Citizens Financial Group's long turnaround is far from over, but the third quarter showed a glimpse of what the company could achieve when it's done.
The Providence, R.I., company's results, released Friday, offered a demonstration of the grow-while-cutting strategy that Chief Executive Bruce Van Saun has been pursuing since taking over two years ago. He has promised to aggressively drum up new business with a hiring push while at the same time modernizing Citizens' technology and cutting the fat from its internal operations — a sharp course correction after years of low returns while Citizens was part of Royal Bank of Scotland.
Citizens had it both ways in the third quarter, with lower expenses and higher revenue, and made a $220 million profit, 16% higher than a year earlier.
There is still much work to be done — its return on equity remains substantially lower than its peers, according to a research note by Sandler O'Neill — but investors were clearly cheered by the quarter, sending its stock price up nearly 6% Friday.
There are plenty more shares likely to hit the market soon. RBS has moved up its divestiture time line and now plans to fully shed its Citizens holdings, currently 21% of the 533 million shares outstanding, by the end of this year.
That puts pressure on Van Saun not only to keep earnings improving, but to make faster progress on what he said is the most difficult part of the transition: changing the company's culture so Citizens can thrive without the security blanket of having a huge parent company.
American Banker spoke with Van Saun on Friday about the latest results, Citizens' transformation over the years and what remains to be done. It has been condensed and edited.
You made a big hiring push in the last few years, but you've also managed to reduce expenses. Is the hiring tapering off or have you managed to keep costs down in spite of it?
BRUCE VAN SAUN: We have focused on extracting the inefficiencies from our existing cost base and using those savings to fund offensive investments in client-facing people, whether they be commercial lenders, mortgage loan officers, or wealth advisers, as well as technology investments. We've added close to 500 people on a year-over-year basis on these offensive areas, and we will continue to do that.
What efficiency gains remain? Have you plucked all the low-hanging fruit?
We launched an initial program to deliver about $200 million in expense saves from an expense base of about $3 billion. We did an organizational redesign to reduce the layers of management, and we probably extracted close to 400 middle-management positions, broadly across the bank. Over time you get a little fat around that middle-management layer. Taking that out not only saves you some money, it makes the organization operate more efficiently, to be more focused on the customer and a little less on bureaucracy.
Last quarter we announced an extension of the program, with the target of generating about $100 million of improvements; about 60% was on the revenue side and 40% on expenses.
It's getting harder to extract those inefficiencies, but we're in a mind-set of continuous improvement and we encourage our people to think about better ways to do our business.
There were a lot of self-generated ideas about how to run the bank better — we received over 5,000 ideas from our 18,000 employees, and 1,200 of those made it through the sifter and made it into the program. We're about 85% through those and we've had really good results.
You hired three new business heads last quarter. Where do you see the best opportunity for loan growth?
In the past five years we've been growing commercial much faster than consumer, because business lending was recovering while consumers were still deleveraging after the crisis. I think that's starting to shift, so there are opportunities to play on the consumer side.
We see growth in education finance, particularly in our education-refinance product, which has been averaging around $300 million of originations per quarter since we launched it.
And we launched a program with Apple to be their partner in financing customers' phone upgrades. We're still in more of a pilot phase, though that's off to a good start, and as of today we have more than 150,000 loans and over $100 million of balances.
Installment unsecured consumer credit is a higher-yielding opportunity for us, and one thing that we're intent on is growing in areas that have attractive risk-adjusted returns, like student lending and the relationship with Apple.
What has been the hardest part of preparing to be an independent company?
The challenge here in separating from a parent you've had for 25 years is that I don't think you had the same sense of accountability and urgency and execution-orientation that public companies have. We had a nice culture here focused on what we call the three Cs: customers, colleagues and the communities that we serve. It was good and it was something to build upon. But there are a lot of enhancements that need to be made to instill that execution-orientation, that business smarts and savvy that you'd like to see at a well-run public company. Partly it's bringing in people who have experience operating in a public company, and we've also invested in leadership training. If you look at the plan that we laid out and our ability to deliver that plan, the company is executing well, and it's a testimony to the leadership that we've assembled.
How long until all the investments have been made and Citizens is firing on all cylinders?
We're getting the right people in place and the picture is improving but you've got to keep at that, and I think we're another year or two from having the team completely gel and perform the way we want to. It's pretty good today, but to be a top-performing bank we still have some maturation there. In terms of our technology we're getting to the point where we're getting fairly well caught up, though that's probably a few years away as well.
We've got a little more defense to play. We're still a few years away from firing on all cylinders, but where we're at right now is a lot better than where we were two years ago, and it's pretty good.