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    Citizens Financial Group Inc (CFG)

    Q1 2024 Earnings Summary

    Reported on Feb 18, 2025 (Before Market Open)
    Pre-Earnings Price$32.41Last close (Apr 16, 2024)
    Post-Earnings Price$33.28Open (Apr 17, 2024)
    Price Change
    $0.87(+2.68%)

    What went well

    • Citizens Financial Group's deposit franchise is strong, with non-interest-bearing deposits stable at 21%, and strategic initiatives like the Private Bank and New York Metro expansion contributing to growth.
    • Net interest margin trends are improving, with expectations to come in at the higher end of the range due to better-than-expected deposit levels, controlled interest-bearing deposit costs, and favorable funding mix.
    • The bank is experiencing a positive trajectory in fee income, particularly from capital markets, card fees, and wealth management services, driven by strategic investments positioning Citizens to benefit from a more constructive capital markets environment.

    What went wrong

    • Elevated charge-offs in the general office loan portfolio, with uncertainty about when net charge-offs will peak, potentially leading to higher credit losses.
    • Lower loan growth expectations due to weaker line utilization and customers opting for bond markets over bank loans, which may pressure net interest income if loan growth doesn't materialize as expected.
    • Weakness in certain fee income lines, including service charges, mortgage banking fees, and global markets (FX and interest rate lines), which were below expectations and could impact overall fee income if they do not rebound as anticipated.

    Q&A Summary

    1. Net Interest Margin Outlook
      Q: How has your NIM and NII guidance changed?
      A: Management expects net interest margin (NIM) trends to improve, likely coming in at the high end of the range or even slightly above. This is driven by better-than-expected deposit levels and lower interest-bearing deposit costs. They also anticipate that net interest income (NII) will stay within the original guidance range, despite loan growth being towards the lower end.

    2. Credit Quality and Office CRE
      Q: What is the outlook for credit quality, especially in office real estate?
      A: Management sees no surprises in credit quality and is carefully managing office exposures. They have a 10.6% reserve for general office loans, based on an expected 71% decline in property values. Net charge-offs may peak later this year or early next, but they feel reserves are adequate and losses are progressing as expected.

    3. Loan Growth Expectations
      Q: How do you see loan growth evolving this year?
      A: Loan demand has been lighter than expected, with utilization levels lower in the first quarter. However, management anticipates a pickup in the second half, driven by increased commercial activity and growth in the private bank. They may come in at the low end of initial expectations for loan growth.

    4. Deposit Migration and Costs
      Q: When will deposit migration stabilize, and how is it affecting NIM?
      A: Negative deposit migration is decelerating and may stabilize until the first Federal Reserve rate cut. DDA balances have flattened, and deposit performance has been excellent. The impact on NIM is diminishing, and the cost of funds in the consumer segment may have peaked in Q1.

    5. Capital Allocation and Buybacks
      Q: Will you continue share buybacks given your CET1 ratio?
      A: With a strong capital position, management resumed buybacks, repurchasing $300 million in Q1 and planning $200 million in Q2. Less loan growth frees up capital, allowing for continued buybacks if loan demand doesn't materialize.

    6. Fee Income and Capital Markets
      Q: What is your outlook for fee income and capital markets activity?
      A: The capital markets, card fees, and wealth management businesses are trending well and expected to be significant contributors in 2024. Capital markets had a strong quarter, ranking #1 in lead tables on the sponsor side. Some areas like service charges and mortgage were weaker but are expected to bounce back.

    7. Swaps Impact on NII
      Q: How do swaps affect your NII guidance?
      A: The impact of swaps is fully incorporated into NII guidance, with a $35 million cumulative net interest income impact from Q1 to Q4. Management is confident in absorbing the step-up in swaps and maintaining the NIM outlook for the year.

    8. Charge-Off Guidance
      Q: Could higher rates lead to higher net charge-offs than expected?
      A: Management does not anticipate higher net charge-offs due to higher rates. Broad credit quality remains very good, with no hotspots in C&I or consumer portfolios. Office exposures are small relative to the loan book, and existing reserves are adequate.

    9. Timing of Office Charge-Offs
      Q: When will office loan charge-offs peak?
      A: Charge-offs on office loans may peak later this year or early next, but exact timing is uncertain. It depends on loan extensions, negotiations, and capital put into transactions. Management is comfortable with how it's progressing.

    10. Fee Progression Details
      Q: Can you provide more details on fee progression and pipeline?
      A: Capital markets activity has been strong, and the pace continues into Q2. The conversion to Mastercard is driving positive developments in the card business. Wealth management is benefiting from advisor hires and acquisitions, contributing to fee income growth.

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