Along, very pleased to have another regional bank with us this afternoon in Citizens Financial, which has been a long time participant of this conference from their IPO, a bunch of years ago. I think many of you know Bruce Van Saun was CFO of RBS a little bit time ago. Since its inception, the Chairman and CEO, at least since its public inception, of Citizens Financial. Bruce?
All right, Jason. All right, it's great to be here, look forward to having a discussion about Citizens, I'll do some slides, and then I think we'll do a little Q&A. Let's kick off here. I'll skip the cautionary language, which you can read at your convenience. Kind of my overriding comments are certainly not the year that we thought it would be, when we turned the calendar to January first. A lot has changed in the environment. A lot of new challenges are out there. I would say, a headline here is that I think we're navigating well through the challenging environment.
You know, as we saw in the pandemic era, being resilient, being adaptable, is really, really important. I think we're demonstrating that again this year. The key to having success in these environments is you start out needing to play strong defense. Focused on your risk appetite, maintaining strong capital, liquidity and funding position. At the same time, you need to anticipate that the storm clouds dissipate, the sun comes out, you need to be continuing to invest in the initiatives that will kind of grow revenues and position the franchise well for the future. That's kind of the balance that we've been focused on this year. You know, I'll show a few slides here, but we're very satisfied with our capital position.
It's near the top of the super-regional peer group. Very satisfied with the quality of the deposit franchise. About 70% is consumer or it's insured, slash collateralized. It's been stable since all the turmoil. Also, really like our businesses. I like what we've built out in consumer and commercial. I think we're positioned for growth and success. We're also well-diversified, having strong positions in each. Just a little bit about Citizens for those of you who may not be that familiar with the story, but we have really a very strong position in the Northeast.
We also serve the rest of the country through the corporate bank, and then through consumer with Citizens Access and with our national lending products. We have, you know, over $220 billion in footings, and then, you know, $155 loans, $172 deposits. We do really focus on delighting customers. We try to have a mindset of, you know, a real effort to make sure that we're helping our customers on their life journey if they're an individual or achieve their business goals if they're a company. We're at record highs, both in terms of our Net Promoter Score, J.D. Power score in consumer, and also customer sat in the commercial side. We have some nice growth statistics here.
We have a very strong position in the league tables in commercial when it comes to middle market. We're regularly able to win jump balls against the mega banks, and then we're getting recognition for that. You can see some of the recognition here at the bottom of the page, including The Banker Magazine designating us the U.S. Bank of the Year in 2022. Give you a few highlights what's going on in consumer. We have really five major areas of emphasis in the consumer bank. I think a huge opportunity for us is building a leading New York City Metro and New Jersey area bank with the acquisitions of HSBC East Coast branches as well as Investors Bank based in Short Hills, New Jersey.
We've done a good job of integrating those two franchises converting onto our platforms, and the potential exists because the customer count per branch relative to Citizens in our core markets like Boston and Philly, we have about 40% of the size with the HSBC branches and about 20%-25% of the size with the Investors branches. There's an opportunity really to leverage our position 200 branch network in those markets to really scale up and grow on the consumer side and the small business side. There's a lot of companies in that area, so it gives us the wherewithal to even grow our market share on the commercial side.
In wealth, we've been working on pivoting the wealth business to be a much more fulsome wealth offering advice to customers, asset allocation, moving beyond traditional bank products like annuities. We have introduced a centralized financial planning group. We basically turned the business around into something that I think has a great profile. There's huge potential here too, if you look at our penetration of the customer base, we're I think 9 of 10 of the super-regional peers, and if we got to median, we would double our fee revenue. We're really focused on that opportunity. We see further opportunities with the national bank. We've been focused on the technology platform. We've moved to a new cloud-based platform.
We put a new mobile app in place and we're bringing products onto the platform. This will ultimately be the platform for the future. We'll take the old core bank off of kind of the legacy platform, and we'll move it onto this digital platform we're building out for Citizens Access. Citizens Pay continues to be, I think, a very attractive offering for us as well. We continue to sign up new merchants and we're developing a kind of credit line in a pocket for consumers where we go direct to consumers and give them another way to pay for things, which is pretty exciting. Lastly just on digitization, we're pushing hard to kind of digitize all the customer journeys front to back, introduce more self-service.
