Citizens Financial Group CEO Discusses Regional Banks' Perception Shift Post Silicon Valley Bank Incident
In an exclusive interview with Bruce Van Saun, CEO of Citizens Financial Group, one of the top banks in the US, a reflection on the aftermath of Silicon Valley Bank's collapse unveils a striking shift in how regional banks are viewed in the industry.
When I arranged to interview Bruce Van Saun, the CEO of Citizens Financial Group, the 14th largest bank in the US, to discuss the first anniversary of the collapse of Silicon Valley Bank, I didn't expect to feel such a strong sense of déjà vu.
However, a busy week of news from New York Community Bank brought back unpleasant memories of the banking crisis from last year.
NYCB admitted to finding a significant issue in their lending operations related to internal loan review. This problem was caused by ineffective oversight, risk assessment, and monitoring activities. In simpler terms, the people responsible for spotting issues early on made mistakes.
Following reports of NYCB seeking crucial investments, the struggling regional bank saw its stock (NYCB) plummet by over 40%, trading at less than $2 per share.
After seeing NYCB's shares plummet, I was worried about a possible banking crisis. But a glance at other regional bank stocks reassured me - most were either slightly down or in positive territory.
Unlike the situation with NYCB, things were different on March 10, 2023 when SVB was closed by regulators. This led to a sharp drop in other regional bank stocks, with many seeing double-digit percentage decreases by the end of the day.
An employee holds the door open at the Silicon Valley Bank branch office in downtown San Francisco, California, on March 13, 2023.
An employee holds the door open at the Silicon Valley Bank branch office in downtown San Francisco, California, on March 13, 2023.
One year has passed since the day that began a series of bank failures. Despite the chaos that followed, the banking industry seems to be in a stronger position now.
However, there are challenges ahead. One major issue is the commercial real estate loans that banks have given out, which have turned bad due to the high office vacancy rates caused by remote work. Consequently, many office landlords have had to lower rent prices or sell their properties at a loss. This situation could result in a substantial amount of missed loan payments.
Federal Reserve Chair Jerome Powell recently cautioned senators during his semi-annual testimony that as a consequence, there may be some banks that fail in the future.
I sat down with Van Saun to discuss how he sees the banking industry a year after SVB’s collapse and what he believes is in store for the future.
This story has been edited for length and clarity.
CNN: Would you mind sharing your thoughts on what caused the bank failures last year during the banking crisis?
Bruce Van Saun: Last year's bank failures were often referred to as regional bank failures, but they were actually idiosyncratic bank failures. For instance, both Signature Bank and Silicon Valley Bank saw their assets increase from $50 billion to over $200 billion in just four years. This rapid growth, combined with accepting a high percentage of uninsured deposits and having narrow customer bases, made them vulnerable to deposit flight risk.
Citizens Financial Group CEO Bruce Van Saun has been leading the Providence, Rhode Island-based bank for over a decade.
Citizens Financial Group CEO Bruce Van Saun has been leading the Providence, Rhode Island-based bank for over a decade.
They made a risky move by borrowing short and investing long, a big no-no in banking. Due to their rapid growth and lack of regulation, they struggled to manage their interest rate risk effectively. In contrast, larger banks like ours have the experience and stability to handle these challenges.
A Silicon Valley Bank office in Tempe, Arizona was captured in a photo taken on March 14, 2023. Some warning signs were overlooked before the recent collapse of Silicon Valley Bank, surprising both investors and bank regulators. The reason for this oversight puzzled banking experts, with some pointing to the shortcomings of US regulations.
A Silicon Valley Bank office is seen in Tempe, Arizona, on March 14, 2023. - With hindsight, there were warning signs ahead of last week's spectacular collapse of Silicon Valley Bank, missed not only by investors, but by bank regulators. Just why the oversight failed remained a hot question among banking experts, with some focusing on the weakness of US rules. (Photo by REBECCA NOBLE / AFP) (Photo by REBECCA NOBLE/AFP via Getty Images)
Rebecca Novle/AFP/Getty Images
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Blaming for the failures of a bank, who should take more responsibility: the bank's management team for not having proper safeguards in place or the financial supervisors whose role is to detect warning signs?
Having a quality board and management team is crucial. They play a major role in decision-making. For instance, SVB's mistake was solely focusing on growth, attracting short-term investments, and investing in long-term Treasuries.
The regulatory process is designed to identify any weaknesses and address them. Despite not facing the same issues as the banks that failed last year, Citizens Bank still felt the pressure like many other regional banks. How was your experience during last year's challenges?
