Banks’ digital upgrade plans unshaken by coronavirus

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The economic fallout from the coronavirus pandemic is forcing many banks to reexamine the business-growth plans they made before daily life ground to a halt. Some banks have decided those plans are still worth pursuing.

Citizens Financial Group in Providence, R.I., says it will keep building out its consumer digital offerings and its merchant financing business, though it has delayed plans for new small-business digital offerings.

While Regions Financial in Birmingham, Ala., is staying the course on a cost-containment program, it has no plans to cut its roughly $625 million-a-year investments in technology, including a new core deposit system overhaul. Chief Financial Officer David Turner said those investments will prove critical as the pandemic wears on.

"We’re going to continue to spend that. That is the table stakes. You have to keep investing,” Turner told American Banker in an interview Friday.

Banks were already facing a delicate balancing act between the cost-cutting expectations of investors and the need to invest in new technology. Those kinds of pressures have only intensified during the public health crisis, the past week of first-quarter earnings reports showed. Credit costs are up, and fee income is down in key areas outside of mortgage banking. Yet banks are expected to help the economy survive the ongoing shock, and demand for their digital services has skyrocketed.

Fee income at Key, Regions and Citizens

Wells Fargo said last week that it would halt expense-reduction plans, including job cuts, because of the pandemic. And Citigroup executives touted a threefold increase in digital-account openings from last year as proof that digital investments have paid off, although they also said the bank could “potentially re-pace certain investments” if need be.

JPMorgan Chase reported a 3% year-over-year increase in expenses to $16.9 billion, in part driven by its continued investments in operations.

Citizens Chairman and CEO Bruce Van Saun said its investments are essential to building a more resilient business. Since it spun off from Royal Bank of Scotland, Citizens has diversified its business by buying fee-based businesses, launching new digital offerings and establishing point-of-sale financing partnerships with merchants like Apple and Microsoft.

The $176.7 billion-asset Citizens had to shelve plans for new digital offerings for small businesses, as it shifted those employees to handling emergency small-business loan applications in the immediate term, Van Saun said in an interview Friday. But it is continuing to work on expanding its digital-only franchise, Citizens Access, and plans to unveil a new bundled product offering late this year or early next year, he said.

“This whole crisis has demonstrated that people are ready to move faster towards digital banking, and we think we have an early-mover advantage in terms of having a strong digital offering,” Van Saun said.

Citizens is also exploring a virtual wealth advisory capability for mass-affluent consumers and believes it can establish new merchant finance partnerships.

Citizens’ 2018 purchase of Franklin American Mortgage in Tennessee helped it handle a surge in refinance volume during the first quarter, Van Saun said. That refinance boom boosted mortgage banking fees to $159 million, nearly double what they were in the prior quarter, and lifted overall noninterest income 16% to $497 million from the year-ago quarter.

The refi-related income helped to offset declines in service charge income and card fee income as consumer spending fell, the CEO said.

Overall, Citizens’ net income fell to $34 million in the first quarter from $450 million in the prior quarter as the bank recorded a $600 million provision for loan losses, most of which was tied to loan-loss accounting changes and COVID-19.

And though it is not slashing its tech budget, the $133.5 billion-asset Regions continues to look for savings by consolidating branches and shrinking office space, Turner said.

Noninterest expenses fell 3.3% year over year to $824 million. Turner said it was possible that the pace of its branch reduction could accelerate, depending on how many more customers become used to digital banking options.

While that is still an unknown, the bank has certainly seen a change in how customers are spending money.

Bruce Van Saun, CEO of Citizens Financial Group, and David Turner, CFO of Regions Financial
"I get a lot of personal emails about how people have invested years in building up their business and their employees are like family. … It’s tough," Citizens CEO Bruce Van Saun (left) says in discussing the toll the pandemic has taken on society. Regions CFO David Turner says it will take an organized effort to restart the economy: “Until you give confidence to the American people, they’re not going to get out and leave their house and spend money."

Regions reported a 30% drop in consumer spending activity in late March as local stay-at-home orders took hold. As a result, its ATM and card fees dropped 3.7% year over year to $105 million for the quarter. But as the pandemic continues to hold the economy at a standstill, consumer noninterest income could take a hit of between $20 million and $25 million per month, executives warned on a conference call.

Regions produced $139 million in net income in the first quarter, down 63% as the bank set aside $373 million in provisions for credit losses as the economy heads into a recession.

As of April 15, Citizens had granted forbearances to around 70,000 retail customers. Regions had processed about 17,000 consumer payment deferral requests and 4,000 requests for business clients.

Van Saun said he is not especially worried about Citizens’ balance sheet but expressed concern that too few small businesses would be able to access the Paycheck Protection Program, which ran out of funding Thursday.

"I think we’ll be able to manage the impact on our portfolios. What keeps me up at night is the pain and suffering that we see with so many people,” Van Saun said. “I get a lot of personal emails about how people have invested years in building up their business and their employees are like family. … It’s really gut-wrenching to see all that."

Regions said for now its book of loans to exposed industries like oil and gas companies, restaurants and hotels is expected to be manageable. The bank reported about $2.5 billion in criticized business loans, up from 19% from the same time last year. Specifically, about 21% of its $548 million in loans to casual dining businesses are categorized as criticized.

Turner said the virus needs to be controlled before the economy can begin what bank executives expect will be a gradual recovery.

“Until you give confidence to the American people, they’re not going to get out and leave their house and spend money,” Turner said. “They’re just not going to do it.”

Allissa Kline and Kevin Wack contributed to this article.

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Digital banking Consumer banking Growth strategies Revenue and expenses Fee income Coronavirus Regional banks Citizens Financial Regions Bank Bruce Van Saun