Parent Trap: Is RBS Good for Citizens?

Parents sometimes do the most embarrassing things.

Royal Bank of Scotland PLC, the parent company of Citizens Financial Group in Providence, R.I., last year posted the largest corporate loss in U.K. history. It has taken more government bailout money than any other bank in the world. And this month it agreed to hold a yard sale for assets that European regulators insisted the company shed, as a condition for receiving more aid.

The turmoil at RBS has been stunning, even by current industry standards. But problems at the parent company have not thrown Citizens off its game, according to Ellen Alemany, the chairman and chief executive of Citizens and of the broader collection of businesses known as RBS Americas. Citizens is a $153 billion-asset holding company for subsidiaries that run 1,480 branches in 12 states in the Northeast, the Middle Atlantic and the Midwest under the Citizens Bank and Charter One brands.

"It's business as usual," Alemany said in a statement prepared by the company in response to requests for an interview. "We are seeing good growth in the franchise from the first part of the year, and we are focused on developing even deeper relationships with the customers we serve as a super regional bank offering local and global products and services."

Business as usual? Seeing good growth? Is that possible for a business tethered to a company subsisting on 45.5 billion pounds ($75.5 billion) in bailout funds?

Well, yes, said Paul Hirsch, a professor of strategy and organization at Northwestern University's Kellogg School of Management.

The drama in the U.K. no doubt is a distraction for employees of RBS' U.S. businesses, Hirsch said. But Citizens' bankers are hardly alone in dealing with the stresses of working for a weakened corporate parent. Moreover, as a foreign-owned firm, RBS has not garnered the same level of media attention paid to U.S.-based rivals, which gives Citizens a bit of public relations cover when it comes to maintaining the confidence of U.S. retail customers.

"If [Citizens] were the only one in trouble and you didn't have so many other banks going down, it might be more of a problem," Hirsch said. "I would think Bank of America looks stranger to people than RBS because we're closer to it and we're seeing headlines about them every day."

But Citizens' ability to compete remains a concern to those who worry that austerity moves by its owner, on top of mounting credit costs, will undermine the franchise's value.

"They are competitive as long as they're not in effect discharging the people who have the best relationships with their customers, because that's who will preserve the franchise — that's the glue," said Arthur Loomis, president of Northeast Capital & Advisory Inc., an investment banking and consulting firm in Albany, N.Y. "That's how they've been chopping themselves off at the knees, when they've been letting those people go."

Citizens laid off 900 people, mainly in retail banking, in January. In April it announced it would cut another 1,250 positions over two years, some through attrition. But Citizens spokesman Mike Jones said the bulk of the cuts would involve back-office jobs in operational support and other departments that do not interact with customers.

Suzanne Moot, a banking consultant with M&M Associates in Milton, Mass., said Citizens continues to hold its own, particularly in New England, where its roots date to 1871. Citizens became a subsidiary of RBS in 1988 and has since made more than two dozen acquisitions to extend its reach.

"They have good distribution, they have very capable branch and regional people and they have a very reasonable lineup of products," Moot said. "I don't see any reason in the world why they can't be competitive with everybody."

Recent deposit-taking data supports that view. Between June 2008 and June 2009, deposits at RBS Citizens and Citizens Bank of Pennsylvania, the primary components of Citizens Financial, rose 4%, to a combined $103.1 billion.

More recently, the company has been opening about 1,000 accounts a week for customers responding to two rewards-based savings programs launched in the spring, HomeBuyer and CollegeSaver.

Under HomeBuyer, customers who save $100 a month for three years toward the purchase of a home will get $1,000 that can be used for closing costs or principal repayment. Under CollegeSaver, parents who open an account before their child's sixth birthday will receive $1,000 plus interest when the child turns 18, provided that a minimum of $25 has been deposited into the account each month.

Citizens says it also has been taking market share in private student loans and home loans. This year, the company for the first time cracked the top 20 in the mortgage lending business, and it has hired about 100 extra loan officers to help handle the added volume, Jones said. The company also plans to grow in wealth management. It recently hired two senior executives from Bank of America along with 40 relationship managers, and it plans to hire another 40 relationship managers next year.

But life on the other side of the ledger has been a lot tougher.

Citizens' loan book as been shrinking along with the rest of the industry, and credit costs have been climbing. Total assets at the two main Citizens subsidiaries dropped 9% from June 2008 to June 2009, to a combined $155.2 billion, while noncurrent loans and leases more than doubled, to $1.7 billion.

And therein lies the rub for RBS. At the current rate of asset contraction, the longer RBS holds on to Citizens, the greater the risk of erosion in the franchise's value. But divesting Citizens — a move that Loomis estimates would free up $15 billion of capital for RBS and bring in a premium for the deposits — probably makes little sense given current market valuations and the continued desirability of the United States as a destination for foreign bank investment.

"They're sitting on a franchise that may have significant value to them, and then it becomes a capital utilization question," Loomis said.

But British banks "have always viewed growth here to be much better than in Great Britain. The rates of return are better and the risk profile is lower."