Citizens Financial Group's Strategy Amid Declining Loan Demand and Asset Quality Issues

Current Loan Demand Trends

Citizens Financial Group is experiencing a decline in loan demand, with a $1.6 billion decrease in commercial loans due to balance sheet optimization, paydowns, and market conditions. This trend is consistent with the broader banking sector, where other institutions also report modest loan growth and soft demand.

"The decrease in total loans and leases as of March 31, 2024 compared to December 31, 2023 reflects a $1.6 billion decrease in commercial given balance sheet optimization actions, paydowns and market conditions driving lower client demand." --- (CFG, sec filing, 2024/Q1)

"We expect kind of in that 6 basis point to 8 basis point range on average, given current levels. And then, loan growth, we assume to be very modest in this -- in our forecast kind of going forward just kind of given the loan dynamics that we're seeing. And then, finally, I would just say, although it's not as going to be meaningful for 2024, it's just the actions of the Fed and what they do, whether they cut or not. So, those are kind of the puts and takes as we kind of think about the next couple of quarters." --- (USB, earning call, 2024/Q2)

"Average loans were up 4% primarily driven by strong demand for working capital loans in TTS." --- (C, earning call, 2024/Q1)

"primarily driven by lower commercial loan balances. Commercial loans were $219 billion, a decrease of $3.4 billion, driven by lower utilization as well as soft loan demand." --- (PNC, earning call, 2024/Q1)

"Average loans were up 2% year-over-year, driven by strong growth we're seeing in custom lending and a pickup in mortgage lending. Both Merrill and the Private Bank continue to see good organic growth, and they produced strong assets under management flows of $58 billion since last year's second quarter, which reflects a mix of new client money, as well as existing clients putting more of their money to work." --- (BAC, earning call, 2024/Q2)

Impact of Declining Loan Demand on Financials

Declining loan demand, influenced by economic conditions and competition, has led Citizens Financial Group to adjust its pricing and mix of assets and liabilities. Additionally, the company has engaged in refinancing activities to capitalize on tighter spreads and reduce financing costs, mitigating some financial impacts.

"These factors are influenced by the pricing and mix of interest-earning assets and interest-bearing liabilities which, in turn, are impacted by external factors such as economic conditions, competition for loans and deposits, the monetary policy of the FRB and market interest rates." --- (CFG, sec filing, 2024/Q1)

"Some of that was just in the bond and the syndicated loan market. There was refinancing to take advantage of tighter spreads and kind of opportunity to lower finance carry costs." --- (CFG, conference, 2024/05/31)

Strategic Responses to Declining Loan Demand

Citizens Financial Group is adjusting its loan expectations due to lower demand, maintaining confidence in financial performance and investments. The company is also focusing on customer acquisition strategies to achieve targets in assets under management, deposits, and loans, despite a 3% decline in net interest income from reduced loan balances.

"And then we’ll see the loan just given where loan demand has started off the year, maybe average loans maybe towards the lower end of that original range." --- (CFG, earning call, 2024/Q1)

"The authorization reflects confidence in our ability to deliver strong financial performance while continuing to invest across our businesses and deliver attractive returns to shareholders." --- (CFG, press release, 2024/06/28)

"As expected, NII is down 3% linked quarter, reflecting a stable margin on a 2% decrease in average interest-earning assets given lower loan balances and day-count." --- (CFG, earning call, 2024/Q1)

"Can you talk about your customers' acquisition strategy there and the path you see to eventually get to the target of $10,000,000,000 AUM, dollars 11,000,000,000 of deposits, dollars $9,000,000,000 of loans?" --- (CFG, conference, 2024/06/10)

Risk Management Strategies for Asset Quality Issues

Citizens Financial Group is addressing asset quality issues by repositioning its balance sheet, enhancing capital liquidity, and deploying loan capital more selectively to achieve better risk-adjusted returns.

"The methods used and judgments made reflect, among other factors, the nature of the assets or liabilities and the related business and risk management strategies, which may vary across the Firm’s businesses and portfolios." --- (JPM, sec filing, 2024/Q1)

"John Stern: Yeah, sure. So I think, you know, in terms of asset sensitivity from a risk management perspective, we are as neutral as you can be." --- (USB, earning call, 2024/Q1)

"For information on industry limits, see Commercial Portfolio Credit Risk Management – Risk Mitigation in the MD&A of the Corporation’s 2023 Annual Report on Form 10-K. Asset managers and funds, our largest industry concentration with committed exposure of $172.3 billion, increased $3.0 billion, or two percent, during the three months ended March 31, 2024, which was primarily driven by investment-grade exposures." --- (BAC, sec filing, 2024/Q1)

"And in data, while there's a lot more to do, we stood up a data governance process and streamlined our data architecture to ultimately facilitate straight-through processing. Overall, we've improved risk management and consolidated and upgraded systems and platforms to improve our resiliency." --- (C, earning call, 2024/Q2)

"Our balance sheet has been repositioned with an exceptionally strong capital liquidity and funding profile and we are deploying our loan capital more selectively to achieve better risk-adjusted returns." --- (CFG, earning call, 2024/Q1)

Overall Financial Performance Analysis

Citizens Financial Group delivered solid second-quarter performance with strong fee income, excellent deposit trends, and good expense discipline. Despite challenges in estimating the impact of economic changes on ACL, the company remains well-positioned in key markets and expects continued strong performance in the second half.

""We delivered solid performance in the second quarter, featuring strong fee performance across Capital Markets, Wealth and Card, excellent deposit trends, good expense discipline and credit metrics in line with expectations," said Chairman and CEO Bruce Van Saun." --- (CFG, press release, 2024/07/17)

"Citizens Financial Group, Inc. | 26 It remains difficult to estimate how changes in economic forecasts might affect our ACL because such forecasts consider a wide variety of variables and inputs, and changes in the variables and inputs may not occur at the same time or in the same direction, and such changes may have differing impacts by product type." --- (CFG, sec filing, 2024/Q1)

"Our overall commercial franchise continues to be well positioned in serving the middle market, private capital, and key growth verticals, and we look for our strong performance to continue in the second half. I should pause to give a shout-out to Don McCree for his appointment as Senior Vice Chair in June." --- (CFG, earning call, 2024/Q2)