Why Is Citizens Financial Group (CFG) Down 6.4% Since Last Earnings Report?

It has been about a month since the last earnings report for Citizens Financial Group (CFG). Shares have lost about 6.4% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Citizens Financial Group due for a breakout? 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 catalysts.

Citizens Financial Q2 Earnings Top, Revenues Climb

Riding on higher revenues, Citizens Financial delivered a positive earnings surprise of 2.1% in second-quarter 2019. Adjusted earnings per share came in at 96 cents, beating the Zacks Consensus Estimate of 94 cents. Also, the bottom line improved 9.1% year over year.

After considering one-time items, net income came in at $453 million, up 7% year over year. Earnings were 95 cents per share, up 8%.

Rise in fee income and interest income supported revenue growth. Also, its capital position remained strong. However, elevated expenses and provisions were headwinds.

NII & Fee Income Drive Revenues, Loans & Deposits Decline

Total revenues for the second quarter came in at $1.63 billion, surpassing the Zacks Consensus Estimate of $1.62 billion. Additionally, the top line was up 8% year over year.

Citizens Financial’s net interest income (NII) increased 4% year over year to $1.17 billion. However, net interest margin contracted 1 basis point (bp) to 3.21% due to increase in funding costs tied to higher rates. This was, however, partly mitigated by higher interest-earning asset yields given higher rates and continued mix shift toward higher-yielding assets.

Also, non-interest income climbed 19% year over year to $462 million. This upside stemmed from strength in almost all components of income, partially offset by reduced service charges and fees.

Non-interest expenses flared up 9% year over year to $951 million. The upswing highlights rise in all categories of expenses, partly muted by lower other operating expenses.

Efficiency ratio increased to 58.41% in the second quarter from 57.95% in the prior-year quarter. Generally, a higher ratio is indicative of the bank’s declined efficiency.

As of Jun 30, 2019, period-end total loan and lease balances declined 1% sequentially to $116.8 billion, while total deposits were almost stable at $124 billion.

Credit Quality: A Mixed Bag

Provision for credit losses jumped 14% year over year to $97 million. Also, net charge-offs for the quarter surged 39% to $106 million.

As of Jun 30, 2019, allowance for loan and lease losses declined 2% year over year to $1.23 billion. Also, total non-performing loans and leases were down 9% to $770 million.

Solid Capital Position

Citizens Financial remained well capitalized in the second quarter. As of Jun 30, 2019, Common equity Tier 1 capital ratio was 10.5% compared with 11.2% at the end of the prior-year quarter. Further, Tier 1 leverage ratio was 10.1%, down 1 bp. Total Capital ratio was 13.4% compared with 13.8% in the prior-year quarter.

Capital Deployment Update

The company repurchased 3.5 million shares at average price of $34.64 during the June-ended quarter. Notably, including common stock dividends, the company returned $268 million to shareholders as of Jun 30, 2019.


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

Net interest income is expected to be broadly stable as modest loan growth might offset NIM contraction due to rate cuts.

Non-interest income is expected to remain flat year over year, given continuing strength in commercial and seasonality benefiting consumer unit.

Management expects non-interest expenses to remain flat, as seasonal decreases are offset by higher revenue-related expenses.

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

Provision expenses are expected to increase and be in the range of $100-$105 million.

Further, Basel III common equity tier 1 ratio is estimated to be about 10.5%.


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 $95-$105 million by 2019-end.

Further, it recently announced TOP 6 Program, 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, fresh estimates have trended upward 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 an A. 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 upward for the stock, and the magnitude of these revisions has been net zero. Notably, Citizens Financial Group has a Zacks Rank #4 (Sell). We expect a below 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.


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