BANCANALYSTS ASSOCIATION OF BOSTON'S ANNUAL BANK CONFERENCE - CITIZENS FINANCIAL GROUP INC

All right, good afternoon to you all. I'm going to start off with a quick update. Last year on the stage, your colleague, Mr. Kaufman, was here, and my trivia revealed that there were 215 banks operating in the United States with the word citizen in their name. Given the slowdown in this reconsolidation, it's no surprise that the number of citizens' banks fell by just five over the past year to 210. So here with us again is the largest of that group, though. Citizens Financial, which has a 28 billion market cap, is 234 billion in assets and is headquartered right here in New England. I will reiterate what I said last year in my intro. Citizens is a bank on the move. Since Royal Bank of Scotland fully sold out of the bank 11 years ago, Citizens has undergone significant operational improvement, added a lot of talent, and launched a number of growth initiatives, one of the latest being the build-out of the private bank. I think the leadership of this bank and the improved quality of the franchise remain underappreciated simply look at beta the one-year beta of citizens stock is greater than all the 25 largest banks ranked by market cap in the country except for citigroup and capital one joining us here today is evp evp and cfo annoyed energy welcome thank you thank you john and just one one note we will leave time plenty of time for questions questions. And I will start off with the questions. Noa, you've crossed the one-year mark with citizens last month. As you look at the competitive landscape today, how do you feel about citizens' current positioning? Yeah, thanks, Joe. Thanks for the invite and thanks for having me here. Look, I had the good fortune of joining citizens a year ago and I was one of those new hires which came and been spending a lot of times with the team. So whether it's our commercial bankers, whether it is our private banking teams, our ops people, our tech folks, the branch colleagues, and what I am really impressed and optimistic about the franchise we have, and I'm really optimistic about where we are heading as well and about our position today. So as we think about our triangle strategy and what excites me is the vectors of growth that we have and the momentum that we actually have in that. So first on our transformed consumer bank, if you think of it, we bank a lot of affluent and mass affluent customers, and we have a long track record of growing low-cost deposits. And we are the number one HELOC originator in the country, and that's an important relationship product as it brings attractive clients to citizens. And we feel that it's a great opportunity for us to cross-sell wealth products and services, and this helps in deeper penetration of our households. In the consumer bank, we are investing in digital. We are investing inclined experience and data, and I'm sure you guys have heard about Next, and we'll talk a little bit about it. It's a very deliberate approach to accelerate deposit and household growth within our existing footprint. New York Metro is a great example of that, where you see that we have been growing. It's one of our fastest-growing regions of our household deposits, and we still see that there is a considerable opportunity for us to gain there. I think the second leg of this tool is our commercial bank, And we have developed a strong super regional franchise with national reach and deep sector expertise and a product set that competes with the best of the industry. So we have built the capabilities in markets, in treasury solutions, corporate advisory, private capital. And as transaction activity picks up, we should see those benefits flowing into our results. and then the private bank you spoke a little bit about it John I think last three years ago we started the private Bank and today it's a meaningful contributor to our bottom line and we bought in an exceptional team and we are attracting high quality talents and and and if you think about it we are providing the white-glove service which can be compared to anyone in the industry the business itself is now 18 billion of deposits 12 billion of loans 12.4 billion of client assets so and it's a meaningful contributor to our bottom line at 11 11 percent of our EPS and then if you take a step back I'm really excited about reimagine the bank program and this is the program that is using technology it's using agentic AI and and we are really rethinking about how work gets done at citizens and how we can serve our our clients even better and if you take even even zoom out a little bit more even if you think about what many of these capabilities are bringing in is really about one citizens and and and that just not just organizational constructs etc it's a really a growth mindset for us where we can really put the client in the center and bring all of our capabilities to bear so my enthusiasm comes from like we We are not just relying on one initiative or one business or one favorable market conditions. We have multiple growth vectors, and we are executing with precision. If we could dig into the first subject you touched on, the private bank and wealth. Leap of faith, launching that back in 23, and it appears to be working out very well. As you mentioned, the business contributed 11% of third quarter earnings. to continue to grow at this pace and what does the future look like there? Yeah, as you said, it was a big leap of faith, but I would describe our private bank journey as both