Suddenly, expenses rising faster than revenue at regional banks

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Citizens Financial Group’s fourth-quarter results highlight the challenges regional banks are facing in generating top-line growth that outpaces expense growth.

Though Citizens reported modest growth in its consumer and commercial loan portfolios in the quarter, three interest rate cuts in the second half of the year reduced loan yields and ate into net interest income. As a result, the quarter that ended Dec. 31 was the first in many in which the Providence, R.I., company's expenses rose faster than revenues compared with the year-earlier period.

“What we haven’t had to contend with for a long time is rates moving down,” Chairman, President and CEO Bruce Van Saun said in an interview Friday after the $165.7 billion-asset company reported its fourth-quarter results. “We either had flat rates for many years or we had a rising rate environment. Now we’ve had three cuts and when net interest income contracts, it certainly crimps the top line and makes it hard to sustain that operating leverage.”

Citizens posted fourth-quarter net income of $450 million, a 3% decrease from the same period in 2018. Meanwhile, expenses grew 4% to $986 million, driven in part by a 4% increase in salaries and employee benefits, which totaled $502 million.

Profits fell even though total loans increased 2% to $119 billion year over year. However, net interest income declined 2% to $1.1 billion, and the net interest margin narrowed 19 basis points to 3.04%.

Citizens is “certainly not alone” as other banks struggled to generate positive operating leverage in the fourth quarter, said Scott Siefers, a managing director at Piper Sandler. Among the banks that announced fourth-quarter results this week, Regions Financial, U.S. Bancorp, PNC Financial Services Group and Bank of America all saw expenses rise faster than revenues when compared with the same quarter in 2018.

Siefers said, however, that Citizens has some advantages over its peers. It has ample opportunities to grow both its retail and commercial loan portfolios, it has room to manage down its deposit costs, and it can “dial up or back the expense growth as needed.”

Van Saun said that revenue growth is likely to be constrained in the near term but that Citizens could return to generating positive operating leverage later in 2020 as deposit costs come down and its net interest margin stabilizes.

“We’re still exhibiting good expense discipline and we’re finding efficiencies, but we’re also continuing to invest,” he said. “We’re balancing delivering well in the near term while making those investments that position us well for future success.”

One of those investments will be a new platform for small-business and lower-middle-market clients. Van Saun said that will include easier access to deposit and borrowing options, as well as tools to help those clients manage working capital.

Van Saun pointed to education refinance and credit cards as two areas where he sees opportunity for further growth. For example, Citizens has redesigned some product features in its credit card business and used data analytics to bring in new customers.

“That’s a business where we’re not ever going to be a scale player, but historically, we punched a little under our weight,” he said.

Van Saun also said he expects to see continued growth in fee income. Citizens has made a number of nonbank acquisitions in recent years, and those helped to boost overall noninterest income 17% to $494 million in the fourth quarter.

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Earnings Regional banks Consumer lending Commercial lending Bruce Van Saun Citizens Financial PNC Financial Services Group Regions Bank U.S. Bancorp Bank of America