CFO OUTLOOK 2018 MIDDLE MARKET - Citizens Commercial Banking

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CFO OUTLOOK 2018 MIDDLE MARKET - Citizens Commercial Banking
CFO OUTLOOK 2018
MIDDLE MARKET
CFO OUTLOOK 2018 MIDDLE MARKET - Citizens Commercial Banking
TABLE OF CONTENTS

Summary and Key Findings.....................................................................1

Growth in the Current Environment......................................................2

Emerging Trends.......................................................................................6

An Increasingly Evolving Role...............................................................10
SUMMARY AND KEY FINDINGS
We are pleased to share our 2018 CFO Outlook – an initiative that supports Citizens Commercial Banking’s
ongoing commitment to provide actionable intelligence that our customers and other organizations can
use to reach their potential. The findings come from a survey of 300 middle market CFOs and focus
on the expanding responsibilities that today’s CFOs face when it comes to driving corporate growth.
In some areas, our findings vary greatly among lower middle market companies ($25MM to $500MM) and have been highlighted to demonstrate
the difference.

When the study was fielded at the end of Q3, 80% of CFOs had a positive outlook on economic growth
in 2018. However, confidence in policy changes under the new administration is waning. CFOs still
believe that changes to current tax policies will benefit their companies, but they have lower expectations
that change to trade and regulatory policies will impact their bottom line. When these attitudes are combined
with the muted-growth environment the country has experienced since the Great Recession, CFOs
clearly recognize that they can’t rely on broad economic growth or the external environment to lift their
company. Instead, CFOs are looking at continuous improvement to fund future growth. To highlight
this fact, 81% of the CFOs surveyed said one of their key objectives in 2018 is to improve operational
efficiencies, followed by expansion into new domestic markets and the development of new products.

To fuel these efforts, CFOs will take advantage of emerging technology trends. They expect to increase
their use of electronic payments, and invest more in both data scientists and big data technologies.
This, in turn, has CFOs reporting that greater technology awareness and adoption is viewed as the most
important new skill they must acquire.

At Citizens, we realize that CFOs are encountering change like never before. In addition to managing
the corporate financials, they are now expected to shape organizational strategies, identify new business
opportunities and expand the use of technology – creating a role more akin to a Chief Growth Officer.
Given this reality, CFOs need a trusted strategic and financial advisor who has the knowledge and
resources to help them quickly take advantage of new opportunities. At Citizens, we earn this role every
day by delivering objective advice, tailored solutions and timely execution, and welcome the opportunity
to discuss how we can help your company reach its potential.

                                                                                                                1
GROWTH IN THE CURRENT ENVIRONMENT
Positive Economic Momentum Should Continue
CFOs have positive expectations for the economy in 2018. Half expect improvement and another
30% believe economic growth will remain the same. CFO optimism is significantly higher among
upper middle market companies compared to lower middle market companies.

                                           Economic Outlook
                                            Economic Outlook

                                           Worsen
                                            20%

                                                              Improve
                                     Stay the same              50%
                                          30%

The upshot of this positive economic view is evident in corporate growth expectations. More than half
of the CFOs surveyed are extremely confident that their company will hit their growth targets and only
9% lack confidence.
                                               Confidence in 2018 Company Growth
                                 Confidence in 2018 Company Growth

                                    55%                             36%                 9%

                          Extremely             Moderately              Not confident
                       confident (10-8)       confident (7-6)            at all (5-1)

2
Tax Reform is Expected to Amplify Business Growth
The 2016 Presidential election created the expectation that major policy initiatives would help spur corporate
growth. At this point, CFOs are still optimistic about federal tax policy changes and a majority (60%) believe
the anticipated federal tax policy changes would amplify company growth, dwarfing the 6% of CFOs expecting
a negative impact.

However, the anticipated business impact of the other three major initiatives – trade, regulatory relief and
monetary – are divisively split.

                                   Factors Influencing Business
                                                  Factors       Growth
                                                          Influencing Business Success

                     Federal tax policy

                                          60%                            35%            6%

                     Trade agreement/Trade policy

                           25%                           55%                      20%

                     Federal regulatory policy

                          21%                        55%                         24%

                     Monetary policy

                        17%                        56%                          27%

                         Positive impact         Moderate impact       Negative impact
                             (10-8)                  (7-6)                 (5-1)

                                                                                                               3
Efficiency and Expansion Lead the Way
Taking cost out of the business will remain a primary focus for CFOs. This powerful trend will continue
near-term as 81% of CFOs are focused on improving operations in the next 12 months.

