Citizens, a public company for 10 years, looks ahead to the future

In late 2013, when Bruce Van Saun returned stateside after a four-year stint in London, where he was chief financial officer at the Royal Bank of Scotland, he faced a tall task.

The New Jersey native was charged with spiffing up Citizens Financial Group, the neglected and underperforming U.S. banking arm of RBS, and spinning it off from the parent company through an initial public offering, at a time when IPO activity was still recovering after the financial crisis.

To transform into a public company, Van Saun had to solidify a leadership team, build a board of directors and figure out how to convince Wall Street that Citizens, which had a return on tangible common equity of around 4.5%, was a good investment. And he needed to do it fast. The bank had set a goal of achieving an underlying ROTCE of at least 10% within three years.

"We had to come up with a plan that would get to double-digit ROTCE in relatively short order, and that was believable and credible for investors," Van Saun said in a recent virtual interview from Citizens' office building in Stamford, Connecticut, where he's based when not traveling.

The company came close, but it ultimately missed its target in 2017. The next year, however, was different. Citizens reported an underlying ROTCE of 13.06%, firmly above the initial 10% goal.

Tuesday marked 10 years since Citizens launched the largest bank IPO in U.S. history, offering 25% of its common shares for sale. The company celebrated the anniversary at the New York Stock Exchange, where it held a cocktail reception in a gilded reception room. Van Saun, the company's chairman and CEO, rang the closing bell.

"It's going to be fantastic," Van Saun said during an interview that took place about five weeks before the anniversary. "We'll have a little party, and then we'll get back to work on Wednesday."

At Citizens, that work has been all-encompassing for more than a decade. The Providence, Rhode Island-based company, which was a prime takeover target prior to its IPO, has been on a years-long journey to remake and reintroduce itself as a viable, standalone regional bank that is also a good, consistent investment in the eyes of Wall Street.

Today, Citizens is one of the largest regional banks in the United States, with $219.9 billion of assets, up from $131.4 billion during the third quarter of 2014. It has a growing consumer bank, including ample retail expansion opportunities in the New York metropolitan region following the acquisition of Investors Bancorp and HSBC Bank's metro New York branch franchise, as well as a six-year-old digital retail bank, Citizens Access, that helps draw deposits from all 50 states.

Its commercial bank offers a full range of treasury solutions, capital markets and advisory capabilities centered on middle-market and mid-corporate-size companies. And its year-old private bank, the third leg of its business model, secured $4 billion of deposits through the second quarter of this year and could add 20% to the company's bottom line in five years.

But there's more work to do. The company's retail presence in the New York metro area has room to grow. The private bank, while off to a solid start, is still young. Meanwhile, Citizens' $18.3 billion valuation and its returns fall short of some peers.

During the second quarter, the company's adjusted ROTCE, which excludes one-time charges, was 11.09%.That's well short of its medium-term goal of achieving an underlying ROTCE of 16% to 18% over the next two to three years.

Nonetheless, Van Saun, who was American Banker's Banker of the Year in 2019, is optimistic about the future.

"I think people are coming around to the fact that we've made a lot of progress," said Van Saun. "It's been a long journey, but I think people are seeing the potential for improved returns and building out these really strong franchises. My hope is that in three years, that comes full circle and is reflected in a higher valuation and an ROTCE" in the target range.

'First off, who is Citizens?'

By all accounts, Citizens' 2014 IPO was a success. RBS' shares were sold off in three chunks, with the last transaction closing on Oct. 31, 2015. That final selloff marked the end of foreign ownership and a new start as an independent bank.

There were plenty of challenges in those days. The consumer business, which relied largely on higher-cost deposits, needed lower-cost funding and more market share. The commercial business, which was narrow in scope, needed more products, services and capabilities.

All the while, the company had to reinvent itself and start telling its own story.

"First off, who is Citizens?" said Terry McEvoy, an analyst at Stephens who's covered the bank since the IPO. "Many of us knew the name, but we didn't understand the ownership profile and the history [with RBS] and what contributed to the IPO of the business. We'd seen the name and the brand, but we needed to know more about how this company would compete in the U.S."

Brendan Coughlin, one of three Citizens vice chairs and head of its consumer bank, has worked at the bank for 20 years, which means he pre-dates Van Saun and most other senior leaders. Coughlin, who joined Citizens from Bank of America, has been in charge of national and regional banking since early 2020.

The bank was in trouble before the IPO, he recalled. The industry was recovering from the financial crisis, interest rates were at zero, and the economy wasn't doing well, he said. What's more, Citizens was owned by "an absentee parent" that wasn't able to help it thrive, he said.

"From my perspective, we had a big target on our back," Coughlin said. The IPO was viewed as "a stay of execution" that offered time to "restructure the bank and take control of it," he noted.

"But we didn't have forever to do it," he said.

Management got to work, reconstructing consumer and commercial banking. They refocused branches to become more advisory in nature. They made investments in digital banking, such as Citizens Access. The bank rolled out student loan refinancing for federal loans and buy now/pay later capabilities, and set out to improve the quality of its customer base.

In 2015, Don McCree joined Citizens as the head of commercial banking. McCree, who had been retired from JPMorgan Chase for about six months when he made the move, has spent the past nine years revamping the bank's commercial platform. He's done that partly by expanding outside of the Northeast into new, faster-growing markets, as well as by growing the company's investment bank and sponsor coverage capabilities.

