One regional bank’s plan to wait out the Fed
One regional bank’s plan to wait out the Fed


Citizens Financial Group’s Bruce Van Saun outlined Friday his response to one of the biggest challenges facing bank CEOs: how to buoy profits while waiting out interest rate cuts.

The Providence, R.I., company plans to boost fee income through mid-2020, when the central bank by some estimates could cease its cuts and ease pressure on net interest margins. Citizens is preparing to lean hard on its mortgage business and to pursue wealth management and other nonbank acquisitions, and gradually lower what it pays on deposits.

“That really has to be a focus if you’re going to offset the pressure on the [net interest margin] from the lower-rate environment,” Van Saun said in an interview Friday. “You have to focus on doing more for your customer and add more services that they will pay fees for. We are getting a return on those investments.”

Noninterest income source

“The mortgage refi boom is not over,” Citizens Financial CEO Bruce Van Saun says. “You can see this carrying on into the first part of 2020.”

The plan presumes that the Federal Reserve and the economy will cooperate. The central bank is expected to make at least one rate cut before year-end. Some investors are betting on two, according to futures data from CME Group. On Citizens’ side is the assumption that the central bank traditionally avoids big policy moves like rate cuts in an election year, though the 2020 campaign is expected to be far from traditional.

Executives of the $164.4 billion-asset Citizens tried to reassure analysts on a conference call Friday that they are confident a recession is not lurking in the near future, and that they could manage around monetary policy until it becomes more favorable to lending.

Riding more mortgage refis

Citizens booked a record for noninterest income of $493 million during the third quarter, a 19% year-over-year increase.

Much of that was driven by fees from mortgage banking tied to a surge in homeowners refinancing into lower rates. Mortgage banking fees nearly doubled year over year to $117 million for the third quarter. The performance was helped by Citizens’ purchase last year of Franklin American Mortgage. Excluding the effects of that deal, noninterest income rose 4%.

Van Saun said there is a backlog of applications that could provide a fee boost in the fourth quarter and even more borrowers who might want to get in on the action next year.

“The mortgage refi boom is not over,” Van Saun said in the interview. “You can see this carrying on into the first part of 2020.”

Making more acquisitions

M&A advisory and other fees from Citizens’ capital markets segment lagged in the third quarter, as did trust and investment services. But the bank is planning to shop for acquisitions that could boost those segments.

Citizens struck a deal earlier this year to buy Bowstring Advisors in the Atlanta area, which caters to midsize businesses. Previously it acquired Western Reserve Partners, which advises industrial and manufacturing companies in the Midwest.

Van Saun said they “might not be done” buying M&A boutique firms in other markets to target new industries. Citizens executives also said on the call with analysts that they are expecting to make a series of deals for smaller wealth management firms to strengthen fee income.

“That concerted effort of putting in place the services that we can and do more for our customers is paying nice dividends at this point,” Van Saun said. “There is still room to grow.”

Citizens is also seeking a partnership with an “iconic” technology company for a point-of-sale or merchant financing offering that could be announced later in October, Van Saun said. He declined to name the company. Citizens has struck similar deals with Apple and the home security firm Vivint.

Repricing deposits

Analysts at Keefe, Bruyette & Woods said in an Oct. 7 research note that banks were beginning to lower their deposit rates in the third quarter, which had not kept pace with Fed interest rate reductions earlier in the year.

As consecutive rate cuts by the Fed becomes more likely this year, “the rate of decline for deposit offering rates will accelerate, as the broader majority [of banks] closes the competitive gap with the first movers that have already begun to drop their deposit pricing,” the KBW analysts said.

Analysts pressed Citizens during the call Friday on whether banks could expect a bounce in margin as early as next year if the Fed stops cutting rates. Van Saun said that what has been a headache for bankers this year could turn into a “tailwind” if the difference between interest income suddenly starts to increase or at least flatten relative to the lower rates they will be paying on deposits.

“If the Fed gets to the end of the easing cycle and you end up with a positive inflows yield curve, I think you could see some positive impacts in net interest margin over the, call it two, three, four, five quarters out into 2020,” Van Saun said. “I think you see some stabilization here over the next quarter or two.”

Analysts at Sandler O’Neill said in a note Friday that although Citizens will not be immune from lower rates, “there are reasons to believe that [Citizens] can sustain fee momentum” and that its net interest margin “should find better support in coming periods.”



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