Citizens sees growth in student loans

The high cost of college has many young graduates reeling under the burden of student loan debt in a sluggish economy that no longer promises a job as a result of a college degree.
Even so, the traditional American pathway to success – a college education – continues to spawn substantial borrowing for student loans, and some banks see the relatively small market for private student loans as an important segment of lending.
Most notably in Rhode Island, one of those banks is Citizens Financial Group Inc., parent of Citizens Bank, which bought a $59 million portfolio of private student loans from Boston-based First Marblehead Corp. in two transactions this year.
The first sale of $39.8 million closed March 28. The second sale of $19.2 million closed at the end of June. The sale was through First Marblehead’s subsidiary Union Federal Savings Bank, which is based in North Providence.
“We jumped at the chance to work with Union Federal and First Marblehead on this,” said Brendan Coughlin, president of auto and education finance for Citizens Financial Group, who is based in Dedham, Mass.
“We’re very bullish in this marketplace, and we have an appetite to grow in this space,” said Coughlin. “Citizens got into the private student loan space, which is a consumer loan, in 2009.
“It’s a bit of a contradiction because the secondary markets evaporated, but consumers still needed to go to school and some returned to school because they didn’t have a job,” said Coughlin. “We saw a void in the marketplace.”
Still, he said, “it’s a very complicated industry. About 95 percent of student loans are from the government. The remaining 5 percent is from the private student loan space. It’s a small industry, but a very important one to our customers.”
Banks long have been offering student loans, said Charles Kelley, executive director of R.I. Student Loan Authority, a nonprofit, quasi-public agency.
“Banks have always seen student loans as a way of developing relationships with students and families for other products,” said Kelley, who has been with RISLA for 22 years. However, a change in federal rules impacted lending for student loans.
“Back in 2010, the regulations changed, and banks could no longer make federal loans,” said Kelley. “So there are fewer banks doing student loans.”
RISLA generally advises students to accept scholarships, grants and federal Stafford loans first, then pursue other options, said Kelley. Those options should include the RISLA-state based loans, which are not federal loans, he said.
“Our mission is to try to get a student and the family the lowest rate possible. With the rates we try to lend at, there’s very little margin, so there’s very little for a bank to make a profit on, if a bank is going to compete,” said Kelley.
Citizens Bank, however, is clear on its mission to grow its student loan business.
“The private student loan market existed before the introduction of the federal Direct Loan Program,” said Coughlin. “During the credit crisis other lenders, mostly nonbanks, pulled out of the private student loans. This was more of a driving factor for Citizens to enter the market than the introduction of the federal Direct Loan Program.”
“We saw this as an opportunity to step in and help students and families by providing affordable financing alternatives, with the intent of building a long-term relationship with the student,” he said.
“The reality is that for many students, a Citizens private student loan can offer a more affordable solution than unsubsidized federal loan alternatives,” he said.
Neither did the national concern about the high rate of student loan defaults deter Citizens.
“Our delinquency rate is less than 1 percent, and 90 percent of our loans are co-signed by a parent,” said Coughlin. “We believe the best consumer protection to ensure their loan is affordable is sound underwriting practices.
“This is in stark contrast to the federal loan program, which has delinquency rates in the 15 percent range,” said Coughlin.
Citizens’ emphasis on student loans comes as the bank prepares for a 25 percent IPO, which Chairman and CEO Bruce Van Saun has said will occur toward the end of 2014, with October likely a prime month. The bank is expected to be fully public by 2016. Citizens is in the process of separating itself from its parent, Royal Bank of Scotland PLC, which got a $70 million bailout from the British government in 2008 and is under pressure to return taxpayer money.
On June 30, Citizens announced a rebranding and among other details, has dropped the RBS name from the Providence-based operations, now called Citizens Financial Group.
Some financial analysts don’t see the purchase of the loans from First Marblehead as impacting the planned IPO.
“The U.S. consumer loan portfolio has lost more than $1 trillion in balances since 2008,” said Christine Pratt, senior analyst at the Aite Group in Boston. “Beyond the mortgage crisis, the reason for this is that consumers stopped spending and borrowing money.
“Adding to this, the government took over the origination of federally guaranteed student loans, and that meant loss of significant revenue to very large banks that were making and servicing these loans – among them, RBS Citizens,” said Pratt. “The bank has had a long commitment to supporting student education, strong investments in technology and well-managed staff to process the loans, efficiently and effectively.
“Purchasing of $59 million dollars in loans, in my opinion, would not have a significant impact on the bank’s $47 billion dollar consumer loan portfolio or the IPO,” said Pratt.
William Howlett, London-based equity analyst for S&P Capital IQ, said the student loan “transactions are very small relative to Citizens’ balance sheet.”
“Two transactions of USD $59 million for student loans, relative to a loan book of USD $85.9 billion at the end of 2013, per the S1 filing, and tangible equity of USD $13 billion are immaterial to the valuation for the IPO.
“I’m not sure what’s driving these small acquisitions, but Citizens has a strong balance sheet with a Basel lll fully loaded common equity ratio of 13.1 percent at the end of 2013, which is well ahead of their peers, giving them capital flexibility to pick up loans to support growth,” said Howlett. •

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