One example that comes to mind here is home equity line of credit is a great product, particularly in this environment. Mortgage rates are high, people have tappable equity, they can borrow against their homes, but they always shied away from the product 'cause it's a very cumbersome origination process. Average origination times in the industry are 55 days. We're now doing over 30% of our originations in under 20 days. We've really just used data and digitization to take the pain out of that. As a result, we originated more HELOCs than anybody in the country, even though we stick to our 14-state footprint. A lot of good things happening in consumer. Move on to commercial.
Again, it's been an effort over the years to build out the coverage organization while also building out the products in sync. I'd say today we're very pleased with the quality of the coverage bankers we have, where they're targeted. We've expanded around the country. Geographically, we've hired for the bigger companies in the mid-corporate space. We've hired industry expertise, both in the coverage bankers and the corporate finance and M&A shops, so that we're very competitive there. We've also through JMP focused on some of the higher growth industries in technology and healthcare and fintech. We have a really great focus on coverage. On the product side, we now have everything.
We can go soup to nuts on beyond just traditional bank products like loan syndications and FX and interest rate hedging and cash management. We can access the debt markets, the equity markets, offer M&A services. Pretty excited by that. The last thing I'd say too is that increasingly private equity firms are buying up kind of the middle-market companies in the U.S. I think they probably have over half the ownership at this point, and we've targeted strong coverage of the private equity players who focus on that segment, and we can do a lot for them. We can show them deal flow, we can finance the deals, we can provide subscription line financing, we can provide all the banking services for their portfolio companies.
I think we're playing that trend better than anybody in the super-regional space at this point. Just a few additional words on New York Metro, the conversions have gone very well and, you know, it's great when things go flawlessly and there's no noise and customers are pleased with the migration. Really I think we did a nice job of that. We're hitting the ground running. If you look at some of the stats, the sales stats, customer acquisition, both at Investors and at HSBC, since they're kind of on our platform, their growth rate should be, given that lower base that I mentioned, their growth rate should be a lot higher than the more mature rest of the system.
It's living up to the billing and certainly exceeding what we put into the deal model. We actually didn't show the financials from the revenues into the deal model, but we had our own estimates as to how we would progress, and that's going very well. We're also building the brand in the New York Metro region. We have some great kind of launch aspects when we first came to New York in the fall, had an immersive experience. Now we're the official bank of the New York football Giants and the New Jersey hockey Devils, which is really raising our visibility, which is important because New York is a crowded market. We own some good assets through the acquisition of Investors.
Let me talk a little bit about what's on everybody's minds these days. You know, I'd say it's been a rough ride. The regional bank stock price is not where anybody would like to see them. Those of you who own them and me, who owns them as well. You know, I do think that there's opportunity here to pick up quality franchises at deeply discounted valuations. When I look at the things that are worrying investors, starting with strength of the capital base, you know, our capital levels, we've maintained strength and capital all along. We never levered the capital base. We always kept a little premium over the rest of the peer group, and I think that's served us very well.
We're kind of right at the top, you know, probably number 2 in the CET1 ratio, and then adjusted for marks. We always ran a slightly smaller securities book, very strong adjusted CET1 ratio and then also TCE and adjusted TCE ratio. Deposit franchise as I mentioned, a lot of consumer deposits, a lot of primary accounts too. Two-thirds of the corporations view us as their primary bank, similarly in consumer about the same percentage also consider us their primary bank. 68% of the deposits are either insured or secured, that's a relatively high percentage as well. We've been able to maintain stable deposit levels after the SVB through the First Republic.
Actually through the end of April, I'll have a slide here, we were up slightly in our deposits. We also have focused on holding significant liquidity. We maintain an LCR ratio that would be Category III compliant as of today. Another area of focus for Investors has been the CRE sector, and clearly, banks are gonna take losses in their CRE books, particularly in the office space. It all at the end boils down to quality of the borrowers, quality of the assets that you're lending against. There, we like the profile of how we've played, basically. We have a high percentage of suburban relative to central business district. CBD is more prone to work return to lagging return to office trends.