ambitious but also very measured and deliberate. So I think the fundamental premise which we started with three years ago worked, like the clients followed their bankers as well as their wealth teams with the strength of the relationships but also the quality of the experience that we were providing so but at the same time we are also focused in building the business building the technology building the control environment and creating the service model so that we make it a sustainable business so not only it's contributing 11% of our bottom line it's also has a above 25% Roxy in this business so we are not only growing but we are also growing sustainably and growing profitably so we have made excellent progress in California if you think of it that's where a lot of the teams came from we are building out the footprint in Florida in Northeast and including our offices in New York City in Palm Beach and West Palm and we have added highly regarded private wealth teams in across the country in Florida and California in New York, New Jersey. We just announced another private wealth stem in late October for Newport Beach in Southern California. We have 10 full-service private bank offices across the country. We call them PBOs and we are opening seven next year and over time that could grow up to 30 in very attractive markets across the company. And then if you think about our balance sheet around this business 18 billion dollars of deposits good DDAs it's a 30 30 more than 30 percent of the deposits are non-interest generating so we are winning the operating accounts with our our clients on the lending side we are seeing loan growth pick up and we are seeing a variety of asset classes in those loan growth but we are very disciplined we want to ensure that the loan to deposit ratio in this business will not cross 70 percent but that additional scale will give us additional NIM additional NII as we grow and then on the well side we have a we have compelling opportunity with as clients bring their wealth products their AUMs with us and that's around 12.4 billion today and we expect that in the medium term to be more than 30 billion dollars in in client assets so look it's it's a great business we are on this journey but strong growth that we talked about. But we are not pursuing growth for growth's sake. We are very mindful in building a high quality franchise with strong financial discipline and which will sustain over time. Shifting over to commercial bank and associated capital markets. The company's done a lot since the IPO and investments and capabilities. What's the strategy to continue to grow that business? Are you missing it? Do you have any missing pieces? And how much could capital markets contribute in a positive environment? Yeah, if I may say so, like I think we are probably one of the best positions, commercial bank, in our asset class. And I think the foundation of the commercial bank still remains the middle market banking. So this is where you serve companies that have revenues between $25 to $500 million. We have a strong regional coverage model. I just spent a day with the team of bankers there. Our bankers really know their clients well and understand the local markets. And we've also expanded into the mid-corporate segment, and this is Where You Serve companies with $500 to $3 billion. They're more public. Like, they have more needs, and it's just not about giving balance sheet capacity. This is where you think about the expertise that you get in, whether you have the industry expertise or you have capital market expertise. And over the last few years, we have been building those expertise, and we are very clear on where we have the right to win. So, for example, in digital infrastructure, in 22, we bought DH Capital, which was one of the leading advisory business in this sector. And if you think about where compute and data centers have gone, I think we would say that was a timely acquisition. Similarly, there are other sectors like online gaming, defense, aerospace. We have very, very good vertical expertise. The other thing we had done very early on, we had we recognized that sponsors are going to have an increasing share in the middle market complex so we bank roughly 4,500 middle market companies and if you think about a portion of them will always transact so you build the sponsored coverage we build the products and that has created an actual opportunity for us as for giving broader advice and facilitating transaction we We bought JMP a few years ago, and that gives us some equity capabilities and highly complementary to the private bank because of its west coast heritage as well as the tech activities there. So as the IPO market improves, that should give us another growth lever. So we feel good about our products and capabilities, and to your question on where it could go from now. If you think about the current environment, the momentum is encouraging if you look at our performance this year. First quarter was a record quarter, second quarter was the record quarter, third quarter we had a very strong quarter, and we have a good outlook for the fourth quarter. And our M&A pipelines are strong, it's at record levels, and, and we have substantial backlog going into 2027. I think the debt activity, there was some timing between Q3 and Q4 but the equity backlog is also strong though some large transactions need to clear the market. There will be always seasonality in this business if you think of it but in a constructive environment we would think