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    Citizens Financial Group Inc (CFG)

    Business Description

    Citizens Financial Group, Inc. (CFG) is a financial services company that operates primarily through two main business segments: Consumer Banking and Commercial Banking, with a third segment classified as Non-Core. CFG provides a range of financial products and services to individuals, small businesses, and large corporations, including deposits, lending, credit cards, and wealth management services . The company serves its customers through a network of branches and ATMs, as well as digital banking platforms nationwide .

    1. Consumer Banking - Serves individuals and small businesses with annual revenues up to $25 million, offering products such as deposits, mortgage and home equity lending, credit cards, small business loans, and wealth management services. Operates through a network of approximately 1,100 branches and 3,200 ATMs, and provides digital banking services nationwide .

    2. Commercial Banking - Caters to companies and institutions with annual revenues ranging from $25 million to over $3 billion, providing financial products and solutions including lending, leasing, deposit and treasury management services, foreign exchange, risk management solutions, and capital markets capabilities. Focuses on middle-market companies, large corporations, and institutions, with specialized industry teams in areas such as Aerospace, Defense, and Government Services .

    3. Non-Core - Includes CFG's indirect auto and certain purchased consumer loan portfolios, which were transferred from the Consumer Banking segment as part of a balance sheet optimization strategy. Reflects CFG's decision to discontinue the origination of certain non-strategic lending portfolios .

    Q3 2024 Summary

    Initial Price$36.21July 1, 2024
    Final Price$39.92October 1, 2024
    Price Change$3.71
    % Change+10.25%

    What went well

    • CFG anticipates a 200 to 300 basis point spread benefit from front book back book dynamics over the next couple of years .
    • Approximately $750 million per quarter in residential mortgages and securities are turning over, contributing to net interest margin growth .
    • There's built-in momentum to raise net interest margin (NIM), reducing the need to expend capital on securities repositioning .

    What went wrong

    • Limited turnover in back book assets: The company indicated that the turnover in their back book for residential mortgages and securities is approximately $750 million per quarter for each category, which may not be sufficient to significantly impact earnings growth over the next couple of years.
    • No plans for significant securities repositioning: Management stated that they do not plan to engage in large-scale securities repositioning, potentially limiting their ability to optimize the portfolio amid changing market conditions.
    • Dependence on built-in momentum to raise NIM: The company is relying on existing momentum to improve Net Interest Margin (NIM), suggesting they may not be taking proactive measures to enhance profitability, which could be a risk if market conditions deteriorate.

    Q&A Summary

    1. NIM Expansion Outlook
      Q: What drives the expected 5bps NIM expansion in Q4 and reaching near 3% NIM by end of 2025?
      A: The expected 5 basis point NIM expansion in the fourth quarter is driven by several tailwinds: ongoing contribution from noncore items (about 2bps per quarter), active balance sheet management including fixed asset repricing, and improving deposit migration trends shifting from a headwind to neutral or slightly positive. Additionally, receipt swaps that were previously a headwind will become a tailwind. Looking ahead, 18bps of time-based benefits are "baked in," bringing NIM to 2.95%, with another ~5bps from factors like front book/back book benefits, strategic deposit initiatives, and proactive downrate protection strategies. We aim to reach near 3% NIM by the end of 2025.

    2. Loan Growth Confidence
      Q: What's driving confidence in loan growth for Q4 and into 2025?
      A: While not expecting significant loan growth in the fourth quarter, we're seeing positive trends, particularly in the Private Bank, with the largest quarterly increase and a strong pipeline. As rates come down, clients are more willing to borrow. In the Commercial Bank, increased activity in private equity is boosting utilization, especially in subscription lines. On the consumer side, non-core loan runoffs are slowing from $1.2-$1.3 billion per quarter last year to $800-$900 million now. We're seeing growth in mortgage and home equity, and we expect these dynamics to contribute to loan growth into 2025.

    3. Credit Quality and NPAs
      Q: Are NPAs peaking, and what's the outlook on credit quality?
      A: We believe NPAs are peaking this quarter, particularly in the general office portfolio, which we're actively managing with significant reserves. While there was a blip in CRE NPAs, the overall problem loan population is consistent, and criticized and classified loans have been stable for four quarters. In consumer credit, net charge-offs have normalized to pre-COVID levels of 50-55bps, and we're not observing any concerning trends. Auto delinquencies are performing as expected, reflecting portfolio dynamics rather than underlying credit deterioration.

