UPDATE 1-Citizens Financial fourth-quarter profit falls on FDIC charge

(Adds job cuts in paragraph 2, NII outlook paragraph 7-9) By Pritam Biswas and Saeed Azhar Jan 17 (Reuters) - Citizens Financial's profit dropped 71% in the fourth quarter, hurt by a $225 million charge to refill a government deposit insurance fund, and the bank warned its net interest income could fall this year. The bank also cut 3.5% of its employees in the fourth quarter, its CEO Bruce Van Saun said, adding more cuts are unlikely. Large banks are required to pay into a Federal Deposit Insurance Corporation's fund that insures customer money when banks fail. The fund was drained of roughly $16 billion after the collapse of two regional lenders last year. Meanwhile, banks are under pressure to pay more to depositors who are chasing higher yields elsewhere. As competition among lenders increases, the increased funding costs have caused industry margins to contract. Tepid loan growth also eroded interest income across the industry in the fourth quarter. Citizens' net interest income (NII), or the difference between what a bank earns on loans and pays out on deposits, fell 12% to $1.49 billion in the fourth quarter versus a year earlier. Its NII this year could fall 6% to 9% from $6.24 billion in 2023. NII will come under pressure as the bank gets rid of money-losing swap contracts, which it had used to hedge against a decline in interest rates. "If we let them ride, then we would have had a bigger negative carry on those swaps," Van Saun said. "But once we terminate them, then the pain stops." Citizens expects to earn more interest income in 2025 to 2027 as the swap contracts expire, the CEO said. NII will also get a boost if the Federal Reserve cuts interest rates, easing pressure on banks to pay for deposits while also spurring loan demand. Larger rivals Wells Fargo and Bank of America also posted a similar drop in their quarterly interest income last week. Citizens also raised its buffer for customers missing or falling behind on repaying debt on their mortgages or credit cards amid an uncertain economic backdrop and a cost-of-living crisis. The bank set aside $171 million in provisions for credit losses in the fourth quarter, compared with $132 million a year earlier. The lender reported a net income of $189 million, or 34 cents per share, in the fourth quarter, compared with $653 million, or $1.25 per share, a year earlier. (Reporting by Pritam Biswas in Bengaluru and Saeed Azhar in New York; Editing by Shounak Dasgupta, Lananh Nguyen and Lisa Shumaker)