that this business could generate roughly 125 billion to 175 million a quarter and maybe potentially more in a good environment. So the point is that we have made the investments, we have been added for the last few years and as the as the environment improves we think that that this the revenues will will show up in our results all right in consumer banking three three plus months ago you unveiled the network evolution and experience transformation initiative which you've called next what are you trying to accomplish and what are the the the near and long-term implications of us. Yeah, we love our acronyms. So next is, we are very excited about it. If you think about, if you take a step back, if you think About some banks are moving outside of their core regions, some banks Are pursuing acquisitions to obtain those deposits. But we believe, and we strongly believe that we can achieve at a lower cost and a substantially lower risk by investing in our core northeast footprint so there are three three pillars to next I think the first is about the physical presence that we have so we have roughly 100 to 120 of remaining in store in store branches and we want to close them down and use the savings to really put up 50 to 60 traditional branches and we have considerable experience doing this kind of repositioning so this traditional locations will actually help better better serve our clientele that we have some of the business banking and wealth clients etc we'll also selectively relocate or refresh some of branches and create this more advisory oriented and business ready formats for these branches but the sequencing will be deliberate we will protect the customer experience will support our communities and will continue to build the citizens brand second pillar is the people's more specialized banker in the branches so they are at the front line so we have approximately four and fifty wealth wealth advisors in our branch network and we are adding roughly ten ten a quarter so we are also expanding our private client at teams as well as small business coverage teams and in the regions that we have piloted this thing we have seen very very encouraging results and thirdly part of it is about adding some de novo branches and the existing footprint especially in the New York metro area as a focus but this is a long-term strategy this is about 10 years and it's about building an efficient lead density in our network in the most attractive parts of our footprint so we are not looking for an acquisition to create that density we expect that our total branch ground will remain the same till 2035 and financially as you have known from citizens we are very disciplined so over the 18 to 20 or 44 months you will see more of it come through our results but the savings from the exit of this in-store branches will offset any expense of putting this new new traditional branches and this in store exits are more front-loaded and while some of the de novo bills will be over a longer period but over the long term I would say this is this solidifies our our long term and medium term performance and it's not an hindrance to our 16 to 18 percent Roxy target for 27 all right I mentioned before we started that that sad Coldplay song that was on before is more fitting for for NASDAQ than this bank conference today, but can you just talk about macro view a bit and how you think about the economy and interest rates? Yeah, look, in our view, the underlying economic fundamentals are positive, and although there is a lot of uncertainty and volatility, and it's going to remain elevated, like that's the name of the game. I think GDP growth will be probably at least 2%, if not closer to 2.5% over the next four or five quarters. The Fed decided to hold rates steady in the October meeting. We'll see what happens later on in the quarter. The third quarter GDP was strong at 3.4%, and consumer spending remains quite resilient. So the economy is still growing. Unemployment remains range-bound 4%, and inflation is being affected by the higher energy prices and the tariffs and geopolitical conflicts. And ultimately, I think the Federal Reserve should be able to bring down the inflation down, particularly if there is more progress towards some of the conflicts resolution around the world. We do expect a few additional rate increases. The question is how many, how many are required, how quickly they will occur, and what's the economic conditions surrounding them. But if the economy remains healthy, the customer confidence holds up, and the market has reasonable clarity around the Fed's intention. A couple of rate hikes should be okay for a business environment. I think the labor market is an important source of support for the consumer, so as long as the unemployment remains around the current levels, I think consumer spending should be resilient in that way. From our clients' perspective, we see commercial clients are still investing. There is some, they're still playing offense, but there is some uncertainty, but there's a little bit of conservatism, but they're borrowing, they are investing, and they are still executing on their strategic plans. And on the consumer side, look, higher income households continue to benefit from the strong equity markets, as well as resilient home values, and a lot of our retail customers are actually homeowners. So, and further down the income spectrum, You would see some people making some trade-offs on their spending, but we don't see any broad areas of concern. So the environment