Citizens Financial's profit drops 33% on interest income slump

Oct 18 (Reuters) - Citizens Financial Group's third-quarter profit fell 33% on Wednesday on a decline in the bank's income earned from charging customers interest on their loans.

Analysts had been expecting the boost from higher interest to taper off as banks pay more to hold client deposits, while loan growth stagnates due to a rise in borrowing costs.

Total deposit costs climbed 34 basis points over the prior quarter, Citizens Financial said.

Shares of the bank fell 1.7% in light premarket trading after the results. The stock has lost nearly 31% of its value so far this year.

Its net interest income fell nearly 9% to $1.52 billion in the three months ended Sept. 30, compared with a year earlier, while net interest margin came in at 3.03% versus 3.25% last year due to higher funding costs.

In a bright spot, Citizens Financial's average deposits at period-end were up 2% from the prior quarter, signaling stabilization after the sector-wide turmoil in March led to client outflows across lenders.

Its loans at quarter-end fell by a marginal 1%.

"We increased our CET1 ratio to 10.4% while continuing to repurchase a modest amount of stock," said CEO Bruce Van Saun in a statement.

The lender also accounted for the possibility that its customers might fall behind on repaying debt on their mortgages and credit cards in the coming months as the economic backdrop worsens pressuring household budgets.

It set aside $172 million in provisions for credit losses in the third quarter, compared with $123 million, a year earlier.

The bank reported underlying net income of $448 million or 89 cents per share in the quarter, compared with $669 million or $1.30 per share last year. (Reporting by Manya Saini in Bengaluru; Editing by Shweta Agarwal)