Citizens Financial at Morgan Stanley Conference: Strategic Growth Amid Challenges

On Tuesday, 10 June 2025, at the Morgan Stanley US Financials, Payments & CRE Conference, Citizens Financial Group Inc (NYSE:CFG) showcased its strategic positioning and growth prospects. The company highlighted its transition into a national commercial bank while acknowledging challenges such as fee income fluctuations. Citizens’ strategic focus on middle market clients and private capital sectors was emphasized as a competitive advantage.

Key Takeaways

• Citizens Financial is expanding nationally and focusing on middle market and private equity sectors.
• The company expects strong second-quarter performance, driven by NII and credit performance.
• Challenges include potential fee income fluctuations due to M&A transaction timing.
• Citizens is ranked number two in the middle market leverage league tables.
• The company is leveraging its size for partnerships with fintechs.

Financial Results

• Second Quarter Outlook: Citizens expects a solid second quarter with strong net interest income (NII) and credit performance, although fee income may fluctuate.
• Fee Income Growth: Projected fee income growth of 8-10% for 2025, driven by M&A, bank and bond fees, equities, and global markets.
• Revenue Diversification: The company has diversified revenue streams across its private bank, mortgage, card, and global markets businesses.

Operational Updates

• National Expansion: Citizens has expanded from its New England/Mid-Atlantic base to higher GDP growth areas.
• Comprehensive Capabilities: It has developed a full-service investment bank with capabilities in leveraged finance, syndicated finance, public securities, and M&A boutiques.
• Private Equity Focus: Citizens maintains a strong private equity/private capital business, benefiting from transitions within its middle market client base.

Future Outlook

• M&A Pipeline: Citizens has a robust M&A pipeline, driven by generational changes and buyer-seller social matches.
• Capital Market Conditions: Recovering capital markets, with refinancing activity expected to increase in the latter half of the year.
• Treasury Solutions Growth: The treasury solutions business has achieved a 10% revenue CAGR since 2015.

Q&A Highlights

• Competitive Advantage: Citizens leverages its smaller size for focused client attention and agility, especially in fintech partnerships.
• Risk Management: The company is actively managing risks in office real estate, with a well-reserved portfolio and reduced exposure.
• Private Bank Synergies: The "One Citizens" approach promotes cross-border flow and a unified client experience.

In conclusion, Citizens Financial Group Inc’s strategic initiatives and operational strengths position it well for growth, despite some challenges. For more detailed insights, refer to the full transcript below.

Full transcript - Morgan Stanley US Financials, Payments & CRE Conference 2025:

Unidentified speaker, Host, Morgan Stanley: Alright. Up next, we have, citizens I’ll get through a quick disclosure. For important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. The taking of photographs and use of recording devices is not allowed. If you have any questions, please reach out to your Morgan Stanley sales representative.

And with that out of the way, we’re delighted to have with us today Don McCree, senior vice chair and head of commercial banking at Citizens. Don, welcome to the conference. Great to be here. So, Don, you you’ve talked about how, you view Citizens as one of the best positioned commercial banks among your super regional peers. Can you talk a little bit about the journey that the commercial bank has been on over the past several years and why you believe you’re best positioned among your competitors right now?

Don McCree, Senior Vice Chair and Head of Commercial Banking, Citizens: Yeah. So I would I would talk about it on three different axes. I joined the company right around the IPO about ten years ago, and the thing we looked at was where we’re situated in the country and which was New England and Mid The Mid Atlantic, which are generally low GDP parts of the country, low company formation. And we decided we had to go national, so we we went powerfully national, in all of our commercial businesses. So that was that was access number one.

The more important access was building out a set of capabilities. At that at the time we we IPO ed, we were basically a lender and a treasury services company. So we built I what I what I really do believe is the best positioned middle market investment bank in the country. And we did that and foremost with leveraged finance and syndicated finance. We added public securities.

We added global markets, which is currency commodities and interest rates, hedging. We then bought five m and a boutiques, which were all industry based m and a boutiques. And so the last of which was most fortunate, which was a data center m and a boutique, so we’re doing pretty well on that right now. And then we bought JMP Securities, which is an equity research, equity issuance house out in out in San Francisco. So today, we sit, and we, we think we have the full complement of all capabilities that any of our clients need at any time in their life cycle.

So it feels really good about being able to engage. And then in parallel with that, we can get into this a little bit more if you want to, we built a really big private equity, private capital business, and we went really long that complex about seven years ago. That’s my background. I was I’ve been doing this for forty two years, and a lot of it was in the in the private equity space. And we just saw the megatrend coming, and we saw private capital coming.