"What I saw was an opportunity to really build a platform from the ground up, so it had an entrepreneurial aspect to it," said McCree, who was named senior vice chair in June. "I thought there was a pretty high chance of success … and it's actually been better than I ever expected."

One of the biggest challenges was shedding Citizens' former thrift-like model, said John Woods, who has been the company's chief financial officer since 2017. Woods was previously the CFO at MUFG Americas Holding Corp., which operated MUFG Union Bank and considered buying Citizens prior to its IPO. So he "had a huge base of knowledge about the company" when Van Saun recruited him, he said.

Woods' initial focus was on reducing funding costs and increasing liquidity. Over time, the branch network has improved, product sets have been enhanced, and there's better pricing, he said.

Today, the consumer bank, commercial bank and private bank are all "at an inflection point," and there's "a lot of really cool stuff" happening within each one, Woods said. But despite the investments, the bank "still lags peers," he said.

"If it doesn't show up in the numbers, then there will be a big 'So what?' about all of this," he said.

Will the profitability gap shrink?

Citizens is one of several banks that's recently been in transformation mode. Citigroup, which is trying to become a simpler, more efficient bank, is another. So too is Texas Capital Bancshares, the Dallas regional lender that's overhauled its business model.

"True transformations" are different from those that revolve around technology modernization, said David Schiff, a consultant in the financial services practice at FTI Consulting.

He did not comment on Citizens' or any other specific bank's transformation efforts. But he defined a "true transformation" as "fundamentally doing something different to operate the bank with strategic differentiation in the market," leading to real, demonstrable outcomes.

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Beth Johnson is Citizens' chief experience officer, which means she's in charge of delivering a top-notch customer experience. Along with Woods and Coughlin, she is a Citizens vice chair.

She said the company has a lot of opportunities to grow. The addition of 200 retail branches through the Investors and HSBC acquisitions was a major win necessary to grow in the New York metro region, and the private bank, which got a boost from the failure of First Republic Bank last year, is another area where Citizens is positioned to reap benefits, she said.

"I think the biggest challenge for Citizens is the pace and level of change in meeting customer expectations," said Johnson, who is a frequent honoree on American Banker's Most Powerful Women in Banking list. "How do we continue to provide great advice to customers and do it in a way that's future-forward versus just the past?"

Citizens Chief Experience Officer Beth Johnson

By and large, analysts agree that the company has done a lot of work to create a sustainable business model. Its annual expense reduction plan, referred to as "TOP," which stands for "tapping our potential," has axed about $200 million of costs since the IPO, or roughly $20 million per year.

While the yearly expense reductions have funded a lot of Citizens' investments, the investments have also put a drag on some profitability metrics.

Citizens' most recent ROTCE of 11.09% was lower than that of the similarly sized Fifth Third Bancorp, which reported a second-quarter ROTCE of 19.08%.

Still, "I would expect over the next three to five years that the profitability gap compared to peers will shrink as [Citizens'] efforts contribute to the bottom line," McEvoy said.

In the near term, the company faces a few challenges, including making sure it is well-reserved against potential office loan losses. In the second quarter, Citizens bolstered its allowance for credit losses on general office loans, bumping its reserve ratio to 11.1% from 10.6% in the prior quarter.

After all of its work, Citizens' stock price should trade at a higher price, said Kevin Heal, an analyst at Argus Research. Shares are up about 16% over the past three months and 23% year to date.

In a research note, Heal wrote that "the stock merits a higher multiple based on the company's strong, long-term growth prospects, including expansion in key mid-Atlantic metro areas and the development of a national presence in wealth management and its digital banking offering."

'Still a work in progress'

As for Van Saun's tenure, one might wonder if a decade-plus at the helm could be enough, given all of the change he's overseen at Citizens and the nagging reality of aging. Van Saun, who is 67, said during his recent interview he has no plans to exit. But the board has taken recent steps to ensure it has a solid CEO succession plan should it need one.

In June, the board of directors not only promoted McCree to senior vice chair in recognition of his work on the commercial bank, but it also approved retention bonuses for Coughlin and Woods.

Both senior executives have been identified as "potential medium-term CEO succession candidates," and they have received a combination of stock and cash awards to ensure they remain in place, the company disclosed in a filing.

Coughlin's bonus included stock and cash awards worth a combined $12 million. Woods' bonus of stock and cash awards was worth a combined $7 million.

The company is being prudent in lining up potential CEO successors, Van Saun said.

"It's important for me, as chair of the board and CEO and for our board more broadly, to make sure that we have really quality CEO succession candidates in the house," he said. "That led us … to make sure that we have some hooks into Brendan and some hooks into John, because I think both of them have the right stuff to eventually run this bank, or another bank."

On a personal note, Van Saun, who is the grandson of a banker, said that he still has some things left to do on his checklist.

"We're having a good run on the stock this year, but we're still not at the valuation that we could be if we continue to drive this execution forward," he said. "So I think I'd like to make sure that I'm confident that that's going to happen" before thinking about stepping away from the job, he said.

Citizens, after all, is "still a work in progress," Van Saun said.

"It looks like now we have a point of destination, and I hope in two or three years you can say the ship came in, and we actually got to a good way station," he said.

"It will never be done. You'll always be heading out to the next journey, but I think we're getting closer to a level of performance that is reflective of the transformation that's taking place here."