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

Very pleased to have Citizens Financial up next. From the company, Chairman and CEO, Bruce Van Saun. Bruce has been a very big supporter of this event since Citizens' IPO.

And prior.

And even prior in his prior two jobs actually. But since the company went public in 2014, just maybe talk to, as you kind of look at the competitive landscape, how do you feel about the firm's current positioning? Where do you see the greatest opportunities? What are you most excited about?

I think we're positioned very well for the future. It's been kind of a long transformation journey to get here. But when I look at the strategy we have, we try to simplify the story and really talk about a triangle of businesses, and that would be the Consumer Bank, the Commercial Bank, and Private Bank and Wealth. And I think we have really strong positioning in each three, lots of things to focus on to both grow households, grow customer base, grow the balance sheet, grow our fee penetration. So when I look at starting with the Consumer Bank, we're very strong in mass affluent and affluent households and have had a lot of growth in low-cost deposits. The acquisitions that we put together in New York to compete in this marketplace have gone exceptionally well. And I think it's our fastest-growing region in terms of households and deposits. And there's a lot more that we can do to get further growth. We're #1 originator in HELOCs in the country. That's a lead product to bring people into the bank, especially mass affluent households. So I feel very positive about that. We're investing in our digital and our data capabilities to keep upping the game in terms of customer experience. And then lastly, I'd say we've started to tap into the great opportunity to cross-sell the wealth products and services. So you see that as something that will continue to drive deeper penetration in the households and our wealth fee revenue. In the Commercial Bank, I'd like to modestly say, I think we're the best positioned super regional Commercial Bank when it comes to, in particular, capital markets capabilities. And so as the markets heat up and there's more deal activity, I think you see our revenues are flexing up and kind of it's a proof point as to what we have. We're going to, we're going to show, I think, faster revenue growth than most of our peers, given the investments that we've made over the years. We've also made a lot of investments in the payment space, and I think there's some great opportunities there. Embedded finance is one that we're focused on. So we feel good about Commercial and then clearly, Private Bank and Wealth with what we did to start up the Private Bank by bringing over a lot of very talented bankers from First Republic after it failed and scaled that up and have roughly $18 billion in deposits and $10 billion or $11 billion in loans and client assets. It's now 12% of the bottom line and got a 25% ROE, and it's growing in a controlled but very strong fashion. That has kind of no roadblocks to continue to grow at a meaningful clip. And then beyond just the businesses, Reimagine the bank, which I'm sure you'll ask me some questions about, so I won't steal your thunder on that, but I think the deployment of new technologies, AI, agentic AI, rethinking how we serve customers, all the functions that we do with the bank. That's going exceptionally well. I think the fact that we know how to put these things in a program to deliver results is differentiating. I feel good about that. And then lastly, I think One Citizens, we have a culture of working well in a collaborative fashion across the enterprise and having the Private Bank with the Commercial Bank, working together to bank successful people across their business needs, their personal needs, their family needs for both banking and wealth products is pretty differentiating. A lot of the folks we compete against, they either don't have that full product set or they don't have that culture or they operate too much in silos. So I think that can really stand out and be differentiated for us as well.

So a lot in there, and I want to double click on a bunch of those points. Before we do that, just maybe pull back and maybe just talk about the macro environment different today than when we had you here last year. Just how you're thinking about the path of the U.S. economy and interest rates? And just maybe talk about the health of your customer base, any changes you've seen recently, et cetera?

Yes. I think the economic backdrop has been relatively good. The GDP growth for the year, I think, will be at least 2%. And I think we could end up ticking up a little bit. And when I look out the next 4 or 5 quarters, I think we could be at 2.5%. Some of that depends on geopolitical and other events. But if you look, the economy is growing, unemployment is holding in, in the low 4s. Inflation is being affected by the war and energy prices and tariffs. But those things get absorbed. And I think ultimately, we should be able to bring that inflation down, particularly if we can have a resolution to the Iran situation. But I feel there's a lot of pent-up demand around the capital markets. They're open. Spreads remain relatively tight. And so -- we've got huge pipelines. And companies generally, our corporate customers are all having good years. They're kind of sticking to their game plans. It's a little more throttled and conservative than if we were completely without some of this uncertainty, but they are playing offense. They are investing. They're out borrowing money. And then I think on the Consumer side, clearly, high-end folks are doing extremely well. And they're just getting the benefit of a really high value stock market and home values holding in really nicely. But even as you go down into the lower spectrum, folks are managing okay. I think they've become adaptable and resilient and kind of make trade-offs in how they're spending their money. But we don't see a lot of stress. We don't see delinquency roll rates ticking up or anything like that.

Got it. And maybe we could talk a bit more on the Private Bank and Wealth opportunity. I think we're up to 11.5% of earnings in the second quarter, 25% ROE, deposits, loans, assets under management or client assets all growing as you add new offices, expand teams. First Republic, kind of built that business offering very low-yielding mortgages. I don't think you're taking that approach. Maybe talk to kind of how you're gathering customers and just what does the future hold?