remains constructive, but it's not without risk. I mean, the election obviously has just occurred, but I don't know how much discussion has been internally, but do you think that could impact the growth outlook? Yeah, look, I think with the change of control in the Congress and the Senate, I think there will be probably increased oversight over the executive branch, but if you think about the tax policy benefits are largely embedded, if you about the regulatory environment and the pro-business agenda, they should be still supportive. So we feel that there's still a lot of growth to be garnered from here. I mean, I think we're halfway through. It'd be good to open up for questions. I have a lot. That way we make sure we get to as many people. And we're going to bring a mic up. Thanks. Hey, Ryan Kenney with Morgan Stanley. Given the volatility in the interest rate environment that we've seen over the last few weeks and volatility in specific sectors of the stock market, notably technology, are you seeing any risk to the capital markets pipeline and any pieces of your business sponsor activity or equity capital markets and any risk to the 4Q fee income guidance up four to five percent? Look I think volatility has been the name of the game the entire year so if you go back to the first quarter, if you go back to March, if we go back through the second and third quarter there has been always been volatility but our clients are transacting. We have a very very strong pipeline and our pipeline has even grown from where we started the quarter and we are seeing like a lot we are getting hired each and every day across our capital markets franchise now the question will be like how does those deals get closed in certain times and and that so so there might be some timing impact to your question on how are we seeing on the outlook our overall outlook we we just started the quarter of one month in we still have two months to go October was there was definitely some rate volatility around but we also had some back up some deals that got moved from q3 to q4 so we had those deals come in so overall we still feel good about the quarter for the guidance that we gave at that during earnings great thank you while we wait for the next one I guess along the lines of the rate volatility we've seen that impact some banks share repurchase behavior or expectations I guess how do these how does that impact citizens and capital management and what what might occur yeah look if you think about our primary ratio of a regulatory capital ratio we are at CET 1 and under the current regulatory framework and we we are running at 10.5 which is at the higher end of our operating operating range and we guided to a 10.6 to 10.7 at the end of the year just slightly higher than they are operating range obviously you saw the AOCI adjusted ratio which was at eight point seven at the of the quarter but since then if you think about rates that have come back especially the long-term rates so that that will that will move around and and if you add from the Basel three framework like from the RWA benefits that we would get that roughly adds another 110 basis points so that 8.7 on that basis is closer to 9.8 to 10 so I think so if you think from that perspective like so as we as we think of this looks all the and even the TCE ratios as we think of all these things we take into account all all these things as we monitor this we also look at about where is RWA heading what's what's the regulatory environment, what's the rates outlook, and how much capital, organic capital, that we are generating each and every quarter. So we evaluate all these things. And on repurchases, there's not a single mechanical trigger. We look at all these thing and we take a holistic view. And we also look at the share price where there it is. So the flexibility of the repurchase program actually lets us adjust to the pace and the capacity that we can do. So we do expect to continue to return capital through common dividends as well as share repurchases. While we'll maintain the capacity to deliver for our clients and invest in the company and preserve a strong capital position, which we have always done. Any other questions? Scott Zeeper is with TD County. When do you start to worry about rate-seeking behavior on the deposit side? Over the last decade or so, it's been such a favorable change in terms of citizens versus itself a decade ago, so the VEDAs have been great overall, things have been pretty benign. When do start worrying about what higher rates end up doing to you? Yeah, Scott, that's a great question. I would say, look, I think what we are trying to do at Citizens across the three businesses is really to get the operating accounts and really have the clients have multiple products of which deposits is one, and how do we ensure that that is the mainstay of our relationship. So if you look at our, we put this chart in our earnings call always, If you think about our low-cost deposits as well as DDAs, that's roughly 42% of our deposit base. And that has remained pretty consistent over time, right, as you see that. You see the private bank, like the $18 billion of deposits, which has been growing over quite nicely every quarter. We have maintained a DDA percentage over 30%. It was 33% at the end of 3Q. So that shows me that we are actually winning the operating mandates each and every. And look, there's a lot which goes on to those relationships. There's lending, there is operating cash, there are always clients that are trying to