Being cast off from a struggling foreign parent company might bring on an identity crisis for some institutions. Not so for Citizens Bank, which is looking to turn its coming independence from the Royal Bank of Scotland into an opportunity to strengthen its consumer banking in the United States.
But it may be a slog.
In the era of too big to fail, Citizens – with about 1,400 branches, including more than 40 in the Buffalo Niagara region, and no investment banking operations – could serve as a test case for whether a midsize regional bank can establish itself in the challenging post-crisis climate. The bank recently failed part of the Federal Reserve’s stress test and has been struggling to improve its profitability in the face of slow loan growth and low interest rates, which have affected the entire industry.
Times are tough for banks everywhere, as financial firms continue to navigate tighter regulations, which have constrained some of the ways banks traditionally make money.
“Cost management and finding pockets of loan growth are really the name of the game,” said Matt Kelley, an analyst with Sterne Agee. “A low-interest-rate environment is hurting everybody.”
As Citizens takes its first steps to separate from RBS, it may not have a good road map to follow. While other foreign banks have spun off their operations in the U.S. since the financial crisis, there have been no good comparisons.
“It’s been mostly foreign banks buying U.S. banks over the last 15 to 20 years,” Kelley said, citing examples including the Mitsubishi UFJ Financial Group of Japan buying a minority stake in Morgan Stanley and Banco Santander completing its acquisition of Sovereign Bancorp during the financial crisis.
But executives at RBS and Citizens do not seem concerned.
“We have great brands, we have great culture,” Bruce W. Van Saun, chairman and chief executive of the RBS Citizens Financial Group, said in an interview earlier this year, before Citizens filed documents last week to go public. “We just have to run the place better.”
Although Citizens has been profitable in recent years, it is cutting costs, revamping the marketing of loans to attract customers and investing in technology as fewer consumers visit branches.
The moves come as RBS plans to spin off Citizens in at least two separate public offerings, beginning with an IPO of about 25 percent of its stake later this year, with the money it raises going to repay British taxpayers. RBS aims to complete the separation by the end of 2016.
Kelley estimated that Citizens could potentially be worth $14.8 billion to $18.5 billion, based on current common regional bank valuations and Citizens’ financial data at the end of 2013. That would value it around the market capitalizations of other regional banks like Regions Financial Corp. and Fifth Third Bancorp.
RBS, which took control of Citizens in 1988, has been under pressure from regulators to repay a government bailout and improve its operations in Britain, where it has faced stiff criticism for its lending practices and executive compensation.
RBS needed a bailout from the British government as the financial crisis festered, in large part because of soured subprime loans as well as write-downs tied to RBS’ acquisition of ABN Amro.
The Financial Conduct Authority, a British regulator, said in January that it had hired a consulting firm to investigate claims that RBS had pushed some of its clients into financial difficulty. And Ed Miliband, the leader of the Labour Party, has been pushing the British government to stop the bank from handing out bonuses of up to double a banker’s salary.
As part of its initiative to refocus on its main markets, the bank agreed in January to sell 94 of its Chicago retail branches and small-business operations to U.S. Bancorp.
While the bank typically ranks in the top five for market share, the company was hovering at around 12th in Chicago, according to Van Saun. It ranks fourth in the Buffalo Niagara region.
The company has already hired around 300 mortgage loan officers to help bolster that business, and Van Saun hopes to hire 400 more.
“I think we’re underpenetrated in terms of making new loans to small businesses,” Van Saun said this year.
New regulations have also limited the fees banks can charge to their clients, traditionally a major source of revenue. And mobile banking, as well as other technologies, has cut back on foot traffic in bank branches, which means that firms have fewer opportunities to use face-to-face interaction to sell products.
“There’s not enough revenue growth in the U.S. banking industry, not enough loan growth, for banks to drive higher profit levels,” Kelley said. “So institutions are laser-focused on reducing expenses.”
As a result, Citizens and other regional banks, including PNC Bank and KeyBank, have recently slashed their number of physical branches and have invested in technology.
“Branch-based transactions have been coming down at a high single-digit to a low double-digit annualized rate for the last couple of years,” Kelley said. “What banks are doing in response to that is they’re unveiling state-of-the-art ATMs, which allow more functionality at a lower cost.”