, et cetera, how do we set the bank up for the future is really important to us. And then on first impressions, I would offer 3. I would say, first, the strength of our culture, really like our ability to get things done for our clients, for our investors as well as for all of us together, I think all kudos to the management team led by Bruce and Brendan and Don and Ted and Susan. And it's really fascinating to see that in action. Second, I think Brendan talked about our strategy. It's well articulated, but it's also well understood by pretty much everyone in the bank, and we are all rowing in the same direction, and we have a shared mission. And third is the opportunity set. We definitely have fantastic businesses. We are in attractive markets. And on top of that, we have some unique growth vectors like the private bank, growing in the Metro New York area, reimagine the bank. So look, it's exciting times. I'm humbled to be part of the team and really looking forward to move the ball forward here.

Great. No, that's very helpful. Moving over to returns for a moment. Obviously, you guys put up just over a 12% ROTCE number in the fourth quarter. You've got a target of 16% to 18% in the medium term. Can you talk to us about the path to get there, the timing? How are you going to do revenue growth versus net interest margin expansion, expense leverage? And then how important to reach those numbers is the execution of the business strategies that Brendan outlined in those 3 groups?

Well, look, we are very committed. This is one -- the ROTCE growth is one thing that as a management team, we talk a lot about. And definitely, we are committing to get into 16% to 18% ROTCE by the second half of '27. I would say there are 4 vectors that we are focused on. The first is our NIM expansion. So as you know, Gerard, we -- our NIM was 3.07% last quarter, and we expect the NIM to be in the range of 3.30% to 3.50%. A lot of the benefits are coming from the time-based benefits that we have, also from the front book, back book dynamics as well as the active hedges that we have on. So these are not rate sensitive. They are not rate related, macroeconomic related, and we expect that this NIM expansion will flow to our bottom line. So that's roughly around 300 to 350 basis points of ROTCE improvement. So if you take 12.2% plus, you add around 350, you are at closing distance to 16% at that point of time. Post that, if you think about the business execution, the private bank is a fantastic growth area for us. It's -- probably will be in mid-teens in the near future as a contribution of Citizens. And that business runs at a 20% to 25% of ROTCE. So that's really ROTCE accretive to the overall franchise. The consumer bank, the transformed consumer bank and the low-cost deposits that we are gathering is definitely ROTCE accretive. And the capital markets franchise, we are just starting, we have built an amazing capital markets franchise. And as the environment becomes more constructive, that will be ROTCE accretive as well. That should add around 100 to 200 basis points, I would say. And obviously, positive operating leverage. We're committed to positive operating leverage that would help as well. On top of that, I think credit, more and more as credit costs come down, and we have been over accruing for credit, and I think credit costs will come down over the near future. We have some AOCI goes the other way as that drag goes on TCE, but we'll offset with share buyback. But we are absolutely committed and confident in getting to the 16% to 18% ROTCE by second half of '27.

Can you remind us because it's so important to the ROTCE goals, the 3.30% to 3.50% margin, remind us when do you think you can get there again?

We expect to be there by 4Q of '27 again. So that's -- these are all consistent in that.

Yes. Got it. Brendan, coming back to the private bank, it was already mentioned that it's 7% of earnings, as you mentioned. Can you walk us through the strategy of building it out the priorities that you have from here? But also, how do you define your core private bank client? Is there a net worth threshold that they have to be over? Or is it business owner focused? Professionals? What are some of those characteristics?