    4. Deposit Beta Expectations
      Q: What deposit beta are you assuming for the projected NIM expansion?
      A: We anticipate our deposit beta to be nearing 40% by the end of the fourth quarter, driven by proactive management of deposit costs. Over the rate-cutting cycle, we expect down-cycle betas to approximate our up-cycle betas, gradually migrating to around 50-55%. This progression supports the NIM expansion into the fourth quarter and beyond.

    5. Swap Terminations Impact
      Q: How does terminating $4 billion of swaps affect NIM and accounting?
      A: We opportunistically terminated $4 billion of short-dated receive-fixed swaps maturing in May 2025 when the yield curve was pricing in 7-8 rate cuts, locking in the protective benefit. The impact of the termination is amortized over the remaining life of the swaps through May, resulting in a more favorable impact on NIM than if we had held the swaps. This strategic move aligns with our proactive interest rate risk management.

    6. Operating Leverage Outlook
      Q: What's the medium-term outlook for operating leverage?
      A: We see significant opportunity for operating leverage driven by NIM reflation to the 3.25% to 3.40% range, providing strong tailwinds over time. The NIM improvement largely drops straight to the bottom line as it doesn't entail additional expenses. While fee growth, particularly in capital markets and wealth, comes with associated costs, overall operating leverage should be quite positive when we look out over the 2025 to 2027 period.

    7. Front Book/Back Book Benefits
      Q: How do front book/back book dynamics contribute to NIM expansion?
      A: As fixed-rate assets in our loan and securities portfolios turn over, we capture a spread benefit of 200 to 300 basis points in the current rate environment. Approximately $750 million of residential mortgages and a similar amount of securities roll off quarterly, and the new assets are booked at higher yields. This ongoing dynamic significantly contributes to NIM expansion over the next couple of years.

    8. Securities Repositioning Plans
      Q: Will you utilize excess capital for securities repositioning?
      A: We do not plan a large-scale securities repositioning. We actively manage the securities portfolio on an ongoing basis, but given the built-in momentum to raise NIM, there's no need to deploy capital for timing shifts in NIM expansion.