So we put a lot of resources around that. And when you get to the coalface of, really, what’s exciting about what we’re able to do in our franchise is we have 4,000 middle market companies that we bank, and 10% of them are looking to transition at any point in time. If they’re selling themselves, 90% of those sales are going into private equity. So it creates a huge pipeline of opportunities for us to bring into the into the PE complex. So that that’s what we’ve tried to do, and that’s why we feel particularly well positioned.

Unidentified speaker, Host, Morgan Stanley: And and and that shows quite clearly you you rank quite strongly in the league tables as well, and and you do compete with some of the largest banks as well. So can you talk about how you compete with those big banks? You talked about the you talked about the richer product set. But but what advantage do you see clients, of of clients working with a super regional bank like Citizens versus large money center bank?

Don McCree, Senior Vice Chair and Head of Commercial Banking, Citizens: So I I think every competitor is formidable, and I’ve never had a moment in my career where I haven’t had a lot of competition, and the money centers are are very competitive. They don’t pay a lot of attention to the middle market. They they they they talk about it a lot. But when things are kind of hot, they’re doing the $10,000,000,000 mega transactions, and they really don’t have the focus that we have. We have absolutely world class people, most of which came out of the money centers who’ve been doing this for years and years and years in their career.

And they’re just able to evaluate risk, evaluate credit, evaluate, the opportunity and price well for the marketplace. And we just you know, we’re number two in the in the middle market leverage league tables of of everybody, including the money centers. Centers. And so that’s, that that’s that’s kind of testimony to to our success. And it’s we we we try to stay focused on what our mission is.

We’re not gonna go compete for the $10,000,000,000 buyout just because our balance sheet’s not big enough to do that. And because we have the great people decked against those companies, we tend to have a win rate that’s pretty pretty attractive. And and do you think you

Unidentified speaker, Host, Morgan Stanley: have the full product set to service those middle market customers right now? Totally.

Don McCree, Senior Vice Chair and Head of Commercial Banking, Citizens: I I I don’t see any gaps at all. We might need to so, you know, about four years ago, five years ago, we really started to pivot towards industry, where we might be a little bit light in terms of the scaling of some of our industry capabilities. But but I I I haven’t seen a time in the last five years where we’ve said we don’t have a capability that that that we need to go service a a situation. Got it.

Unidentified speaker, Host, Morgan Stanley: Don, maybe pivoting over to the, to the macro environment. We’ve had some time to digest the announcements of April 2. We’ve also have had several positive announcements since then. At a recent conference, Bruce talked about how some customers are also starting to feel more comfortable. Can you elaborate on that point and and what you’re seeing in the commercial banks specifically?

Don McCree, Senior Vice Chair and Head of Commercial Banking, Citizens: Yeah. You know, so I had I had seven CEO meetings last week with our clients, and they’re all pretty sanguine. They’re they’re they’re obviously focused on country by country, tariff by tariff, interest rates, everything that’s going on out there, you know, tomorrow’s tweet, yesterday’s tweet, what what what what the uncertainty in the environment is. But by and large, they’re they’ve adjusted, and they’re adjusting. And the the report is, you know, we may not be pulling the trigger on x y z investment right now or x y z acquisition, but there’s not a lot of real worry out there among the

We’re starting to see it a little bit in in loan pipelines and deal pipelines and the like. So I think that that, you know, now that we’re three months into this and people have kinda seen the movie, that, that that people are just understanding there’s gonna be a little bit of a level of uncertainty. But I I you know, one of the things I’ve said numerous times is I go all the way back to COVID. And in COVID, companies went through probably the most extreme stress they ever went through. And they learned that they had to, you know, kind of manage their companies better, cut their expense bases, manage their inventories, manage their debt levels, and that’s really caught through.

So, you know, what I what I’ve always been worried about in the middle market, in particular, is some of the lack of professionalism and management. They’re they’re great business people, and they’re great at running their businesses. But financial risk management and inventory risk management was something that, that they struggled with, and they fixed that during COVID. And that that’s really put all these companies in a better position going into whatever we’re going into. And, so we don’t see a lot of financial distress.

And I think at at the margin, the companies are getting a little more optimistic, and they’re saying, you know, once we get through the summer into the half, we feel that that business activity could be quite interesting.

Unidentified speaker, Host, Morgan Stanley: So maybe a good segue from that is is into the guidance. Can you talk about any updates to the second quarter guide? Is there anything there you wanna share with us? Yep. I mean, I I

Don McCree, Senior Vice Chair and Head of Commercial Banking, Citizens: we we feel good. I think the second quarter looks like it’s gonna be solid, and we’re we’re not changing guidance. Our NII is performing incredibly well. Our charge offs and credit is performing incredibly well. We’ve got a little bit of noise in fees.

