Following this year's banking crisis, the Chairman and CEO of Citizens Financial Group, Bruce Van Saun, sits down with American Banker Editor-in-Chief Chana Schoenberger. Van Saun discusses how he guided Citizens through the crosswinds of the crisis, and how he is planning for the future of regional banking.
Transcription:
Chana Schoenberger:
Hello, I'm Chana Schoenberger. I'm the Editor-in-Chief of American Banker, and I have with me here again today Bruce Van Saun, who is the chairman and CEO of Citizens. Welcome back.
Bruce Van Saun:
My pleasure.
Chana Schoenberger:
Nice to have you on Leaders again.
Bruce Van Saun:
Great.
Chana Schoenberger:
Just start here by telling me a little bit about your career in the financial sector. You've been doing this for how long now?
Bruce Van Saun:
Over 35 years.
Chana Schoenberger:
That's a while.
Bruce Van Saun:
That's a while. So I've had the real pleasure and benefit of working for some great companies with great challenges and working for some great people. I kind of can pick up the story. Early days, I went to work at Wasserstein Perella, which was the first investment banking boutique. So really getting that off the ground was a really great challenge. I then went over to Deutsche Bank and helped them scale up their business here in the US as they wanted to become more of a global player.
I went after that over to Bank of New York and we transformed Bank of New York into a leading security service or an asset management company. Did almost a hundred deals over an 11 year period. Then went over to RBS when they had a fall to go over there and help fix it, which was a huge challenge and came off really well in terms of getting them back to safety and soundness. They owned Citizens and ultimately had to dispose of Citizens as part of the penalty for being bailed out. And so RBS sent me over here to fix up Citizens and take it public and go out on our own. So that's the short story.
Chana Schoenberger:
And you're still here 10 years later?
Bruce Van Saun:
Still here. I'll hit my 10 year anniversary at the end of the month. October 1st, 2013 is when I came over.
Chana Schoenberger:
Wow, okay. So that's a long career so far. And still going. Talk a little bit about Citizens, about the recent performance, how it's doing, where it's going.
Bruce Van Saun:
Sure. So very pleased about how we've navigated a very challenging year. Certainly it's not the year that we expected coming into the year.
Chana Schoenberger:
You and everybody else.
Bruce Van Saun:
The Fed aggressively raising rates and then the bank failures on the west coast and pressures on deposit funding and funding costs going up. So we've had to really stay strong and just navigate through a number of challenges that were unexpected. But I think we've always had a philosophy that maintaining a strong balance sheet's really important. And so we had a core capital ratio, set one ratio was at the high end of our peer group. We have 70% consumer funding on our deposit base, which tends to be more sticky than commercial deposits.
And so I think we ran the bank in a safe fashion, which interestingly allows you opportunities to stronger banks when you get into a choppy, turbulent period, have a chance to play some offense. And so we took a look at some of the failed banks and weren't successful, but I think gave a good showing. And from that sprung the opportunity for us to lift out a huge team of First Republic customer facing private bankers that ultimately wanted to go to a different platform than JP Morgan and try to recreate something that they could really impact. And we've had an express desire to be bigger in the wealth business, and so this was a golden opportunity for us. So I like the balance we have between consumer and commercial. I think we're very strong on the consumer side and adapting to being more digital-oriented and using data and turning the branches more into advice centers and being the trusted advisor to an individual on their life journey.
And we got bigger in small business with the acquisition of Investors Bank, and we've always had a very strong corporate bank that now is nationwide. We have offices around the country, we have industry verticals. We cover sponsors who increasingly own more of middle market America, and we have all the services to do a great job with sponsors. So I think we're really well positioned to continue to thrive and grow once we get through this kind of turbulent period.
Chana Schoenberger:
So let me go back to something you said a minute ago. You've hired a bunch of advisors from First Republic, which is almost easier than buying the whole bank. You just acquihire the people you want.
