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Why Is Citizens Financial (CFG) Up 1.5% Since Its Last Earnings Report?
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It has been about a month since the last earnings report for Citizens Financial Group, Inc. (CFG - Free Report) . Shares have added about 1.5% in that time frame.
Will the recent positive trend continue leading up to its next earnings release, or is CFG due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Citizens Financial Q1 Earnings Beat Estimates, Costs Up
Riding on higher revenues, Citizens Financial delivered a positive earnings surprise of 2.6% in first-quarter 2018. Earnings per share of 78 cents topped the Zacks Consensus Estimate of 76 cents. Also, the reported figure compares favorably with adjusted earnings of 57 cents recorded in prior-year quarter.
The company experienced continued expansion of margins and loan growth, which aided higher revenues. Also, higher deposits and lower provisions were some other positives. However, increase in expenses and lower fee income were the main undermining factors.
The company reported net income of $388 million compared with $320 million recorded in year- ago quarter.
Increase in NII Partially Offset by Higher Expenses and Lower Fee Income
Total revenues for the quarter were $1.46 billion, which lagged the Zacks Consensus Estimate of $1.47 billion. However, revenues were up 6% year over year.
Citizens Financial’s net interest income (NII) increased 9% year over year to $1.09 billion. The rise was primarily attributable to average loan growth and improved margin. In addition, net interest margin expanded 20 basis points (bps) year over year to 3.16%. This was mainly due to higher interest-earning asset yields, given balance sheet optimization initiatives and improving loan mix, partly mitigated by increase in funding costs.
However, non-interest income declined 2% to $371 million. The fall was due to lower capital markets fees and other income, partially offset by higher mortgage banking fees, trust and investment services, and card fees.
Non-interest expenses were up 3% year over year to $883 million. The increase reflects rise in almost all components, except other expenses.
Efficiency ratio declined to 60% in the first quarter from 62% in the prior-year quarter. Generally, lower ratio is indicative of the bank’s improved efficiency.
As of Mar 31, 2018, period-end total loan and lease balances increased nearly 1% sequentially to $112.2 billion while total deposits increased marginally to $115.7 billion.
Credit Quality: A Mixed Bag
As of Mar 31, 2018, net charge-offs for the quarter declined 20% year over year to $70 million. Provision for credit losses fell 19% to $78 million. Additionally, total non-performing loans and leases were down 17% to $868 million.
However, allowance for loan and lease losses increased 2% to $1.25 billion on a year-over-year basis.
Capital Position
Citizens Financial remained well capitalized in the quarter. As of Mar 31, 2018, Common Equity Tier 1 capital ratio was 11.2%, flat year over year. Tier 1 leverage ratio came in at 10%, up 1 bp from the year-ago quarter. Total Capital ratio was 13.9% compared with 14% in the prior-year quarter.
Capital Deployment Update
As part of its 2017 Capital Plan, the company repurchased 3.9 million shares during the quarter. Notably, including common stock dividends, the company returned $283 million to its shareholders.
Outlook
Second-Quarter 2018
The company expects 1.5% sequential average loan growth. Also, average loan-to-deposit ratio is expected to be about 98%.
NIM is expected to expand modestly on a sequential basis on the back of higher interest rates, partially offset by modest curve flattening.
Non-interest income is anticipated to increase 5% sequentially with benefit from rebound in capital markets.
Management expects non-interest expenses to remain stable sequentially. It also expects to achieve positive operating leverage and improvement in efficiency ratio.
Provision expenses are expected to be in the range of $80-$90 million. The tax rate is expected to be nearly 23%.
Further, at the end of the first quarter, Basel III common equity tier 1 ratio is estimated to be 11.2%.
Full-year 2018
Average loans are expected to grow in the range of 4.5-5.5% while average deposit growth is expected to be between 4.5-6%. Loan-to-deposit ratio is expected to be between 97-98%.
Management expects NII to grow by 7-9%. Also, average earning assets are expected to grow 4-5.5% in 2018. NIM might expand by 9-12 bps on the back of December 2017 rate hike and assumption of further hikes in April and October 2018.
Non-interest income is expected to grow by 4.5-6%.
