Citizens Financial Group is forecasting net interest income to shrink in the second quarter after deposit runoff this year has prompted the regional lender to pay more for deposits and recession fears have led it to tighten lending standards.
Executives at the $222 billion-asset bank told analysts on Wednesday during a first-quarter earnings call to expect NII to decline 3% from the April-June period following a 4.7% decline in total deposits since the end of last year.
The Providence, Rhode Island, company's spending on interest-bearing deposits rose 51 basis points during the quarter in an effort to attract new depositors. Partly as a result, the bank lowered NII growth projections for 2023 to between 5% and 7% from earlier guidance of 11% to 14%.
Citizens CEO Bruce Van Saun said the bank is having to "pay a little more" in deposit costs to "stay competitive" amid rising interest rates as clients seek to move funds into higher-yielding investment accounts and away from regional lenders after two bank
"There is a greater appreciation on the part of depositors that the [Federal Reserve] has moved rates very high and that there's alternative ways to make more money on cash," Van Saun said during an interview. "To compete in that frothy environment, you have to be sharper in your offering."
For Citizens, Van Saun said, deposit "churn" occurred between January and February due to seasonal factors and rising interest rates that led depositors to seek higher rates elsewhere.
In March, as the economy absorbed the collapse of Silicon Valley Bank and Signature Bank, deposits at Citizens "held flat," Van Saun said. While the bank lost some larger corporate depositors, it also opened around 5,000 small-business accounts and 800 commercial accounts, he said.
"We have a solid deposit base that's stable through the turbulent period, and that we can get rolling again," he said.
Also contributing to the bank's forecast for second-quarter NII is its pullback in auto lending that began last year as well as a more careful approach to consumer credit in general amid economic uncertainty, Van Saun told analysts.
Citizens has tightened lending standards for the auto industry and other sectors over the last year as a "cautionary measure," he added.
"We've made credit tightenings, not because we've seen anything we don't like, just in an abundance of caution to make sure that we don't have any tail risk in the portfolio," Van Saun said during Wednesday's earnings call.
Another area of concern Citizens noted during the bank's earnings call is commercial real estate. Rising interest rates and back-to-work trends following the pandemic are making office-related exposures riskier.
While nearly 100% of the bank's office-related borrowers are current on their obligations, around 24% of its $6.3 billion office-related loan book is "criticized" or under stress, Citizens Chief Financial Officer John Woods told analysts.
Citizens added $35 million to its allowance for credit losses to account for the risk of a recession and "the outlook for losses in the commercial portfolio, particularly in office," Woods said.
"Our current reserve level contemplates a moderate recession and known risks, and there should be less of a need for further reserve builds given anticipated spot loan decline for the year as auto runs down," Van Saund told analysts.
Total loans of $154.7 billion fell 1% compared to last year's fourth quarter. Commercial loans of $80.9 billion decreased 2% during the same period, while the bank's $73.8 billion retail portfolio declined 1%.
In addition to paying higher funding costs, Citizens is planning to intensify growth initiatives in its consumer and commercial businesses to attract new customers. The bank has launched new products in recent years including CitizensPlus for wealth management clients and Citizens Access savings accounts.
Underpinning that effort is the bank's market expansion into the New York metropolitan region following the bank's
"Job one is playing defense," Van Saun said during the interview. "But to be successful, we need to be continuing on with investments in key initiatives where we think we have a right to win."
The Pittsburgh bank grew its deposits in the first quarter, even as the failure of two other regionals sparked outflows across the industry. But PNC executives warned Friday that rising funding costs could continue to eat into its net interest margin.
For the quarter, Citizens reported total revenue of $2.1 billion, down 3% from last year's fourth quarter. Net income of $511 million decreased 22% during the same period, while NII declined 3% to $1.6 billion.
Noninterst income fell 4% since last year's fourth quarter to $485 million, driven by a 15% drop in capital markets fees. Citizens updated noninterest income guidance for the full year: Instead of increasing 7% to 9%, it is now expected to rise in the mid-single digits.
Noninterest expenses totaled $1.3 billion, a 5% increase from last year's fourth quarter. Citizens adjusted its full-year guidance, saying noninterest expenses are expected to rise 5%, not 7% as forecasted earlier.
"The plans we have remain on course," Van Saun said. "We've put numbers out there that are realistic and that we can deliver against while still making investments to position us for the future."