    Key Metrics

    View all financials →
    Revenue by Segment - in Millions of USDQ3 2014Q4 2014FY 2014Q1 2015Q2 2015Q3 2015Q4 2015FY 2015Q1 2016Q2 2016Q3 2016Q4 2016FY 2016Q1 2017Q2 2017Q3 2017Q4 2017FY 2017Q1 2018Q2 2018Q3 2018Q4 2018FY 2018Q1 2019Q2 2019Q3 2019Q4 2019FY 2019Q1 2020Q2 2020Q3 2020Q4 2020FY 2020Q1 2021Q2 2021Q3 2021Q4 2021FY 2021Q1 2022Q2 2022Q3 2022Q4 2022FY 2022Q1 2023Q2 2023Q3 2023Q4 2023FY 2023Q1 2024Q2 2024Q3 2024
    Consumer Banking--------
    - Net Interest Income(50)(100)(64)-(109)(128)(173)(237)
    - Noninterest Income28313439132323440
    - Total Revenue(22)(69)(30)-23(96)(139)(197)
    Commercial Banking--------
    Non-Core--------
    Other--------
    Consolidated Total Revenue2,1282,0942,0141,9888,2241,9591,9631,901
    Revenue by Geography - in Millions of USDQ3 2014Q4 2014FY 2014Q1 2015Q2 2015Q3 2015Q4 2015FY 2015Q1 2016Q2 2016Q3 2016Q4 2016FY 2016Q1 2017Q2 2017Q3 2017Q4 2017FY 2017Q1 2018Q2 2018Q3 2018Q4 2018FY 2018Q1 2019Q2 2019Q3 2019Q4 2019FY 2019Q1 2020Q2 2020Q3 2020Q4 2020FY 2020Q1 2021Q2 2021Q3 2021Q4 2021FY 2021Q1 2022Q2 2022Q3 2022Q4 2022FY 2022Q1 2023Q2 2023Q3 2023Q4 2023FY 2023Q1 2024Q2 2024Q3 2024
    Brooklyn----1,629---
    Manhattan----2,605---
    Other NYC----1,405---
    New York - ex. NYC----1,396---
    New Jersey----3,829---
    Pennsylvania----2,613---
    California----2,314---
    Texas----2,163---
    Massachusetts----1,897---
    Florida----1,087---
    Other Southeast----3,056---
    Other----5,477---
    Total Revenue----8,224---
    KPIs - Metric / QuarterQ3 2014Q4 2014FY 2014Q1 2015Q2 2015Q3 2015Q4 2015FY 2015Q1 2016Q2 2016Q3 2016Q4 2016FY 2016Q1 2017Q2 2017Q3 2017Q4 2017FY 2017Q1 2018Q2 2018Q3 2018Q4 2018FY 2018Q1 2019Q2 2019Q3 2019Q4 2019FY 2019Q1 2020Q2 2020Q3 2020Q4 2020FY 2020Q1 2021Q2 2021Q3 2021Q4 2021FY 2021Q1 2022Q2 2022Q3 2022Q4 2022FY 2022Q1 2023Q2 2023Q3 2023Q4 2023FY 2023Q1 2024Q2 2024Q3 2024
    **Amount of Principal Forgiven**Varies by category$1 million$0 million$5 million-$2 million$2 million$0 million
    **Commercial Criticized Balances**$7.4 billion$8.0 billion$9.0 billion$8.4 billion-$8.7 billion$8.4 billion$8.6 billion
    **Commercial Real Estate Criticized Balances**$3.7 billion$4.3 billion$5.1 billion$5.0 billion-$5.4 billion$5.4 billion$5.5 billion
    **Commercial and Industrial Criticized Balances**$3.6 billion$3.6 billion$3.8 billion$3.4 billion-$3.3 billion$3.0 billion$3.1 billion
    **Allowance for Loan and Lease Losses to Nonaccrual Loans and Leases**203%172%160%154%-142%139%123%
    **Allowance for Credit Losses to Nonaccrual Loans and Leases**229%193%179%170%-157%151%136%
    **Ratio of Net Charge-Offs to Average Loans and Leases**0.34%0.40%0.40%0.40%-0.50%0.52%0.54%
    **Contingent Commitments Related to Renewable Energy Investments**$7 million$7 million$7 million$67 million-$63 million$63 million$61 million
    **Tax Credits Recognized**$87 million$87 million$76 million$334 million (annual)-$97 million$94 million$99 million
    **Other Tax Benefits Recognized**$18 million$20 million$17 million$71 million (annual)-$23 million$24 million$21 million
    **Amortization Related to Tax Credit Programs**$81 million$85 million$71 million$320 million (annual)-$99 million$89 million$88 million
    **Net Benefit (Expense) in Income Tax Expense from Tax Credit Programs**$24 million$22 million$22 million--$21 million$29 million$32 million
    **Net Benefit (Expense) in Noninterest Income from Tax Credit Programs**$(2) million$(1) million$0 million$(5) million (annual)-$(2) million$(1) million$(2) million
    **Weighted Average Constant Prepayment Rate**-----7.0% [146]7.1%8.3%