Yes. I think First Republic initially offered some low mortgage rates, in particular, to bring customers to the bank. And then I think over time, there kind of pitch became more about the service levels that we offer, white glove service and we take the pain out of your banking experience, and we always have your back and we have a lot of expertise. When they came over to us, that was the calling card. And so the reason a lot of their customers followed over to Citizens Private Bank is because they love their bankers and the experience they were getting, and they already had their mortgages and they were still kind of sold on to JPMorgan. And so -- and we were in a higher rate environment. So the demand for credit from us wasn't really that significant at the outset. And so we started out, we were running a loan-to-deposit ratio of 30% or 40%. That's now moving up towards 60%. Some of those mortgages were 7/1 ARMs and they're coming due. And so we're seeing a pickup in demand for things like mortgages or CRE, but I don't really see the business getting to a point where that LDR is north of 60% or 70%. So we'll -- I think we have a real focus on operating accounts for PE/VC and businesses and the two-legged customers is something where we're trying to manage that LDR to be in a reasonable place. And so looking forward, even if that LDR goes up a bit, so we're using a little more capital in the business, we get scale benefits as it continues to go up. And so I don't see that ROE dipping. I mean we said initially that we'd be between 20% and 25%, and we've sustained it at 25%, but it should certainly be in that ballpark and probably closer to the higher end.

Got it. And I guess while the Private Bank gets a lot of publicity, I feel like the Commercial Bank, what you've done there over the last several years has been maybe equally as exciting. I know you're now transitioning leadership of that business to Ted Swimmer. Maybe talk any expected change in strategy? Maybe update us what's going on there? Maybe talk to the capital markets opportunity just given kind of a macro uncertainty out there?

Yes. I don't see any -- I mean, Ted and Don and I were the ones who made the strategic choices to build the business and do some acquisitions and build out product capabilities while we were building out some great coverage bankers. But one of the things I think we made a really good call on early was how are we going to distribute coverage and middle market is something that generally, you need strong regional base of coverage bankers who know the customers and can kind of really lean in on those local relationships. And then as we kind of migrated up, and those are generally companies $25 million to $500 million in revenues, and we wanted to grow that. That's a very attractive business, and you get a lot of deposits from that business as well. Mid-corporate are bigger companies. They're usually multibank. A lot of them are public and their revenues are $500 million to $3 billion. But if you're really going to play in that space, you need to bring in some bankers with industry expertise. So we set up industry verticals and areas that we thought we'd see a lot of activity, and we already had some existing knowledge and expertise and relationships. One of the ones that we saw early on was digital infrastructure as one of the verticals, and we bought an M&A boutique DH Capital, who was one of the best independent advisers in that space. And kind of timing was good on that one. We did that in '22. And now you see kind of the rush of demand for compute and data centers and things. And so we're right in the thick of it. But making good calls across aerospace and defense, online gaming. I think we've done that well. And then the other one has been in sponsors. We kind of early on thought that PE sponsors would increasingly own more of middle market America. So we had to build out not only the covered bankers to cover that space, but then also the product capabilities and subscription lines and other things that they need. And kind of one of the things that makes us particularly relevant to sponsors is if we have 4,500 corporate clients, a certain percentage are going to sell themselves every year. So we built out M&A capabilities so we can take them to market. We can either go to the strategic route. We know which PE firms, what's their swim lanes. And that makes you quite valuable because they're always looking for opportunities to put their money to work. So we've kind of, I think, really thought through how to build this the right way along the way in six M&A boutiques, but we bought JMP, which brought us some equities capabilities. So as the IPO market heats up, we're also participating in that. So I just feel really good that we have really great talent and we can go toe to toe. When the mega banks come into our space, the JPMorgan, Wells Fargos, BofAs, we can win head-to-head contests with them, which feels really good.

Maybe to build on that. we've seen loan growth accelerate really across all major line items last quarter. Corporate Bank was a contributor to that. We saw higher utilization rates in both corporate banking and sponsor finance. Technology, energy were kind of key contributors in industries. Maybe talk about the outlook for here and just what role is AI-related investment spending playing? What's the runway there? And there's been some talk around loan spreads. How are those behaving?

Yes. I think we're tracking to where we thought the kind of loan growth would be on a spot basis for the year. I think some of that accelerated a bit into the second quarter. So we're running a bit ahead on the average or at the top end of the range on the average loan basis. But I don't look at it as quarter-by-quarter, it's kind of -- you'll have ebbs and flows where you might have some pull forward in 1 quarter and then corresponding drop off a little bit in the next quarter, you might be anticipating a repayment of a CRE loan that doesn't happen, then it happens in the next quarter. But what I would say is for the full year, I think we're tracking where we expected and we'll have growth in the second half, but it won't be as significant as what we had in Q2. I think there's certainly plenty of competition out there, but I wouldn't say spreads are compressing at this point.