So in my business, we’ll probably have we have a whole bunch of transactions that are kinda straddling the second and third quarter. Whether they close or whether they don’t close, it’s I don’t really care, because the pipelines are super strong. But we have really strong activity in the private bank, in the mortgage business, in the card business, in the global markets business. So one of the things that that we, we look at is, is the diversification of the revenue streams that we’ve been able to accomplish over the last several years. So we feel we feel we feel good about the second quarter.

Unidentified speaker, Host, Morgan Stanley: Great. So so so not changing any of the guide. The fees depends on, you know, where where the transactions pull through into this quarter

Don McCree, Senior Vice Chair and Head of Commercial Banking, Citizens: or not. Largely you know, it’s it’s really m and a. So it’s it’s interesting. You know, everybody is doing one one more lap around the diligence on m and a deals with tariff changes, and there’s doesn’t seem to be a lot of people home at the FTC right now. So so if you have Hart Scott approvals or things like that, they’re just taking a little bit longer.

But, you know, we have larger m and a pipelines than we’ve ever had. And and, again, back to our core business model, we’re a little bit immune to some of the bigger challenges in places like m and a because we’re doing smaller transactions, and we’re doing middle market transactions. So they tend to get less attention. So there there’s a little more certainty there.

Unidentified speaker, Host, Morgan Stanley: So so that’s a good place maybe to talk about fees. You expect about at at the top of the house, you expect an eight to ten percent fee income growth for 2025. Can you talk about what the main drivers are at the commercial bank?

Don McCree, Senior Vice Chair and Head of Commercial Banking, Citizens: Yeah. It’s it’s it’s pretty it’s pretty diversified. So, you know, our big fee pools are, you know, m and a, which just might be about a in any given year, bank and bond fees, which are syndicated finance, the leveraged finance would much might be around 50%, and then, equities, which makes up the balance. And then we have a pretty big global markets business, which, you know, rises and falls based on where currency trends are, where interest rate trends are. So that’s doing quite well right now.

So, again, I go back to the thing I said before, which is I like the diversification in terms of fees, but, but, you know, we we will have, you know, a pretty broad pipeline across all of those kind of different fee streams at any point in time. And, and, again, private equity is a reasonably big driver in terms of of where we make a bunch of our bank and bond fees in terms of underwritings.

Unidentified speaker, Host, Morgan Stanley: So it you know, we’ll we’ll get into some details, but it sounds like if there is volatility, it is it it isn’t that great for some parts of the business, but there’s other parts of the business that can compensate for that. Exactly. Got it. Well, so so so maybe let’s talk about capital markets. You know, it sounds like conversations have started to resume again a little bit.

Can you talk about what buyers and sellers need to see before you actually get that activity and see those deal completions come through?

Don McCree, Senior Vice Chair and Head of Commercial Banking, Citizens: It’s it’s been for the last couple years, it’s been all about valuation. And, you know, sellers wanted to pay less and buyers wanted to get more. And and and getting those two things together were, were, somewhat challenging. It’s gotten a a bunch better. People have also had to adjust to higher interest rates.

So particularly if you’re dealing in in private equity and leveraged finance, you’re you’re paying a higher carry on your on your on your debt load. So that that impacts what you can pay. That impacts valuation. But I think, you know, it it it’s interesting to me. A lot of the driver of our m and a and our, leveraged finance and and syndicated finance business is generational change underneath companies.

So mom and dad have been running the company for years. Kids don’t wanna be in the business. They just wanna cash out. And so it’s not always about the maximum price, and we see a lot of things that we do which are more around the social match between a buyer and seller. So, you know, we do a lot with family offices, and they tend to be a different kind of buyer than a PE firm might be.

But I think I think that it it feels like there’s a well, let’s let’s go to the givens. The givens are there’s a massive amount of liquidity out in the market, whether that’s in the debt markets, whether that’s in the private equity markets. So there’s a whole bunch of money that needs to go to work. Number two is there’s a lot of private equity firms who have not realized in terms of their investments over the last several years, and they’re out fundraising again. And and it’s interesting.

We’re watching some of the fundraising that’s going on, and it’s going well. And so you would you would have thought that some of the LPs would be standing back and saying, wait a minute. You know, I haven’t gotten a a a carrier return on my on my existing investments, but some of these things, saw Tomo Bravo just announced a massive upsize in terms of the of the the fundraise that they did. So there’s a lot of people that want to transact. So it’s really a question to that goes to the question you asked, which is how do you get the valuations together?

And, and we’re feeling like it’s it’s beginning to move again. And I think the other thing that’s helping is, you know, you’ve got the administration backdrop of a more friendly m and a environment. So m and a is a little more friendly. You’re starting to see the IPO markets move. You’re starting to see, you know, decent issuance out there.

