Why Is Citizens Financial Group (CFG) Up 3.8% Since Last Earnings Report?

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It has been about a month since the last earnings report for Citizens Financial Group (CFG). Shares have added about 3.8% 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 drivers.

Citizens Financial Q3 Earnings Beat, Expenses Rise

Citizens Financial delivered a positive earnings surprise of 3.3% in third-quarter 2018, riding on higher revenues. Adjusted earnings per share of 93 cents topped the Zacks Consensus Estimate of 90 cents. Also, the bottom line compared favorably with 68 cents per share reported in the prior-year quarter.

The company experienced continued expansion of margins and loan growth, which aided higher revenues. Also, higher fee income was another tailwind. However, increase in expenses and provisions were the main undermining factors.

After considering non-recurring items, the company reported net income of $436 million or 91 cents per share compared with $341 million or 68 cents recorded in the year-ago quarter.

Revenues & Loans Increase, Expenses Escalate

Total revenues in the quarter were $1.56 billion, which lagged the Zacks Consensus Estimate of $1.57 billion. However, the reported figure was up 8% year over year. On an underlying basis, total revenues increased 7%.

Citizens Financial's net interest income increased 8% year over year to $1.15 billion. The rise was primarily attributable to average loan growth and improved margin. In addition, net interest margin expanded 14 basis points (bps) to 3.19%.

Non-interest income increased 9% to $416 million. The rise was due to growth in card fees, foreign exchange, interest rate products, along with trust and investment services fees. On an underlying basis, non-interest income climbed 3%.

Non-interest expenses were up 6% year over year to $910 million. The increase reflects higher salary and employee benefits tied to higher revenue-based compensation, along with the impact of strategic growth initiatives. Expenses increased 2% on an adjusted basis.

Efficiency ratio declined to 58% in the third quarter from 59% in the prior-year quarter. Generally, lower ratio is indicative of the bank's improved efficiency.

As of Sep 30, 2018, period-end total loan and lease balances increased nearly 4% year over year to $114.7 billion and total deposits grew 3% to $117.1 billion.

Credit Quality: A Mixed Bag

As of Sep 30, 2018, net charge-offs in the quarter increased 32% year over year to $86 million. Allowance for loan and lease losses increased 1% to $1.24 billion. Also, provision for credit losses increased 8% to $78 million.

However, total non-performing loans and leases were down 11% to $832 million.

Capital Position

Citizens Financial remained well capitalized in the quarter. As of Sep 30, 2018, Common Equity Tier 1 capital ratio was 10.8%, down from 11.1% on an annual basis. Further, Tier 1 leverage ratio came in at 9.9%, flat year over year. Total Capital ratio was 13.4% compared with 13.8% in the prior-year quarter.

Capital Deployment Update

As part of its 2018 Capital Plan, the company repurchased $400 million of common stock during the quarter. Notably, including common stock dividends, it returned $529 million to its shareholders.


Fourth-Quarter 2018 (excluding expected notable items)

The company expects 1-1.25% sequential average loan growth. Also, average loan-to-deposit ratio is expected to be about 98%.

NIM is expected to expand 3-4 bps on a sequential basis, on the back of higher interest rates and benefit from balance sheet optimization strategies.

Non-interest income is anticipated to increase 5-7% sequentially with benefit from strong capital markets. Also, support from the full quarter impact of Franklin acquisition is expected to be experienced. Excluding Franklin, core growth is expected to be in the range of 2% to 4%.

Management expects non-interest expenses to rise 2-3% on a sequential basis. It also expects to achieve positive operating leverage and improvement in efficiency ratio. Excluding Franklin and notable items, expense growth is expected to be around 1% to 2%.

Provision expenses are expected to be in the range of $85-$95 million. The tax rate is expected to be nearly 23%.

Further, Basel III common equity tier 1 ratio is estimated to be about 10.8% (including the impact of Franklin American Mortgage acquisition).

Full-year 2018

Average loans are expected to grow in the range of 4.5-5.5% while average deposit growth is expected to be between 4.5-6%. Loan-to-deposit ratio is expected to be between 97-98%.

Management expects NII to grow by 7-9%. Also, average earning assets are expected to grow 4-5.5% in 2018. NIM might expand by 9-12 bps on the back of December 2017 rate hike and assumption of further hikes in April and October 2018.

Non-interest income is expected to grow by 4.5-6%.

Expenses are anticipated to increase by 3.25-3.75%. Also, the company targets to deliver positive operating leverage of 3-5%.

Notably, efficiency ratio is expected to improve by 200-250 bps.

Provision expenses are expected to be in the range of $425-$475 million.

Net charge-off is expected to rise modestly with additional reserve build to fund loan growth. The tax rate is expected to be 22.5%.

The company is targeting a dividend payout ratio of nearly 30% for 2018. Year-end Basel III common equity tier 1 ratio is estimated to be between 10.6-10.8%.

Efficiency Initiatives

In late 2014, Citizens Financial had announced its first efficiency program - TOP I - which resulted in $200 million costs savings. During the second quarter of 2015, the company 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, which delivered a pre-tax benefit in excess of $115 million. Further, the company launched the Top IV program, which is expected to deliver pre-tax benefit of $105-$110 million by the end of 2018.

Finally, continuing with the trend, Citizens Financial announced TOP V 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 $90-$100 million by 2019-end.

TOP IV Program

Citizens Financial launched TOP IV efficiency initiatives in second-quarter 2017. These efficiency initiatives are anticipated to generate pre-tax revenues and expense benefits of $105-$110 million in 2018.


The company expects to achieve its target by the end of 2018 through efficiency initiatives driven by following factors -

  • The company plans to focus on centralization/centers of excellence and simplification of roles and responsibilities.
  • Also, it targets to achieve end-to-end re-designing of processes and leveraging automation to reduce costs and improve efficiency.
  • Citizen Financial plans to achieve cost efficiencies by streamlining customer journeys.
  • The company seeks to recognize contract efficiencies and demand-management opportunities.
  • On the technological front, the company plans to optimize infrastructure and streamline network support.

Revenue Enhancement

Citizens Financial's target of run-rate benefit by the fourth quarter of 2018 is expected to be driven by the following factors-

  • The company plans to build a digital mortgage platform that reaches out to consumers directly. Also, it seeks to leverage the call center to offer 'service to solutions'.
  • Citizen Financial plans to attract new customers and retaining the existing ones by enhancing customer journeys in targeted areas.
  • It targets to expand corporate partners in installment lending and to expand C&I lending in the Southeast.
  • The company aims to improve fee income through several initiatives.

TOP V 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

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

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 B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. 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 looks promising. It comes with little surprise Citizens Financial Group has a Zacks Rank #2 (Buy). We expect 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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