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The thinking behind Citizens Bank’s M&A spree

Jun 7, 2022 / Consumer Banking
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Many U.S. banks are building scale via acquisition. Among the largest institutions, Citizens Bank looks to be the pacesetter.

Don McCree, vice chairman and head of commercial banking at Citizens, is with us to talk about its M&A strategy and what he sees ahead for the industry.

A few takeaways from the conversation:

  • One key area Citizens has been targeting with its acquisitions is the M&A space itself — providing advice and services to help clients with deals whether the client is buyer or seller.
  • He says the most important factor in a banking-related acquisition is compatible culture. If that fit isn’t there, much of the deal’s value can be lost because key people leave.
  • Citizens is committed to the branch because they view physical locations as being critical in achieving their goal of being their customer’s primary financial institution.

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Below is a full transcript of my interview with Don McCree.

Don, this conversation is mostly going to focus on Citizens and its growth strategy, but I do want to start out by asking you more of a topical question about the current macro environment. As the bank’s head of commercial banking, how are you thinking about inflation, how are you thinking about rates, and also recession risk?

Obviously, a pretty interesting time out there. Let’s start with inflation. I think we’re well beyond the comments of transitory inflation which were the topic of about six months ago, and clearly we are in an inflation spiral right now. I think it’s been exacerbated by the Ukraine and pressures coming into some of the energy markets in particular, but also the food markets off the back of the war in the Ukraine. Clearly, the stoppage in China due to the pandemic hasn’t helped things either. We think it continues to stay relatively high. It might be peaking in terms of all the inflationary pressure, but we don’t think it reverses in any kind of significance. Obviously, the Fed started a little bit late, but they are being at least verbally aggressive with the rate cycle. We think the 10-year (Treasury note) hovers around 3%, at least for the time being, but short-term rates is clearly going to go 50 basis points for the next two meetings. Big question on our mind is we’re already seeing a little bit of cooling in the economy in some places, so the question is, “Can they pause after the two hikes of 50 (bps) each in the next two meetings?” But I think that’s maybe a 50-50 outlook. The recession risk is something that we’ve got our eye on. Our view is really that we don’t expect a deep recession in 2022 or ’23. If the Fed has to continue on a very aggressive stance, obviously the risk goes up that you could get a deeper recession, but right now that’s not our base case.

Let me hit you with another high-level question here that’s on point for the heart of our conversation. Bank consolidation – it’s a trend in the U.S. that’s been in place for several decades now, the quest for scale certainly being a big part of that trend. Now, we’re looking, as you just mentioned, at the possibility of an economic slowdown or even worse. Do you see bank consolidation continuing in that direction over the medium term, and if so, is that a good thing for the industry, and is it a good thing for consumers?

I do think you’ll see bank consolidation, and you’ve seen a fair amount of bank formation also. I tend to think it’s going to be at the lower end, in the community end of the banking industry. I don’t think you’ll see a ton of consolidation, certainly with the biggest banks and probably not with some of the bigger regionals. I think the current regulatory environment is a little negative on bank consolidation of anything really above the size that we’re at, which is about $200 billion (in assets) right now. There’s still enormous capacity in the financial system in the U.S. There’s still something on the neighborhood of 5,000 banks. There’s a huge non-bank sector which has emerged in scale, both on the consumer side and on the commercial side, and that just continues to grow with the growth in fintechs and alternate providers and funds on the commercial side. I don’t think it’s a bad thing that there’s bank consolidation for the consumers or corporates because competition is extremely robust and will continue to be extremely robust. The other thing that I think consolidation is being driven by is the need to invest and particularly the need to invest in technology. Some of the numbers that you hear the biggest banks talk about – I think JPMorgan Chase talks about $10-$12 billion in terms of investment every year. You need to be big to be able to keep up with the industry and have the scale of financial resources to continue that investment. That investment really is driving innovation, data analytics, better offerings for the consumer, digitization, and it’ll become the real future of what banks look like as we go forward. So, yes, I think it will continue but I don’t really think it’s going to be to the detriment of either corporate customers or consumer customers.

Don, Citizens has made at least 10 acquisitions over the past five years. I suspect your shopping spree may not be done yet. Tell us a little bit about the strategy. In a big-picture sense, what is Citizens trying to accomplish through this aggressive acquisition program?