Bruce Van Saun:
Yeah, well, if you'd ask some of my people who've been working around the clock to get this thing off the ground, I wouldn't say they's to describe it as easy, but yes, it probably is easier.
But what's interesting is that the clientele that First Republic focuses on, which is wealthy people, investible assets, $3 million and up, say, expect certain service levels and it's referred to as white glove service. So we're standing up the business on our existing capabilities, but we have to make a lot of modifications to get to that kind of white glove service level. So that's been interesting as to how do they get the velvet rope treatment in terms of the call center interactions. If they are used to being able to wire $50,000 and we have a cap on wires of $10,000, how do we harmonize that? So that unit has kind of a slightly different framework for how we're running it. So I think what we did initially, most of the folks came over in June and we kind of said, just talk to your clients in July and rest up, you've been through a tough year and let us work behind the scenes to get things ironed out.
So when the switch turns on and the first experience a customer coming over to Citizens has to be really good. And so we did that and in August we said, all right, let's start to bring some business over. Let's not make a ton of business, but let's just get it going. And then after Labor Day we'll really step on it and we'll kick this thing into gear and start to see it grow. So that's kind of where we are and all that's going pretty well, but I wouldn't describe it as easy.
Chana Schoenberger:
So did you have a formal turnkey conversion this week?
Bruce Van Saun:
There's not really a conversion. We're riding over the same rails, but there were lots of, let's say, operational capabilities and customer experiences that we had to kind of uplift to the new standard, which I think in the end is actually going to be good for all of Citizens because some of the changes that we're making can cascade down and benefit our affluent and mass affluent customers as well.
Chana Schoenberger:
So you're going to let them wire large amounts of money?
Bruce Van Saun:
Not necessarily, but I think some of the digital things that we're doing to really address the service levels for these customers, we can just kind of imitate and bring down to the broader customer base. So it's a really good opportunity for us to just keep ing our game and how we deliver for customers.
Chana Schoenberger:
So you bought an RIA some time ago?
Bruce Van Saun:
Yes.
Chana Schoenberger:
How does this all fit together?
Bruce Van Saun:
Yes, good question. So good memory. So Clarfeld is a wealth manager that's based in Tarrytown, New York, probably you could look up the Hudson River here and see it.
Chana Schoenberger:
That way.
Bruce Van Saun:
That way, sorry. But in any case, they focus on ultra high net worth customers and 10 million and up kind of investible assets. And it's been a home run in terms of capturing opportunities with our commercial business owners.
So a family owns a middle market company, they do a leverage recap and pull out a hundred million of equity dividends. Clarfeld comes in and helps manage that money or helps estate plan that money or the company sold similar thing. So they are very highly rated RIA in terms of their capabilities and service. But now that the trick is we have to scale that as one of the wealth solutions for these private bankers, and we probably have to keep building out more wealth capabilities in terms of hiring additional people and doing some lift outs from other places. So that's kind of a stage two. We've got the private bankers, hunter gatherers, people who control relationships, but we're going to have to continue to scale up the wealth business.
Chana Schoenberger:
So what is the pitch? Why would a wealth manager come and work for you as opposed to the millions of other opportunities?
Bruce Van Saun:
Well, one of the thing is flow opportunities. So if you've got, I think the team that came over is capable of generating $3 to $4 billion of fresh AUM flows every year. And so if you're an asset manager, part of your time is spent trying to generate new business, and part is managing the portfolios. And if the generating new businesses easier and you're just seeing that business come in over the transom, that's a pretty attractive opportunity for folks.
Chana Schoenberger:
I was told once that it's about 80/20. So wealth managers spend or financial advisors spend 80% of their time prospecting for new clients, 20% of their time actually managing their money.
Bruce Van Saun:
I think prospecting and kind of client handholding, that kind of is, I'd say, yeah, that's probably a good split.
Chana Schoenberger:
Putting their white gloves on. Yeah, that's important. Okay. So you mentioned the banking crisis, which is of course the issue of 2023.
