Citizens Financial (CFG) Up 28.7% YTD: Is it Worth Considering?

Citizens Financial‘s CFG shares have appreciated 28.7% year to date against the industry’s decline of 2.4%. The stock also outperformed the S&P 500 Index, which rallied 17.6% in the same frame.

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The company’s focus on BSO plans, strategic and efficiency initiatives, and inorganic growth moves continue to aid its financials.

Analyst Estimates

Over the past month, the Zacks Consensus Estimate for earnings of $3.24 and $3.95 per share has moved 1.6% and 1% upward for 2024 and 2025, respectively. These metrics indicate growth of 3.5% for this year and 21.9% for 2025.

Now, let’s discuss some key factors likely to provide further impetus to CFG stock.

Strategic and Initiative Efficiency Aid Growth

Citizens Financial’s long-term strategy involves growth in wealth management offerings, improved capabilities in the high-net-worth segment and expansion into key markets. In October 2023, it launched the Citizens Private Bank, strengthening its operations in the wealth management space. The company plans to open between five and six private banking offices throughout 2024.

CFG’s focus on executing a series of revenue and efficiency initiatives led to the introduction of the ‘Tapping Our Potential’ (TOP) program in late 2014. The first three TOP programs helped achieve a $215-million income benefit. Following this, the Top 4 program and Top 5 program delivered pre-tax benefits of $115 million and $125 million, respectively. The TOP 6 program achieved $425 million in pre-tax run-rate benefits in 2021, while the TOP 7 and TOP 8 programs achieved around $115 million in pre-tax run-rate benefits in 2022 and 2023. The company launched its TOP 9 program , aiming for a pre-tax exit run rate benefit of around $135 million by the end of this year.

Strategic Acquisition

CFG has been growing via acquisitions. In 2022, it acquired College Raptor, Inc., DH Capital LLC., 80 East Coast branches and the national online deposit business from HSBC Holdings. The acquisitions of Investors Bancorp and the HSBC branches created a strong franchise in the greater New York City and Philadelphia Metro areas and New Jersey by adding 234 branches. In 2021, the company acquired JMP Group and Willamette. The acquisitions have strengthened the company’s balance sheet, creating a strong foundation for solid revenue growth. These buyouts enable the company to expand its product and fee-generation capabilities and geographic reach.

Strong Balance Sheet

Citizens Financial has a strong balance sheet. As of Jun 30, 2024, it had total borrowed funds of $13.1 billion, while total available liquidity (compressing cash and due from banks, interest-bearing cash and due from banks as well as interest-bearing deposits in banks) was $12.3 billion. The company’s senior long-term debt enjoyed investment-grade credit ratings of BBB+, BBB+ and Baa1 from Standard & Poor’s, Fitch, and Moody’s, respectively. This will likely enable the company to access the debt market at favorable rates. Hence, we believe that Citizens Financial will be able to meet its debt obligations in the near term, even if the economic situation worsens.

Strong Capital Position

Citizens Financial’s focus on maintaining a strong capital position will support capital distribution activities. As of Jun 30, 2024, the company’s capital ratios remain at a decent level, with a Common Equity Tier 1 (CET1) ratio and a total capital ratio of 10.7% and 14%, respectively. In June 2024, the company increased the capacity of the common share repurchase program by an additional $656 million. As of Jun 28, 2024, $1.25 billion worth of shares have remained available under the repurchase program. In July 2022, the company increased its common stock dividend by 8% to 42 cents per share. Given its consistently improving performance, strong liquidity position, and capital strength, Citizens Financial’s capital distribution activities seem sustainable.

Few Concerns Prevail

Q2 Results Not Impressive

The company’s second-quarter 2024 earnings per share of 78 cents missed the Zacks Consensus Estimate of 79 cents. The bottom line declined from 92 cents reported in the year-ago quarter. Also, the top line declined 6.3% year over year. The results were adversely impacted by lower net interest income (NII) and a rise in provisions.

The net interest margin (NIM) shrunk 30 basis points to 2.86% on the back of increased funding and swap costs and the impact of building liquidity. The efficiency ratio of 66.3% in the second quarter increased from 62.3% in the year-ago quarter, reflecting lower profitability.

Mounting Expenses

Escalating expenses are a major headwind for Citizens Financial. The company’s non-interest expenses witness a CAGR of 11.3% over the last three years (2020-2023), with uptrend continuing in the first half of 2024. Though management is making efforts to control expenses and generate positive operating leverage, costs are likely to remain due elevated to the opening of private banking offices, franchise expansion nationally and investments in new technological advancements.

Commercial loan concentration

The loan portfolio of CFG contains a high amount of commercial loans (50.7% of total loans and leases as of Jun 30, 2024). The current rapidly-changing macroeconomic backdrop may put some strain on commercial lending. In case of any economic downturn, the credit quality of the loan category may deteriorate. Thus, the lack of loan portfolio diversification is likely to hurt the company’s financials if the economic situation worsens.

Parting Thoughts

Although the company’s focus on executing a series of revenues and efficiency initiatives looks encouraging, its rising expense base and lack of loan portfolio diversification are major concerns.

Thus, investors should not rush to buy CFG stock. Rather, they can wait for a better entry point. The Zacks Rank of 3 (Hold) supports our thesis.

Stocks Worth Considering

A couple of top-ranked finance stocks are First Bancorp FBNC and First Community Corp FCCO.

First Bancorp’s current-year earnings estimates have been revised 11.3% upwards in the past 30 days. FBNC currently carries a Zacks Rank #2 (Buy).

The consensus estimate for FCCO’s current-year earnings has been revised 4.3% upward over the past 30 days. FCCO currently sports a Zacks Rank #1 (Strong Buy).

You can see the complete list of today’s Zacks #1 Rank stocks here.

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