Citizens Financial (CFG) Up 9% Since Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Citizens Financial Group, Inc.CFG . Shares have added nearly 9% in that time frame , outperforming the market.

Will the recent positive trend continue leading up to the stock's next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Citizen Financial Tops Q4 Earnings on High Revenues

Citizens Financial's fourth-quarter 2016 adjusted earnings per share came in at $0.55, beating the Zacks Consensus Estimate of $0.52. Also, the reported figure improved 31% year over year, on an adjusted basis.

Organic growth was reflected in the quarter with continued rise in loan as well as deposit balances, along with higher revenues. On the downside, the company recorded increased expenses and provisions.

Net income available to common shareholders jumped 27.6% year over year to $282 million, on an adjusted basis.

For 2016, net income available to common shareholders climbed 17.1% year over year to $1.01 billion, on an adjusted basis. Adjusted earnings came in at $1.93 per share compared with $1.61 in 2015. Results surpassed the Zacks Consensus Estimate of $1.91.

NII & Fee Income Drives Revenues; Loans & Deposits Growth Continues

For 2016, total revenue was $5.3 billion, surpassing the Zacks Consensus Estimate of $5.1 billion. Further, revenues improved 10.4% year over year.

Total revenue for the quarter was $1.36 billion, surpassing the Zacks Consensus Estimate of $1.33 billion. Further, revenues were up10.6% year over year.

Citizens Financial's net interest income increased 13.3% year over year to $986 million. The rise was primarily attributable to average loan growth. In addition, net interest margin expanded 13 basis points (bps) year over year to 2.90%, mainly due to enhanced loan yields.

Also, non-interest income climbed 4.1% year over year to $377 million. The rise was aided by strength in capital markets and mortgage banking fees, partially offset by reduced card fees, trust and investment services fees and service charges and fees.

Non-interest expenses were up 4.6% year over year to $847 million. The rise highlights higher salaries and employee benefits expense, other expense and amortization of software expense. On an adjusted basis, non-interest expenses increased 5% year over year.

Efficiency ratio declined to 62% in fourth-quarter 2016 from 66% in the prior-year quarter. Generally, lower ratio is indicative of the bank's improved efficiency.

As of Dec 31, 2016, period-end total loan and lease balances increased 9% year over year to $108.3 billion, while total deposits rose 7% from the year-ago quarter to $109.8 billion.

Credit Quality: A Mixed Bag

As of Dec 31, 2016, allowance for loan and lease losses decreased 2% year over year to $1.24 billion. Provision for credit losses grew 12% year over year to $102 million.

Also, net charge offs for the quarter jumped 35% year over year to $104 million. Additionally, total non-performing loans and leases edged down 1% year over year to $1.05 billion.

Solid Capital Position

Citizens Financial remained well capitalized in the quarter. As of Dec 31, 2016, Common equity Tier 1 capital ratio was 11.2% compared with 11.7% at the end of the prior-year quarter. Further, leverage ratio came in at 9.9% compared with 10.5% as of Dec 31, 2015. Total Capital ratio was 14.0% compared with 15.3% in the prior-year quarter.

Capital Deployment Update

As part of the company's 2016 Capital Plan, the company repurchased 6.3 million shares at an average price of $28.71 per share, during fourth-quarter 2016.

Citizens' board of directors announced an increase in quarterly cash dividend to $0.14 per share, a rise of $0.02. The new dividend will be paid on Feb 16, 2017 to shareholders on record as of Feb 2.


First-Quarter 2017

Compared with fourth-quarter 2016, loans are projected to grow at a rate of 1.5%, while NIM is expected to improve by 2-3 bps in the first quarter of 2017 on a sequential basis.

Since, the first quarters are generally impacted by seasonality, revenues are expected to be lower.

Provision expenses and tax rates are expected to remain stable sequentially.

The company expects expenses to grow due to seasonality.

Citizens Financial expects CET1 ratio to be around 11.1% by the year end. Also, it expects the loan-to-deposit ratio to be 98%.

Full-Year 2017

Citizens Financial expects a stronger balance sheet position in 2017 reflected through mid single-digit average earning assets, loans and deposits growth sequentially.

Further, management expects revenues to grow at a higher rate compared to expenses for generating meaningful operating leverage.

Regarding NII, management expects it to increase 8--9% in 2017. NIM is expected to increase 8-10 bps.

Additionally, management expects provision expenses along with the tax rate to be almost stable.

Notably, the company expects CET1 ratio to be around 11.2% by the year end. Also, it expects the dividend payout and loan-to-deposit ratios to be 24% and 99%, respectively.

The company anticipates an increase in fed funds rates in June and November/December. Also, a cut in the unemployment rate along with an increase in GDP by 2-2.5% is expected by the end of 2017. These economic factors are expected to benefit the company in the year.

Efficiency Initiatives

During the second quarter of 2015, Citizens Financial announced Top II revenue and expense initiatives, which resulted in a pre-tax benefit of roughly $105 million in 2016. Following its success, Citizens Financial launched Top III program and expects to achieve a pre-tax benefit of $100-$115 million including tax efficiency benefit of $20 million.

TOP III Efficiency Initiatives

Citizens Financial announced the launch of TOP III efficiency initiatives. The new efficiency initiatives are anticipated to generate pre-tax revenue and expense benefits of $80-$95 million and pre-tax benefits of $20 million from tax efficiencies in 2017.


The company expects to benefit $55-$65 million by the end of 2017 through efficiency initiatives driven by following factors -

• In the consumer front, the company has streamlined staff in non-revenue areas and is now focused on branch optimization and efficiencies relation to the mortgage business.

• In the commercial front, the company has largely completed the target to streamline loan process including relationship management coverage models, portfolio management and operations.

• Also, the company has made good progress in simplifying and re-engineering processes in each of the functional areas particularly in Finance, HR, Risk and Technology.

• In the fraud front, the company's aim to improve algorithms and enhance chargeback process is underway.

Revenue Enhancement

Citizens Financial targets a run-rate benefit of $25-$30 million by the fourth quarter of 2017. It is expected to be driven by the following factors -

• The company is focused on attrition management though analytics to predict and reach out to at-risk commercial customers and proactively develop retention plans for the same.

• Regarding unsecured lending, the company launched initiatives with good initial customer responses.

Tax Efficiencies

The company executed several initiatives mainly tied with R&D, renewable, other tax credit in order to match up tax rate to peer levels. Such initiatives are expected to result in 2017 tax rate of around 31% with pre-tax benefit of $20 million from tax efficiencies.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed an upward trend in fresh estimates. There have been five revisions higher for the current quarter.

Citizens Financial Group, Inc. Price and Consensus

Citizens Financial Group, Inc. Price and Consensus | Citizens Financial Group, Inc. Quote

VGM Scores

At this time, Citizens Financial's stock has a poor Growth score of 'F', a grade with the same score on the momentum front. However, the stock was allocated a grade of 'B' on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregte VGM Score of 'D'. If you aren't focused on one strategy, this score is the one you should be interested in.

The company's stock is suitable solely for value based on our styles scores.


Estimates have been trending upward for the stock. The magnitude of these revisions also looks promising. It comes with little surprise that the stock has a Zacks Rank #2 (Buy). We are expecting an above average return from the stock in the next few months.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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