Citizens loses $929m as bad loans proliferate

By Ross Kerber
Globe Staff / February 26, 2009
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Citizens Financial Group, New England's second-largest banking system, reported a $929 million loss in 2008 and said it may have to write off nearly $2 billion in bad loans, a surprisingly deep hit for the Providence company.

Citizens made the disclosure in a filing to federal banking regulators this month. The loss is a huge swing from the previous year, when Citizens reported nearly $1.5 billion in profit, and reflects how even a mainstream lender that did not dabble in exotic investments has been hurt by the collapse of the housing sector and the economic downturn.

In addition to losses on housing loans and credit cards, Citizens' loss was also driven by a $1.5 billion charge it took to lower its total "goodwill" or the total value of some of its assets. The company would not provide an explanation for the charge, but analysts believe it relates to its beleaguered Midwestern banking operation, Charter One, which operates in states hit hard by the downturn, such as Michigan and Ohio.

Still, by some common financial measurements, Citizens remains in average shape compared with other banks. But its parent company, the Royal Bank of Scotland Group, is among the most troubled of the world's large banks. Royal Bank is expected to reveal a major restructuring this morning that could include selling off portions of its far-flung international empire.

Royal Bank has been under government control since the fall, when the United Kingdom stepped in with $29 billion of emergency capital to keep it afloat. In exchange the UK central bank, the Bank of England, now owns 70 percent of Royal Bank and holds several seats on its board of directors.

Neither the Royal Bank of Scotland nor Citizens would comment yesterday because Royal Bank is scheduled to release its earnings in London this morning. In addition to Citizens, Royal Bank's US operations include investment unit RBS Greenwich Capital in Greenwich, Conn., which also has financial problems, and credit card operations.

Citizens' US filing indicated the bank in 2008 more than doubled the amount it sets aside for bad loans, to $1.93 billion, from $727 million in 2007. Moreover, Citizens disclosed that for 2008, it made no dividend payments to parent company RBS compared with $2 billion in 2007.

As a subsidiary of a foreign bank, Citizens does not release financial statements as frequently as US-based banks, so its brewing problems were not as well known as those of institutions that received funds from the $700 billion US government banking bailout. Now, though, its latest financial filing reveals that Citizens has some of the same problems that have dragged down other prominent US banks.

"This is really quite surprising to me," said Milton banking analyst Suzanne Moot. "Certainly Citizens in the Northeastern states had a reputation of being a responsible lender and you hadn't heard much about them making crazy loans."

Moot noted that about half the amount Citizens has reserved for bad loans, some $916 million, stemmed from consumer borrowings such as home-equity lines of credit and credit cards.

Citizens' performance is not extraordinary by any means. It ranks about average in many categories compared with its peers, such as ratio of losses to total loans and leases, or the amount of bad loans it has been able to recover. If anything, said Robert Patten, a banking analyst at Morgan Keegan in New York, Citizens is part of a crowd of banks rushing to shore up sagging finances.

"The banks continue to play catch-up in loan-loss reserves and charge-offs," and Citizens "is no exception," he said.

US officials have been working for months to restore the nation's banks to sound footing. Just yesterday the Obama administration gaves new details on how it would provide funds for large banks if they need more backing. But it said it would begin to subject large recipients of government aid to "stress tests" to determine if they would be able to withstand further downturns in the economy, for example, another spike in unemployment. The results of those tests would determine if the banks will receive the additional funds.

As an RBS unit, Citizens hasn't been eligible for the US infusions, but it also isn't subject to lending restrictions that RBS faces in England as a condition of loans from the British government.

The Providence company owns Citizens Bank, which has branches in 13 states, from New Hampshire to Pennsylvania, and Cleveland-based Charter One, which it bought in 2004 for $10 billion. Now, both Moot and Neil Smith, an analyst for German commercial bank WestLB, said the $1.5 billion charge appears to be for Charter One, to reflect a lower value for the franchise.

Royal Bank has said it plans to write off at least $21 billion in charges across all its operations. The Scottish bank's new chief executive, Stephen Hester, has said he was considering asset sales but had been noncommittal about Citizens Financial or its units.

Some British newspapers have reported the Royal Bank is contemplating splitting itself in two, a "good bank" and a "bad bank," with the latter made up of assets that could be sold or written off.

Smith said he found that solution unlikely and he expects bank executives and British officials to present a plan that would instead set up some kind of asset-protection system in which bad assets would stay on RBS's books but with government backing.

Either way, Smith said, it would be difficult for RBS to sell Citizens to raise money to reinforce its own position. For one thing, there would be hardly any buyers. "It would be difficult to sell a US bank at a reasonable price," he said.

Ross Kerber can be reached at

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