At a moment of economic uncertainty, Citizens Financial Group views stepping back from recent strong gains in its lending businesses as the best path toward future growth.
“We don’t necessarily need to be that greedy. We need to start managing risks,” CEO Bruce Van Saun said during an interview Tuesday. “We’ve had a nice run benefiting from higher rates, but we’re not going to play for the last possible hike.”
Like many banks, Providence, Rhode Island-based Citizens has been benefiting from the Federal Reserve’s push to raise interest rates in an effort to combat inflation.
The $226.7 billion-asset bank reported a 34% rise in net interest income to $1.5 billion during the second quarter, and its net interest margin jumped to 3.04%, a 33 basis-point increase from the same period last year.
Analysts responded positively, with Brian Foran, an analyst for Autonomous Research, calling the bank’s results “relatively upbeat.”
But the environment may soon shift as clients start to demand higher deposit prices aligned with rates set by the Fed. Citizens' best move now, Van Saun said, is to lock in floating rates in its commercial loan portfolio, while shifting the bank’s consumer lending business to less risky strategies.
“We’re going to start locking in and protecting our downside to sustain this level of net interest margin and return on equity,” Van Saun said.
In the bank’s commercial portfolio, Citizens began swapping floating rates for fixed payments to help secure the “levels of net interest income we’re operating at now,” Van Saun said.
The move is aimed to “thread the needle” between a mild recession that may leave “a little money on the table” and a more severe downturn, according to Van Saun.
“If the recession comes sooner and rates fall back down, then we’ll pat ourselves on the back,” he said.
The strategy for Citizens’ consumer portfolio is similarly conservative.
The bank plans to pull back from “opportunistic” auto lending and reduce the scale of its mortgage business, which generated $13 million less in fee revenue than during the same period last year, a 15% drop.
Instead, Van Saun said Citizens plans to “shift” the bank’s consumer lending focus to home equity lines of credit, student loan financing and its Citizens Pay point-of-sale business.
“We’ve benefited from higher rates pushing up net interest income,” Van Saun said. “Now we can step back and look strategically at where we want to do some pruning.”
During the second quarter, Citizens reported $1.9 billion in total revenue, which was up 24% from last year’s second quarter.
Net loans and leases grew 28% from the year-ago period to $154.2 billion, while net charge-offs fell 37% to $49 million.
Bruce Van Saun, the Rhode Island bank’s CEO, previewed a branch-light strategy in new markets like South Florida and Washington, D.C. Citizens recently closed acquisitions of Investors Bancorp and much of HSBC’s U.S. retail banking business.
Citizens pointed to increased advertising costs and investments in business development in explaining a 32% rise in noninterest expenses from the same period in 2021.
Net income fell by 44% to $364 million due largely to an increase in loan-loss reserves. Citizens added $216 million to its reserves after releasing $213 million during the same period last year.
The bank's earnings per share of $0.67 was below the $0.80 average estimate from analysts surveyed by FactSet Research Systems.
Shares in Citizens rose Tuesday by 1.94% to $37.89.