Bruce Van Saun:
I'm glad you didn't call it the regional banking crisis. We like to refer to it as the idiosyncratic bank crisis.
Chana Schoenberger:
We just call it the banking crisis.
Bruce Van Saun:
Yeah, okay. I'll let that one go.
Chana Schoenberger:
I feel like it's not the fault of the regionals. If you say the global financial crisis of 2008, that sort of says that it happened all over the world, and this is the banking crisis of 2023 because even the vast majority of banks that are still doing, they're still solvent, were affected by it. So how are you affected by it and what do you think is going to happen now?
Bruce Van Saun:
Yeah. Well, I would say that the banks had failed, grew very fast. They had versified business models and they took in a lot of uninsured deposits and didn't manage interest rate risk well. So that was the kind of special group, and we were the kind of traditional, more conservative, boring regionals.
They didn't want to be considered a regional bank. They wanted to be the growth banks, but traditional regionals have years of experience of steady growth and capital allocation and interest rate risk management. So for us, I'd say the agenda shifted to defense, defense, defense. So strong defense, let's make sure we're preserving capital, we're buttoned down on our risk appetite in terms of lending and that we're building our liquidity that we're holding onto deposits and making sure operationally we can access all different forms of liquidity if we need it. So the mantra initially was play super strong defense, but if you think about sports teams, winning teams don't just focus on one side of the ball, they play both sides of the ball. So we said we have some really good initiatives where we're playing offense and we're making investments and we need to keep that going.
So probably need to trim and not play as broadly as we were before. But the things that we really believe in, we need to keep investing in. And so things like this First Republic lift out to help us scale the private bank that's always been on our list and the New York Metro with the two acquisitions we made with HSBC East Coast branches and Investors, that is tracking very, very well. And it needs continued nurturing to get it where we want to get to it. Some of the things we have with Citizens Pay and Citizens Access and our commercial bank focused on private capital, there's probably five or six things that are really important to get. So when we stabilize and get through this turbulent period, we're going to grow hopefully faster in a safe and prudent way, but faster than our peers.
So that's been the game plan.
Chana Schoenberger:
Great. Okay. So there's, and we've written about this a lot. There's sort of this three-tiered banking sector right now. So you've got the too big to fail banks, which are, some have argued that they're essentially government agencies at this point.
Bruce Van Saun:
They wouldn't say that.
Chana Schoenberger:
They would not say that, that they're sort of officially too big to fail. And those are the ones that you saw in some cases buying some of the failed banks or some of their assets.
Bruce Van Saun:
And just getting deposit flows.
Chana Schoenberger:
Just tons of deposit flows, flight to safety, some call it the flight to quality. And then there's the super regionals and the regionals, and then there's the community banks and credit unions, which is a very sort of Lions Club, Rotary lending to the folks in the community on Main Street. How do the super regionals stay competitive?
Bruce Van Saun:
Yeah, so let me just back up one second. I like that landscape by the way. I think having a very diverse banking landscape with banks of all shapes and sizes has been really a strong foundation to the US economy and something that other countries really should envy because any person or small business or company can get access to credit on favorable terms and lots of services including global services for the biggest companies. So we have a great banking system, I think where the super regionals -- people say, are you kind of in the middle of the river so you can get out competed, but small guys who are super local, but you're not big enough to compete against a super big guy. So what's your niche? And I would say if you stay focused on areas that you have strength, you don't try to be too broad and you're more nimble than the big guys and you have more scale than the little guys.
So you're actually not in a bad place. And if you look at the returns of the regionals, they've been pretty good and better than many of the mega banks through time. So they're easier to manage, easier to sustain your culture, to get your messages top to bottom. You can be nimble, you can be innovative, but you can't afford missteps. You kind of have to focus on things and get your strategy right and really be good and disciplined in execution. So we think we're distinctive in a number of ways, having a customer-centric culture that we want to be a trusted advisor to an individual on life's journey or a company as they're navigating their business challenges. That permeates the whole company, which everybody talks about. It's hard to actually achieve that. We operate with real financial and operating discipline. So we have these top programs every year, we try to figure out ways to run the bank more effectively, find efficiencies so we can reinvest in better technology, better customer experiences.
