Underwriting, Mortgages to Aid Citizens (CFG) Q3 Earnings

Citizens Financial Group CFG is scheduled to report third-quarter 2020 results on Oct 16, before market open. While its revenues are expected to have improved year over year, earnings might have declined.

Before we look at the factors that might have influenced third-quarter earnings, let’s see how the company performed in the previous quarter.

In second-quarter 2020, this Providence, RI-based bank surpassed the Zacks Consensus Estimate on the back of a solid rise in mortgage banking and capital market fees, which supported revenue growth. However, credit quality deteriorated amid the coronavirus outbreak-led crisis.

Citizens Financial Group, Inc. Price and EPS Surprise

Citizens Financial Group, Inc. Price and EPS Surprise

Citizens Financial Group, Inc. price-eps-surprise | Citizens Financial Group, Inc. Quote


Factors at Play

Net Interest Income (NII) Muted: A muted lending scenario, mainly in the home equity and commercial real estate loans front (accounting for almost 52% of the company’s total loans and leases), is expected to have affected interest income during the quarter.

Also, the Fed continued to keep interest rates at near zero level in order to shield the U.S. economy from the coronavirus outbreak-related mayhem. This is likely to have substantially hurt net interest margin and NII.

However, the Zacks Consensus Estimate for average interest earning assets of $162.8 billion for the quarter indicates an 11.2% improvement from the prior-year quarter’s reported number.

The consensus estimate of $1.16 billion for NII suggests 1% year-over-year growth.

Higher Capital Market Fees: The third quarter witnessed a bounce back in IPO activities, making it one of the busiest since 2000. Also, as companies continued to build liquidity to tide over the pandemic-induced crisis, there was a rise in follow-up equity issuances.

Further, amid near-zero interest rates and the Federal Reserve’s bond purchase program that commenced on Mar 23, bond issuance volumes were strong as companies took this as an opportunity to bolster their balance sheets. So, growth in Citizens’ equity and debt underwriting fees is expected to have been robust in the third quarter.

The consensus estimate of $54 million for the capital market fees indicates year-over-year growth.

Fee Income Lower: Per the Fed’s data, deposits improved in the third quarter and are likely to have aided the company in bagging higher service charges and fees. Also, given the strong equity markets, trust and investment services fees are expected to have increased.

Moreover, due to record low mortgage rates, demand for mortgage refinancing activities and fresh originations remained strong in the quarter. As a result, Citizens is expected to have witnessed higher mortgage banking fees. The Zacks Consensus Estimate for the same is pegged at $234 million, indicating a substantial rise from year-ago quarter.

However, the trend of consumer spending was unimpressive during the quarter, which is likely to have negatively impacted card fees. The consensus mark for card fees is $54 million, suggesting 19.4% fall from the prior-year quarter’s reported number.

The Zacks Consensus Estimate for foreign exchange and interest rate products fees of $33.4 million implies a fall of 4.5% year over year.

Given the expectations of a rise in most components, the consensus estimate for non-interest income is pegged at $567 million, suggesting 15% growth.

Expenses Higher: Despite its TOP 6 efficiency initiatives, Citizens’ expenses are expected to have increased due to investments in enhanced data analytics and technology to improve customer experience.

Asset Quality: Management expects a smaller reserve build, though provision expenses are expected to depend on the depth of recession and pace of recovery.

Also, the consensus estimate for non-performing assets is pegged at $1.2 billion for the third quarter, which indicates a 43.9% increase from the prior-year quarter’s reported figure. Likewise, the consensus estimate for non-performing loans of $1.15 billion suggests a 45.4% rise.

Earnings Whispers

Citizens has the right combination of two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: Earnings ESP for Citizens is +9.84%.

Zacks Rank: The company currently carries a Zacks Rank #1 (Strong Buy).

The Zacks Consensus Estimate for its earnings for the quarter is pegged at 70 cents, which suggests a decline of 28.6% from the year-ago reported number. However, the consensus estimate for sales of $1.73 billion indicates 5.7% growth.

Other Stocks to Consider

Here are some other finance stocks that you may want to consider as these too have the right combination of elements to post an earnings beat in their upcoming releases, per our model.

CullenFrost Bankers, Inc. CFR is scheduled to release quarterly earnings on Oct 29. The company, which carries a Zacks Rank #3 currently, has an Earnings ESP of +2.61%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Navient Corporation NAVI is set to release quarterly results on Oct 20. The company currently has an Earnings ESP of +9.46% and a Zacks Rank of 1.

The Earnings ESP for Associated Banc-Corp ASB is +2.71% and the company presently carries a Zacks Rank #3. It is scheduled to report quarterly numbers on Oct 22.

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