As the chairman and CEO of Citizens Financial Group (NYSE:CFG), Bruce Van Saun is overseeing a comprehensive turnaround at one of the nation's biggest banks. It's still too soon for Van Saun to declare victory, but if the Providence, Rhode Island-based bank continues on its current path, it could soon emerge as one of the country's top-performing regional banks.
I had the opportunity to discuss Citizens' progress with Van Saun. What follows is the transcript of our conversation, edited for organization and flow.
John Maxfield: Is Citizens a turnaround story?
Bruce Van Saun: The description of Citizens as a turnaround story is valid. We were owned by a foreign parent, Royal Bank of Scotland, that ran into some difficulties in the financial crisis. As a result, we were playing defense for an extended period of time in terms of shrinking the balance sheet and raising capital levels.
When I came over to Citizens [from RBS] in October 2013, our goal was to benchmark our performance against peers, start playing offense, and turn the company around. It has a good foundation in place, with a strong regional focus in an affluent part of the country, as well as a good balance between consumer and commercial. But it had been undermanaged.
We built a very clear plan. We had a high capital ratio after being birthed by RBS. So one of the early initiatives was to put the capital back to work and start leveraging up the balance sheet by finding attractive areas to grow loans. Then it was about investing in our fee-based businesses and improving our capabilities broadly in terms of what we could deliver to customers.
The plan was fairly straightforward and we've executed on it well. Our performance was initially behind our peers, but now we've pretty much caught up with them. We like to say now that we're turning the corner. We're moving out of our turnaround phase.
Maxfield: How is it that Citizens' loan book is growing twice as fast as other leading regional banks?
Van Saun: It's a number of things. We've been underpenetrated relative to our potential on the commercial banking side. So we went out and recruited experienced commercial bankers, many of whom have relationships with companies that are above the middle market -- ones with more than $500 million in annual revenue.
To serve these companies you need industry expertise. So we set up a healthcare group, a technology group, an energy group. And we've been bringing over bankers who have strong relationships in these industries. When there's an opportunity to enter into a credit relationship with these companies, we're there to do so. Then we hopefully move over and become a more important bank for them.
The other side is the commercial real estate business. As part of RBS's efforts to reduce its exposure to commercial real estate, Citizens became underweight in it, even telling long-standing customers that we weren't open for that kind of business. So when I came over, we flipped the sign around to say "shop open." A lot of those customers liked working with Citizens in the past and have rotated us back in.
On the consumer side, there wasn't initially a lot of loan demand. The only game in town was auto lending. So we revved that up a bit, entering into a relationship with Santander USA to gain experience and exposure to prime auto paper. We viewed that as a bridge. Once demand picked up in other areas, we would rotate out of that auto exposure, which is exactly what's happening.
We saw opportunities to jump into education refinance loans, too. We're one of the bigger players there. That's given us a bit of momentum and growth. We've also hired 200 new mortgage officers, bringing the total to 550. We've entered into strategic partnerships with companies like Apple and HP as well, to help them deliver installment credit to some of their customers. And we've grown in the personal unsecured market by having a debt consolidation product for people with high-interest credit card loans.
You have to be selective. You have to be judicious about where you're playing, and be innovative on the consumer side, but that's what's allowed us to grow. The yield on our loans is up, the return on capital employed in our loan book is up, but our projected loan losses in stress tests are down. So we're achieving better risk-adjusted returns while reducing risk.
The one thing we have to focus on is that, while we have plenty of capital, our loan-to-deposit ratio ended the first quarter at 97%. So if we're going to grow loans at a good clip, we need to continue growing deposits as well, because we fund each dollar in loan growth with a dollar of deposit growth. And we want to find those deposits in a cost-effective manner.
Maxfield: How does a newly independent bank ensure that it maintains discipline in future cycles?
Van Saun: That comes from having years of experience and the wisdom you gain from that. My team have all been around the block and in the industry for many years, most of us for 25 or 30 years, so we've seen the cycles.
The key is to maintain your underwriting standards and to back away from the market when things are too frothy. Stress-testing has been really good in this regard, in terms of making decisions about loan exposure. So the combination of having experience, undergoing annual stress tests, and then marrying these to sophisticated tools for identifying risk gives us a fair amount of confidence that we should perform in line with our peer group if not better in future cycles.