And if you're really good at that over time, that makes a huge difference. And we're committed to excellence. So every service we have, the people we have the technology have, we want to be excellent. So I think if you kind of hone your strategy, banks our size can continue to be successful and effective.
Chana Schoenberger:
You mentioned a minute ago that you bought a whole network of branches. So this is an interesting thing that I keep hearing from bank CEOs, which is that consultants have been saying for a long time that the branch is dead, there's no value to the branch, and yet banks keep buying and expanding their branch networks. So clearly you don't believe that. What is there about branches?
Bruce Van Saun:
Well, branches, if you look at customers and their satisfaction with banks, they want the whole omnichannel experience. They want to be able to go into branches when they have certain needs.
They want to access you 24 7 online or through the contact center. And it all has to work together seamlessly. Those are your most satisfied customers. When we thought about New York, so we had this so-called hole in a donut, had a New England franchise, pick up MidAtlantic and Southern New Jersey, and there was nothing in that New York metro. It would be impossible to really attack that as a digital only bank in our view. So we needed a branch network with a one-two punch of HSBC and Investors. We've got 200 branches in the greater New York area. We got about a million new customers and number eight deposit market share. So we got substance, we have now a customer base, and I think the branches have another benefit, which is they have great billboard value. So you've hopefully noticed around here, but people know we're in town and it has more of a halo effect over our overall franchise when people see Citizens as now playing in a big heavily competed market like New York.
So anyway, I think what you're seeing a lot of banks do is test and learn. So maybe we don't need quite as many branches. We can consolidate some, and you've seen JP Morgan probably run a flat branch count over the last five years, but they've ventured all these new cities and they've consolidated other branches in places where they were too dense. You're seeing some of the online, when our citizens access and some of the other regionals are kind of thinking through, should I put a cluster of branches in some of the cities where we have customer base and that help that kind of online effort to have a limited number of branches. When we bought HSBC, we'd have a small branch footprint, eight branches in the DC area and six down in the Miami area. And so can we go play offense with digital and supplement that by having the branches and kind of benefit from driving some of that traffic through the branches.
So it's really interesting, but I think the branches are going to be here for a long time to come.
Chana Schoenberger:
Okay. So just going back to the raft of bank failures we had, now we're sort of in the phase where they're on the Congressional hearings and the regulators are thinking about what do they need to change in terms of either new rules, we're enforcing the existing rules differently. What do you think is going to happen?
Bruce Van Saun:
Well, they have some proposals out there, which I'm not sure are directly on target to what happened. So the knee-jerk reaction is we need more capital in the system and we need more long-term debt to kind of make these banks easier to resolve. So I think the proposals will generate a lot of interest and feedback. So we're in a comment period, and I think politicians are very interested, like what's the support for increasing capital 20% in the banking system and what are the second order consequences of that?
Is that going to make credit harder to obtain or is it going to drive more lending outside the regulated banking system into the non-bank system and private equity's licking their chops? Is this good for the country? So I think there's still a real debate to be had over this as to whether the cure might be worse than the disease at the end of the day, but it'll be really interesting to see how it plays out.
Chana Schoenberger:
Do you think that is what's going to happen?
Bruce Van Saun:
I think that there'll be some alterations in the proposal. So it goes out as a proposal and then people will ask for, let's see the, you said you did the comprehensive capital review. Show us the transparently what the implications are for the economy and for lending, what happens to lending in the banking system. So I think it'll take some time to kind of put that together and have this dialogue.
So I don't think this will happen overnight.
Chana Schoenberger:
So in terms of the economy, where is the economy headed? There's been this whole sort of debate for the last year about the recession versus non recession phase. There's, you look at the employment numbers and the GDP numbers and where's it all going?