We have a high percentage of Class A buildings as well. The geography is relatively dispersed and relatively strong markets. Clearly, criticized assets are going up, workouts are going up. It's very manageable in a way because, you know, all of these loans for the most part are current and paying. Then you get to a maturity, and then the borrower and the lender have to make a decision as to, you know, are we gonna extend a loan and on what terms. In some cases, you'll have agreements where the borrower sees value in the building and will put equity in. For that, the lender will extend the term of the loan.
Or if there's a workout and there's not enough cash flow, the lender can create an A and a B note structure. A loan becomes performing, the B becomes a charge off, but represents a warrant if things get better down the road. There's a playbook that banks have used over time that everybody's dusting off and putting more people into this area. It's a fairly manageable process because you have visibility into what the maturities are, and you can start working with the borrowers to get ahead of things.
The last thing I'd say that has been on folks' minds has been the potential regulatory changes, and I think there's a general fear that the cure could be worse than the disease when it comes to things that the Fed is mulling over. I'd say on that, there's a very active dialogue with the industry, with the folks in the Congress, and with the regulators and the policymakers and the administration about trying to avoid that, to try to be really judicious in kind of what was the situation with these banks. They were idiosyncratic. They grew too fast. They have management failures, supervisory failures. Doesn't look like lack of regulation was the root of the problem. We'll see how it plays out.
I think I'm hopeful that, in general, people like the structure of the U.S. banking landscape with almost 5,000 banks of all shapes and sizes. We have community banks, small regionals, large regionals, mega banks who kind of provide different levels of service and provide plenty of credit to all players in the economy, including small business can get access to lots of credit. If the kind of reaction from the policymakers is much more regulation, that could certainly disturb that landscape that has served our economy and our country so well. Anyway, we're having those dialogues.
I think if things do change, the good news is the proposals go out for comment and review, takes a while, and then any fixes they put in place usually burn in over time. I think the industry will have the opportunity to adjust to that. Just a few slides to kind of follow that up. I mentioned that we're kind of high on the capital stack ranking. You can see our CET1 ratio at March 31st, and if you then back off the unrealized losses, we're kind of second there at 8.7%. If you look at the TCE ratio, second at 6.6%, and then if you adjust for the HTM marks, we're again strong at 6.4%.
We consciously decided when we saw the world getting a little choppy that we wouldn't push on loan growth as much and we would work to preserve our capital, and I think that's proving to have been a sound decision. We're also we're still very profitable, so we're making kind of mid-teens ROTCE, which allows us to generate 25 basis points of TCE. We start at a good point, and we're in a cash capital generative, which is also very positive. We have the wherewithal to do share repurchases. We bought $400 million in the first quarter, and we would look to still buy stock over the course of the year. Certainly we're gonna be a little cautious and watch what's happening in the external environment.
I mentioned deposit base here, you can see that it's very diversified across business. It's diversified across product mix. The consumer deposits are 67% insured, 68%, and DDA as a percentage of the total is holding in pretty well, so 29, 27, still at 26 kind of at the end of the first quarter. This slide shows kind of going back to this middle of last year, which is just after we had closed the Investors Bank transaction. If you look at our deposit trajectory, we were actually aggressive in building deposits over the back half of the year. The industry was actually losing deposits, and our peers were losing deposits.
In the first quarter, we kind of made the call that we weren't gonna see as much loan growth, and we wanted to kind of focus on sequential beta performance and our NIM performance. We let a little more kind of run off in the quarter than our peers did. Having said that, we were still kind of spot on to the H.8 and the peer performance if you look at the three quarters taken as a whole. In the month of April, our deposits were slightly up. The good news is from the Silicon Valley weekend to the end of March, we were flat, and then we're slightly up in April.
I think our outlook for the rest of the year is that we'll make back some of those deposits, and that we should be able to grow deposit absence, some additional new factors that cause more turbulence. We have some really strong efforts underway both in consumer and commercial that we have a lot of confidence in because we've seen them working up to now as we've transformed the deposit base. Some of these are already in motion, and they have momentum. Others are new initiatives that we're really leaning into. I think the agenda in any bank these days is not loans, it's deposits, deposits. We're very focused on driving these various initiatives forward.
