After years of cheap money, interest rates are rising, along with many consumer prices. Bruce Van Saun, chief executive of Citizens Bank, which has the second-most bank branches in the Philadelphia area (behind Wells Fargo), fielded questions last week about the impact of higher food and fuel costs and rising borrowing rates on his company and its customers. This interview was edited for brevity and clarity.
It’s been a rough year for U.S. stocks, but your parent company, Citizens Financial Group, jumped 7% on Tuesday — right after you reported lower sales and lower profits vs. last year. What made investors so happy?
We were due for a bounce!
Back in January, the Fed had a plan: They were going to raise interest rates three or four times this year. It was going to be gradual, and the economy was going to stay solid.
That was a “buy” invitation, to pile into bank stocks. We were repricing loans but holding back on raising deposit rates. That’s the perfect scenario for [higher profits].
But by the middle of February, it became much clearer that inflation was going to stay elevated. So the Fed would have to be more aggressive and raise rates a lot faster. And that was exacerbated by [Vladimir] Putin’s war on Ukraine.
That’s why bank stocks dropped?
Yes. Investors stood back and said, “Uh oh. Two problems: Depositors will demand higher rates, that will hurt [bank profits], and it will be harder for the Fed to engineer a soft landing for the economy.” So the probability of a recession in 2023 went up, and we watched bank stocks slide.
But our earnings report just showed that faster-rate-hike scenario, for us, is actually quite positive. The way our balance sheet is positioned, we [are earning] about $300 million more on our [annualized] net interest revenues than were in January.
Don’t higher loan rates hurt businesses and consumers, and won’t that hurt their banks, too?
It’s not all gravy. Some of our fee income will be negatively impacted by this environment; there will be less home mortgage refinancing as rates rise. Capital markets will also be softish. But deal pipelines are still good for future quarters.
Are we headed toward a recession next year?
We still have a view the Fed can bring in a soft landing for the economy. But the situation is a little more fraught, it’s more challenging than before.
Are businesses and consumers borrowing less, as rates spike?
What is different this time is that rates are rising in the best of times, from a credit standpoint. Consumers are flush with cash. The labor market is very tight; there are good job opportunities. Property values have gone up; if you have a house it has likely gained value. Even used autos: If an auto is repossessed, the value is up, a lender might not even lose money on it.
Big companies have booked record profits. Is business headed toward recession?
Some companies washed out in the COVID storm. Most companies weathered it. They cut their expense base, they made their workforce more digital, they managed supply-chain issues. And now they are still positioned to do well.
And we are not seeing loans migrating into the “troubled” categories. So hopefully any recession would be shallow and not have a big impact, either on people or companies.
The Biden administration says inflation has peaked. Do you see signs that’s true, or should we brace for food, fuel, and other prices to continue to rise?
Inflation is persistent. The Fed is going to have to administer some medicine to slow demand and bring it down. The Fed is most concerned that inflationary expectations not get built-in. When they do, it’s hard to stop prices from going up and up. If I’m paying 5% to 7% more, I want a raise that’s consistent with that inflation. Then the company has to raise prices. We saw that in the 1970s.
Don’t all these rising prices hurt the poor most?
People higher up the income ladder take inflation in stride, it will cost them a little more for gas, food, and entertainment. But the majority of people at median or below-median income levels, who live paycheck to paycheck, are having to suddenly pay double to fill their gas tanks. It’s eye-watering to see the price of steak.
So you are getting a backlash. There’s quite a bit of disenchantment for the people it hurts. That’s why the Fed is on the case.
Why are prices rising?
If you get fiscal and monetary profligacy, you’re going to get inflation. That includes [anti-pandemic measures such as] helicoptering in $1,400 checks for everyone. Restrictive energy policies that were supposed to force us to renewables at warp speed, and demonizing fossil fuels, that’s also part of the equation.
It used to be Republicans were pro-business, while liberal Democrats ran against “the corporations.” But lately, with Florida canceling Disney’s special treatment, with conservatives demanding media-content controls, and the breakup of the tech giants, have both parties turned anti-business?
I think it’s symptomatic of the divisiveness we have in the country. It’s like no one is immune.
Companies try to stay focused on having a clear purpose — whom they are serving, and why. They try to develop clear plans to help all their stakeholders. But with the country as polarized as it is, if you lean in on social issues too far one direction, you [upset] half the customers. Lean the other way, you [upset] the others.
So how do you take principled stands that show some wisdom and judgment? Or are you better focusing on delivering a great job and service, and stay hidden below the tree line? A lot of companies are wrestling with that.
How are you applying that at Citizens?
Double down on: purpose and vision, building communities, returns to stakeholders, openness to diversity and inclusion, taking care of your customers. It gets tricky in some of these social issues. Workers want the companies to stand up. It becomes a fraught road to travel.