Nearly half of firms will seek to expand in domestic markets or develop new products. Fewer firms will look
                                                      Upper middle        Lower middle
to undertake initiatives like international expansion, divestiture or acquisition. When it comes to acquisition,     Sources of Gro
                                                      market              market
two-thirds of upper middle market companies expect to pursue this action over the next 3 years.

                               Opportunities for Growth           Upper middle market

                                                                   9%                  56%                           35%
                Opportunities for Growth

Focus on improving operational efficiency                         Lower middle market

                       81%                       12%   6%         4%     19%                         77%

Expansion into new domestic markets
            47%                     35%            19%             Next 12 months           1 to 3 years     No plans to pursue

Internal development of new products

            46%                  27%             27%

Expansion into new international markets
    16%         20%                   64%                          Upper middle market
                                                                   >$500MM
Acquisition of new products
                                                                    9%                56%                          35%
 10%      20%                         70%
                                                                   Lower middle market
Acquisition of another company                                     $25MM to
Global Expansion Strategies Vary by Industry
International expansion is a much greater focus for upper middle market firms as compared to lower middle
market firms, with 66% seeing it as an opportunity for 2018. As these global opportunities are assessed,
distinct patterns are apparent with different industries targeting different regions.

APAC is a leading market for expansion opportunity across industries. Western Europe is a focus as well,
particularly for the Retail and Hospitality industries. The Middle East is emerging as a target for manufacturing
and services companies.

                                  International Markets Being Considered

                                                                          Business &
                                                                                           Retail &
                                          Overall      Manufacturing      Professional
                                                                                          Hospitality
                                                                           Services

          Other Asia-Pacific               44%             44%               47%            40%

          Western Europe                    42%             41%              35%             53%

          China                             42%             41%              47%             40%

          Middle East                       33%             41%              41%              7%

          Australia                         29%             26%              35%             27%

          Eastern Europe                    24%             24%              29%             20%

          Japan                             20%             24%              18%             13%

          Canada                            18%             15%              18%             27%

          Central/South America             18%             26%               6%             13%

          Mexico                            17%             18%               6%             27%

          Africa                            9%              12%              12%               --

          Russia                            8%              12%               6%               --

                                              Upper middle market
                                                    >$500MM

                                                  Middle market
                                                  $XMM to
EMERGING TRENDS
Greater Utilization of Electronic Payments
In the near term, CFOs are looking to increase their utilization of electronic payment technologies to drive
greater business efficiencies, reduce costs and improve working capital. On average, CFOs seek an increase
of 17% in payables and 15% in receivables executed electronically.

CFOs realize that electronic payment technologies make good business sense: 4 out of 5 acknowledged the
positive impact they are having on overall company performance.

                                                                                                               21
                                      Electronic Payments Utilization
                                          Electronic Payments Utilization

                             Payables                                   Receivables

                                                                                    54%

                                        41%
                                                                    39%

                       24%

                      Current         Wanted                      Current         Wanted

6
A Measured Approach to Real-Time Payments
CFOs are well aware of the impending real-time payment systems and the business benefits. Widespread
implementation is likely to be delayed, though, as they are apprehensive about being among the first to market.

About half of upper middle market CFOs and nearly two-thirds of lower middle market CFOs who plan
to implement real-time payment systems are waiting for their peers to lead the way.

                   Current Status

                                                                   When Implementation Will Occur
          Implemented         4%                                       Among those who intend to
                                                                      implement after systems have
                                                                       been implemented by others
           Researched,
                                     38%
 planning to implement

   Researched, no plans
                                   30%
    for implementation

         Aware, but no
                              19%
   research or planning
                                                                                            64%
             Not aware     9%

                                                                          49%

                                                                     Upper middle      Lower middle
                                                                       market              market
                                                                      >$500MM             $25MM
                                                                                       to
Unlocking Value From Data
Although some positive impact has already been felt, most CFOs believe they are not currently using big
data to its potential.

Upper middle market CFOs are further along, with the right talent and technology in place to realize a
positive business impact, as compared to lower middle market CFOs who have not been able to leverage
big data technology as much or as effectively.