We have good granularity in our portfolios. You don't want to get too overweight in any particular industry or geography. That's an important aspect of it. Another is just not chasing growth for growth sake.
Maxfield: What role does technology play in Citizens' plans?
Van Saun: The real frontier in banking is around digitization. The objective is to make sure consumers and companies can bank however they want to bank with you -- be it in a branch, on a smartphone or personal computer, whatever.
Whether it's checking balances, making deposits, making payments, digital is really where the next frontier is. So we have to pivot from some of the large mainframe and more central approach to serving customers, to being able to move digitally and really focus on the customer experience. That's the area we're moving aggressively into.
Another area we're looking at is cloud computing. Do we need to have such a big investment in mainframes? And servers. Can we move some of that to the cloud? This gives a bank more flexibility and shortens your development time, meaning that you can get products to market faster. That's really exciting if we can be responsive to customers and it doesn't take us a year and a day to satisfy their needs.
Maxfield: Open application programming interfaces, or open APIs, are a big deal right now. What are your thoughts on them?
Van Saun: I think they're very helpful. You want your core systems to be open so we can take in APIs and then use the best minds that are developing great products to wrap those into our offerings. So I think that's a real positive.
We're not of the size and scale to invent everything here. But if we're nimble and flexible and have an open infrastructure that can accept APIs to plug in some of these great fintech products and services, then we can keep up with the big guys and maybe even get a little ahead in some instances.
I do worry that if the developers don't have great security against hacking and cyber threats, that the liability will go back to the deep pockets -- the bank. So you have to have very clear rules of the road in terms of who has access to the information and how they use it.
Maxfield: Your latest shareholder letter mentions that Citizens recently invested in advanced analytics, or big data. What have you seen so far?
Van Saun: The increased use of data analytics is really about having a repository of data on households, be it households that we serve today or households that could be our customers in the future.
A popular product for the mass affluent, for example, is a home equity line of credit. Most of those folks own their own homes and have some appreciation in them that they can tap into as a relatively inexpensive means of securing credit. So we can use data analytics to identify and prioritize effective offers to these customers.
It's still early, but we've seen powerful results. In some of our direct mail campaigns, the conversion rate has been two to three times greater than the conversion rate of past campaigns. It's similar to approaches that many consumer products companies already use. Banks have just been behind the curve in understanding the profiles of their customers and that they can use that data to better serve customers.
Ultimately, big data will become table stakes to compete in the bank industry. Fast-forward five years from now and everyone will be doing this. But right now banks that are using big data effectively have an edge, and may be able to grow and solidify their customer base before other banks get in on it.
Maxfield: To be a top-performing regional bank, Citizens' credit rating will need to improve. Are there specific plans in place to address this?
Van Saun: We've been in active dialogue with the ratings agencies about making sure they understand our plan and the progress we've made. They've taken comfort in our fortress balance sheet and I think the reason our rating isn't where we'd like it at this point is that our earnings levels have been lower than peers. That gap is rapidly diminishing, but the ratings agencies tend to look more out of the rearview mirror than the front windshield. So we'll need to have a more sustained level of improved operations at the current level to get us a better rating.
We're just trying to make sure they understand our plan and are comfortable that we're not taking undue risk. Our capital position is strong and our earnings are improving, so they can look at us in a new light and have confidence in terms of where we are.
Maxfield: Is there any reason to believe that the recent news about the Citizens Checkup initiative will have a material impact on the bank's performance?
Van Saun: No. And we said that from the get-go when the story first ran.
This is a good program for customers. What we're doing is inviting them in for a free consultation to understand where they are on their life's journey, and then trying to figure out if they have the right set of products and services to help them achieve their goals.
The customers who have gone through the program love it. Survey results show that 95% of customers enjoy the experience, and 91% would recommend it to someone else. So I think the program is aligned with knowing your customers, making sure you're offering suitable products.
If The Wall Street Journal found a few people who claimed that there's pressure to set appointments or that they didn't always file the proper submissions around calling efforts, we have a full review going on to see if there's ways to sharpen how we've implemented the program. But it's a great program and it's here to stay. It's not scandalous. It's actually something that I think is very admirable and it's a great way to up our game in terms of knowing our customers and having more interaction with them.