Got it. And maybe on the Consumer Bank, last quarter, you unveiled this NEXT initiative, Network Evolution and Experience Transformation. Talk about optimizing your branch network. I think that was kind of -- a lot of your slides talked to, you looked at as I guess, a shift from in-store back to traditional branches. You also talked about adding specialist in select locations and focusing more on small business and wealth. Just maybe talk about the near-term and longer-term financial implications of that initiative.

Yes. I'm really excited by this. I think increasing the whole speed of our Consumer deposit growth rate is really important. If you're our stable deposit base is growing at a good clip. That creates a lot of optionality in terms of what kind of loan growth you can go fund. So that was important. And we see different banks taking different approaches on that, Jason. So some banks are moving outside of their region. They think they're saturated in their region or their doing acquisitions to acquire those deposits. I think that we brought in a really strong leader for Consumer, Matt Boss, who came from TD and prior to that, BofA, he's got a lot of experience in the footprint about kind of how we can tilt the playing field a little bit, getting mostly out of the remaining in-stores, opening up in some great locations looking at each micro market to optimize those markets opening selective de novos in that and positioning ourselves to be attractive to the kind of Consumer customers we want to bring into the bank and serve and also small businesses. There's a huge opportunity, I think, to up our game with small business and get meaningful deposit growth and fee growth from that segment. So part of this is in the short run, we'll front run some of the investment in the people. They have relatively quick paybacks. So we've piloted a number of regions where we put either wealth specialists or business banking specialists into the branch and tried to look at optimizing our sales capacity across a region and to very good results, both -- on both sides, both on Wealth results and Business Banking results. And so that gives us the confidence that we can start to thread that in and do that pretty aggressively, I think, over the next 18 or 24 months and still stay within our overall kind of expense guardrails that we'd like to set. And then the repositioning we've done a lot of the work to know what's going to happen and what locations we want to move to, and we're working to secure that. That kind of stretches out over a longer period of time. If you're moving just simply from an in-store to a nearby branch, you start with 40% to 50% of the number of customers you have in a stand-alone branch. If you have a pure de novo, you start with 0. So I think the de novos will be spaced out but some of these moves out of the in-stores is more actionable, be more front loaded and not have significant drag in the short term and actually start to, as you go from 40 to 50 up to 100 really start to pick up that deposit growth rate.

And you touched on Reimagine the Bank earlier, and you're in this kind of comprehensive modernization program. Maybe expand on that a little bit, talk about how AI is impacting how you operate and serve customers today? What's driving some of these productivity enhancements you thought about? You talked about -- I think you talked about $100 million annualized pretax benefits this year, growing to $450 million as you exit 2028. Are those still the numbers and maybe the biggest near-term opportunities?

Yes. So basically, we've looked at everything the bank does from onboarding customers to servicing a complaint to dealing with a fraud issue and kind of worked with a blank chalkboard and said, "here's the technology, the people and the processes that support that function today and if we deploy these new tools, what could it look like in 2 or 3 years?" And the net result of that is you're going to have a much better customer experience, you're going to be more efficient in how you operate and you'll have better kind of risk and control environment as well. So there's a lot of benefits that come out of that. The trick is getting from here to there. So I think we've gone through the architecting phase. And in various areas, we've got -- of the total program, there's like 50 initiatives and probably about 30 of those involve technology, maybe 20 are kind of rethinking vendor relationships and trying to consolidate vendors and things like that or facilities and kind of optimizing kind of where people work and how they show up at work. So it's a mix, but the technology stuff is already starting to drive dividends. I mean, we have -- we're capturing complaints and being able to spot things that we can improve. We're dealing with more self-service in our kind of chat in Consumer. We're doing, I think, better efforts around Commercial for doing annualized reviews or prospecting. So we have a lot of things in flight. Most of the benefit for this year would be kind of the tried and true in terms of -- we got a lot of benefits coming from vendor, a number of benefits from facilities consolidation. We got some early-stage wins in the technology driven, but that really starts to ramp in year 2 and year 3. The interesting thing is the $450 million is not all expenses because if you do a better job with your customers, your attrition goes down, if you can get them using your products quicker, you're deepening and generating more revenues from those customers and reducing their attrition. So by year 3. We have significant revenue benefits that I think are they're real. Like a lot of times, people will this revenues and say, "Just tell me what the expenses are going to be." If you do an M&A deal, that's how people look at it. But in this instance, we have some real science behind how that's going to play out, particularly in the Consumer Bank.

Maybe we could pull up for a second before we get into some more detail, but there is a lot of guidance out there for Q3 and the full year. I know there was always some puts and takes. Maybe give us any updates you provided. I know you gave us a little nugget earlier, average loans at the upper end of the range. I don't know if that was a total company or commercial.

That was for the year, for the full year.

The company overall?

For the company overall.

And then anything else you want to highlight?