Citizens Financial Group (CFG) Up 8.5% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Citizens Financial Group (CFG). Shares have added about 8.5% in that time frame, outperforming the S&P 500.

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

Citizens Financial's Q3 Earnings Top on High Revenues

Riding on strong growth in mortgage banking fees, Citizens Financial delivered a positive earnings surprise of 2.1% in third-quarter 2019. Adjusted earnings per share came in at 98 cents, beating the Zacks Consensus Estimate of 96 cents. Also, the bottom line jumped 5% year over year.

Rise in fee income, on the back of solid rise in mortgage banking and card fees, supported revenue growth. Also, its capital position remained strong. Further, loans and deposits balances showed improvement. However, elevated expenses and provisions were headwinds. Also, contraction of margin posed a concern.

After considering notable items, net income came in at $449 million, up 1% year over year. Earnings were 97 cents per share, up 7%.

Fee Income Growth Drives Revenues, Loans & Deposits Rise

Total revenues for the third quarter came in at $1.64 billion, surpassing the consensus estimate of $1.63 billion. Additionally, the top line was up 5% year over year.

Citizens Financial’s net interest income (NII) declined marginally year over year to $1.15 billion. Also, net interest margin contracted 10 basis points (bps) to 3.12%. This was, however, partly mitigated by higher interest-earning asset yields given continued mix shift toward better-returning assets and modestly higher short-term rates.

Non-interest income climbed 19% year over year to $493 million. This upside stemmed from strength in almost all components of income, partially offset by reduced capital markets fees.

Non-interest expenses jumped 7% year over year to $973 million. The upswing highlights rise in all categories of expenses, partly muted by lower other operating expenses. On an adjusted basis, expenses rose 6%.

Efficiency ratio increased to 59% in the third quarter from 58% in the prior-year quarter. Generally, a higher ratio is indicative of the bank’s declined efficiency.

As of Sep 30, 2019, period-end total loan and lease balances climbed 1% sequentially to $117.9 billion. Also, total deposits increased about 1% to $124.7 billion.

Credit Quality: A Mixed Bag

Provision for credit losses jumped 29% year over year to $101 million. Also, net charge-offs for the quarter jumped 31% to $113 million. As of Sep 30, 2019, allowance for loan and lease losses increased 2% to $1.26 billion.

However, total non-performing loans and leases were down 5% to $793 million. Also, nonperforming loans and leases as a percentage of total loans and leases contracted 6 bps to 0.67%.

Solid Capital Position

Citizens Financial remained well capitalized in the third quarter. As of Sep 30, 2019, Common equity Tier 1 capital ratio was 10.3% compared with 10.8% at the end of the prior-year quarter. Further, Tier 1 leverage ratio was 9.9%, flat year over year. Total Capital ratio was 13%, down from 13.4%.

Capital Deployment Update

The company repurchased 14.1 million shares at average price of $35.43 during the September quarter. Notably, including common stock dividends, the company returned $662 million to shareholders.


Fourth-Quarter 2019 (excluding expected notable items and including impact of acquisitions)

Net interest income is expected to be broadly stable as loan growth might offset rate or yield-curve effects on NIM.

Non-interest income is expected to be down modestly from record levels, given higher capital markets fees to mostly offset a drop in mortgage revenues.

Management expects non-interest expenses to be flat to down slightly on cost management.

Also, the company expects to deliver positive operating leverage and further improve its efficiency ratio.

Provision expenses are expected to increase by $10 million.

Further, Basel III common equity tier 1 ratio is estimated to be about 10.1%.

Full-year 2019

Average loans are expected to grow in the range of 3-5%.

Management expects NII to grow 5-6.5%. Also, average earning assets are expected to grow 3-5% in 2019.  NIM might expand by low-to-mid single digits bps, reflecting benefit of balance sheet optimization.

Non-interest income is expected to grow 11-13%, as the company continues to leverage investments and expand the capabilities. Excluding the impact of Franklin American Mortgage acquisition, fee income is likely to grow 4-6%.