So the whole capital market, which has been, I wouldn’t say frozen, but it’s been a little bit stalled. And if you go back and look for the last nine months or twelve months, we’ve had record capital markets quarters, but it’s all been refinancings. There’s the new money machine has not begun to really move yet. And my feeling is as we get into the back half of this year and as we get into next year, the the new money side of things should should be taking off. And that’s irregardless of where interest rates are because people have adjusted to the interest rate environment.

So it it sounds like there’s a base level of activity that’s continuing, and

Unidentified speaker, Host, Morgan Stanley: the rest of it is more of a coiled spring, and and we’re pretty close to that.

Don McCree, Senior Vice Chair and Head of Commercial Banking, Citizens: And there’s always you know, I think I think if you’re if you’re if you if you just look at the big macros, you’ve had, you know, a lot of companies that maybe didn’t refinance during COVID, maybe didn’t refinance before that. You’ve got bonds kinda coming up to maturity cliffs. You’ve got debt coming up to maturity cliffs. That’s what drove the refinancing trend. So it it doesn’t really matter to us whether it’s refinancing or or a new money deal.

But if you get both going together, it’s gonna be quite powerful.

Unidentified speaker, Host, Morgan Stanley: And and when you talked about interest rates not mattering as much, do you mean that because we we we know that we’ve, you know, peaked on the short end. We’ve come down. Is is that what matters more? Is it the long end that volatility that matters?

Don McCree, Senior Vice Chair and Head of Commercial Banking, Citizens: I think I I don’t I mean, I don’t mean to say it doesn’t matter. I think people have adjusted to it. And, again, remember, you’re younger than I am, that these interest rates aren’t that high. I mean, I remember my mortgage was, like, 18%. So so if people what we need is directional certainty as opposed to massive volatility.

It’s very hard to do transactional business when there’s a

Unidentified speaker, Host, Morgan Stanley: lot of,

Don McCree, Senior Vice Chair and Head of Commercial Banking, Citizens: volatility. If people kinda settle in and say the ten year’s gonna be at four and a half, maybe we get a couple interest rate cuts on the short end, you get a steepening of the of the yield curve. We know what that what that environment’s gonna look like. You can actually hedge out some of the risk if you decide you wanna do that. It just gives the the the kind of baseline of an ability to transact as opposed to the ten years whipping around 80 basis points.

And, and and, you know, most of what we do is is floating rate. So the the the short end of the curve is what matters.

Unidentified speaker, Host, Morgan Stanley: Got it. And and, you know, while we have a little bit of volatility here, you’re also doing

Don McCree, Senior Vice Chair and Head of Commercial Banking, Citizens: a lot in the FX and hedging space. You recently became a registered swap dealer. How big of an opportunity is that over time? It’s pretty good. It’s probably, you know, another 20% business that we can do.

Just I mean, we’ll we’ll have a baseline growth, but just being a swap dealer, what we there’s a rule in the in the derivatives market called the de minimis rule. If you’re not a swap dealer, you have a cap of how much risk you can have by be becoming a swap dealer. We remove that cap, and it allows us to just do opportunistic transactions on the edge, and that’s that’s the that’s the 20%. You know, we’ll have the baseline of of the normal things we do, but it just allows us to engage in some things that might be at the margin a little less profitable. But it’s it’s nice revenue just to, you know, add to the kitty.

Unidentified speaker, Host, Morgan Stanley: Got it. And then on the treasury solutions business, you know, that’s driven a nice 10% revenue CAGR since 2015, so it’s a great business for you. Talk about what’s driving growth in that business and where you’re seeing the most traction today.

Don McCree, Senior Vice Chair and Head of Commercial Banking, Citizens: So that was a you know, way way back when when I joined, that was a real repair job. It was a little bit of a mess. So we had to stabilize the business, which was really the five years. We had to put a new portal in, and we had to put some new technology in. So that’s all behind us.

So we’ve actually begun to win quite a bit of core treasury services business. What I mean by that is receivables and payables and and depository business with our with our core clients. We’ve taken attrition down by about half. So that’s a that’s a challenge you have in some of these businesses. So that’s stabilized the core.

We’ve done really well in a couple sectors like merchant services, where we’re now banking the top eight merchant services companies, and we just won a huge piece of business in the last quarter. And then we continue to grow that. And now we’re moving pretty aggressively into two areas, one of which is kind of industry focused solutions. So think, like, we’re a we’re a huge gaming bank. We do a lot of the physical gaming, and we do a lot of high yield in the gaming sector.

We’re gonna move into the iGaming space on the payment side. We’re we’re we’re having some negotiations there right now, and then we’re gonna move pretty strongly into embedded finance. And, and we’ve got a couple things, that are close to being signed on on that front. So that’s a way to extend, you know, the reach of our payments business. And then there’s all sorts of interesting things.

