Why Is Citizens Financial Group (CFG) Up 8.3% Since Last Earnings Report?

A month has gone by since the last earnings report for Citizens Financial Group (CFG). Shares have added about 8.3% 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 catalysts.

Citizens Financial Q4 Earnings Beat, Expenses Rise

Citizens Financial delivered a positive earnings surprise of 4.3% in fourth-quarter 2018, riding on higher revenues. Adjusted earnings per share of 98 cents topped the Zacks Consensus Estimate of 94 cents. Also, the bottom line improved 38% from the prior-year quarter.

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

After considering non-recurring items, the company reported net income of $465 million or 96 cents per share compared with $666 million or $1.35 in the year-ago quarter.

For full-year 2018, adjusted earnings per share were $3.56, surpassing the Zacks Consensus Estimate of $3.52. Further, the figure increased 38% from the prior year.

Revenues & Loans Increase, Expenses Escalate  

For full-year 2018, the company reported revenues of $6.13 billion, up around 7.4% year over year. Yet, the revenue figure lagged the Zacks Consensus Estimate of $6.14 billion.

Total revenues in the quarter were $1.59 billion, which missed the Zacks Consensus Estimate of $1.60 billion. However, the top line was up 7.3% year over year. On an underlying basis, total revenues increased 9%.

Citizens Financial’s net interest income increased 8% year over year to $1.17 billion. The rise was primarily attributable to average loan growth and improved margin. In addition, net interest margin expanded 14 basis points to 3.22%.

Non-interest income increased 4.2% to $421 million. The rise was due to growth in card fees, letter of credit and loan fees and capital markets fees, partially offset by lower mortgage banking fees and other income. On an underlying basis, non-interest income climbed 2%.

Non-interest expenses were up 6% year over year to $951 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 60% in the fourth quarter from 61% in the prior-year quarter. Generally, lower ratio is indicative of the bank’s improved efficiency.

As of Dec 31, 2018, period-end total loan and lease balances increased nearly 2% sequentially to $116.7 billion, and total deposits grew 2% to $119.6 billion.

Credit Quality: A Mixed Bag

As of Dec 31, 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 jumped 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 Dec 31, 2018, Common Equity Tier 1 capital ratio was 10.6%, down from 11.2% on an annual basis. Further, Tier 1 leverage ratio came in at 10%, flat year over year. Total Capital ratio was 13.3% compared with 13.9% in the prior-year quarter.

Capital Deployment Update

As part of its 2018 Capital Plan, the company repurchased 8.25 million shares of common stock during the quarter. Notably, including common stock dividends, it returned $427 million to its shareholders.



First-Quarter 2019 (excluding expected notable items)

The company expects 1% sequential average loan growth, given strong commercial lending pipelines and solid growth in education and retail unsecured.

NIM is expected to remain stable on a sequential basis on the back of higher interest rates and benefit from balance sheet optimization strategies.

Noninterest income is expected to be broadly stable as a rebound in capital market fees is likely to offset seasonal impacts.

Management expects non-interest expenses to rise low-to-mid single digits on a sequential basis.

Provision expenses are expected to be stable. The tax rate is expected to be nearly 22.75%.

Further, Basel III common equity tier 1 ratio is estimated to be about 10.5%.

Full-year 2019

Average loans are expected to grow in the range of 3-5%.

Management expects NII to grow 5-6.5%. Also, average earning assets are expected to grow 3-5% in 2019.  NIM might expand by low-to-mid single digits bps, reflecting benefit of balance sheet optimization.

Non-interest income is expected to grow 11-13%, as the company continues to leverage investments and expand the capabilities. Excluding the impact of Franklin American Mortgage acquisition, fee income is likely to grow 4-6%.

Expenses are anticipated to increase 5.5-6.25%. Excluding the impact of Franklin American Mortgage acquisition, costs are likely to grow 3-3.5%. Also, the company targets to deliver positive operating leverage of 3%.

Notably, efficiency ratio is expected to improve 100 bps.

Provision expenses are expected to be in the range of $400-$450 million.

The tax rate is expected to be 22.75%.

The company is targeting a dividend payout ratio of nearly 30-35% for 2019.

Year-end Basel III common equity tier 1 ratio is estimated to be about 10.2%.

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 delivered pre-tax benefit of $115 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 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 C. Charting a somewhat similar path, 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. 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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