Citizens Financial Group CEO: We’re occupying white space First Republic dominated & doing it better

Key Concepts

• Bank ETF: Exchange Traded Fund tracking bank stocks.
• CRE (Commercial Real Estate): Property used for business purposes.
• Accretive: Adding to earnings or value.
• ROE (Return on Equity): A measure of financial performance calculated by dividing net income by shareholders' equity.
• Private Wealth Teams: Groups of financial professionals who manage the assets and financial planning for high-net-worth individuals.
• White Space: An untapped or underserved market segment.
• Helocs (Home Equity Lines of Credit): A revolving line of credit secured by a homeowner's equity in their property.
• ROTCE (Return on Tangible Common Equity): A key profitability metric for banks, measuring net income against tangible common equity, excluding goodwill and other intangible assets.
• Net Interest Margin (NIM): The difference between the interest income a bank earns on its assets (like loans) and the interest it pays on its liabilities (like deposits), relative to its interest-earning assets.
• Legacy Drag from Swaps: A negative impact on current earnings or financial metrics due to long-term interest rate swap agreements entered into in the past.
• Basis Point (bp): One-hundredth of a percentage point (0.01%).
• Super Regionals: Large regional banks that operate across multiple states.
• Capital Markets Revenue: Income generated from activities such as underwriting, trading, and advisory services related to financial markets.
• Credit Costs: Expenses incurred by a bank due to loan losses or provisions for potential loan losses.
• CRE Office Loan Workout Costs: Expenses associated with managing and resolving problematic loans secured by commercial real estate office properties.
• M&A (Mergers & Acquisitions): Corporate transactions involving the combining of companies (mergers) or the acquisition of one company by another.
• Organic Growth: Business expansion achieved through internal efforts and increased sales, rather than through acquisitions.
• Jump Balls: A competitive situation where multiple entities are vying for the same business or opportunity.

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Citizens Financial's Strategic Growth and Outlook

Citizens Financial's Chairman and CEO, Bruce Van Saun, discussed the bank's significant progress, strategic initiatives, and financial targets, highlighting its strong organic growth trajectory and competitive positioning. This comes amidst a backdrop where Bank ETFs are up almost 20% this year, while CRE is up less than 5% over the same period.

Private Bank Expansion and "2.0 Version" Strategy

Citizens is highly enthusiastic about the growth of its private bank, which was effectively a startup initiated after the failure of First Republic in mid-2023.

• Rapid Growth: The bank initially hired 150 people in mid-2023 and has since expanded its headcount to approximately 500 people by 2025.
• Financial Impact: This initiative is on track to be 7% accretive to Citizens' bottom line and is delivering an ROE of over 20%.
• Geographic and Service Expansion: Citizens has reinforced its initial teams and expanded into Southern California, hiring private wealth teams to complement private bankers.
• Filling the "White Space": Van Saun stated, "We're occupying that white space, that First Republic dominated." He believes Citizens is creating a "2.0 version" that will be "even better than the original First Republic version."
• Competitive Advantage (2.0 Version): Unlike First Republic, Citizens leverages its fully built-out commercial bank with 4,500 middle market relationships. These relationships often involve successful individuals who require both business and personal/family banking services. Citizens' ability to offer "total solutions" across business and personal elements, combined with its consumer bank's full range of products (including being the #1 originator of HELOCs in the country), provides a more comprehensive offering than First Republic.

Path to Achieving 16-18% Return on Tangible Common Equity (ROTCE)

Citizens currently has an ROTCE of around 12% and sees a clear path to achieving its target of 16-18%. This path is driven by several factors:

1. Net Interest Margin (NIM) Expansion: A significant 300-400 basis point lift is expected from the natural run-off of legacy swaps. These swaps have created a "legacy drag" on earnings, and as they mature, the accounting hit diminishes, naturally lifting the NIM. This "time-based benefit" alone is projected to push ROTCE to over 15%.
2. Growth Initiatives:
   • Private Bank: Continued expansion and profitability from the private bank.
   • Commercial Bank: Positioned as "the best positioned among the super regionals," the commercial bank saw activity levels pick up in Q3, leading to its second-highest capital markets revenue quarter since Q4 2021, which is expected to be sustainable.
3. Reduction in Credit Costs: Credit costs are currently running "a little high" due to the ongoing "burning off" of CRE office loan workout costs. As these costs subside, Citizens anticipates a further benefit to its ROTCE.

These combined factors provide strong confidence in reaching the 16-18% ROTCE target, with lower interest rates potentially also contributing positively.

M&A Outlook and Competitive Stance

Regarding industry consolidation, specifically referencing the announced merger between Fifth Third and Comerica, Bruce Van Saun offered Citizens' perspective:

• Organic Growth Focus: Citizens does not feel compelled to merge, emphasizing its strong organic growth potential. "We think that we have a lot of organic growth and so we don't feel compelled."
• Sufficient Scale: Citizens believes it has "enough scale to be competitive," regularly competing and winning against larger banks like J.P. Morgan and Bank of America in the middle market and commercial space. "We go up against JPM and B of A in the middle market and the commercial space day in and day out, and we win jump balls against them."
• Opportunistic Approach: While not actively seeking mergers, Citizens remains opportunistic. However, Van Saun stated that "the bar would have to be very, very high" for any potential acquisitions.

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Conclusion

Citizens Financial is demonstrating robust organic growth, particularly through its expanded private bank, which is strategically filling a market void with a comprehensive "2.0 version" service model. The bank has a clear, multi-faceted path to achieving its ambitious 16-18% ROTCE target, driven by NIM expansion, successful growth initiatives in its private and commercial segments, and anticipated reductions in credit costs. Despite recent industry M&A activity, Citizens remains confident in its current scale and competitive strength, prioritizing organic growth while maintaining a highly selective stance on potential acquisitions.