One thing that we I think have distinguished ourselves upon is our commitment to running the bank efficiently. We have something called Project TOP, Tapping Our Potential, which I started in a kind of just in the run-up to the IPO. We had our first TOP program. You can see TOP 1, $200 million, and they've kind of been in the $100 million-plus range year in and year out. We took a kind of two-year effort and made a very big TOP 6 program that leaned heavily into technology. TOP 8 is something that we announced at the end of last year, that's progressing very nicely. We indicated on the first quarter call that we were looking for opportunities to upsize that.
stay tuned on that front. I think if you go into the year and you think about the outlook, you know, a lot of things are hanging in as expected, but clearly, what you're paying for your funding cost is gonna be more expensive, so that's gonna lower your net interest margin and your NII. you know, I think we need to stay focused on how do we drive some offsets to that through the expense line. there's some exciting new things there too. The capacity of AI to kind of change certain job families is a little bit in the early stages, but we're pretty excited about what could come from that.
Anyway, I'll stop there and just say, kind of to sum up, I think we built a very strong franchise. We're navigating the current environment and challenge as well. We're positioned for continued growth and attractive returns over the medium term. We'll just be resilient, get through current turbulence and continue on a building a great bank agenda. I will stop there and Jason.
Thanks, Bruce. Appreciate that. You touched on it, a couple of times, so maybe if you just give us kind of your kind of take on the recent regional bank stock volatility. In your presentation, you talked about growing deposits, strong capital, good credit quality and a lot of kind of, you know, good or grown organic growth opportunities, yet we see these 15%, 20% drops in regional bank stock prices, yours included.
Yeah.
kind of what's your take on all this?
Yeah. I think like every bad thing, it seems like is priced in. You know, the worry list that I went through is, you know, is there existential threat to the funding base, and what's the implications for earnings power? Is the regulatory changes gonna lower long-term structural ROEs? You know, I think there's those kinds of things. Is the credit loss how bad is the recession gonna be? Are banks gonna get clocked in their CRE exposure? I think there's a lot of worry beads that people say, "You know, I'm just I'm not gonna hang around here," or why would fresh money come in even though it looks like a screaming buying opportunity when you can buy these banks at tangible book or even below a little bit?
Historically, you've made a killing. That should restore itself. You put in your notes about how the relative valuation to the S&P is kind of at an all-time low. If you go back 100 years, it's probably as low as it's ever been. So, you know, I think what we need to focus on is just, you know, focus on what we can control in building a great bank and playing the defense and making the offensive investments and the stock will take care of itself. I do think there's another wild card out there is that the shorts have really piled into the regional bank space.
One of my concerns is, and other CEOs, not just me, is it seems like a perfect short because if the whole group is a little wobbly and they start trying to drive the stock price down, stock price can be connected to deposit outflows. Some banks running itself fine, but then a depositor sees the stock price goes down and says, "Hmm, I wonder if my money's safe. Maybe I should diversify." The bank reports deposit outflows, and the whole vicious cycle kicks in. The shorts can kinda make a fair amount of money here. You know, I think the policymakers in Washington are very vigilant about this. There could be market manipulation. We'll see if they take any action on that.
In any case, that's just, I think, another contributing factor besides just the fundamentals.
Got it. Then, you know. Yeah, sure.
Address there.
Go, go, go.
'Cause to me, the way to rationalize it, your capital slide. Core tier 1 of 10%, that sounds good, but you ex-AOCI, that's 8.7%. On the right side of page is a ratio that I don't quite understand. It's more like 6%. The question is it the right level, and where is the goalpost going? Like, will you need to be at 8%, 9% core tier 1 in the future? Ex-AOCI, I think that's the debate.
Yeah.
The way to rationalize it.
The point that we're making on a relative basis here, we have a strong position at 8.7. Our SCB that we get from the Fed when we go through the stress test process is 7.9. We have a buffer already today without the need for any phase in relative to what the SCB would say. You know, the other thing about the adjusted number is that it cures itself over time because the securities mature. A lot of that will accrete back. You're not kinda today under the current rate environment, you're at 8.7, but, you know, that number will be well into the 9s if we don't take any action just by those securities maturing.
