Strong Balance Sheet Aids Citizens Financial (CFG) Amid High Cost

Citizens Financial Group, Inc. CFG has a healthy balance sheet position. The company’s balance sheet optimization (BSO) plans involve the reduction of its non-core loan portfolio to focus on relationship-based lending. Solid liquidity and a strong capital base indicate sustainable capital distributions. Yet, a rising cost base limits bottom-line growth. Also, the performance of the mortgage banking business is expected to be subdued in the near term.

Its loans and deposits saw a compound annual growth rate (CAGR) of 7.6% and 10.9%, respectively, over the last four years (2018-2022). However, both metrics declined in the first nine months of 2023. Nonetheless, the bank has been enhancing its deposit base by advancing its deposit-gathering capabilities.

Further, its BSO plan includes the reduction of its non-core loan portfolio from $12.3 billion as of the third-quarter 2023 end to $4.7 billion as of the 2025 end. The sale proceeds will be used to improve core liquidity and support organic relationship-based loan growth of its core portfolio. The company projects $11 billion and $9 billion in deposits and loans, respectively, over the medium term.

Also, the bank’s long-term strategy involves growth in wealth management offerings, improvement of capabilities in the high-net-worth segment and expansion into key markets. In October 2023, it launched the Citizens Private Bank, enhancing its operations in the wealth management space. The company plans to open six private banking offices in 2023 and throughout 2024. Management believes that Citizens Private Bank will reach breakeven in the second half of 2024 and will be accretive to earnings by 5% in 2025.

Citizens Financial’s focus on executing a series of revenue and efficiency initiatives led to the introduction of the “Tapping Our Potential” (TOP) program in late 2014. The company plans to launch its TOP 9 program, along with a major cost reduction initiative. The TOP 9 program will focus on the simplification of organizational structure and procurement efficiencies, and include artificial intelligence into its operations. Amid the weak macroeconomic conditions, efforts to augment efficiencies will preserve returns.

Escalating expenses are the key downsides for Citizens Financial. The company’s non-interest expenses witnessed a CAGR of 7.8% over the last four years (2018-2022), with the momentum continuing in the first nine months of 2023. Costs are likely to remain elevated in the upcoming period due to the opening of private banking offices, franchise expansion nationally and investments in newer technological advancements.

Uncertainty about the performance of Citizens Financial’s mortgage banking business is another concern. While the company’s mortgage banking fees increased in 2020, supported by low mortgage rates, the same witnessed a decline at a CAGR of 4.7% from 2019 to 2022, with the downtrend persisting in the first nine months of 2023. High mortgage rates have been adversely impacting mortgage origination volumes and refinancing activities. For 2023, we expect mortgage banking fees to decline 5.7%.

The loan portfolio of Citizens Financial contains a high amount of commercial loans (51.7% of the total loans and leases as of Sep 30, 2023). The current rapidly changing macroeconomic backdrop may put some strain on commercial lending. Thus, the lack of loan portfolio diversification is likely to hurt the company’s financials if the economic situation worsens.

Over the past six months, shares of this Zacks Rank #3 (Hold) company have rallied 32.3%, outperforming the industry's 13% rise.


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Bank Stocks Worth a Look

A couple of better-ranked stocks from the banking space are WSFS Financial Corporation WSFS and Byline Bancorp BY.

Earnings estimates for WSFS have been unchanged for 2023 over the past 30 days at $4.47. The company’s shares have gained 13.2% over the past six months. WSFS Financial currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Byline Bancorp’s earnings estimates have moved 1.4% north for the current year at $2.83 over the past 30 days. In six months’ time, BY’s shares have gained 18.8%. The company carries a Zacks Rank #2 at present.

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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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