Bruce Van Saun:
I've been a consistent optimist that based on what we see from the health of the consumer and the health of corporate America, hard to see how the Fed raising rates and the economy slowing is going to tip all the way into a meaningful recession. When a lot of people were making that call, we said at worst is shortness of shallow, but it may just be a growth slowdown where it feels like the GDP is going sideways for a while. And I'd say based on how things are playing out, I'm kind of now a convert to soft landing.
It looks pretty good from where I sit. I think the Fed has probably done hiking. They are getting some news. I think there was some recent news about the health of the economy, it's stronger maybe than people expected, but there's also news that the labor market is coming under control, that energy prices are going up, but other things that impact people's pocketbooks aren't going up as much. So there's a little bit of mixed data out there, but I think the Fed will probably sit here through November and examine the different crosscurrents and data and their inclination is probably to hold and not hike. I think if they hike, they hike one more time, 25 basis points. So I think that to me is important, is positive for the economy that we get to peak rates. And then even if they go sideways for six months before they start cutting, I think companies will adapt to that and it'll just start to stabilize the economy and it'll start to generate more activity in the capital markets once people kind of know that we're at peak rates.
We're already starting to see some of that. We're starting to see the capital markets picking up. We're going to be, our JMP subsidiaries going to be on the cover of three IPOs this month, which we haven't said in a long time.
Chana Schoenberger:
Wow. Yeah. What's an IPO again?
Bruce Van Saun:
So it's good. So we're starting to see some green shoots, which is good.
Chana Schoenberger:
Well, I hope you're right. Yeah, optimism is always a good thing. I hope inflation is over. I think we're all sick of paying $10 for a box of Cheerios.
Bruce Van Saun:
Well, that won't go down anytime soon, but at least it won't be $12. So that's six months from now, right?
Chana Schoenberger:
$15. Yeah. So many of your bankers, you obviously are a senior guy, you've been around for a while. Many of your bankers have never worked in a normal rate environment. They weren't here in the eighties and they don't remember what it's like and they think of the pandemic era zero rates as being normal. And so they think these are high rates, which obviously historically they're not high rates. What do you do in terms of, maybe it's a training question or just sort of helping them to understand what is the strategy in a rate environment like this?
Bruce Van Saun:
Yeah, well, we have some really great veteran senior leadership, and we do, we'll do training sessions, we'll do teach-ins, and we'll talk about the olden days, which it is good to have a little gray hair and have some perspective. But I'd say the big question now to me is, where's the natural Fed funds rate? When the Fed cuts, are they going to three to three and a half? Are they going to two and a half to three? Is it going to be lower than that? So what's your view of sustainable GDP, and then where do real interest rates need to be to keep the economy stable and on an equilibrium?
And it's helpful to have perspective, as you say, because anybody under 35 never really saw interest rates when the natural Fed funds rate used to be 3%. Well, guess what? I think that's probably more likely than not that we're going to sit at somewhere near that level at the end of the cutting cycle.
Chana Schoenberger:
Not your first rodeo. It is always funny to talk to people where this is the first time they've been through a business cycle and they think the world is ending, and you sort of explain to them the last three or four or five things that have happened.
Bruce Van Saun:
Well, I think senior leaders at a bank need to be very calm and measured and stoical. And I tell people when times are good, don't be giddy and kind of look for the trap doors because they're not going to last forever. And when times are tough, there's the old saying, it's always darkest just before the dawn. You have to recognize that things will bounce back and you have to keep your energy up so your team, if they see you defeated, they're going to be defeated. So kind of staying chipper and we can get through this and here's what we have to do. That's the kind of leadership that you need if you're going to be in a heavy cyclical industry like banking.
Chana Schoenberger:
Great. Well, thank you so much. I really appreciate you coming on with us.
Bruce Van Saun:
Okay, my pleasure.
Chana Schoenberger:
Great to see you today.
Bruce Van Saun:
Yeah, nice having a conversation.
