Why Citizens Financial Is Primed for Growth

The Rhode Island-based lender is on track to becoming a top-performing regional bank.

Motley Fool Staff
Motley Fool Staff, John Maxfield, and Gaby Lapera
Jun 9, 2017 at 7:31PM

Since Citizens Financial Group (NYSE:CFG) went public in 2014, investors have seen a meaningful improvement in its performance. In the first quarter of this year, for instance, both its profitability and efficiency metrics made substantial year-over-year gains.

Listen in on this segment of Industry Focus: Financials to learn what's behind this impressive performance, as The Motley Fool's Gaby Lapera and contributor John Maxfield dig into the backstory behind Citizens Financial's 2014 initial public offering.

A full transcript follows the video.

This video was recorded on May 26, 2017.

Gaby Lapera: Citizens Financial was actually spun off from the Royal Bank of Scotland (NYSE:RBS). The Royal Bank of Scotland is not the most guilt-free financial institution, I guess you could say it that way, going into the financial crisis. Mistakes were made. So, Citizens Financial got spun off.

John Maxfield: That's right. Citizens Financial was a relatively small bank when a few decades ago the Royal Bank of Scotland purchased it. They invested in it, boosted it up, it grew and grew. It's now one of the largest banks in New England. That's its stronghold. It's based in Providence, Rhode Island, it has $150 billion in assets now. But Royal Bank of Scotland's, like so many other banks during the financial crisis, got into a whole bunch of trouble, making bad loans, making bad decisions strategically. So they had to, in the immediate wake of the crisis, at the direction of regulators, they basically had to shut down growth and just focus on retreating and retrenching, which is not uncommon for banks in the financial crisis. But the position that put Citizens in is that it put it at a really competitive disadvantage against the company like, well, Wells Fargo is in kind of a different place now than it was back then, because they have the whole fake account scandal last year, but Wells Fargo, JPMorgan Chase, these guys were able to continue growing and growing and growing. But Citizens, when it was still a subsidiary of the Royal Bank of Scotland, it was watching everybody grow, but because of the restrictions on the Royal Bank of Scotland in terms of having to de-risk its balance sheet and shrink as opposed to grow, Citizens Financial was directly impacted by that. Then in 2014, it spun off in an initial public offering, so, it went public, and it was the biggest IPO of a bank in United States history. I can't remember exactly, don't quote me on this exactly, but I think it had something like $120 [billion]-$130 billion in assets when it went public. So, it was already a large bank when it went on to the market.

Lapera: Yeah. Being a large bank has advantages and disadvantages. One of the main disadvantages is that you're subject to a lot of regulatory stuff. So, they're getting spun out from their parent company and dumped into the world in not a great time for them, because 2014 was when things were starting to turn around and look good for banks. I think a lot of banks were doing OK by then, but Citizens came out in a really tough spot for a bank.

Maxfield: Yeah, it absolutely did. I think you can look at that as a glass-half-full, glass-half-empty perspective. When I was talking to Bruce Van Saun, I got the impression that he looks at it as a glass half full, coming from that perspective, and here's why. In the immediate wake of the financial crisis, one of the main things that really hit the banks, you had the subprime mortgage crisis, that hurt banks. But the banks who that really hurt were the ones who securitized those mortgages, and then sold them in securities to other institutional investors, and then in the process of securitizing those and selling those, there were incorrect things said in those documents, or misrepresentations. And that's what caused the losses at these big banks, like Bank of America and Citigroup. But if you look at a lot of the other banks across the country, the thing that really hit them was commercial real estate loans. These are like development loans, so it's just a piece of land that's priced up when the market is doing really well, and then the bank will loan on that, and if the market falls out, there's nothing on that property to act as effective collateral. So, one of the things that the Royal Bank of Scotland forced throughout this entire organization was, I'm not sure they completely stopped making commercial real estate loans, or if they just throttled it significantly, but when Citizens spun out of the Royal Bank of Scotland, it was way behind in commercial real estate loans, way behind in mortgage loans, way behind in all of these other things, which meant that, to a certain extent, there was only one direction to go, and that was up. And we're starting to see that come through right now in Citizens' performance.