optimize their thing. There is wealth, there isthe other transaction fees, how can you provide the real services, payment services, etc. So what we want to be is truly be the operating bank for both our consumer clients as well as our commercial clients. So that's the aspect of it. Obviously, every day, every quarter, people will start to optimize for rates that they see. But if you can bring your holistic bank, if you bring the total value for that to that client, the client will see the value and then probably not always try to try to do to nitpick you on on on five basis point of rates so but that's that's the purpose and that's where we are heading as a bank and all right hey when you think about the reimagine the bank initiative you know just given how the pace of change from AI has accelerated outside of the financial change that you made at earnings maybe just talk about how this is you know influencing your plans for the program are you accelerating any of it and does it change the end goal at all thank you yeah look I'm really excited about to reimagine the bank and and and Ryan this is this is a continuation of our technology journey that we have we have been on for several years if you think about it our our we are one of the probably one of of the few banks that are on the cloud fully and that gives us a lot of flexibility about how we think about our processes how we think about how to reimagine some of those processes that we work on both so under Brendan's leadership and with Bruce's guidance we have been at it for the last one year or so right and and when we started this we really thought about and looked at all our processes. So whether it's our compliance testing, whether it is our client onboarding, whether it our fraud processes, even some internal processes like finance and HR process etc. We looked at everything and the question that we asked is with the advent of the new technology what can we do to really materially change the client experience and also have a material impact to our efficiency and that's why there are like this like there are 50 initiatives that really came up and and we have been implementing them over over over the last last month or so and we are seeing some very good results I'll give you a few examples and and weird we spend the last three days with with our reimagine the bank team and roughly 500 people are actually involved in in reimagining this at this view so one of the things I would say is like look at look if you think about our our applications we this year alone we have rationalized 35 applications here today and it's just not about the applications things about how much simplicity that you can create in the environment your controls becomes better your cost starts to come down come down we are also going through and using AI and thinking about in our credit cards how do you think about complaints and how can you put your complaints in a bunch and ensure that you can find out the recurring themes and you can actually serve our customers better. Similarly in the commercial bank we are looking at about our credit processes and how you can get your credit memos done faster you can think about client prospecting you can think about about your annual reviews with your clients so all of those things are really really getting a lot more productive as we go through and these are some of the things that has happened this year alone right I think so we are incredibly excited about it and if you think about just to make sure that we still have the financials we are you know that we run these programs with a very very tight discipline and this is no different so we up the financials as Ryan said to do a little by 25 million dollars in in 27 this year we are exiting at a hundred million dollar exit run rate on the savings and the and the program is net neutral on an expense basis this year so that's that is quite an accomplished I would say in the first year of a massive transformation program And in 2028, we exited $450 million run rate with two-thirds of those savings are in the expense line, which if you do the math, it's like 5% of our expense base, of our 2025 expense base. So we are focused. We are running this with a lot of discipline, and we are quite excited about not only just the financial aspect of it, but what it means for the bank and how we are really reinventing our processes. Just shifting to asset quality, strong for you across the industry, given everything that's happening that we touched on before. But what areas are receiving the most attention right now and anything worrying the bank? Yeah, no, overall, John, we feel good about credit. We are not seeing any meaningful hotspot in CNI, if I start with commercial, not any signs of any stress in that book. In CRE, as you know, we continue to work through our office portfolio, and a large part of that is behind us, and the portfolio is considerably smaller, and we probably have a few more quarters before it's fully behind us. But we don't see any broad-based changes within the CNI. But we obviously monitor companies with exposures to consumer discretionary spending or more towards any consumer and markets. And on the consumer side, we don't see, again, anything broadly concerning. Our consumer base skews more towards mass affluent and affluent households, and most of our retail customers, as I said, are homeowners. So resilient home values and equity markets provide meaningful support on these households. But we are also watching the lower income cohorts