Expenses are anticipated to increase 5.5-6.25%. Excluding the impact of Franklin American Mortgage acquisition, costs are likely to grow 3-3.5%. Also, the company targets to deliver positive operating leverage of 3%.

Notably, efficiency ratio is expected to improve 100 bps.

Provision expenses are expected to be in the range of $400-$450 million.

The tax rate is expected to be 22.75%.

The company is targeting a dividend payout ratio of nearly 30-35% for 2019.

Year-end Basel III common equity tier 1 ratio is estimated to be about 10.2%.

Medium-Term Targets

Having achieved the medium-term targets set in 2018, the company raised them to following:

  • Return on common tangible equity of 14-16%
  • Efficiency ratio of 54%
  • Common equity tier 1 ratio of more than 10%

Efficiency Initiatives

In late 2014, Citizens Financial had announced its first efficiency program — TOP 1 — which resulted in $200 million costs savings. During the second quarter of 2015, the company announced Top 2 revenue and expense initiatives, which resulted in a pre-tax benefit of roughly $105 million in 2016. Following its success, Citizens Financial launched Top 3 program, which delivered a pre-tax benefit in excess of $115 million. Further, the company launched the Top 4 program, which delivered pre-tax benefit of $115 million by the end of 2018.

Finally, continuing with the trend, Citizens Financial announced TOP 5 program with its second-quarter results. These fresh objectives target strong positive operating leverage with goal to self-finance growth initiatives and is expected to achieve pre-tax benefit of $105-$115 million by 2019-end.

Further, it announced TOP 6 Program also, which is expected to deliver $300-$325 million in pre-tax run-rate benefit by 2021. Along with the traditional TOP objectives, the new program will also take into account ways to transform company’s operating manner and customers’ satisfaction in a better way. The cost of Top program implementation is expected to be between $50 million and $75 million in 2020-2021.

TOP 5 Program

Efficiency initiatives

With help from following factors, the company expects to achieve about 67% of targeted benefits:

  • Branch transformation: Accelerated optimization of its branch footprint
  • Mortgage simplification: Focus on organizational design and improving fulfillment efficiencies
  • Process improvement: Next wave of opportunities to re-design end-to-end processes and leverage automation to reduce costs and improve outcomes
  • Customer journeys: Continue with three current customer journey initiatives to drive simple and excellent customer experiences while delivering cost efficiencies. It also plans to initiate two new journeys
  • Vendor/Indirect spend: Recognize further contract efficiencies and demand-management opportunities

Revenue Initiatives:

  • Next-phase data analytics: Develop real-time analytics to drive enhanced personalization, further expand marketing-driven production
  • Build-out fee income capabilities: Customer journey on commercial payments; and build out of bond-underwriting capabilities
  • Expand into growth areas: Establish offices in new and attractive MSAs, including Dallas and Houston

TOP 6 Program

The Program will consist of two elements:

  • The transformational program, which is designed to improve how it delivers for customers and how the bank is operated. The company also seeks to redefine cross-organizational operating model to deliver a more customer-centric, efficient and agile environment by modernizing IT practices. Through this, the company targets pre-tax run-rate benefits of $100-$125 million and $200-$225 million by 2020 and 2021, respectively.
  • The traditional program will be similar in nature and scope to TOP 2-5 programs and is anticipated to deliver $75-$100 million and more than $100 million in benefits by 2020 and 2021, respectively.

The company mulls that the program will help offset interest-rate headwinds, maintain commitment to delivering positive operating leverage, improve efficiency ratio and ROTCE. Also, it plans to fund new strategic revenue initiatives such as significant expansion of digital strategies to increase customer reach and developing new digital offerings for commercial customers.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month.

VGM Scores

At this time, Citizens Financial Group has a poor Growth Score of F, however its Momentum Score is doing a lot better with a C. Charting a somewhat similar path, 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 aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.


Estimates have been broadly trending downward for the stock, and the magnitude of these revisions has been net zero. Notably, Citizens Financial Group has a Zacks Rank #3 (Hold). We expect an in-line 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.


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