Citizens Financial Group is strengthening its cash position to account for a variety of risks, including commercial real estate stress, potential new regulations and geopolitical uncertainty.
The Providence, Rhode Island-based bank bolstered its reserves during the third quarter by setting aside $2.32 billion in its allowance for credit losses, which was up $122 million from the same period last year.
The bank's Common Equity Tier 1 capital ratio ticked up to 10.4%. That ratio was at 9.8% a year earlier and 10.3% in the second quarter of 2023.
The $225 billion-asset regional bank is "focused on building our liquidity even further" during the fourth quarter, CEO Bruce Van Saun said Wednesday in an interview.
Credit deterioration in commercial real estate lending is one of the factors that Van Saun cited in explaining the strategy.
Over the last two quarters, Citizens has charged off $100 million in office-related loans. And between July and September, it added $354 million in loan-loss reserves to cover its so-called general office portfolio, which accounts for around 61% of the bank's total office loans.
During the third quarter, the bank's nonaccrual loans increased by $444 million from the year-ago period, which Citizens said was driven by an increase in stressed office-related loans.
The bank factored in a "very severe" decline in office-related real estate valuations when setting its current loan-loss reserves, Chief Financial Officer John Woods told analysts during the bank's third-quarter earnings call.
Citizens executives feel comfortable that the bank is positioned to withstand the ongoing stress facing its CRE portfolio, Woods added. "The financial impact of further deterioration beyond our outlook would be manageable," he said.
Stress in office loans has been
Last week, Fitch Ratings lowered its outlook on Citizens' credit rating from "positive" to "stable," citing the bank's exposure to commercial real estate loans, as well as a difficult funding environment and higher credit costs.
"Given a lot of the headwinds — from CRE, deposit migration and higher funding costs — it's more than likely that [Citizens'] earnings power will stay at the level where it currently is, as opposed to our previously expected improvement over the rating horizon," said Mark Narron, an analyst at Fitch.
Terry McEvoy, an analyst at Stephens, said that Citizens has "modestly higher" exposure to office-related loans than other banks, which is a "concern that has contributed to the overhang on CRE being larger at Citizens."
"The outlook for net interest margin and deposit competition has eased considerably since March and April," McEvoy said. "Now, the near-term risk is around a slowing economy and the impact higher interest rates will have on the health of borrowers, specifically within commercial real estate."
Throughout this year, Citizens has reported steadily declining net interest income and a compressing margin. The bank's third-quarter net interest income of $1.52 billion was down 9% from the same period last year. Over the same one-year period, the net interest margin contracted by 22 basis points to 3.03%.
The bank's margins have been hurt by rising deposit costs. Total deposit costs rose by 163 basis to 2.02% from last year's third quarter. Interest-bearing deposit costs increased by 204 basis points to 2.60% over the same period.
During the third quarter, Citizens reported total average deposits of $176.5 billion, which was up 2% from the second quarter, but down 1% from last year's third quarter.
Citizens is scaling back the size of its loan book as it
Revenue totaled $2.01 billion during the third quarter, a 7.5% decline from the same period last year. Net income of $430 million was down by 32% over the same span.
Van Saun cited multiple rationales for the decision to build more liquidity.
Citizens is mindful of what he called "second-order consequences" from pending regulations that would set
A "defensive posture" that strengthens the amount of cash Citizens has on hand will better position the bank to serve clients later, Van Saun said. He noted that some companies may want to be able to make bigger draws on their credit lines in the event they need those funds in the future.
"We're better prepared to meet that demand if we've already gone out and put more cash on the balance sheet," Van Saun said.