closely, but there is not a large part of our portfolio, but there is no broad-based change that we are seeing. And as you see, our charge-off rates are coming down in the high to mid-30s, and we expect that it will get lower as we finish working through the office portfolio. So we are not at all complacent, we are monitoring each and every day, but today as issues appear they are pretty boxed and manageable versus any widespread or system-wide issues. What about the topic getting more attention is just the AI boom and beneficiaries and how much maybe that's propping up local areas, but I guess there's obviously the direct exposure, but the indirect exposure, you know, electricians, HVAC suppliers, hotels. I guess if the pace does slow, how do you assess and manage the credit risk amongst the indirect exposure? Yeah, that's a great question. I would say, look, the AI infrastructure is clearly creating a strong demand, right, and in the data center ecosystem and helping the U.S. GDP growth but what gives me confidence is in our lending book if you think about is the quality of the team we have a tremendous amount of experience in in CRE project finance or experience in evaluating and managing construction risk I mentioned DH capital which we bought bought a few years ago we have those expertise we have expertise in DCM and ECM and ABS for that market and we have very sector dedicated in-house credit underwriting teams, we have portfolio management teams, so we have built a very strong intellectual capital position in this sector I would say and of course this is then combined with very disciplined risk management and in the digital infrastructure ecosystem. So our direct exposure to data centers is modest, is roughly one percent of our loans roughly around 1.5 billion dollars as of as of the of the last quarter and even on data centers our focus is really on experienced operators with strong track records and diversified portfolios so when we do the underwriting we are looking for long-term leases 12 to 15 years we have power power providers that are connected we the the developers own the land And we are, our portfolio is largely geared towards the five largest hypergrade hyperscalers and development companies. So there's not much of speculation here. So our underwriting makes sure that we mitigate those risks. On your question on the ancillary sectors, as you rightly said, there is a boom that is happening. And it is a net positive, I would say. With respect to the other sectors, we are seeing that in the benefit, but we believe that our exposure to those sectors are relatively modest. And if you think about nationally, yes, AI has got a lot of GDP growth and consumption, but it's not as dramatic in our core northeast markets because data center bills are not happening in this area. But it is benefiting the companies, and obviously when at some point in time the AI wave will slow down. But I think those companies are pretty resilient, and there shouldn't be a credit problem as such. But our exposures are not substantial. Any other questions? I guess this is all related to the entire discussion, but when thinking about returns, ROTCE, 15.1% in the third quarter, the target is 16 to 18 percent by the end of next year how do you bridge the gap and what could returns look past that yeah so look we are quite confident of our 16 to 80 percent goal of at the end of 27 I'm not going to give out a new target today but but I think our the way citizens has always operated is we definitely want to print the target we want to reach it and we'll talk about the next target after that but the opportunity is is is increasingly visible so if you start with the 15% of return that we did in the third quarter roughly another 110 basis point comes from the name expansion so part of it is our terminated swap parts of it is the front book back book but but that gets you above 16% already and then from that you see another 135 to 150 basis point of potential improvement through our business processes as we said we delivered 600 basis points of operating leverage this quarter the private bank is growing nicely it's at a 25% proxy we see capital market fees growing so all this business execution should add another 135 250 basis point and then and then as the credit we talked a little bit about credit as the office portfolio rolls off as the NCOs come down the charge of rates come down that should add another another 15 to 25 basis points and if you take them all together you are well within within the range of this and remember this does not include reimagine the bank benefits which are additive to this this now obviously rate volatility and AOC I will move move some time it may get you towards the higher end of the ratio or may get you to the middle of the pack but but but I think like but that's that's that's just more over time that will dissipate and I think what we have you also have share buybacks that should also get get the TC in the right place so that that doesn't impact the direction I think it will probably impact marginally where where we land and London but we are incredibly confident about this 16 to 18 percent as and we have a clear bridge and we have to just execute consistently as we go through the fourth quarter as well as the as well as as well the quarters of 27. We have time for one more question I think we're all set that was really appreciate your company coming again this year and look forward to return next year thank you John thanks very much it's great to see all of you