It has been about a month since the last earnings report for Citizens Financial Group (CFG). Shares have added about 1.8% in that time frame, underperforming 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 its most recent earnings report in order to get a better handle on the important drivers.
Citizens Financial Q2 Earnings Beat Estimates on Higher Revenues
Citizens Financial has reported second-quarter 2020 earnings per share of 53 cents, which surpassed the Zacks Consensus Estimate of 9 cents. The bottom line, however, compares unfavorably with 96 cents in the year-ago quarter.
Increase in fee income on the back of a solid rise in mortgage banking and capital market fees supported revenue growth. Further, deposit balances showed improvement. Also, capital position remained strong.
However, credit quality deteriorated amid the coronavirus outbreak-led crisis. Also, elevated expenses and contraction of margin were other headwinds.
The company reported net income of $253 million compared with $453 million in the prior-year quarter.
Fee Income Growth Aids Revenues, Costs Increase
Total revenues for the second quarter were $1.75 billion, surpassing the consensus estimate of $1.68 billion. Additionally, the top line moved up 7% year over year.
Citizens’ net interest income declined nearly 1% year over year to $1.16 billion. Also, net interest margin contracted 33 basis points (bps) to 2.87%. This was, however, partly mitigated by higher interest-earning asset yields and lower funding costs.
Non-interest income climbed 28% year over year to $590 million. The upside stemmed largely from a rise in mortgage banking and capital market fees.
Non-interest expenses jumped 3% year over year to $979 million. The upswing highlights the rise in almost all categories of expenses. On an adjusted basis, expenses rose 2%.
Efficiency ratio increased to 56% in the first quarter from 58% in the prior-year quarter. Generally, a lower ratio is indicative of the bank’s increased efficiency.
As of Jun 30, 2020, period-end total loan and lease balances declined 1% sequentially to $125.7 billion. However, total deposits increased 8% to $143.6 billion.
Credit Quality Worsens
Provision for credit losses was $464 million compared with $97 million in the year-ago quarter. Also, net charge-offs for the quarter jumped 39% to $147 million.
Non-accrual loans and leases were up 36% to $990 million. As of Jun 30, 2020, allowance for loan and lease losses increased 91% to $2.53 billion.
Capital Position
Citizens remained well-capitalized in the second quarter. As of Jun 30, 2020, common equity tier-1 capital ratio was 9.6% compared with 10.5% at the end of the prior-year quarter. Further, Tier-1 leverage ratio was 9.3%, down 80 bps year over year. Total Capital ratio was 13.1%, down from 13.4%.
Citizens recorded an improvement in book value per share, which increased to $32.13 as of Jun 30, 2020, from $30.88 at the end of the year-earlier quarter.
Capital Deployment Update
The company made no share repurchases during the quarter. Notably, including common stock dividends, it returned $168 million to shareholders.
Outlook
Third-Quarter 2020 Outlook (excluding notable items and including the impacts of acquisitions)
Net interest income is expected to rise modestly sequentially due to expectations of loan growth, partially offset by a decline in margins. Excluding PPP loans, loan growth is projected to be down modestly due to the full quarter impact of a decline in commercial loan in line with utilization in the second quarter.
Average loans are anticipated to be down in the low-single digits, given the pay down in commercial line draws during the second quarter. Excluding the impact of line draws, PPP and loan sales, management expects loan growth to be broadly stable.
NIM is expected to be broadly stable with the benefit of lower deposit costs being offset by ongoing rate headwinds, after excluding the impact of PPP loans.
Fee income is expected to be down in the mid- to high-single-digit range, reflecting lower mortgage banking fees from record levels, partially offset by recovery in other fee categories.
Non-interest expensesare expected to be up in the low-single-digit range, reflecting higher origination-related cost levels in the mortgage business.
Management expects a smaller reserve build, though provision expenses are expected to depend on the depth of recession and pace of recovery.
2020 Outlook
Management expects NII to remain stable, as loan growth is offset by a meaningful decrease in NIM due to lower rates.
The company expects to see strong loan growth, driven by higher commercial loans demand, the impact of government programs like PPP, and with increased demand in education and merchant financing. Also, it anticipates strong increase in commercial and retail deposits, reflecting heightened liquidity, given the Fed’s actions and the low rate environment.
Non-interest income is expected to be meaningfully driven by the exceptionally strong results in mortgage, which more than offset the weakness in other fee categories related to COVID-19. Further, the company anticipates several key fee categories to benefit from a return to more normal activity levels in the second half, which will likely help cushion a moderation in mortgage revenues.
Non-interest expenses are expected to be up modestly, particularly given higher compensation tied to stronger mortgage production and impacts of COVID-19, which includes government lending programs and customer relief efforts.
Provision expenses have the greatest potential for variability in 2020, and will depend on the depth of the recession and the pace of recovery.
Regulatory capital ratios are expected to strengthen from current levels, as net income coupled with the suspension of buybacks through year-end more than offset the impacts of higher risk-weighted assets. Even in more severe economic scenarios, the company expects capital ratios to remain strong and above required minimums.
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 9.75-10%
- Dividend payout ratio of 35-40%
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 fresh objectives targeting strong positive operating leverage with goal to self-finance growth initiatives and delivered pre-tax benefit of $125 million in 2019.
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 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 $175-$225 million in benefits by 2020 and the rest in 2021.
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 upward during the past month. The consensus estimate has shifted 23.96% due to these changes.
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. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top 20% 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.
Outlook
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. 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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