When Bruce Van Saun took the helm at Citizens Financial Group (NYSE:CFG) in 2013, things looked bleak. Its parent company at the time, Royal Bank of Scotland (NYSE:RBS), had spent years trying to shrink and de-risk its balance sheet, leaving Citizens Financial well behind its peers in areas like commercial real estate loans and mortgages.
Things started to improve after Citizens was spun off from RBS in a 2014 initial public offering. Since then, the Rhode Island-based bank's prospects have improved meaningfully, thanks in no small part to Van Saun.
In this segment of Industry Focus: Financials, The Motley Fool's Gaby Lapera and contributor John Maxfield dive into Citizens Financial's turnaround story.
A full transcript follows the video.
This video was recorded on May 26, 2017.
Gaby Lapera: The other thing that you mentioned earlier was Van Saun, the CEO. He's kind of been an angel for Citizens Financial. He's really the person who seems to be driving this new culture and new ideas that are helping the bank in their turnaround story.
John Maxfield: Bruce Van Saun has been an executive at a lot of different major institutions. I talked to Richard Bove, one of the most respected banks analysts in the country. He's a veteran bank analyst, he's been around, he's on CNBC all the time talking about banks, he writes notes to his clients every day and I consider them to be pretty good commentary. When I talked to Richard about this -- he goes by Dick -- when I talked to Dick about this, I asked him what do you think about Bruce Van Saun, and he told me literally that Bruce Van Saun is an excellent banker. Mind you, Dick Bove is someone who doesn't mince words when he doesn't like a bank CEO. So, I consider that to be pretty high praise, and it really did corroborate my thinking, and help to crystallize my thinking on Citizens, and back up what the numbers were saying to me in terms of Citizens' performance.
Lapera: Yeah. So, why don't you talk a little bit about some of the stuff that Van Saun has done to improve Citizens' position? Like their recruitment efforts or their tech investments, or stuff like that.
Maxfield: OK. So, let me paint a picture with some numbers for you. Last year, Citizens grew its loan book by 7.7%, about 8%. Its peer group average, these are other banks that are a few hundred billion in assets, grew their loans last year by 5.4%. So, it outperformed on loan growth. So, that's an important thing to keep in mind. Another is that the revenue, it makes sense that the revenue would grow fast, because the main product that a bank sells is loans, and if you're selling more loans, your revenue is going to go up. Their revenue last year rose by 8.9% versus 5.4% for the average competitor. Then, the efficiency ratio, which we talk about all the time in the context of banking on this show, which tells you the percent of revenue that a bank spends on operating expenses, it fell by 376 basis points, so by 3.76%. I think it's now starting to close in on that 60% threshold that banks strive for. So, if you look at those three metrics, which are probably the most important metrics when you're analyzing a bank's performance, it had a really, really good year. So, the question is, as a general rule, and I think this is a good way to think about things as an investor, and to think about things in general, to think about general rules and exceptions -- this is actually how lawyers are taught to think. The general rule in the case of loan growth is you want loan growth to be robust. But, any time that loan growth outperforms the peer group average, you have to look at that askance. Because the general rule is that loan growth that is too fast is concerning, because it means that you're going out and making loans maybe to people who shouldn't be getting them.
Lapera: And, for listeners who are a little bit newer to banking, every time a bank makes a loan, you have underwriters who check to see, how risky is this person, are they likely to pay back their debt? During the financial crisis of 2008, banks were not very strict at underwriting, and you saw what happened. So, that's the concern when you see super rapid loan growth. Do you think that's what's happening here with Citizens?
Maxfield: To your question, Gaby, your original question was, talk about the things they're doing and investments they've made. I think its rapid loan growth is more a function of not necessarily reducing the underwriting standards, which is what you're referring to, and I was referring to in that general rule. It's more about the fact that it was so under-concentrated in these loan groups relative to other banks that it had a ton of upward momentum that was just waiting for it to take advantage of.
Lapera: Real quick, the loan groups that you're talking about are the commercial real estate and regular home loans, right?
Maxfield: Right. Commercial real estate is one of the main ones, home loans is another one. Basically, what Citizens did is, once it spun off from the Royal Bank of Scotland, and it had more operational flexibility to make investments in the business, and to grow as opposed to contract, what they did is went out and almost doubled their staff of mortgage officers. If you're going to double your staff, the number of people who are your loan officers, then you should expect to grow a lot faster. And, they're going out and recruiting loan officers that deal with larger companies from other banks. And those loan officers from these other banks that have these large accounts are bringing those accounts over. So, when you start to put all those pieces together, you start to say, "Oh, OK, it makes sense now, that its loan book is growing faster than its other book." And it makes sense for reasons other than the fact that whether a bank is or is not manipulating the underwriting standards.