Why Citizens is willing to pay so much for deposits

The price of deposit growth in this environment may be steep, but it’s one that Citizens Financial Group is willing to pay.

The $160.5 billion-asset Citizens has outpaced some other regionals so far this quarter in adding deposit. That accomplishment, of course, comes with a steep price, but CEO Bruce Van Saun says it’s worth it for the additional control it gives the Providence, R.I., bank over its funding strategy.

After all, he said that Citizens has had strong loan growth and yields compared with its peers, and it has done so while keeping its loan-to-deposit ratio to just a shade under 95%.

“Some banks are not really playing offense on their balance sheet. They’re not growing loans that much,” he said in an interview after the company’s quarterly conference call. “We want to be playing offense, as long as we’re finding prudent and smart ways to grow the balance sheet. We want to bring in new customers and have a healthy, growing franchise and then look for ways to cost effectively manage that.”

Citizens reported on Thursday that total deposits grew 6% year over year to $123.9 billion. Interest expenses associated with deposits nearly doubled to $287 million. Citizens’ loans also grew 6% to $117.6 billion.

By way of comparison, KeyCorp in Cleveland reported Thursday that its loans rose 2.4% to $90 billion and deposits rose 3% to $108 billion. And M&T Bank reported on Monday that total loans grew 1% (led by a 6% increase in commercial lending), but its deposits fell 1% over that same time period. Its loan-to-deposit ratio stood around 98% in the first quarter, leading some analysts to question if the bank would let that drift above 100% and if they might have difficulty funding loan growth.

One of the highlights this quarter was Citizens Access, the $160.5 billion-asset bank’s new digital deposit-gathering franchise.

Launched in mid-2018, Citizens Access netted the bank another $3 billion in deposits by the end of the year, exceeding an initial projection of $2 billion. By the end of the first quarter, Citizens Access had brought in $4.6 billion in new deposits, mostly from affluent and mass affluent customers completely new to the bank.

The digital effort currently offers only high-yield savings accounts and certificates of deposits, and Van Saun said it’s too early to say yet whether they’ll start offering a checking account along with Citizens Access.

But he does want to market other products and services to the 60,000 or so new households the bank has picked up. Those customers may not want to leave their primary bank, but perhaps Citizens can interest them in its wealth management services, for example. Or they may be interested in a digital loan product, Van Saun said.

Van Saun expects that Citizens Access can expand at a rate of roughly $1 billion per quarter, which would put it close to or beyond $7 billion by the end of the year.

Whether Citizens chooses to go beyond that $7 billion depends on a number of factors.

“Some of that will depend on the outlook we have for loan growth and the pace at which some of our other deposit initiatives are gaining steam,” Van Saun said. “Citizens Access isn’t a unit unto itself. It’s an arrow in the quiver of our funding strategies and we trade that off with other avenues to take in funding.”

Those other avenues include widening the bank’s commercial deposit base. Van Saun explained that a number of years ago, when then-parent Royal Bank of Scotland needed to shrink its balance sheet, the bank chased away a good deal of commercial deposits.

Now the bank is working to get some of those deposits back, Van Saun said. One example is trying to get more escrow deposit business from property managers that already have loans with Citizens.

He added that the newer digital brand has, however, provided a nice bridge to help fund more lending while Citizens rebuilds its commercial deposit capabilities.

Speaking on the company’s quarterly conference call on Thursday morning, Chief Financial Officer John Wood commented that the further away we get from the Federal Reserve’s last rate increase, the more manageable deposit costs should become.

But Van Saun said he does not share the recent view of some observers that a rate cut could even be in the cards later this year and that the bank views that as a slim possibility, at best.

“If I had to pick whether the next [movement in interest rates] would be up or down, I still personally think it’s more likely to be up than down,” he said. “The market may disagree with that, but I think the economy is in good shape, and I think we’ll get a little tailwind when this China trade arrangement gets put to bed.”