Bruce Van Saun, the CEO of Citizens Financial, has helped lead a remarkable turnaround at the bank since it was spun off from RBS in 2013.
Earnings and its stock price are up, return on tangible equity hit a key goal in the third quarter, partnerships with fintechs are bearing fruit and loan growth is slowly but steadily increasing. But the next few years may be even better, according to the CEO, in part thanks to the unlikeliest of places: Washington.
The tax cut bill passed by the Senate last week could boost lending and hiring, while bipartisan regulatory relief legislation gaining steam on the Hill would free Citizens of the burdens of being considered a systemically important financial institution.
“Most of the time period when we were making this progress, we didn’t really have any tailwinds, in fact we had some headwinds,” Van Saun said in a lengthy interview, citing a slow economy and lackluster loan growth. Given moves by Washington and in the economy now, however, “I think potentially there’s a little wind in our sails and a little wind at our back. Which feels good. We’re optimistic that we’re positioned to continue to perform well.”
During the interview, Van Saun tackled everything from the impact the regulatory relief bill will have on his institution to cyber threats to controversy earlier this year about the bank’s aggressive push to get customers into branches. He also touched on whether he views fintechs as competitors, the future of bank branches and how artificial intelligence may transform the industry going forward.
Following is an edited version of the Q&A.
Are you hopeful on the tax bill? Do you think it will have a positive impact?
BRUCE VAN SAUN: Absolutely. The watershed here is are we going to get a lower tax rate that makes us more competitive globally. If there is an agreement on a corporate tax rate reduction, that will be very good for sentiment and unleash some of the animal spirits. People will say, "OK. I’m going to invest because I think this bodes well for the economy." There are other elements of it that are positive, such as running off on capital expenditures. That’s one of the reasons productivity has held back is because there hasn’t been as much capital expenditures. It hasn’t risen back to the level it was pre-crisis.
The tax system that we have ... puts us at a competitive disadvantage. You’ve seen inversions, you’ve seen jobs shift overseas. You’ve seen money stored overseas. So I think that also gets addressed and that’s good for the U.S. economy. There are a number of reasons that you should be optimistic if that happens. It will be another shot in the arm for the U.S. economy.
Is the end result going to be more lending from banks like yours?
If the economy is stronger, there is more money in circulation, there is more demand for loans. These kinds of volumes are going to go up in terms of loan demand, deposits in circulation. That’s all positive in our ability to make income.
I think it keeps the Fed on the path to raising rates on a consistent basis. Most of our balance sheet is positioned to be asset sensitive, so we’ll make money as short rates move up. So that’s positive.
Lastly, from our own standpoint as an industry, the regional banks ... pay relatively high tax rates because we have nothing overseas to benefit from lower tax rates overseas. Cutting that rate down to 20% off 35% is going to be a meaningful improvement on our after-tax income, [earnings per share] and return on equity. There’s lots of ways we benefit, both from our economy being stronger and also through the tax code.
What’s your sense of the tone from the administration and the new regulators?
They are putting very good people into those positions. So the quality of the vetting process … has been very good. The folks going into the bank regulatory sphere or on the Fed have been very high-quality selections.
I think the tone is we are here to make sure that the economy is growing to its full potential. We’ve had a lot of regulation go into effect that is necessary and prudent. But what happens after a crisis like we’ve had is that the pendulum swings too far and you have to find ways to bring it back into greater equilibrium. So we sustain the important protections that were put into place, but eliminate some of the excesses which tend to absorb resources and create busy work and hold back the economy.
The Senate reg relief bill would raise the SIFI threshold to $250 billion of assets. [The current threshold is $50 billion, while Citizens has roughly $150 billion of assets.] Are you optimistic about the bill’s chances?
I’m optimistic. This is the first instance, really, where you’ve had a major bipartisan effort around a piece of legislation. It’s an important piece of legislation.
Quote'We went through a period, when I came over here, we had a regulatory deficit of things we should have been doing that we had to do.'
The House started out with something that was much broader and had a wish list aspect to it. I think the Senate has taken the important things that they can find agreement on just to show they could do something and move the ball down the field.
What kind of impact will changing the SIFI threshold have on your bank?
I don’t know if I can pinpoint. People say, "Are you going to start saving money because you don’t have to put as much effort out into these things?” I would say from our standpoint, we went through a period, when I came over here, we had a regulatory deficit of things we should have been doing that we had to do.