We just we we this is public. We partnered with a company called Nivon, and we’re they’re a travel services company, we’re embedding them in our card services. So when we we we market our card services to small business and middle market business, we’ll have a travel services element to it, and it’s probably one of the best travel services companies in the country. So just I think the big trend that I see in the payments business is bundling service bundles with traditional payments, and you’ll see us doing a lot of that over the next couple of years. So it it it sounds like

Unidentified speaker, Host, Morgan Stanley: you have the full product set and just about building on that now, and that’s helping you both on the on the deposit side as well as the

Don McCree, Senior Vice Chair and Head of Commercial Banking, Citizens: deposit And again, I go back to what I said about, you know, about our size. You know, when we’re talking to a lot of these service providers, they’re they’re scared by the big banks because they think the big banks are gonna trample them, and the smaller banks are beginning to outgrow. So for a regional bank like us or or a region or a Fifth Third or any of us, there’s a there’s a space which we can occupy, which is a a really attractive space. And and and a lot of these emerging fintechs and service providers thought they could do it by themselves, and they’re realizing they really can’t. They need a banking partner to do that.

And so that’s that’s really where we’re we’re spending a lot of time right now.

Unidentified speaker, Host, Morgan Stanley: Got it. Maybe talking about loan growth, what are you seeing in terms of commercial lending activity in the second quarter? You know, I think early in the quarter, Bruce talked about line utilization ticking up recently. Talk about what’s driving that.

Don McCree, Senior Vice Chair and Head of Commercial Banking, Citizens: Yeah. So I think it was probably about fifty fifty tariff inventory building that drove, and maybe another 50% actually real investment in businesses, whatever that might be. And some of that was also in the private we we have a big private credit, private equity lending complex, and some of the utilization uptick was was in that sector also. We’re seeing it continue in the second quarter. I mean, we we continue to see pretty healthy pipelines.

We continue to see line utilization up a little bit. We’re not seeing a reversal of what we might have thought was inventory build in in in terms of of tariff building. So we’re pretty we’re pretty confident that the the the trends are our friend, if if if you wanna say, in terms of of what we’re seeing in loan growth. And and, again, if we if we do get what we think we are going to get, which is a major uptick in PE and private credit activity towards the back end of the year, that’ll just be another accelerant because that’s not really dependent upon an individual transaction we’re doing. That’s dependent upon activity across the complex.

So if someone’s doing a deal in Europe or someone’s doing a deal, internationally, we’ll get we’ll get some some utilization on those on those subscription lines and the private credit leverage lines that we do.

Unidentified speaker, Host, Morgan Stanley: And if I remember correctly, the first quarter, there was strong debt capital markets activity, and that was a little bit of a dampen on on loan growth. What what’s been the impact of that in the second quarter? It’s probably been a push. I don’t

Don McCree, Senior Vice Chair and Head of Commercial Banking, Citizens: think you know, debt capital markets has been you you saw a lot of high yield in the in the first, quarter, and I think what a bunch of that was was loans or outstandings that had ended up on banks’ balance sheets, which should have been in the bond market. But the bond market was kind of unfriendly from a liquidity standpoint, so people lagged it a little bit, and they were just kinda recalibrating some of their, some of their, capital structures. Those those tended to be the larger companies.

Unidentified speaker, Host, Morgan Stanley: Got it. So so as we think about, commercial loan growth in general we think about companies starting to make those big CapEx investments again, you know, you noted it’s a little bit more of a a a coilspring as you go into the back half and maybe into next year. What do you do you think the companies need to see? Is it is it full certainty on the trade side? Is it, you know, more talk about

Don McCree, Senior Vice Chair and Head of Commercial Banking, Citizens: I I I I’m I’m kind of feeling like the trade movie is behind us. You know, you’re gonna get these negotiations in London with China, but it felt like, you know, six weeks ago, it was just insane. And and that’s you know, actually used to bank mister Trump. So I know I know how he negotiates. But that was the we’re gonna go camped out here, and and people were just, oh my god.

And then it’s back here, and it’s actually I don’t know if we’ll get trade deals or not. We might get, you know, we might get memorandum of understanding and things like that. But it just seems like the the the crazy uncertainty is kinda off the table. So that that’s that’s number one. And then number two, it gets back to what we talked about before.

It’s it’s it’s valuation certainty. I mean, I was with, the good news is I was with two CEOs at the Celtics Knicks game, one of Knicks won the game, which was quite fun. And both of them were sitting on the other side of me saying, I’m going to my board tomorrow, and I wanna do an acquisition. Do you think I should do an acquisition? And I said, yes.

I said, if you can get a good value, and you can actually not put your company in jeopardy by not overleveraging, this might be the best time. And I think you’re getting a little bit of change in psychology from, I’m just gonna, like, stop and go to the sidelines to, hey. I see some opportunity out there. And if I actually have capital and I can, you know, strike against that opportunity, I’m gonna engage in it. So I I think I think it’s that it’s what I said before.