Expenses are anticipated to increase by 3.25-3.75%. Also, the company targets to deliver positive operating leverage of 3-5%.
Notably, efficiency ratio is expected to improve by 200-250 bps.
Provision expenses are expected to be in the range of $425-$475 million.
Net charge-off is expected to rise modestly with additional reserve build to fund loan growth. The tax rate is expected to be 22.5%.
The company is targeting a dividend payout ratio of nearly 30% for 2018. Year-end Basel III common equity tier 1 ratio is estimated to be between 10.6-10.8%.
Efficiency Initiatives
During the second quarter of 2015, Citizens Financial 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 has also launched the Top IV program. This new program is expected to achieve pre-tax benefit of $95-$110 million by the end of 2018.
TOP IV Efficiency Initiatives
Citizens Financial launched TOP IV efficiency initiatives in second-quarter 2017. These efficiency initiatives are anticipated to generate pre-tax revenues and expense benefits of $95-$110 million in 2018.
Efficiency
The company expects a benefit of $50-$65 million by the end of 2018 through efficiency initiatives driven by following factors –
The company plans to focus on centralization/centers of excellence and simplification of roles and responsibilities.
Also, it targets to achieve end-to-end re-designing of processes and leveraging automation to reduce costs and improve efficiency.
Citizen Financial plans to achieve cost efficiencies by streamlining customer journeys.
The company seeks to recognize contract efficiencies and demand-management opportunities.
On the technological front, the company plans to optimize infrastructure and streamline network support.
Revenue Enhancement
Citizens Financial targets a run-rate benefit of $45 million by the fourth quarter of 2018. It is expected to be driven by the following factors-
The company plans to build a digital mortgage platform that reaches out to consumers directly. Also, it seeks to leverage the call center to offer ‘service to solutions’.
Citizen Financial plans to attract new customers and retaining the existing ones by enhancing customer journeys in targeted areas.
It targets to expand corporate partners in installment lending and to expand C&I lending in the Southeast.
The company aims to improve fee income through several initiatives.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates. There have been four revisions higher for the current quarter compared to three lower.
VGM Scores
At this time, CFG has an average Growth Score of C, however its Momentum is doing a lot better with an A. 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 B. If you aren't focused on one strategy, this score is the one you should be interested in.
Based on our scores, the stock is primarily suitable for momentum investors while also being suitable for those looking for value and to a lesser degree growth.
Outlook
Estimates have been broadly trending upward for the stock and the magnitude of these revisions looks promising. Notably, CFG has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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Why Is Citizens Financial (CFG) Up 1.5% Since Its Last Earnings Report?
It has been about a month since the last earnings report for Citizens Financial Group, Inc. (CFG - Free Report) . Shares have added about 1.5% in that time frame.
Will the recent positive trend continue leading up to its next earnings release, or is CFG due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Citizens Financial Q1 Earnings Beat Estimates, Costs Up
Riding on higher revenues, Citizens Financial delivered a positive earnings surprise of 2.6% in first-quarter 2018. Earnings per share of 78 cents topped the Zacks Consensus Estimate of 76 cents. Also, the reported figure compares favorably with adjusted earnings of 57 cents recorded in prior-year quarter.
The company experienced continued expansion of margins and loan growth, which aided higher revenues. Also, higher deposits and lower provisions were some other positives. However, increase in expenses and lower fee income were the main undermining factors.
The company reported net income of $388 million compared with $320 million recorded in year- ago quarter.
Increase in NII Partially Offset by Higher Expenses and Lower Fee Income
Total revenues for the quarter were $1.46 billion, which lagged the Zacks Consensus Estimate of $1.47 billion. However, revenues were up 6% year over year.
Citizens Financial’s net interest income (NII) increased 9% year over year to $1.09 billion. The rise was primarily attributable to average loan growth and improved margin. In addition, net interest margin expanded 20 basis points (bps) year over year to 3.16%. This was mainly due to higher interest-earning asset yields, given balance sheet optimization initiatives and improving loan mix, partly mitigated by increase in funding costs.
However, non-interest income declined 2% to $371 million. The fall was due to lower capital markets fees and other income, partially offset by higher mortgage banking fees, trust and investment services, and card fees.