Well, let's start there. Our target client is $5 million in net worth with $2 million or more in investable liquid assets. That's not a hard threshold. That's just our target. That's who we're marketing to. And we believe -- so when you look at how that stacks in the industry, clearly, traditional retail banks don't serve that client well. Traditional private banks tend to have their cutoff a bit higher. And so we believe there's tremendous white space and opportunity left behind by the West Coast Bank failures to go into that market and really provide high-end white glove service to that customer base. Many of those folks are crossover business owners and personal banking relationships. So it will be a distinctive part of this model is to have a single point of contact approach to bring that all together. And that seems straightforward, almost seems motherhood and apple pie. But when you think about the money center banks, they tend to be too big and too bureaucratic to pull that off. And when you think about the smaller firms, they tend to not have the sophisticated capabilities. So there's very few banks that are actually in that sweet spot to deliver the full bank in a distinctive way. And there honestly are very few things that are truly, truly, truly distinctive in financial services. This is one. When done right, it is a very distinctive feel and a very distinctive experience. So we're very committed and convicted that there's white space here for us to go after. But when you look at the profitability model of it, I'd say a couple of things. We were very interested to copycat pieces of Old First Republic, principally their service, culture and intensity. They are very distinct set of criteria that we'd like to change about the model. So we went in saying, look, there's a few principles here. We are going to run this at an ROE accretive profile for the bank. That's number one. Number two, we're going to create high-quality liquidity profile that's self-funding for this franchise. That's lendable deposits, that's sticky and is not going to drag the rest of the franchise down. Number three, pristine credit profile. And number four, market-based asset pricing and more expense discipline. So when you add all that up, I get the question a lot. Well, FRB was 11% or 12% ROE, how are you guys possibly at 20% and 25%. That's the principles that we're running the business, and we've been able to drive the growth and keep returns at the same time with that target segment because of the client experience. So as we look forward, we spent the last 2 years really building out the model, proving to ourselves and to the market that we could do that. We've been able to thread the needle of getting growth and returns and fill the space from an experience standpoint. So now we're in expansion mode. So we're opening up new private banking offices. We've got 7. We're going to go to 12 by the end of the year. We've hired new teams. We've bolted on teams in Southern California, a couple of teams in Southern California, Northern California, Boston, New York, Palm Beach, going to West Palm Beach. We've hired 10 private wealth teams so far and have aspirations to hire at least 5 or 6 more through the end of the year. So now that we're on a foundation that we have even firmer conviction on, we're going to start to leverage our positive operating leverage and put some money back into this franchise to drive long-term growth. And as Aunoy mentioned briefly a second ago, we do believe over the medium term that our 7% EPS accretion will wind up into the mid-teens inside of our ROE kind of 16% to 18% window through 2027 and into early 2028.

Very good. And coming back to -- so you got this sweet spot that you mentioned about the $5 million, $2 million liquidity. How do you -- because, obviously, you're not the only one in that space. But how do you differentiate yourself now that you have that targeted space? Is it pricing, service, what do you bring that make you more attractive than maybe one of your direct competitors?

It's really service is the simple answer. And I know that sounds squishy, but it's actually not. And I've got lots of stories I could share with you. We launched the business, I met hundreds and hundreds of clients. And I was expecting them to come up and ask about low-price mortgages as maybe something that might be on your minds. I didn't hear that once. It was all about the talent we brought on, the absolute obsession with experience that they deliver, making banking frictionless. And then it's the integration. These folks don't want to have a banker for their business relationship and a separate banker for their financial planning and wealth and then go deal with the retail branch for their personal banking. So having one person that knows all of that and is an expert and has the expert team, but it's the generalist manager to bring the bank. And as it relates to pricing, we look at pricing, but it's in the context of understanding the full relationship and where we can give pricing back because it's getting offset by wealth AUM, we'll do that, but it's within our profitability guardrails. And anyway, some of that sounds like motherhood and apple pie. I would very much tell you with real-lived experience, it is not. There are very, very few banks that actually are getting that done.

Yes. Aunoy will come back to Commercial Banking in a second. But Brendan, on the Consumer Banking and wealth side, when you look at that, what's the competitive advantages that you guys have in that line of business? And when you look out over the next couple of years, how are you going to drive those returns to meet that overall corporate goal of 16% to 18%?