I think it’s that directional certainty that that people are beginning to see.

Unidentified speaker, Host, Morgan Stanley: Got it. Perfect. The the other side of it is is competition. Can you talk a little bit more about that? You know, you you spoke about how there’s there’s always competition, right, whether it’s from the larger banks, whether it’s from the regional banks.

Talk a little bit about, you know, what’s happening on the loan spread and loan structure side and what you’re seeing on the middle market side.

Don McCree, Senior Vice Chair and Head of Commercial Banking, Citizens: I I think it’s, you know, it’s it’s tightening a bit. We run a really disciplined capital allocation process where we review returns on relationships or returns on transactions away from credit. And it’s really is this a piece of business that we want to, want to undertake, and is it gonna generate a reasonable, rational return and drop, you know, money to the bottom line for us? We don’t see a lot of companies so where that becomes an issue is when we’re trying to go dislodge an existing agent, and we’re going in and we’re trying to win a new piece of business. That that can be intensely competitive, and we’re we’re gonna have to make a two, three, five year judgment about whether we can turn that into a a great client going forward.

In our existing client base, we don’t really see a lot of client losses due to pricing or structure. And our our my my real view on that is if we take really good care of our customers and serve them and remember, these are thirty and forty year customers. So we’ve been through the great recession. We’ve been through COVID, and we’ve been through a lot of crisis periods with them. If we do a good job, we don’t think we’re gonna lose a client for 10 basis points on the loan spread.

And that’s not the way most most particularly middle market companies think. Bigger companies, absolutely. You know, they’re they’re they’re they’re move in a and they’ll they’ll move you out. But that’s not where most of our outstandings are anyway. Those are generally undrawn lines and things like that.

We we play that market for the capital markets business. So I think what I talk to my teams about is if you do day in, day out, good job, you know, articulate what’s going on in the market, stay very communicative with your clients, are there good times and bad times, have great relationships, we think we de you know, of course, you’re gonna have a company here or there who moves, but we think we derisk that attrition pretty significantly. And then we have to have we spent just an enormous amount of time as a company just thinking about client experience and what does it look. And we haven’t talked about it, but one of the best things that hap has happened to us is we built this private bank now, hiring about 200 of the First Republic bankers. These people are unbelievable client service people.

And the whole company is learning from the way they take care of their clients and and actually provide a full service bundle to their client base. So customer service, you know, kinda great responsiveness, good times and bad, that should reduce your attrition.

Unidentified speaker, Host, Morgan Stanley: So so maybe before we get into private capital, let’s talk about the private bank a little bit and talk a little bit more about the synergies between the private bank and and and your business and, you know, how you’re getting that growth.

Don McCree, Senior Vice Chair and Head of Commercial Banking, Citizens: Yeah. So so so of all, it’s it’s early days. Right? We’ve only been at this for, you know, a little under two years, But the early returns are super exciting, and we’re seeing a lot of cross border flow between the private bank and the commercial bank. And so, you know, we have we have a phrase we’re using called one citizens, which is showing you know?

So we’re not we’re trying not to to basically, run the company with a referral mechanism. Like, a commercial bank was referring something to the private bank. Private bank’s referring someone to the commercial bank. We’re gonna do that, of course. But we’re trying to show up as one company in the initial kind of conversations with with these, these clients.

And if you think about it, you know, you take a private equity firm. We can, give them a subscription line. We can bank their partners. We can do loans to the management company. We can finance their portfolio companies.

We can deliver them m and a fees. We might put them on our alternatives platform in the wealth business in terms of raising capital. So there’s a suite of things that we can provide. And to me, the thing that is, you know, most interesting is we’re relatively small. So JPMorgan can do that all day long.

And but they’re just gigantic, and it’s really hard to get the whole company kinda organized. And we’ve we’ve we’ve been able to get everybody organized around, you know, showing up, and and I’ll I’ll give you one one anecdotal story. There was a customer in, Boston who my head banker there was trying to land as as a prospect for eight years, and he couldn’t land them, couldn’t land them, couldn’t land them. The CEO and CFO became clients of the private bank. The day after they onboarded the private bank, the CEO called my banker and said, I’m moving all my business.

It was such a good experience. And that’s, you know, that’s one little anecdote. So we can’t extrapolate that against the whole franchise, but we’re trying to create ecosystems in the markets that we’re present in. And the other thing that the private bank has done for me is it’s given us branding all over the country. And so we have a middle market strategy now, which is going into California and going into Florida.

The reason we’re doing that is are those those are two big centers of our private banks. So we have people on the ground. We have awareness of the company. When we walk in, it’s not like, who is Citizens Bank? People know who we are, and we’re getting good referrals from from the private bank in terms of opportunities in the marketplace.