Non-interest expenses were up 3% year over year to $883 million. The increase reflects rise in almost all components, except other expenses.
Efficiency ratio declined to 60% in the first quarter from 62% in the prior-year quarter. Generally, lower ratio is indicative of the bank’s improved efficiency.
As of Mar 31, 2018, period-end total loan and lease balances increased nearly 1% sequentially to $112.2 billion while total deposits increased marginally to $115.7 billion.
Credit Quality: A Mixed Bag
As of Mar 31, 2018, net charge-offs for the quarter declined 20% year over year to $70 million. Provision for credit losses fell 19% to $78 million. Additionally, total non-performing loans and leases were down 17% to $868 million.
However, allowance for loan and lease losses increased 2% to $1.25 billion on a year-over-year basis.
Capital Position
Citizens Financial remained well capitalized in the quarter. As of Mar 31, 2018, Common Equity Tier 1 capital ratio was 11.2%, flat year over year. Tier 1 leverage ratio came in at 10%, up 1 bp from the year-ago quarter. Total Capital ratio was 13.9% compared with 14% in the prior-year quarter.
Capital Deployment Update
As part of its 2017 Capital Plan, the company repurchased 3.9 million shares during the quarter. Notably, including common stock dividends, the company returned $283 million to its shareholders.
Outlook
Second-Quarter 2018
The company expects 1.5% sequential average loan growth. Also, average loan-to-deposit ratio is expected to be about 98%.
NIM is expected to expand modestly on a sequential basis on the back of higher interest rates, partially offset by modest curve flattening.
Non-interest income is anticipated to increase 5% sequentially with benefit from rebound in capital markets.
Management expects non-interest expenses to remain stable sequentially. It also expects to achieve positive operating leverage and improvement in efficiency ratio.
Provision expenses are expected to be in the range of $80-$90 million. The tax rate is expected to be nearly 23%.
Further, at the end of the first quarter, Basel III common equity tier 1 ratio is estimated to be 11.2%.
Full-year 2018
Average loans are expected to grow in the range of 4.5-5.5% while average deposit growth is expected to be between 4.5-6%. Loan-to-deposit ratio is expected to be between 97-98%.
Management expects NII to grow by 7-9%. Also, average earning assets are expected to grow 4-5.5% in 2018. NIM might expand by 9-12 bps on the back of December 2017 rate hike and assumption of further hikes in April and October 2018.
Non-interest income is expected to grow by 4.5-6%.
Expenses are anticipated to increase by 3.25-3.75%. Also, the company targets to deliver positive operating leverage of 3-5%.
Notably, efficiency ratio is expected to improve by 200-250 bps.
Provision expenses are expected to be in the range of $425-$475 million.
Net charge-off is expected to rise modestly with additional reserve build to fund loan growth. The tax rate is expected to be 22.5%.
The company is targeting a dividend payout ratio of nearly 30% for 2018. Year-end Basel III common equity tier 1 ratio is estimated to be between 10.6-10.8%.
Efficiency Initiatives
During the second quarter of 2015, Citizens Financial 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 has also launched the Top IV program. This new program is expected to achieve pre-tax benefit of $95-$110 million by the end of 2018.
TOP IV Efficiency Initiatives
Citizens Financial launched TOP IV efficiency initiatives in second-quarter 2017. These efficiency initiatives are anticipated to generate pre-tax revenues and expense benefits of $95-$110 million in 2018.
Efficiency
The company expects a benefit of $50-$65 million by the end of 2018 through efficiency initiatives driven by following factors –
Revenue Enhancement
Citizens Financial targets a run-rate benefit of $45 million by the fourth quarter of 2018. It is expected to be driven by the following factors-
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates. There have been four revisions higher for the current quarter compared to three lower.
VGM Scores
At this time, CFG has an average Growth Score of C, however its Momentum is doing a lot better with an A. 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 B. If you aren't focused on one strategy, this score is the one you should be interested in.
Based on our scores, the stock is primarily suitable for momentum investors while also being suitable for those looking for value and to a lesser degree growth.
Outlook
Estimates have been broadly trending upward for the stock and the magnitude of these revisions looks promising. Notably, CFG has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.