                                                                                                                   24
                                       Current Impact of Big Data
                                                                                                      24
                                                       Current Impact of Big Data
                     Upper middle market
                                     Current Impact of Big Data
                     >$500MM
     Upper middle market
     >$500MM
                               39%                          48%                  14%

               39%                          48%                  14%
                     Lower middle market
                     $25MM to $500MM

                         23%                                    23%                                 Lower middle market
                                                                                                    $25MM to
Technology Investments Will Accelerate
Both upper and lower middle market CFOs believe the future impact of big data will be significant and both are
planning to invest more to ensure success.

Almost all upper middle market CFOs anticipate spending more on people and technology to drive an
increased impact while about two-thirds of lower middle market CFOs plan to increase their investments.

                                Expected  Impact of BigofData                                                    26
                                    Expected   Impact     Big Data                                   26
                       Expected Impact of Big Data

              Upper middle market
     Upper middle market
              >$500MM
     >$500MM
                                   59%                                  39%               2%
                         59%                               39%                 2%

               Lower middle market
     Lower middle market
               $25MM  to $500MM

                                                                                              Lower middle market
                          61%                                     69%               Lower middle market
                                                                                              $25MM  to
AN INCREASINGLY EVOLVING ROLE
Pace of Change Will Accelerate
Continuous growth leads to a continuously evolving role, and CFOs expect the pace of this change to
                                                                                                                     2
accelerate. While only 10% of CFOs experienced a significant change in their role over the past 3 years,
                                                              Change in CFO Role
twice this amount expect significant change in the next 3 years.                                                     2

                                                          Change in CFO Role
                      In past 3 years
                                             Change in CFO Role

                      In10%
                         past 3 years            64%                             27%

                       10%                       64%                             27%
                      In next 3 years

                      In next
                           21%3 years                   60%                        19%

                           21%                          60%                        19%

                        Significant change     Moderate change             No change
                              (10-8)                (7-6)                    (5-1)
                        Significant change     Moderate change             No change
                              (10-8)                (7-6)                    (5-1)

As this evolution continues, CFOs will be expected to work collaboratively with their CEO across a broad range
of strategic initiatives. While this expectation isn’t new, what’s surprising is that 29% of CFOs already spend as
much time on business strategy as they do on financial tasks.

Looking ahead, 58% of upper middle market CFOs feel confident in meeting this challenge compared to just
38% of lower middle market CFOs.
                                                                                              16
                                Strategy and Financial Focus of CFOs
                      Strategy and Financial Focus of CFOs

                     Only financial     9%

                   Mainly financial,
                                                                61%
                    some strategy

                   Equally on both              29%

                   Mainly strategy,
                                        2%
                    some financial

10

                             Time Spent on Strategy vs                                        17
Where CFOs are Focused
Close to two-thirds of both upper and lower middle market CFOs are focused on the tasks that are necessary
to keep their company properly financed, and more than half are focused on cash management to help optimize
working capital.
                                    Where CFOs are Spending Time

                                          Upper middle market
                                              >$500MM
                                        Less focus çè More focus

           Corporate governance           42%                   63%           Investor relationships

                Human resources
                                          41%                55%              International expansion
                   management

                Fraud prevention                                              Keeping the company
                                            32%              52%
                  and monitoring                                              properly financed

          Systems processing and
                                            32%             47%               Cash management
          information technology

                                                           43%                Regulatory compliance

                                          Lower middle market
                                         $25MM to
METHODOLOGY

Survey Population    CFOs of U.S.-based businesses with $25MM+ in revenue
Profile of Survey    Manufacturing, construction, energy, pharmaceuticals (116); business and professional
Respondents          services (87); retail, hospitality, food and beverage (97)

Total Completes      N=300 CFOs
Weighting and      Data were weighted to align with the national population of companies based on
Representativeness revenue group.

                                                Revenue                  2017
                                                $25MM to
CITIZENS COMMERCIAL BANKING
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                                                                                                            13
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Disclaimer: This document has been prepared for discussion and informational purposes only by Citizens Bank, N.A. and/or Citizens Bank of
Pennsylvania (“Citizens”). In the preparation of this document, Citizens has relied upon and assumed, without independent verification,
the accuracy and completeness of all information available from public sources. Citizens makes no representation or warranty (express or implied)
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©2018 Citizens Financial Group, Inc. All rights reserved. Banking products and services are offered by either Citizens Bank, N.A. or Citizens
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