Citizens Financial again builds up reserves to shield against office losses
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Citizens Financial Group has increased its reserve coverage for office loans in every quarter since early 2023. During the second quarter, the regional bank bolstered its reserve ratio for general office loans to 11.1%, up from 10.6% in the first quarter.
Jeenah Moon/Bloomberg
Citizens Financial Group remains cautious about potential losses within its office loan portfolio.
During the second quarter, the regional bank once again bolstered its allowance for credit losses on general office loans, bumping its reserve ratio to 11.1% from 10.6% in the prior quarter.
Providence, Rhode Island-based Citizens has now increased its reserve coverage for office loans in every quarter since early 2023. And for good reason: since the second quarter of 2023, as struggles within the broader office landscape began to ramp up, Citizens has charged off about $319 million of general office loans, equating to a cumulative loss rate of roughly 8%.
For the quarter, Citizens reported net income of $382 million, down 18% year over year. The decline was partly driven by an 11% decrease in net interest income, the company said.
Fee income rose 9% year over year, largely assisted by a 52% year-over-year increase in capital markets fees. Wealth and card fees also helped, with both reaching record levels, the bank said.
In an interview Wednesday following Citizens’ second-quarter earnings call, CEO Bruce Van Saun said it’s too soon to say whether the company will add more padding to its office-loan reserves during the third quarter. So far, it has been able to take office-related charge-offs directly without tapping the reserve, but how much longer it can do that is unclear, he said.
“If I had to guess, I would say it’s unlikely in the second half of this year that you would call the pivot, where you could say that things are now improving, so you can start releasing reserves,” Van Saun said. “I think it’s likely that we’re going to keep doing what we’ve been doing.”
The office sector continues to be a problem area for many banks. In the post-pandemic world, many companies are downsizing their square footage, or leaving their office spaces entirely, given the shift toward hybrid and remote work environments. Combined with higher-for-longer interest rates, some property owners are running, or will eventually run, into trouble paying their loans.
A recent analysis by Moody’s Ratings of banks’ commercial real estate exposures showed that some lenders may need to increase their reserves in order to cover potential office losses.
At Citizens, general office loans totaled $3.3 billion through the end of June, reflecting about 59% of the company’s total office book. The firm defines “general office” as that with multiple tenants.
The $219 billion-asset company continues to reduce the size of its office portfolio, which totaled $4.1 billion at the end of March 31, 2023. The company is not currently originating new general office loans, Van Saun said.
Citizens has one of the highest office reserve levels among its peers, according to analyst Terry McEvoy of Stephens Research. In the first quarter, the peer average was around 7%, he said.
About 70% of Citizens’ office loans are tied to buildings in the suburbs. The remaining 30% in “central business districts” are where the company has noticed more stress, Van Saun said.
“I feel like they’ve been prudent in building up the reserve ratio around office,” McEvoy said in an interview. “In building the reserve, they didn’t just put a finger up in the air. It’s been a thoughtful analysis of valuations and default risks, to match the stress the office sector is seeing today.”
During the quarter, Citizens made more progress on building out its private bank, which now has $4 billion in deposits, up from $2.4 billion in the first quarter. It is “tracking well” toward meeting the goal of $11 billion of deposits by the end of 2025, Van Saun told analysts on the earnings call.
The company added two private wealth teams, one in California and one in Boston, during the quarter, and there’s a good chance that it will add more in New York and Florida, Van Saun said in the interview.
“Don’t be surprised to see us do a few more wealth liftouts over the balance of the year,” he said.
Citizens repurchased $200 million of shares during the quarter, and plans to buy back $250 million to $300 million in the third quarter, executives said Wednesday.