So it’s it’s it’s early, but very positive from my my standpoint.

Unidentified speaker, Host, Morgan Stanley: Excellent. Wanna spend a few minutes here talking about private capital and private equity as well. You know,

Don McCree, Senior Vice Chair and Head of Commercial Banking, Citizens: you spoke about taking advantage of the big megatrend early on. How have you positioned the bank to serve both private equity and private credit? So private equity is is is, you know, a pretty simple story. You know, we started in the traditional way, which we’ll we will finance your leveraged buyout, KKR or or Ares or whoever it might be. That’s morphed into a broader kind of set of services around subscription lines, around, m and a flow, around derivatives for their portfolio companies, and we try to talk to those complexes around the entirety of the relationship.

And we’re, you know, we’re we’re we’re we’re tiny versus the big banks. I mean but but we are as you said, we’re number two in leveraged finance for middle market, so we talk to their middle market teams. And we try to be relevant, giving them industry ideas and giving them m and a ideas and really talk to talking about them about what the bigger trends are. So five, six years ago, this whole private credit trend takes off. I mean, it was always there, but it just accelerated in a meaningful way.

We saw it happening at the time, and we said, okay. We have to be bankers to the private credit arms of these firms. And so how are we gonna do that? So, you know, one of the really interesting things is there is, there is a financing vehicle for the private credit companies. They leverage themselves.

But the way they leverage themselves is effectively through an asset based securities structure, which is kind of a double a, single a equivalent in terms of credit risk. And we can lend in a asset based structure, which gives us full substitutability of collateral. It’s fully collateralized, and we make more money doing that than we make doing an individual idiosyncratic leverage buyout. So we’ve kind of taken advantage of, you know, the the the the the slowing of the traditional way that leveraged buyouts were financed and the increase the way private credit is financing and actually neutralized our revenue streams in terms of of ability to play it. And then we can go back to that private complex.

A lot of these are private equity sleeve, real estate sleeve, private credit sleeve, asset based lending sleeve, and we can become completely relevant to the entirety of the company, which allows us to, to basically position ourselves to to win a disproportionate amount of their business. We have not gone into one of these partnerships with a private credit fund. We think that is a bad strategy. We don’t think it’s worked anywhere. And, and instead, we’ve we’ve actually built a syndicate desk that sells to the private credit firms now.

So if you think about private credit, we’re selling risk to them. We’re financing them, and we’re doing other transactional business with them in terms of operating business and depository business. So we’ve turned them into a client set, which is an emerging client set, which we we think is actually quite attractive. Why do you

Unidentified speaker, Host, Morgan Stanley: say that? Why do you say the getting into a partnership with a private credit firm is is not the right answer?

Don McCree, Senior Vice Chair and Head of Commercial Banking, Citizens: I what at at the heart of it, and this is just my view. This is I’m a I won’t say it’s a citizen’s view. It’s my view. And I run the business, so we’re not doing it. It’s almost like you create two credit committees.

Right? And it’s it’s very hard to deliver in terms of of of a credit decision that that’s being originated through a bank and then funded through a private credit firm. And and anytime I’ve done partnerships with any partner, I always view it as a reputational extension of myself. Right? And so you’ve gotta create certainty for your clients, and you’ve gotta create deliverability.

And I’ve just worried that so so, you know, we’d rather deal with all of them as opposed to just partner with one, and we just think that creates better optionality over time. Got it. The the other side of it is, you know,

Unidentified speaker, Host, Morgan Stanley: the risk on the credit side. And and how do you how do you think about the risk when it comes to servicing private credit?

Don McCree, Senior Vice Chair and Head of Commercial Banking, Citizens: You know, we’re not we’re not worried about it. I mean, it’s it’s the risk that I I focus on is it’s there’s preferential capital treatment to the the lending activity because it’s structured as an asset based deal. So it’s it’s a lower risk rating than a regular loan, so that gives you a high return. The one thing that I keep in the back of my mind is I I go back to twenty five years ago when the regulators changed the rules on mezzanine debt on banks’ balance sheets, and they said we’re gonna put a four times multiplier on them, and it instantly became unprofitable. So if you get a regulatory trend that says we wanna try to slow down private credit, and we haven’t there was an interesting paper put out by the Boston Fed, which basically concluded that private credit is pretty safe, and that that came out about, you know, a week and a half ago.

So we don’t see it coming yet. But, you know, if there was some kind of change in capital treatment, that’s the thing that would worry me. I I also am a little focused on if you start to get massive retail content, you know, and you’re starting to see retail raises. This is primarily institutional money. So you start to get retail raises in size into either private equity or private credit, then you could start to see some of the regulatory, you know, backdrop change a little bit.

