Citizens Financial Draws a Blueprint for Big Change

When the folks at Citizens Financial Group said it was time for some changes, they meant it.

The Providence, R.I., bank is overhauling its operations as it prepares to be spun off from the Royal Bank of Scotland. Every financial institution is under pressure to adapt to the times, and some of these changes might have happened anyway, but executives of the $127 billion-asset Citizens seem to have seized on a rare opportunity to forge a new identity. Whether the moves prove right or wrong, they provide a blueprint that other bankers can study.

The process carries all the way to sources of inspiration: Michael Cleary, the head of U.S. distribution for consumer banking, is thinking more like an online retailer than the bank across the street.

"We have to make sure we understand customer expectations that are set outside of banking at places like Amazon," Cleary said. "Customers have those same expectations at the bank."

Over the last few years, Citizens has simplified some of its retail products, expanded its commercial lending and invested in new mobile and ATM technologies. Executives believe that the changes will bolster its customer experience and help it compete in a difficult environment.

The changes will keep pace with other banks and improve its return on assets and other profitability measures. And, though Citizens executives would not discuss the spin-off because of a quiet period, the revamp could paint a better picture for potential investors when RBS begins selling off its U.S. unit later this year.

"This is not a market where investors are tripping over themselves to buy bank stock," said Jeff Davis, managing director of the financial institutions group at advisory firm Mercer Capital. "The dynamic is RBS is selling at a point where profitability is uninspiring."

During the first quarter, Citizens' return on assets was just 54 basis points, roughly half that of some of its peers, Davis said. Because of this, it was almost imperative that the company, which traditionally was known for its retail operations, expand its commercial lending.

In 2009, Citizens began bulking up its commercial operations by investing in new technology, such as a loan origination platform, providing intensive training to employees and bringing in talent as needed, said Robert Matthews, vice chairman of Citizens Financial with responsibility for its commercial banking business lines.

These efforts have continued with the company's recent announcement that it was expanding its lending for franchising, health care and technology beyond its traditional markets in New England, the Mid-Atlantic and the Midwest to include areas like Washington, Atlanta, Dallas and Los Angeles. Citizens is looking to serve companies with annual revenues of at least $500 million, Matthews said. Because of this, they don't need local branches.

"We looked at our peers and realized that they had a strong retail business and a strong commercial business," Matthews said. "It really was an opportunity we weren't playing in, and we decided that we should begin to build that out."

Focusing on commercial lending makes sense because current regulatory scrutiny is making it more difficult to earn money from retail products, Davis said. Several of the larger banks also are deemphasizing the retail business right now by selling or closing branches and are looking to shrink their deposits, said Chris Whalen, senior managing director for the financial institutions ratings group at Kroll Bond Rating Agency.

Additionally, investors are looking to buy stock in companies that are likely to increase earnings in the future, said Steven Reider, president of consulting firm Bancography. Being able to show that the bank has a commercial presence in cities with growth potential could be a big plus, he added.

"You have to go where the growth is, and Texas is a growth story," Davis said. "But nothing is easy. It is a highly competitive market, and there are bank and nonbank lenders in those markets so expanding isn't a panacea."

Besides putting a greater emphasis on the commercial business, Citizens has also revamped some of its retail operations, executives said. The main goal has been to make interactions with customers simple, clear and personal, executives said.

This has included simplifying some checking account practices, such as not charging overdraft fees on transactions of less than $5. One checking account allows customers to avoid a monthly fee by making just one deposit in a month.

The bank has rolled out 1,600 ATMs that allow customers to make deposits without a deposit slip and tellers have gone mostly paperless, Cleary said. If a customer tries to overdraw their account from an ATM, they are alerted to the problem.

"It has really been a journey, not a destination," said John Rosenfeld, head of everyday banking for Citizens Financial. "We are working on simpler, clearer and more personal products for just about everything we have."

These changes fit with overall trends where banks are making their practices easier for consumers to understand, observers said. Some banks, such as KeyCorp and Bank of America, have launched checking accounts that eliminate overdraft charges or other fees as a way to be more customer friendly.

"A typical way to differentiate yourself in this no-interest-rate environment is how do I make it more attractive to the consumer?" said Tim Scholten, the president of the consulting firm Visible Progress. "These accounts hope to attract the retail customer that will stick with them for the long haul."