Citizens Financial Group (NYSE:CFG), with $187 billion in assets, has been on a great run, with the stock up more than 49% in 2021. Like most of the banking industry, the Rhode Island-based lender has benefited from the recovering economy after a difficult year in 2020. Although Citizens is a standard regional bank in many respects, its strategy and balance sheet are different from its peers. That makes it an interesting play in a crowded industry.

More exposure to the consumer

Since the Great Recession, many banks have focused less on consumer credit and more on commercial lending. If you look at any of Citizens' peers, their loan books are weighted more heavily toward the commercial sector than the consumer market. Citizens, on the other hand, has focused a lot more on consumer lending. At the end of the third quarter, the bank had more than $65 billion of consumer loans compared with almost $58 billion of commercial loans. That mix probably will be closer to a 50-50 split once commercial lending bounces back. Even then, Citizen's loan portfolio will lean more toward consumer lending than its peers.

Picture of building with the word bank on it.

Image source: Getty Images.

This benefited the bank in the third quarter, as consumer lending rose 3% while commercial balances declined 2% from the prior quarter. Solid contributions came from residential mortgage loans, which rose 5% as interest rates remained low, and auto loans, up 6% in the quarter.

Its "other retail" loan category, which includes unsecured personal lines of credit and Citizens Pay, a buy now, pay later product, continued to decline. But that's because the bank is intentionally running down its portfolio of unsecured personal credit lines. Management said Citizens Pay loan balances were actually up 40% year over year. Once unsecured lines of credit stops falling, expect this business to be a solid contributor to growth in Citizens' consumer portfolio.

The make up of Citizens's balance sheet is helpful right now. While many banks that are more dependent on commercial lending are struggling for loan growth, Citizens consumer lending is carrying the load. Meanwhile, the bank has the potential for more growth when commercial borrowing rebounds and interest rates rise. Management has forecast 3% total loan growth for the fourth quarter.

A good strategic plan

Citizens has had this consumer-heavy loan mix since it was spun off from the Royal Bank of Scotland, now NatWest Group PLC-ADR (NYSE:NWG), at the end of 2015. But in recent years, management has put together a much better strategic plan for its consumer banking operations and is working to develop a national consumer bank.

This effort began with its online high-yielding savings account, called Citizens Access, a national digital platform. Since 2018, Citizens Access has accumulated about $5 billion of deposits across all 50 states. The bank will be migrating these customers to a new cloud-based platform that will bring checking accounts to Citizens Access; checking accounts pull in cheaper deposits than savings accounts. Then, once the bank closes on its pending acquisition of 80 of HSBC's (NYSE:HSBC) U.S. branches, it could add as many as 400,000 new customers to Citizens Access -- a large expansion of the customer base.

Once Citizens Access is migrated to the new platform, the bank will focus on rolling out all of its consumer products, including mortgage, auto, student loans, Citizens Pay, and wealth management, into better digital formats. Then I suspect management will think about how to integrate these lending products with Citizens Access and cross-sell them to its national digital customer base.

Execution is key

Execution will be key for the national digital consumer bank. Citizens must create a digital platform and experience that is easy to use and that encourages customers to purchase multiple financial products, which makes them more profitable to the bank. To accomplish this, Citizens must seamlessly fold together the digital checking and savings accounts with consumer lending products and wealth management. The bank has the opportunity to create a powerful growth engine that would help it continue to stand out from its peers.

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