But most of these are three hundred and sixty four day facilities, So you can adjust the book really quickly, and there’s not something that’s gonna happen overnight that’s gonna change the paradigm. So we just we just pay attention to it. But I don’t I’ve heard all the arguments about systemic risk and this and that. I I don’t really really see it. And and for us, where we can I haven’t lost one client to private credit?

So where we see them competing is in leverage lending. Mhmm. And they will do higher leverage points than we would ever do, so we wouldn’t compete for those transactions anyway. And our our holds in leveraged lending are kind of an average of $12,000,000 across the portfolio, so we’re not building a leveraged lending book. So it’s not as if they’re taking assets away from us.

It becomes, you know, a risk to our NII or our p and l. So it’s, it’s really a question of how do you maintain your underwriting fee revenues by being able to distribute to them, and how do you actually take advantage of of a financing opportunity that actually is, to me, a little more interesting than regular way leverage buyouts.

Unidentified speaker, Host, Morgan Stanley: Yeah. So just to follow-up on that leverage lending point, you know, I think banks typically don’t do anything over six given the the the guidance from the regulators. But, you know, we have been hearing private credit spend going a little bit lower down on the leverage scale. Is that but but you’re you’re not seeing that much competition from them now? We we are, but we we you

Don McCree, Senior Vice Chair and Head of Commercial Banking, Citizens: know, we’re we’re distributing to them. So it’s it’s not as again, we don’t want that on our balance sheet anyway, whether it’s six or five or four. Yep. I mean, we’re we’re we underwrite at 500,000,000. We sell it down to to 12 or 12 or 20 or whatever the number might be.

So it’s not as if they’re disintermediating us. It’s just like as if we’re selling to another bank or we’re selling to a CLO or we’re selling to a mutual fund or we’re selling to somebody else. It’s just another it’s another outlet. Where where we have, particularly in this quarter, is they’ve come down in their price points a little bit and we’ve had volatility, the way we would underwrite a transaction is, say, Sofer plus 300, and then we’re gonna put a 150 basis points of what’s called Marketflex on top of it to protect the underwriting risk, they can come in at $3.25 fixed and take the whole issue down. So the sponsor will sit there and say, I like the certainty.

I might I might bias that transaction to private equity. But that that kind of kind of fluctuates based on market conditions. So the combination of volatility and price is what what what we worry about.

Unidentified speaker, Host, Morgan Stanley: Got it. I’m gonna come to the audience in just a sec. But maybe, can you talk a little bit more about just credit quality, what’s happening so far in the second quarter, and, where you’re seeing the the most risks, or what portfolios you’re watching across?

Don McCree, Senior Vice Chair and Head of Commercial Banking, Citizens: You know, the one the one we continue to watch is office real estate, but we’ve we’ve told that story a lot. We’ve got it really well reserved, and there’s been no real underlying change in what that portfolio has looked like. We’ve been on it for two and a half, three years now, so we’ve got it, you know, boxed. We what we have seen is a real decline in movement of loans into our workout groups and movement of loans into deteriorated classes. So credit feels like it’s it’s holding in there.

Unidentified speaker, Host, Morgan Stanley: And, well, while you spoke about general office, the office reserve is at 12%. It’s it’s one of the highest, if not the highest, amongst peers. How are

Don McCree, Senior Vice Chair and Head of Commercial Banking, Citizens: you thinking about managing that over time? We’re reducing it. We’re we we we have a stated goal of reducing commercial real estate overall. Mhmm. You know, we’ve taken our office exposure, correct me if I’m wrong, Kristen, but, like, from 4.1 to start to about 2.8 now, maybe a little bit higher than that.

So it’s come down quite a bit. It continues to trend down. The predominant of that has been payoffs and paydowns. We’ve written off, you know, 300,000,000, a little a little bit more than that. But but I think we we we feel like that that reserve is is completely adequate.

And then, you know, if we get it down to, you know, a much lower level, you could see us do a cleanup trade sometime in the future. There’s a lot of buyers out there, and it’s it’s interesting to me that there’s there’s a lot of people that have raised distressed funds to kind of focus on real estate, but very few of them have been have been deployed. There’s not a lot of sellers out there. And the rest of the real estate portfolio, we got we got a really small life science sciences portfolio, which, obviously, given everything going on in the universities we’re focused on, but there’s very little university content in those labs. So that feels like it’s in pretty good shape.

Multifamily feels like it’s in it’s in pretty good shape. There’s tons of liquidity in the multifamily sector, So we’ve been taking those into the agencies and and and moving some of that off the off the balance sheet already. So

Unidentified speaker, Host, Morgan Stanley: Alright. Perfect. With that, we’re actually out of time. Don, thanks so much for joining us. Alright.

Thanks, everybody.

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