    Executive Team

    NamePositionStart DateShort Bio
    Bruce Van SaunChairman and Chief Executive OfficerOctober 2013Bruce Van Saun has been serving as the Chairman and CEO of CFG since October 2013. He has extensive experience in the financial services industry, having previously served as Finance Director at The Royal Bank of Scotland Group plc and held senior positions at The Bank of New York Mellon, Deutsche Bank, Wasserstein Perella Group, and Kidder Peabody & Co. .
    John F. WoodsVice Chair and Chief Financial OfficerMarch 2017John F. Woods joined CFG in February 2017 and became CFO in March 2017. He was appointed Vice Chair in February 2019. Before CFG, he was CFO of MUFG Americas and held positions at J.P. Morgan Chase. He began his career with Arthur Andersen in 1986 .
    Donald H. McCree IIIVice Chair and Head of Commercial BankingAugust 2015Donald H. McCree III has been Vice Chair and Head of Commercial Banking at CFG since August 2015. He previously held senior leadership positions at J.P. Morgan Chase & Co. for over 30 years .
    Brendan CoughlinVice Chair and Head of Consumer BankingJanuary 2020Brendan Coughlin serves as Vice Chair and Head of Consumer Banking at CFG. He has been with CFG for over 19 years, holding various positions in Consumer Banking. He was named President of Consumer Lending in June 2015 .
    Elizabeth S. JohnsonVice Chair and Chief Experience Officer2013Elizabeth S. Johnson is the Vice Chair and Chief Experience Officer at CFG. She joined CFG in 2013 as Head of Corporate Strategy and has held roles such as Chief Marketing Officer and Head of Virtual Channels .
    Polly Nyquist KlaneExecutive Vice President, Chief Legal Officer, and General CounselApril 2022Polly Nyquist Klane joined CFG as Executive Vice President, Chief Legal Officer, and General Counsel in April 2022. She previously served as Deputy General Counsel at Capital One and Fannie Mae .
    Susan LaMonicaExecutive Vice President and Chief Human Resources Officer2011Susan LaMonica has been the Chief Human Resources Officer at CFG since 2011. She previously held senior leadership roles at J.P. Morgan Chase .
    Michael RuttledgeExecutive Vice President, Chief Information Officer, and Head of Enterprise Security and Technology2019Michael Ruttledge is the Executive Vice President, CIO, and Head of Enterprise Security and Technology at CFG. He joined CFG in 2019 and has led the Next Generation Technology transformation .
    Richard SteinExecutive Vice President and Chief Risk OfficerJanuary 1, 2024Richard Stein joined CFG in May 2023 as Executive Vice President and Senior Risk Advisor. He was appointed Chief Risk Officer on January 1, 2024 .
    C. Jack ReadExecutive Vice President and ControllerJuly 2018C. Jack Read is the Executive Vice President and Controller at CFG. He joined CFG in July 2018 and became Chief Accounting Officer in August 2018 .
    Claude E. WadeUpcoming Board Member, will serve on the Risk CommitteeMarch 1, 2025Claude E. Wade has been appointed to the Board of Directors of CFG, effective March 1, 2025. He will serve on the Board's Risk Committee. He currently serves as Executive Vice President, Chief Digital Officer, and Global Head of Business Operations at AIG .
    Wendy A. WatsonCurrent Board Member, Chair of the Audit Committee, member of the Risk Committee and the Compensation and Human Resources CommitteeOctober 2010Wendy A. Watson has been a board member of CFG since October 2010. She is the Chair of the Audit Committee and a member of the Risk and Compensation and Human Resources Committees. She will retire in April 2025 .

    Questions to Ask Management

    1. Given that you've terminated $4 billion of swaps in the third quarter and the forward curve now implies fewer rate cuts, how will this decision impact your net interest margin guidance, and can you elaborate on the accounting treatment and its effect on earnings in the coming quarters?
    2. With your general office commercial real estate exposure still at $3.2 billion and reserves increasing to 12.1%, how confident are you that you've adequately provisioned for potential future losses, especially considering the ongoing challenges in the office sector?
    3. You anticipate deposit betas nearing 40% by the end of the fourth quarter; given the competitive deposit environment, what strategies are you implementing to manage deposit costs, and how sustainable is it to expect stable or improving deposit costs while maintaining deposit balances?
    4. Your net interest margin guidance relies on front book/back book dynamics contributing to expansion; can you specify the volumes and yields of loans and securities expected to reprice, and quantify the anticipated impact on NIM given current rate expectations?
    5. The Private Bank is expected to start contributing to earnings in the fourth quarter; considering the significant investments and rapid expansion, what risks do you foresee in achieving profitability, and how sustainable is the growth in deposits and loans in this segment?

    Share Repurchase Program

    Program DetailsProgram 1
    Approval DateJune 28, 2024
    End Date/DurationN/A
    Total additional amount$656 million
    Remaining authorization amount$925 million
    DetailsThe program aims to return capital to shareholders. The timing and amount of repurchases depend on factors such as the company's capital position, financial performance, strategic initiatives, market conditions, and regulatory considerations.