I think we have sufficient capital, and I think even if the regulators increase the capital requirements, we're in much better shape than most of the peers who have generally they start with a more leveraged CET1 ratio, and they have much bigger AOCI marks. Some of them, it'll take a number of years to get back to kind of a 10% level if that becomes the new goalpost.
Right. Ask him.
Thanks. Maybe just taking a step back and wondering what you see as the regulatory change, and then seeing how Citizens might be able to meet that over time.
On capital or on anything?
Just on anything.
Yeah.
How do you see as-?
Yeah, I think.
As you said it should be targeted, I wonder what you think they should target?
Yeah. I think what they're focused on now is kind of the LCR, which is a liquidity stress kind of regime and ratio. You know, one of the things I mentioned is that we've held a lot of liquidity, so we're Category III compliant. If they kind of push things down, Category III standards apply to 4 and 2 applies to 3, we have, I think, a strong position without having to make significant adjustments. Although there could be changes that, for example, in how you run your stress tests, if all of a sudden, based on the recent experience, a corporate deposit outflow assumption is twice as fast as what it was before.
If it was 20% under stress and now it's 40%, the amount that you can lend against that deposit is lower, and you have to hold more cash in securities. That's one thing that particularly when it comes to the Category IV banks. We provide 45% of the corporate lending in the country. Our LDRs tend to start with an 8. You look at the mega banks, and they're kind of down around 50%. To me, that's a big question is if they start to change the frameworks and the outflow assumptions and force banks in our kind of category to hold more liquidity, that means we have less room on the balance sheet to make loans, which has lots of second-order consequences.
Who's gonna pick up the slack? Does that move to the non-bank sector, or is there just less credit available in the country, and what's the impact on the economy? These are the kind of debates that are taking place, Vasco, is like, there's no free lunches in any of this. If, you know, the decision is that, you know, you've gotta be more bulletproof from these deposit runs, then you're making less loans, and that changes the business model, that can change structurally the ROEs, but it could also impact the economy. To me, that's the one that we're most focused on. I think the capital stuff is manageable, particularly for us, but we'll see how it plays out.
Yes. Bruce, you mentioned deposits up slightly in April. Maybe just give us a little more context in terms of what's, you know, driving that. Is it driven by price? Is it driven by, you know, time brokered? Or just kinda maybe just more context?
Well, I was just gonna say...
Kind of how you see that progressing through-
Yeah
... the year.
Kind of what was interesting is, after we announced our results in mid-April, we saw some money come back. Frankly, I think there were some of your bigger depositors are doing a little diversification. We're getting some in, and we're getting some out, but we kinda saw, okay, this picture looks pretty good, so that was good. We've had some campaigns to attract fresh money on the consumer side, which you're paying up for. I think it's a combination of just continuing to have our coverage bankers focus on deposits, the importance of deposits, making sure that people we extend credit to are bringing the deposits in, and anybody who diversified, you know, bring it back, stick it here.
Then on the consumer side, just being competitive with the rates that are being offered in the market.
When you say paying up, is that in the context of kinda the overall beta expectations you've had?
Yes. Yes. Yep.
Got it. Then, you know, it'd be remiss to ask, but you know, your name has been linked with a couple of the potential failed bank acquisitions, you know, First Republic and maybe another. You know, given the, you know, where you are in the HSBC, ISBC, you know, could you handle doing something else? Just how do you think about, you know, additional acquisitions in the current backdrop?
Well, I would say, you know, the likelihood of seeing any open bank transactions of any size this year is almost de minimis from any participants, including ourselves. Just the marks that go into the balance sheet from an interest rate and a credit standpoint mean, most, a lot of these banks have very diminished TCE, and the math doesn't work on those kind of deals. On failed banks, closed bank deals that the FDIC takes into receivership and then is offering kind of capital infusion and liquidity support, those deals can be very attractive. You know, you become, in effect. You're working out a problem for the FDIC, and they're prepared to make it worth your while.
