Market is reacting to 'fear more than facts' amid banking uncertainty: Citizens exec

Citizens Financial Head of Consumer Banking Brendan Coughlin discusses how macro uncertainty in the banking sector is impacting market confidence.

Video transcript

SEANA SMITH: Hard hit regional banks are back in the green today, but it has certainly been a tough couple of trading weeks here for these names. PacWest, Western Alliance among the worst performers over the past five trading days, as investors still continue to worry about some of the stress that we have seen in the sector. The S&P Regional Banking ETF down nearly 12% in the past month.

For more on this, we want to bring in Brendan Coughlin. He is Citizens Financial Vice Chairman and head of Consumer Banking. Brendan, it's great to see you here in studio again. So just give us a sense from what you're seeing and what you're seeing in terms of client behavior.

BRENDAN COUGHLIN: Yeah, look, the market is reacting very different than what we're seeing inside the bank. You break up the world up into consumers, into wealth customers, and then corporates. And Citizens skews very heavily into the consumer base.

It's been extremely stable. In fact, through when SVB failed in early March through today, we've been generally flat in deposits. We've seen some outflows, but a lot of inflows too. There's been a little bit more volatility in the wealth segment and commercial, where they're kind of getting down to the FDIC cap.

But banks-- there's a flight to safety going on now. And banks our size are seeing a lot of folks diversifying in as much as out. So we're seeing a lot of stability in the business.

AKIKO FUJITA: Yeah, what does that tell you about where the consumer is? And we talked a lot about where the savings rate is, potentially sort of diminishing after so much had been saved up over the last several years. I mean, what are you seeing on that front? And what does that tell you about where the mindset is?

BRENDAN COUGHLIN: Yeah, consumers are still very resilient and strong. Really, what we're seeing right now is normalization, which has been expected for quite some time. Consumers were about 40% high in deposits from pre COVID to the peak. That's been cut by about half.

So you're starting to see a little bit of a diminishment in excess liquidity. But by and large, consumers are still very much more healthy right now than they were even pre COVID. On the credit side, we're also seeing a very mild uptick in delinquencies.

But I would just classify that as a normalization. It's still well below where it was pre COVID. There's nothing I'm looking at right now that would suggest there's a lot of risk in the health of the consumer, other than a normalization, which we all expected coming off the heels of COVID.

SEANA SMITH: And, Brendan, when we talk about the volatility that we've seen in regionals, of course, there's been brought to light or I should say re-entered the discussion some additional regulations and what exactly that could potentially do to a bank like yours. Give us a sense of why you think, I would guess, that it's probably not the best idea, and what a landscape dominated by big banks, what that would mean for consumers?

BRENDAN COUGHLIN: Well, we already are compliant with regulations that would be for the next tier up versus where we're at now as a category 4 bank. We're one of the highest capitalized banks in our peer set. We've got plenty of excess liquidity.

Our deposit base already skews heavy consumer. It's very stable. And so all the regulation that's being discussed around liquidity actions and tightenings, we feel good about it-- that we're already sort of compliant with all those regulations. I don't know that it's necessary if you just academically looked at the health of the regional banking sector as a whole-- there's a risk for overcorrection.

The question is right now, what the market is really reacting to is fear more than facts. And so is there a need for some stability through regulation is really what I think the regulators are debating right now. But there's nothing that we would see inside of the institution that would suggest there's a need for a lot more regulation with the facts that we're looking at.

SEANA SMITH: Brendan, and getting a little bit more about the consumer, you talked about the savings rate what we're seeing in terms of delinquencies. What are you seeing in terms of spending patterns-- what people are spending on and where?

BRENDAN COUGHLIN: Yeah. Spending is up substantially still from pre COVID-- about 15%. It's been flat, though, the last couple of quarters. So you're also starting to see a normalization. About half of the excess spending from pre COVID is actually real goods and services. People are buying more things. The other half is inflation based.

And you're seeing a normalization there too. So travel is coming back. Gas is coming back. Restaurants are still-- you're hard pressed to even find a reservation at restaurants these days. So a lot like the consumer, when you look at the actual data, the economy still feels really strong. There's, obviously, storm clouds gathering on the horizon. But the behavior of the consumer hasn't followed suit the way you would normally expect.

SEANA SMITH: Does that surprise you, given the fact that there are so many things to be a bit worried about? And we haven't even talked about the debt ceiling yet.

BRENDAN COUGHLIN: We went through an unprecedented time period in COVID. And I think hindsight's 2020. But the overstimulation of the economy with lots of free money, whether it's in the form of not having to make loan payments, or extra stimulus, or fiscal policy, I think has created a bit of a vacuum here that it's hard to actually predict and model.

There's no comp for this in the market. And so it's not all that surprising. If you stare at consumers and they still have more money in their pocket, generally speaking, than they did before COVID and their debt loads are lower, that they're feeling confident enough to spend, I think it will take unemployment really picking up before this becomes a real moment for consumers and it really changes behavior. And we'll see. We'll see how the next couple of quarters play out.

SEANA SMITH: Yeah, and up until now, the labor market has certainly been extremely resilient. Brendan, what do you make of the negotiations, the showdown, what's happening right now down in DC over the debt ceiling and how serious the potential fallout could potentially look for your sector?

BRENDAN COUGHLIN: Yeah. We've been here every time-- every year, every two years. And so I like to believe that it's just political jockeying. And hopefully we'll get a last minute deal. I think that's what most people would believe will end up happening.

You know, normally, that's the way you look at this is that it's politics and you kind of control what you can control. With what's going on right now in the market on fear based trading, I think you just have to look at it and say, make sure you're running a safe and sound institution.

Make sure we're creating plenty of liquidity in case of the unknown, whether it's debt ceiling, whether it's another bank failure. You've got to be prepared for these things. And so we're taking a lot of actions to put our arms around our customers, make sure that we're viewed as a safe destination for deposits. We're lending out prudently to customers that we have relationships with.

The bank is still wide open for business, but we're taking precautionary measures. Right now, it's about balancing defense and offense. We're also playing a lot of offense. We're growing in New York City. We're doing a bunch of things to really make sure-- in markets of turmoil in any industry, you get winners and losers. And folks that come out of this cycle in better positions end up winning in the long run. So we're really trying to balance that defensive and offensive mindset to navigate through the cycle.

SEANA SMITH: Are you optimistic we're going to be able to avoid a recession? Powell seemed a little bit more optimistic than he had been at the last meeting.

BRENDAN COUGHLIN: Personally, I'm not an economist, but with everything that I see, it feels unavoidable to me that we're going to hit some level of a recession. The way I would call it would be a much more mild one. I think the strength of the consumer will buoy the economy and protect against a deep and prolonged recession.

I think we'll see a run of the mill recession. For most of us, we haven't been through one of those in an awful long time. So what is a run of the mill recession? But I do think we'll ultimately have to have unemployment get up a little bit higher to stem inflation. And getting inflation back down under control will still be a top priority of the administration. And it feels very hard to believe that we can get that to happen without some level of recession to me.

SEANA SMITH: All right, Brendan Coughlin, always great to speak with you. Citizens Financial--

BRENDAN COUGHLIN: Same here. Thanks a lot for having me.