    Past Guidance

    Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: Q4 2024
    • Guidance:
      1. Net Interest Income (NII): Expected to be up about 1.5% to 2.5%, driven by a 5 basis point improvement in net interest margin .
      2. Noninterest Income: Expected to be up mid- to high single digits, reflecting expected seasonal strength in capital markets .
      3. Noninterest Expense: Projected to be up about 2% .
      4. Operating Leverage: Expected to achieve positive operating leverage .
      5. Net Charge-offs: Expected to be broadly stable .
      6. Allowance for Credit Losses (ACL): Should continue to benefit from noncore runoff and improving loan mix .
      7. CET1 Ratio: Expected to be broadly stable with about $200 million to $250 million of share repurchases .
      8. Deposit Beta: Expected to be around 40% by the end of the fourth quarter .
      9. Net Interest Margin (NIM): Expected to expand by 5 basis points into the fourth quarter .

    Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: Q3 2024 and FY 2024
    • Guidance:
      1. Net Interest Income (NII): Expected to be down 1% to 2%, driven by one last step up in swap costs for the cycle .
      2. Noninterest Income: Expected to be up slightly, reflecting seasonally lower capital markets more than offset by a pickup across other categories .
      3. Noninterest Expense: Expected to be stable .
      4. Net Charge-Offs: Expected to be down modestly .
      5. Allowance for Credit Losses (ACL): Should continue to benefit from noncore runoff .
      6. Common Equity Tier 1 (CET1) Ratio: Expected to come in about 10.5% .
      7. Share Repurchase: Approximately $250 million to $300 million of share repurchase currently planned .
      8. Interest Rate Outlook: Contemplates a 25 basis point rate cut in each of September and December .

    Q1 2024 Earnings Call

    • Issued Period: Q1 2024
    • Guided Period: Q2 2024 and FY 2024
    • Guidance:
      1. Net Interest Income (NII): Expected to decrease by about 2% for the second quarter. For the full year 2024, NII is expected to land within the range of down 6% to 9% .
      2. Net Interest Margin (NIM): Expected to come in a little better than initially expected, offsetting the impact of lower loan demand. The medium-term NIM range is projected to be 3.25% to 3.4% .
      3. Noninterest Income: Expected to be up approximately 3% to 4% for the second quarter .
      4. Noninterest Expense: Expected to be stable to down slightly for the second quarter .
      5. Net Charge-Offs (NCOs): Expected to be about 50 basis points for the second quarter and trending in line with expectations for the year .
      6. Allowance for Credit Losses (ACL): Should continue to benefit from the noncore runoff .
      7. Common Equity Tier 1 (CET1) Ratio: Expected to come in at about 10.5% for the second quarter, with approximately $200 million of share repurchases currently planned .

    Q4 2023 Earnings Call

    • Issued Period: Q4 2023
    • Guided Period: FY 2024
    • Guidance:
      1. Net Interest Margin (NIM): Expected to average in the 2.8% to 2.85% range for the full year, exiting the year around 2.85% .
      2. Net Interest Income (NII): Expected to be down 6% to 9% for the full year 2024, with changes in the swap book contributing to about half of that decline .
      3. Noninterest Income: Expected to be up in the 6% to 9% range, depending on the market environment, led by a rebound in capital markets .
      4. Expenses: Expected to be up about 1% to 1.5%. Excluding the private bank, expenses would be down 1.3% to 1.5% .
      5. Common Equity Tier 1 (CET1) Ratio: Expected to end the year at about 10.5%, which is at the upper end of their target range .
      6. Share Repurchases: Plan to resume share repurchases in the first quarter in the $300 million range, with more over the course of the year, depending on market conditions and loan growth .
      7. Net Charge-Offs (NCOs): Expected to be about 50 basis points for the year .
      8. Loan Growth: Average loans expected to be down roughly 2% to 3%, with spot loan growth of 3% to 5% over the course of the year .
      9. Deposit Growth: Spot growth expected to be 1% to 2% .
      10. Dividend Payout: Targeting a dividend payout of 35% to 40% .
      11. Operating Leverage: Expect to return to sequential positive operating leverage in the second half of the year .
      12. Capital Return: Expect a 95% capital return performance in 2023, with a range of 75% to 100% over time .
      13. Private Bank: Expected to contribute meaningfully as it matures .

    Competitors

    Competitors mentioned in the company's latest 10K filing.

    • Community banks
    • Super-regional and national financial institutions
    • Credit unions
    • Savings and loan associations
    • Mortgage banking firms
    • Consumer finance companies
    • Securities brokerage firms
    • Insurance companies
    • Money market funds
    • Hedge funds
    • Private equity firms
    • FinTech companies