To me, the question really is: Do you kind of stay focused on things that fit your strategy and your business model? The things that we were rumored to look at, such as SVB Wealth and Boston Private inside SVB or First Republic, which has a big wealth franchise, those things fit our strategy. If the math behind a hugely capital accretive transaction comes along with it, those would be good deals that would serve our shareholders well. Whether you would sign up for just a mercenary thing that here's a capital structure that you're the workout agent, you maybe don't like the franchise that much, you might keep little pieces of it, would you go take a look and kick the tires on some of those?
In, you know, some instances maybe, but in some instances, you just say, "I got a good game plan. I'm gonna kinda stick to the game plan. I don't wanna get distracted." That's kind of how we would think about it.
Well, I was hoping we could delve a bit more interest in credit quality.
Just on the last point, I think the success that we've had with, you know, the Investors and the HSBC, the seamless conversions, is confidence inspiring. We don't have to do another deal, but I think we have the muscle and the team in place to jump on it if those opportunities arise. I think, you know, the fact that we're rumored to be playing in these things would say that the regulators take a positive view of our capabilities, the strength of our management team, our ability to execute and integrate, and the strength of our capital base.
Got it. Just... Sure.
Sorry, maybe just to stick with the problem at the regional banks rather than move on to asset quality, which is great topic as well. I mean, Jamie Dimon was mentioned during the whole FRC transaction that he thinks that we're now-
Towards the end of the whole situation. I know you don't have a crystal ball, but what are your thoughts around where we are? Are there more failures in the system? Are we more or less done? What are your thoughts?
Yeah, it's hard to kind of go out there and be on record, but I agree with Jamie in that I think the kind of call it three, there was Silvergate too, but just in kind of the bigger banks that failed, they had a very unique business model, they grew too fast, and the growth exceeded management's capacity to actually run the place in a safe and sound fashion. If you look around, there's kind of not many more examples of that. By the way, you as investors all loved that model. These are the growth banks are so much better than these traditional stodgy banks that don't grow. Geez, look what happens.
In any case, you know, I look around our peer group and I'm sure there's folks who would like to have some mulligans to not invest in low-yielding securities when rates are really low. They have the diversity and kind of strength of business model and processes around asset liability management to withstand that and to, you know, kind of watch it burn off and live to see another day. I think it's not a regional bank crisis to me, it was a idiosyncratic high-growth bank crisis. Whether the shorts can kind of create their destruction and bring down a bank that appears to be sound, remains to be seen. I think that's kind of the wild card that I would see out there.
Yeah.
I guess, Bruce, as we're winding down here, you know, you have kind of the month of April in the books. You know, on your earnings call last month, you kind of gave, you know, fairly detailed kind of 2023 guidance, 2Q guidance. Kind of a month later, kind of just any thoughts, any areas kind of better than expected, worse than expected, just given what we've seen?
You always like to get me to do mid-quarter updates to my guidance, don't you? Yeah, look, I'd say it's what we thought. What we're experiencing through April is what we put in our guide. There's really nothing that stood out as being different.
Let me just ask you one other question on that. You know, on the earnings call, you did kind of increase modestly your kinda net charge or ratio guidance for the year. Although you did say maybe less need to build the ACL. Can you just maybe just talk to kind of where you were seeing kind of maybe incremental degradation and just kind of your overall thoughts how this cycle plays out?
You know, the reason for doing that was simply because in the first quarter, we had a higher NCO than kind of what we thought. We got hit with these little mini Scud missiles with one-offs actually not even the CRE book, but in the corporate book, kind of like companies that suffered from pandemic trends or technological obsolescence. You know, the fact that we started the year at 34, it's hard to kind of say low-to-mid 30s when you know the trend's gonna be higher. We just said it's kind of mid-to-high 30s. I don't see any real worry beads across consumer, across corporate, broadly, and CRE continues to be the area that we're most focused on.
As I said, it's kind of a slow motion accident that you're just monitoring and managing and I think the results will fit inside the envelope of provision guide and charge-off guide, and the ACL, build and strength that we have.
Great. With that, please join me in thanking Bruce for his time today.