Providence-based Citizens Financial Group will scale back activities in states where it isn’t among the top five financial institutions.

The Providence Journal / Steve Szydlowski

Financially troubled Royal Bank of Scotland plans to cut costs at Providence-based Citizens Financial Group, withdrawing from states where it is a marginal player, its chief executive officer said yesterday.

RBS reported a record $34-billion loss for last year, according to its latest earnings report, and company executives outlined plans to sell various units yesterday during a videoconference in London.

For its part, Citizens reported a net loss of $929 million for last year, according to federal regulatory filings, and faces the prospect of writing off nearly $2 billion in bad loans.

Stephen Hester, RBS’ new CEO, indicated that the British bank plans to hold onto Citizens.

“Citizens does have strong market-leading positions in the attractive markets of the Northeast and Mid-Atlantic of the United States,” Hester told financial analysts yesterday in London. “It is our belief that this business can be restructured [so] that it makes an attractive part of our group.”

Hester said Citizens will have to “draw back” on a number of efforts, including “geographically,” paring back activities in states where the bank isn’t among the top five financial institutions.

Citizens’ federal filings this week note that the bank sold 18 branches in the Adirondacks late last year and made a deal to sell its 65 branches in Indiana.

Citizens will give up most activities outside its core markets at the same time it improves selling more banking services to customers, cuts credit risk and raises deposits.

“We believe this is a good bank and can be a very good bank but it needs a lot of work,” Hester said. “Even if we didn’t believe that, it’s unsalable today at an attractive value so in either event we have to rebuild value and that’s what we are going to do.”

The Citizens group includes Citizens Bank, New England’s second-largest, and Charter One in the Midwest.

The Charter One acquisition in 2004 cost about $10 billion and has since proved a drag on Citizens. The price was a large part of a $1.6-billion write-down of goodwill in the fourth quarter, according to federal filings.

In December, Citizens said it would lay off about 900 of its 24,500 employees this year. The bank said the layoffs would occur throughout the regions where it does business and did not break down how many would occur in New England.

Citizens’ spokesman Mike Jones said there are no plans for further layoffs at this point.

Hester declined yesterday to address potential job cuts in RBS’ operations worldwide, but his comments indicate that some parts of Citizens’ operation, which employed 5,500 people in Rhode Island and 3,600 in Massachusetts at the end of the year, may see a cash infusion.

The bank, he said, has been “starved” of technology investment, which has made Citizens inefficient.

“The retail network isn’t working as well as it should,” he said. “The retail network we need to particularly revitalize as a revenue generator.”

RBS also will change its growth strategy for the United States, he said, indicating that the British bank would shy away from the acquisitions that brought it trouble.

“We need to prove that we can grow [U.S. operations] organically,” he said.

Citizens will have to clean up its balance sheet to achieve that growth, although to a far lesser extent than RBS.

Citizens paid no dividend last year to struggling RBS, compared with $2 billion the previous year.

The Providence-based bank doubled the amount it set aside last year for bad loans, to $1.93 billion, from $727 million in 2007, according to federal filings.

“We have tough targets for Citizens,” Hester said.

RBS sees little potential for growth in other international markets as it said it will scale back operations in 36 countries, abandoning or selling operations in the Middle East and Asia, as well as New Zealand, Portugal and Romania.

pgrimald@projo.com