Basically, what we’re trying to do on both the consumer side and the commercial side is build a set of capabilities which will allow us to serve our customers however they want to be served. That’s particularly important on the consumer side, but also through any types of problems or capital needs or advisory needs that they may have on the corporate and the wealth side. The theme of our acquisitions has really been building out our capability set. When I got here seven years ago, at the time of the IPO, on the commercial side we basically lent money and did payments. That was really our lifeblood. I looked at the business and said, “Listen, I need to be able to help a company sell itself, I need to be able to take a company to the public markets, I need to be able to help the company hedge its risks in the currency markets or the interest rate markets, and I need to be able to access any variety of capital markets at any point of a cycle that those customers may need to access in order to accomplish whatever they want to accomplish. It could be a sale of a company, it could be the building of a new plant, it could be growth in working capital, but it also has to be enduring for good times and bad times. The acquisitions that I have made have really been a couple of themes. One is merger and acquisition advice. We’ve got about 4,000 private companies in our client base and a lot of those companies are selling themselves. They want to turn to us as their lead bank and say, “Can you help me?” We also have a very big client base which is private-equity sponsors. They are the buyers of a lot of these companies, so being able to deliver high-quality opportunities into the sponsor base and then provide the financing really allows us to serve all sides of the transaction. Then most recently, we added a wealth capability in scale and we’re able to take the proceeds of those transactions and invest them for our clients as they realize the sale proceeds of a business that sold. Late last year, we did two non-M&A transactions. One was a company called JMP Securities which took us into the equity business. It also is very significant with the new economy, so early-stage tech, early-stage healthcare and fintech. Despite what’s going on in the markets right now, we do think the long-term trajectory for those sectors is quite strong. I will say that as we’ve been acquiring, we have been hiring also, so it’s been both an organic and an inorganic strategy. The number one priority for the company right now, in terms of acquisitions, is more in the wealth space.

Via acquisitions and organic growth, you’re close to $200 billion in assets as you mentioned, which size-wise puts you among the top 20 banks in the country. Just a fraction of the scale, however, that the money center banks have. Aside from size, which you mentioned earlier as being one of the imperatives to success in the business, what else is key to competing with the likes of Chase and B of A and Citi?

I think number one is being very client-centric. Everybody says that some banks do it better than others. We think we’re excellent at keeping the client at the center of the plate, thinking about their problems, giving them ideas on how to improve their business, and being with them all the time. I think if I go back to two years ago, when the pandemic hit and our clients were in severe distress because remember, nobody knew the government programs were coming and the PPP programs were coming, so you had a high level of distress. I remember convening a call a day into the national emergency and saying to all of my bankers, “I want you on the phone with your customers every day,” finding out what’s going on, helping them think through their problems, helping them understand where the pressure points were going to be based on what we’re seeing across the entire portfolio. We want to be there giving advice and helping clients through any problems that they might have constantly. The second ingredient is having great ideas, knowing their businesses really well, and helping them create value. An example of what we’re doing right now on that front—this is a nonfinancial type of thing we do with clients—is around ESG (environmental, social and governance). Our mid-sized clients really don’t have the resources to really think about ESG. We’re beginning to advise them on what is it, what do they need to be thinking about, and dealing with the reality of, if they’re in a supply chain, they’re going to get an RFP and be asked to describe what they’re doing to become greener. They need our help in doing that. Being relevant with the issues of the day is part of that trusted advisor type of relationship. Then we just have to be excellent at execution. I think the secret sauce that we try to bring is great client-centricity and excellent execution. If we do our job well, then there’s no reason for any of our clients to go and work with another bank.

When you’re eyeing an acquisition, what are some of the key attributes that you’re looking for? And how much of what you’re doing deal-wise can be planned out as part of a long-term strategy, and how much of it is opportunistic based on what’s available in the market?

I’ll start with the latter. It’s always a little bit opportunistic based on the desire of a company to sell, so you are dependent upon a willing shareholder. But the way I think about that question is I knew exactly what I wanted to accomplish. I had a long-term strategy mapped out. I knew the sectors that I wanted to be involved in and I knew the capabilities that I wanted to develop. As we look at acquisitions—and I’ve probably looked at several hundred acquisitions over the last five years—the single most important in a financial-services acquisition is culture because it is about the people and understanding the culture of the target institution and how it is going to meld. It doesn’t have to be the same culture as ours, but how it is going to meld with our culture is really critical or you’re going to end up losing value because people will walk out the door because the cultures don’t meld well. I’m really happy to say in all of the acquisitions we’ve done, we’ve lost virtually no senior people, and now we’re on year five of the first acquisition. The cultural fit has worked well. The other thing we try to do is really spend time articulating to the selling company what our strategy is, what we’re trying to accomplish, why we think they’re complementary and how we want to work together going forward, so there’s no ambiguity about what the operating relationship is going to be. Then the final thing that we do as we bring acquisitions in-house is we fully integrate them. What you see some banks do is they’ve almost created separate companies which are their investment bank versus their commercial bank. That’s just a recipe for conflict and potential bad culture. We haven’t had the problem with that as we’ve done these acquisitions.

Branch-wise, Citizens is concentrated in New England and in the Middle Atlantic regions. The acquisitions that you’ve done, they’ve provided you with more of a coast-to-coast reach. Thinking of the country as a chess board, how are you deciding the sequence of your moves?

