A diversification effort underway at Citizens Financial Group in Providence, R.I., is a prime example of how regional banks are wringing additional revenue out of a challenging economy.
The $150 billion-asset bank is cultivating a niche in middle-market banking, making more loans to companies with annual revenues between $25 million and $500 million and adding M&A advisory and other services to offer to those same customers. Moreover, it has hired executives from other banks to spread those services to businesses outside its traditional markets in New England and the Midwest.
Regionals nationwide for several years have been expanding out of market and investing in specialty lines — whether it’s Webster Financial’s offering health savings accounts and opening of commercial lending offices along the East Coast, TCF Financial’s financing of recreational vehicles and other products, or First Horizon National’s formation of a restaurant franchise business around loans it purchased from GE Capital. The impetus is as strong as ever given the fact that interest rates remain relatively low and overall commercial loan growth has weakened.
Citizens CEO Bruce Van Saun, whose company went public in 2014 and completed its spinoff from Royal Bank of Scotland the next year, alluded recently to the tough growth environment.
“I think we assumed when we went on the [initial public offering] roadshow that we’d have a number of rate hikes that would help our performance and that didn’t happen,” he said last week at the Bernstein Strategic Decisions conference. Also, “we thought GDP [growth] would be a little faster, and it wasn’t.”
Yet the bank’s earnings per share have nearly doubled to 57 cents per share in recent years and other yardsticks such as return on equity have improved, he said.
Scott Siefers, a principal with Sandler O’Neill, says the company has found ways to strengthen itself. “Van Saun had laid out a strategy to get them up closer to peer levels of profitability, and I’d say he’s delivered really well on it,” Siefers said.
Part of the bump has come from making more middle-market loans, especially in other parts of the country. Last year, Citizens recruited a former SunTrust Banks executive to head up commercial lending in Atlanta, and this spring it added a JPMorgan Chase veteran to lead expansion efforts in the New York metro area.
Middle-market loans rose 5% in the first quarter from a year earlier to $12.5 billion. And loans to a larger group, companies with annual revenue between $500 million and $3 billion, rose 12.5% to $7.2 billion. Those growth rates compare favorably with the bank’s 7% gain in total loans in the same period.
To complement that push, Citizens recently bought the M&A advisory firm Western Reserve in Cleveland, which it thought would attract middle-market clients. Citizens has also invested heavily in capital markets capabilities and a tech platform that matches middle-market clients with potential business partners, Don McCree, head of commercial banking, said in an interview.
Well over half of the bank’s middle-market clients have indicated an interest in some type of transaction, be it an acquisition or a leveraged finance deal, and Citizens wants to be well-positioned to advise them, he said.
“We have a lot of [business] owners who are thinking about doing something. It doesn’t necessarily mean selling their company,” McCree said. “There’s a whole variety of different corporate finance actions a company can take, and what we’ve tried to build over the last several years is a set of capabilities that will allow us to do any of those.”
All the changes are helping transform the bank into more of commercial bank than it had been, said David George, a senior research analyst at Robert W. Baird & Co.
“From my perspective, the strategy makes complete sense,” George said. “The legacy Citizens franchise is one that was more historically focused on small businesses and transactional business on the consumer side.”
Still, venturing outside one’s geographic markets can carry risks, Siefers said.
For one thing, investors don’t always like it. “But by the same token, the reality of midmarket banking is that you sort of have to be a national player to some extent,” he said.
With the end of the second quarter just a few weeks away, a recurring theme has emerged in recent presentations by executives at national and regional banks: Post-election optimism has cooled, and while middle-market borrowers are still hopeful for regulatory and tax relief, they are waiting for clarity on these policy issues before pursuing more credit.
McCree concurred with that assessment and expressed a wait-and-see approach for the bank itself.
“The financial markets are all right there, ready to support transactional business that a client might want to do,” he said. “We’ll see. I think we have a good year ahead of us; we may have a great year ahead of us, but we’ll be happy with a good year.”
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Corrected June 6, 2017 at 2:18PM: Because of an editing error, an earlier version of this story understated the value of loans that Citizens made last quarter to companies with annual revenue between $500 million and $3 billion. It was $7.2 billion.