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Citizens Financial Group (CFG) Up 13.8% Since Last Earnings Report: Can It Continue?

Zacks Equity Research
·6 min read

A month has gone by since the last earnings report for Citizens Financial Group (CFG). Shares have added about 13.8% 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 its most recent earnings report in order to get a better handle on the important drivers.

Citizens Financial Q3 Earnings Lag Estimates, Provisions Rise

Citizens Financial reported third-quarter 2020 earnings per share of 68 cents, which lagged the Zacks Consensus Estimate of 70 cents. The bottom line, also, compared unfavorably with 97 cents in the year-ago quarter.

Considerable rise in provisions amid the coronavirus outbreak-led crisis hurt the company’s results. Elevated expenses and contraction of margin were other headwinds. However, increase in fee income on the back of a solid rise in mortgage banking and capital market fees supported revenue growth. Also, capital position remained strong.

The company reported net income of $314 million compared with $449 million in the prior-year quarter.

Fee Income Growth Aids Revenues, Costs Increase

Total revenues for the third quarter were $1.79 billion, surpassing the consensus estimate of $1.73 billion. Additionally, the top line moved up 9% year over year.

Citizens’ net interest income declined nearly 1% year over year to $1.14 billion. Also, net interest margin contracted 28 basis points (bps) to 2.82%. This was, however, partly mitigated by higher interest-earning asset yields and lower funding costs.

Non-interest income climbed 33% year over year to $654 million. The upside stemmed largely from a rise in mortgage banking, capital market fees and trust and investment services fees.

Non-interest expenses jumped 2% year over year to $988 million. The upswing highlights higher equipment and software expense given continued investments in technology along with rise in outside services and salaries and employee benefits tied to strong mortgage banking results. On an adjusted basis, expenses rose marginally during the quarter.

Efficiency ratio decreased to 55% in the third quarter from 59% in the prior-year quarter. Generally, a lower ratio is indicative of the bank’s increased efficiency.

As of Sep 30, 2020, period-end total loan and lease balances declined 1% sequentially to $124.1 billion. Also, total deposits decreased marginally to $142.9 billion.

Credit Quality Worsens

Provision for credit losses was $428 million compared with $101 million in the year-ago quarter. Also, net charge-offs jumped 94% to $219 million.

Non-accrual loans and leases were up 73% to $1.28 million. As of Sep 30, 2020, allowance for loan and lease losses increased 109% to $2.74 billion.

Capital Position

Citizens remained well capitalized in the third quarter. As of Sep 30, 2020, common equity tier-1 capital ratio was 9.8% compared with 10.3% at the end of the prior-year quarter. Further, Tier-1 leverage ratio was 9.5%, down 40 bps year over year. Total Capital ratio was 13.3%, up from 13%.

Citizens recorded an improvement in book value per share, which increased to $32.24 as of Sep 30, 2020, from $31.48 at the end of the year-earlier quarter.

Capital Deployment Update

The company made no share repurchases during the quarter. Notably, it returned $168 million to shareholders through dividends.


Fourth-Quarter 2020 Outlook

NII is expected to remain stable, assuming no PPP forgiveness benefit in the fourth quarter. NIM is expected to be down low- to mid-single digit.

Average loans are anticipated to be broadly stable.

Fee income is expected to be down in the mid-teens, reflecting lower mortgage banking fees given lower gain-on-sale margins.

Non-interest expenses are expected to be up modestly, reflecting seasonal factors.

The company expects relatively stable net charge offs in the range of 60-80 basis points of average loans. It also expects a reserve release in fourth quarter given reserve bills taken year-to-date. Also, it expects to witness a decline in NPAs.

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 15.64% 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 C. However, 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.


Estimates have been 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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