We’ve got branches in New England, the Mid-Atlantic, Pittsburgh, Michigan, Ohio, into the Midwest also. We just acquired HSBC’s branches in New York, Florida, and Washington DC, and we just acquired a bank called Investors Bank in New Jersey. From a branch standpoint, the HSBC and the Investors acquisitions filled in a hole for us in the New York metro area. From the commercial banking side, the sequencing was really, I wanted to build M&A first and then move into the equity business, so we bought a series of M&A boutiques and then we bought the equities platform out in San Francisco. My business is actually fully national at this point. I’ve got customers in all 50 states. We’ve actually got more customers outside of our branch-footprint states than we do inside of our branch-footprint states. One of the things that I did when I arrived is I characterized our existing footprint as lower-growth GDP in the country, and we began to expand into the higher-growth GDP areas like the Southeast, Texas and California. We built banking teams in Florida, Atlanta, Charlotte, Houston, Dallas, Los Angeles and San Francisco. We were pushing from a strategic standpoint banking growth and coverage growth, then the acquisitions came in and added product capabilities and solution sets to that banking growth. The other thing I will mention is, notwithstanding our branch network, we fully believe that the game in the consumer side is digitization, and we’re working to launch a national digital bank. We already have a national digital depository bank. We think of ourselves as a national bank already, notwithstanding the fact that the branch network is concentrated in New England and the Mid-Atlantic.

You mentioned the acquisition of the branches from HSBC along with its national online deposit business. You now have more than 1,000 branches in your network, which is a pretty sizable physical presence, right? How is Citizens thinking about the future of the branch, and how are you preparing for that future?

It’s an interesting question because I think there’s a lot of views on whether branches are necessary or not. Our view is that it’s very hard to have the primary relationship with a customer if you don’t have a branch. That being said, we are trying and will succeed in pushing a lot of our customers to transact in their simple transactions with us digitally. If they want to deposit a check or they want to wire money, self-serve online via your device is the future, and that’s how we’re going to grow the national bank. We’re transforming our branches into more advice centers where we solve higher-value problems that our clients might have. That’s true of both our wealth centers and our core branches. We’re on a journey where we’re doing that as we go and certainly not complete with that. But the nature of what clients want to use our branches for is changing and we do believe we need to be multichannel in terms of really capturing the full value proposition, particularly with the consumer.

Don, let’s finish up our conversation with a rapid-fire Q&A on a handful of emerging issues for banks that are likely to become more significant in the next few years. I’ll mention the issues one by one. For each one, could you give me a sentence or two on how you see its impact on banking in the U.S. over the next few years? Start with ESG.

Most important is what I mentioned a minute ago, which I think it’s becoming quite topical for our clients. We have to take everything that we’re going to do on our ESG agenda for Citizens and make it relevant for our clients and help them along their journey, both with the advice that I talked about, but also building products like green deposits, which is a product that we launched about six months ago. We’re looking at a carbon-linked deposit product. We’re moving down the path for more solar investments, more green bonds and the like. Definitely one of the bigger emerging topics for not only Citizens but for our clients.


Crypto, I think about from a variety of different angles. One is obviously what we can do in crypto is heavily regulated right now, so whatever we decide to do, we have to go get a regulatory clearance to do. We do think we need to have crypto capabilities for our consumer clients and our wealth clients, giving them the ability to invest if they want to invest in crypto. We announced about three months or so ago that we’re now clearing crypto transactions for one of our merchant processors in our payments business, so we’re beginning to dip our toe in the water and trying to build services for the commercial clients also.

What about banking as a service?

Banking as a service really is being driven by APIs and really partnerships with a lot of fintechs. For us, the core challenge has been, “Do we have the engineering talent to really provide the backbone of banking as a service?” It would be interesting to know as we talk about keeping up on technology, we’ve hired 500 engineers in the last two years and are transforming our entire tech stack to an engineer-led tech stack and moving it into the cloud, as opposed to an outsourced tech stack with vendors. That’s going to be the key enabler for banking as a service.

Finally, open banking.

A similar answer, actually. That’s going to be API-driven. We’ve now got the talent to open up our technology via APIs to people that want to partner with us and use it. It’s all about maintaining trust, confidence, control, and risk management as we roll out any services that we want to provide. Both banking as a service and open banking are really a function of what you can do from a technology and engineering standpoint. We’ve been investing heavily to be able to participate in that and then we’ll pick our spots as to where we think the best opportunities are.

And with all of the new things coming down the road, there are no doubt plenty of strong opportunities that you’ll have to choose from. So, Don McCree, vice chairman and head of commercial banking at Citizens Bank, many thanks again for joining us on the BAI Banking Strategies podcast

Okay, Terry, thanks so much for having me. Thanks to BAI and all the good work you do.