Yes. As goes the consumer franchise, sort of as goes CFG overall, it's really the confidence, as I mentioned, the bedrock of our confidence to go larger in capital markets, go larger in private banking. So we've got a lot of focus on this. The foundation has been fully transformed. I mentioned the deposit transformation and the profitability transformation that we've undertaken. Really now, it's continued to solidify us as a bank for mass affluent. As I look at our right to win, across all of our businesses, you've got to have real clarity. And in consumer, it's around our mass affluent business. We're going to have mass market customers, but we're likely or unlikely to outbank JPMorgan and Bank of America at scale with digital capabilities and so on and so forth in mass market. So our mass affluent customer, it's also where the profit pools are in retail banking. So with deposit fees getting regulated or competed away, mass affluent is the place to be and we've got distinct capabilities there. So we're growing our household base. We're repositioning our capital book. We're running down the noncore book, auto loans, purchased assets, replacing them with private banking loans. We're #1 in the U.S. in HELOC lending in the retail franchise. We're replacing a high-return relationship-based banking. We've had double the growth in our wealth management franchise in retail. Much has been made about Citizens and our private wealth growth. In the retail franchise, 75% of our wealth revenues actually come from our retail franchise and the 3 million retail customers that we have, and that's growing at 2x the market. So between all of those levers and then a steady continuation of deposit growth, that's really where we see it. And the capabilities that we're looking at, we're making big investments in digital. We're about to launch a new digital app here in the coming weeks. And we've kicked off a body of work post-COVID on what's the future of retail branch banking. And I'm here to say, it's still very viable. And you're seeing our competitors invest in branch banking. We will begin doing the same thing and smartly adding branches in core locations to densify and create long-term outsized deposit growth for the retail franchise.

Aunoy, talking about the Commercial Banking side of the house. It looks like we might be on the start of the strong business cycle, C&I lending, when you look at the H.8 data is really picked up in the last 3 to 4 months. Can you walk us through and share with us how the Commercial Bank is positioned? How are they going to maximize returns? And then recently, Citizens closed on another commercial advisory acquisition. Can you share with us how that's going to play into the strategy? And could it be a meaningful contributor to the business this year?

Yes. Look, as Brendan mentioned, I think we have one of the best positioned Commercial Bank in our space. And I would say over the last 10 years under Don and Ted, we have built an amazing franchise. First of all, on the product suite, if you think of it, our product suite is second to none. We have great ECM capabilities. We have great DCM capabilities, M&A, hedging around FX rates, et cetera. So it's fantastic to see that. Second is our coverage models, right, whether it's the middle market that was the bread and butter of the business. And then we have expanded into mid-corporate. We are also expanding geographically into Florida, into Southern California, into New York City here. So that's actually giving us some more boost in the Commercial Bank as we think through. We're also investing in technology. We are investing in the platforms around treasury, around cash management, around payments. Those actually comes with very good deposits, gets with fees. So those actually have been ROTCE accretive in many ways. And so it's a great platform. And then obviously, we have the private credit. We have been there for a long time in private credit. It's not we just hired yesterday, and we saw this trend a long time ago. So not only we have the relationships with the sponsor community, we also have the relationships with the corporates, but we also know how to structure risk, how to price risk. So that's also important. And that has been attracting a lot of talent to our platform as we go through. So the Matrix acquisition that as we just mentioned, it's just -- it's a small boutique advisory firm that we bought. It's in downstream energy and some retail convenience. And it's -- we are closing it this quarter. So it will be part of our contribution this year, but it was always in the guide, and it's very small compared to overall CFG space.

Yes. Brendan, coming back to you on the reimagining of the bank, can you give us some examples of what you've done there, but also how is AI playing into the reimagining of the bank? And using the baseball vernacular, are we in the first, second, third innings of this AI transformation that it will be tied, not just to yours bank, but others as well?