We added a lot of resources across the board to get to the state of expectation that the regulators had for regional banks. We had some catching up to do, including in the CCAR [the Fed’s Comprehensive Analysis and Review stress test] process.
We’ve done a fantastic job of basically putting the right frameworks in place, the right skills, the right people in place. But you overbuild when you’re catching up. We’ve started a draw-down on that because once you go from war to peacetime, you can start to extract some of those resources and turn them into routine practices and turn them into industrialized, operationalized processes. I think that will just continue.
When you free up resources like that, that allows us to take those resources and talk about self-funding. So if we need to invest more in our digital capabilities or we want to build up our mortgage business, our wealth business, we hire a bunch of bankers on the corporate side. So anytime you can find efficiencies and ring out some extra expenses, then you can take those and use it to self-fund things that can help deliver better for your [customers].
If Congress were to drop the CCAR requirement, or the Fed weren’t running CCAR for you, would the bank still do that kind of stress test itself?
Absolutely. Stress testing has been a very big advance in terms of just the sophistication of risk management at banks. We will certainly continue that practice even if they didn’t require it at all. Even if they just said, "You know what. We think the banks have enough capital now. They don’t have to do it." I think every bank is going to do it.
It’s a best practice.
Quote'The thing that I might worry about is really cyber.'
Crises happen in cycles. Is the next one coming? Do you see anything on the horizon that worries you?
It’s usually not the last thing that gets you. It’s the thing you didn’t think about that becomes the next thing.
Balance sheets are as strong as they’ve been in recent memory. I think we’re in a very good, prudent shape. The risk management practices and our governance are far better than they were before the crisis. So I think there’s a lot of strength there.
What keeps you up at night?
The thing that I might worry about is really cyber. All the hacking that’s going on. Fraud and other things are something you spend a lot of money on that. You spend a lot of time and effort on that.
There’s good public-private bodies that share information about what’s going on. I think we’re all smart on the front foot. But you always wonder, am I doing enough? Where are the bad guys going next? It’s a cat-and-mouse game. You put a lot of good stuff in place and you can’t rest. You are trying to figure out they — just did this, what’s my next move?
That’s an area that requires constant effort and focus on the part of regulators, boards, management.
Obviously commercial lending has been disappointing of late. Is this an area that Citizens if feeling good about going forward or is it going to continue to struggle?
Our ability to grow faster than peers — for a while, and maybe for a number of years — is still sustainable. Because we are building out the franchise. We’re still hiring coverage bankers. We’re hiring product specialists. We see opportunities to grow into certain industry segments or certain geographies.
That gives me confidence that we can continue to execute our strategy, grow gains in the market share and add decent levels of loan growth relative to our peer growth.
QuoteFintechs 'force us to be good. They force us to keep our antenna up and to pore over things that could be beneficial to how we serve our customers.'
You’ve been entering into partnerships with Apple and fintech firms. Are fintech firms a competitor or partner?
They’re both. Fintechs started out thinking that banks are big, dumb and slow and we can eat their lunch, and they are not very good with their customers. I think as they’ve gone through life, they realize that banks have a lot of natural inherent advantages. That they have a good brand, they have a big customer base. They have good data. They have good underlying technology.
They are now working to private-label with the bank to offer their services or the products that they’ve developed. We’ve done two partnerships with fintechs of note.
One is with a company called SigFig on digital robo-advisory services that we’ve bundled into an offering we have called SpeciFi, which combines digital and banking services on a simple app. I think we were really first to market in the regional peer group in launching that comprehensive product. It’s off to a reasonably good start. What we expected as adoption is starting to pick up.
The other one worth noting is Fundation, which is a small-business origination and fulfillment system. So they do massive credit scoring based on lots of different data sources and can really quickly determine whether you should make a small-business loan or not and then have a very good experience in being able to close the loan and draw down the amount of the loan. So we’ve now launched that as well and they are private-labeling that for us.
In both instances, [these are] very good companies have very good product capability. If we tried to build that on our own, it would take us forever and a day. I’m not sure we’d be as good, frankly. Because they are now serving multiple customers, so they have multiple demands. Their capability gets quite sharp.
In general, they force us to be good. They force us to keep our antenna up and to pore over things that could be beneficial to how we serve our customers.
How much do you see AI as the future within banking?