BVS: In the industry, there was a perception of being seen as guilty until proven innocent. We felt like we were constantly defending ourselves. Despite having the facts on our side – being well capitalized and having loyal consumer deposits – we still had to work hard to communicate our story.
Citizens Financial Group is the 14th largest bank in the US
Citizens Financial Group is the 14th largest bank in the US
Michael Nagle/Bloomberg/Getty Images
We were very focused on maintaining deposits and liquidity right from the start. We knew there were opportunities to benefit from banking failures. Customers from SVB and Signature Bank were eager to move their money and open new accounts with us. The demand was so high that we extended our hours and had extra staff on weekends. This reassured people that we are a safe bank, as they trusted us with their accounts.
In times of external stress, we have standard protocols in place. We meet daily to address any concerns, but we were not losing sleep over this situation.
How has the past year changed Citizens’ business model?
One thing that’s become apparent is that deposits are going to cost more. So where we’re lending those deposits is even more important.
When the Federal Reserve was injecting a significant amount of money into the financial system and you had a large number of deposits, there were opportunities to improve your profits that may not have been part of a long-term strategy.
We were involved in the indirect auto loan sector and had agreements with SoFi and Affirm where Citizens purchased some of their loans and shared in the associated risks in return for fees. However, we made a decision to shift our focus. We decided to prioritize strengthening our deposit base.
What are your thoughts on the current situation at New York Community Bank? With a recent $1 billion investment and a significant management overhaul, do you believe they are on the right track now?
When a company's stock is consistently dropping, it's easy for people to assume the worst and think that the bank is headed towards failure. However, I believe that the risk of failure has significantly decreased due to the infusion of capital from external investors and their commitment to addressing the bank's issues.
NYCB will have instant credibility with regulators due to Joseph Otting being CEO. Otting previously served as the comptroller of the currency from 2017 to 2020 and was the CEO of OneWest Bank, successfully guiding the lender through a challenging period. In 2015, OneWest Bank was sold to CIT Group for $3.4 billion.
Do you think NYCB's current situation could be a warning sign of potential issues ahead for the banking industry?
BVS: It’s unique because it's a combination of three banks in a short period of time. (NYCB acquired Flagstar in 2022. A year later, it bought $40 billion of assets from Signature Bank, boosting NYCB’s total assets to over $100 billion. Crossing this threshold is important for banks as they are required by law to allocate more capital to safeguard against potential losses.)
Office real estate is just one component of commercial real estate, albeit the most worrisome to banks and economists.
Office real estate is just one component of commercial real estate, albeit the most worrisome to banks and economists.
CARLOS BARRIA/X90035/REUTERS
EB: What about commercial real estate, though? With fewer people working in offices compared to before the pandemic, are you preparing for potential challenges in the banking sector? How is Citizens Bank planning to minimize losses, especially since nearly one-fifth of your loans are in that sector?
A sign advertises vacant retail space for lease in the Loop on April 20, 2023 in Chicago, Illinois.
A sign advertises vacant retail space for lease in the Loop on April 20, 2023 in Chicago, Illinois.
Scott Olson/Getty Images/File
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Why it’s not all doom and gloom for commercial real estate
When it comes to our portfolio, it's important to look beyond the surface. The types of properties we invest in make a difference.
In the realm of commercial real estate, we focus on industrial, warehouse, and distribution spaces, which have proven to be solid investments. Multi-family homes are also a good choice for us.
We are particularly interested in offices that house life science businesses, such as lab research facilities. These types of properties have shown resilience, remaining open and operational even during the challenges of Covid. However, we are cautious when it comes to loans for general office buildings, as they pose a higher level of risk.
We have thoroughly reviewed our financial situation and have determined that although we may incur some losses, we are well-prepared and have set aside significant reserves to cover them. Our team is closely monitoring each loan with our most experienced staff members. Overall, we believe that our approach to managing this situation is effective.
Editor's P/S:
The article delves into the banking industry's current state, one year after the collapse of Silicon Valley Bank. It highlights the challenges regional banks face, as exemplified by the recent struggles of New York Community Bank (NYCB). The article emphasizes the importance of sound risk management practices and the need for banks to adapt to changing market conditions.
Bruce Van Saun, CEO of Citizens Financial Group, shares his insights on the industry's resilience and the strategies his bank has implemented to navigate the evolving landscape. He underscores the significance of deposit stability, the shift away from higher-risk lending, and the focus on sectors with long-term growth potential. Van Saun also expresses confidence in Citizens' ability to weather potential headwinds in the commercial real estate sector due to its prudent lending practices and diversified portfolio. Overall, the article provides a comprehensive overview of the banking industry's current landscape and the key issues that banks are facing.