Right. I'll start by just from Citizens standpoint, we've had this top program going on for well over a decade. And this is the third time we've taken a step back and had it be a significantly upsized program to reposition the bank. One was our IPO. Second was right before COVID with the digital transformation that was underway. And now here with the AI potentially revolution, that's underway across the globe. But it's not all AI, just pulling back about 50% of the program, I would call AI-fueled front-to-back zero-based transformation for the franchise. The other 50% is good old fashioned. What got us here won't get us to the next level. Let's simplify the business model, reflect on the next phase of our journey and reposition the bank that way. So from a financial standpoint, we've shared that we think this will contribute, exit rate $450 million in net income at the end of 2028. And while we do that and build that impact in 2026, it will be negligible in terms of its impact, positive or negative, won't take us off our guide. And this is really not contemplated in our long-term guidance on -- or medium-term guidance on 16% to 18% ROE. So that's kind of how I think about the framing financially. Your point around examples. In the non-tech space, I'll give you 3 quick ones. So we're front to back simplifying our vendor lineup, but more importantly, looking at it much more strategically, which horses do we think will be the right ones for us to bet on long term and consolidate. Our facilities, we've got a decent amount of vacancy after return to office, and we've built the bank product by product. So taking a step back, reshaping our culture, getting rid of excess space, consolidating will be good for expenses, but also good for culture and innovation and speed to market long term, that will be able to fuel a lot of our investments. And then lastly, we're making a big investment in our branch network to drive long-term sustainable low-cost deposit growth and household growth. That's embedded in the non-AI piece. Where most of the conversation and action is on the AI front, so I'll give you a couple of examples, our call center. We've got aspiration to take out 50% plus of our phone calls and have them be served by an agentic AI agent. That is already in pilot. We're working through it, preparing to scale it. It's going quite well. And we've got strong conviction that by the end of the year, we'll have made a meaningful dent in that 50% goal. Point number two is engineering. We believe that the role of an engineer will radically change in the future. Instead of an engineer coding on their keyboard, they're going to be overseeing 10 agentic bots that's doing 80% of the code development, and they'll take it the last mile. That's going to give tremendous leverage to our CapEx. So we think our developers will be 10x -- 5 to 10x more productive in a future world. That is also in the process of being developed. And lastly -- not lastly, we have 47 initiatives. The last one I'll highlight is just analytics. A big investment in fraud and credit analytics to leverage AI to enhance loss rates, less false positives, better credit underwriting. So those are just a few examples. But I would say, look, despite every 6 months, I feel differently about the progress and maturity of AI. It's moving so fast. I still think we're in the second or third inning. We're starting to see real use cases. It's not vaporware, but it's still really nascent. And so we want to be on the forward leaning edge here.

Sure. Maybe we could move over to credit. And outside the general downtown office, everybody knows what's going on there. But when you guys -- Aunoy and Brendan, when you look at credit, are you seeing any trends that concern you? Or is it all still very manageable and...

Yes. Let me start and obviously, Brendan can jump in. But I think we feel good about credit where we are. You mentioned the general office, that's being worked out at pace, and I think those costs will come down. We also have the noncore book running down. We also have CRE coming down. Most of our originations, as you mentioned, in C&I or on the retail side are secured, lower loss content originations. So we feel that our credit costs are in the right shape. On the retail side, most of our -- 75% of our book is secured lending. So that's really helpful. And the loan-to-book value ratios, it has gone up over time. So I think we feel good about credit as we sit here today.

I just would accentuate that. Every last detail I look in the consumer business, there's nothing I'm losing sleep on at all. We're watching it closely just given what's going on in the macro backdrop. But there's nothing we see that's of any cause for concern. And on the private bank side, we've yet to have a delinquent loan or a charge-off.

No, that's very good. Aunoy, maybe we're 2 months into the quarter, maybe you could tell us how things are shaping up relative to your guidance and share us with those kinds of thoughts.

Absolutely. Look, we are very confident about meeting the overall guidance that we gave at earnings. The first 2 months have actually been quite constructive. We have seen good balance growth. We have seen clients engaged with us. We are seeing the capital markets flywheel going. Obviously, the last couple of weeks with the Middle East conflict, there has been some uncertainty. If it's short-lived, it probably won't matter. If it drags on, we will see if it has got any impact to our -- over the long term. But we feel very confident in meeting the guide that we set out at earnings for the quarter.

Great. We're running out of time, but I do want to -- last question for both of you. Just what do you want the investors to take away? What's the core message about Citizens' future outlook? And what is that message that you're starting with?

Sure. Look, as I have commented on, as you said, 5 months, I would say we have a lot of opportunity. We are executing in a very disciplined and a targeted manner, and we have the team in place, and we are confident of meeting our medium-term goals that we set out.

I would just add, many times, the investor community will look at most of the regional banks in a bucket and have a hard time finding differentiation. I feel really confident that there is significant differentiation in the Citizens' story. And I see that both in financial outcomes and the forward outlook of 500-plus basis points of operating leverage and the return profile improvement that we're seeing. But more importantly, durable, long-standing improving right to win in all of our customer segments. We've got distinctive growth with a distinctive right to win, which even when you get past the medium-term outlook, I feel really good that we're on a path to truly be a distinctive story in regional banking. And as we've mentioned, Bruce has helped lead a reload of the leadership team. We've got reimagine the bank going. We're really pulling out all the stops here to take a real run and have this be one of the strong stories in super regional banking over the next 1 to 3 years.

Great. Please join me in a round of applause thanking Brendan and Aunoy for coming.