There’s some great opportunities to leverage the power of AI in playing offense and playing defense. We have to do a huge amount of effort around KYC [know your customer], anti-money-laundering, BSA, and so employing artificial intelligence to really look for patterns and go comb through data to figure out where there’s risk can be done dramatically faster and more efficiently than the way we’re doing it today.
So, the other thing is using data. There’s a fine line between using big data and using AI, but we’ve invested significantly in big data capabilities so we … have information on every household and we can look at what’s the propensity for someone to respond to a digital offer? The next person that comes into our branch, what’s their greatest need? How should we approach that customer?
Using the intelligence, gathering the data and then putting it through an algorithm to figure out how do you help your customer, what’s the next great need that they have?
You recently launched a program to bring more people into the branch, which generated some controversy in The Wall Street Journal [which accused employees of the bank of faking meetings with customers in order to meet the bank’s goals]. How’s that going?
It’s a great program. We said all along we thought it was a good program notwithstanding the noise that came out in the article. And we did a full review and we ascertained that it was running as intended.
It wasn’t a widespread issue?
No, it was very localized issue. Frankly, what it is intended to do is to bring people back into the branches. We’re trying to turn the branches into advice centers and basically say, "You should come in." If you go to the doctor once a year to make sure you’re in good health, you should make sure you come in to your local bank and have a conversation with a trained banker who can make sure that you’re making the progress on life’s journeys that you should be making. Are you saving the right amount? Do you have the right level of debt? Are you paying too much for some of your debt? Can we help you shave some of the cost off your debt?
Basically, that’s been really, really helpful. We’ve approached probably over 500,000 of our customers have come in to do that. The satisfaction rate once they do that is very, very high. The satisfaction rate for colleagues who know how to do that … they’re happy too because they actually feel that they’re adding value to those customer relationships. They are becoming the trusted adviser that we want them to be and that they want to be.
Quote'It’s going to take all the branches and reformat them from those big, clunky branches of yesteryear oriented toward transactions towards something that’s sleeker, more private, with nicer interiors, that will facilitate that advice model.'
Are you worried about the future of the branch? There’s a lot of talk about it going away.
All banks have taken staff out of the [branches]. There’s less need for pure transaction processing. The need for pure tellers and the like has definitely diminished as you can do much of what a teller did right through an intelligent deposit machine, an ATM machine, or through your phone.
What’s happened is there’s a shift in the needs for what types of people do you need in those branches. In most of those branches, there’s staff of universal bankers who can do a little of this and a little of that. They can do some of the complex transactions that require a teller, but they can also have conversations about wealth advice and wealth needs.
We try to get people cross-trained with other licenses and then we have specialists. We have licensed bankers, we have small-business specialists. We have mortgage loan officers. We have financial consultants. We have a number of specialties working out of the branches.
We want the branches to have some privacy. So we want to have more offices that you can close the door, that you can have confidential conversation. Unlike branches of yesteryear, where if you got off the teller platform, you went over to the side to a number of open desks and you are talking to your banker and then your neighbor is talking to their banker and you have to talk about personal stuff.
It’s not good. We have a project called Branch Transformation where over a 10-year period, it’s going to take all the branches and reformat them from those big, clunky branches of yesteryear oriented toward transactions towards something that’s sleeker, more private, with nicer interiors, that will facilitate that advice model, deliver that advice model.
Will there be more branches? The same, fewer?
You could pinch down a little bit the size just because [people] don’t go. The foot traffic is decreasing. If you thought you need to have a branch every one and a half or two miles, you can probably go three miles. You don’t need quite the density because people can take a picture of their check and deliver it and have it deposited into their bank account. I think there’s an ability for a little bit of thinning. But I don’t think that’s where the big play is, at least for us.
Overall, how are you feeling about Citizens’ future?
We’ve done well as a bank. I like the fact that we had a fixer-upper because that gives you levers to pull. We’re a self-help story. Running the bank better translates into opportunities to have better financial performance.
There’s still things to improve upon, there’s still things to execute on and the strategy that took us this far can continue to drive us to better levels of return. So the combination of that , having a proven team that has executed well and now the tailwinds of … tax reform likely to go through, regulatory reform, we’re seeing it happen now.
Most of the time period when we were making this progress, we didn’t really have any tailwinds, in fact we had some headwinds. We’ve made good progress, and I think potentially there’s a little wind in our sails and a little wind at our back. Which feels good. We’re optimistic that we’re positioned to continue to perform well.