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Why Is Citizens Financial Group (CFG) Up 5.1% Since Last Earnings Report?
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It has been about a month since the last earnings report for Citizens Financial Group (CFG - Free Report) . Shares have added about 5.1% 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 Estimates on Fee Income Growth
Aided by higher revenues, Citizens Financial pulled off fourth-quarter 2020 positive earnings surprise of 39.4%. Adjusted earnings per share of $1.04 surpassed the Zacks Consensus Estimate of 91 cents. Also, the bottom line compares favorably with 99 cents in the year-ago quarter.
Increase in fee income on the back of a solid rise in mortgage banking and capital market fees supported revenue growth. Also, the capital position remained strong. However, rise in provisions and elevated expenses hurt the company’s results. Lower loans and contraction of margin were other headwinds.
Results excluded certain non-recurring items. After considering those, the company reported net income of $456 million or 99 cents per share compared with $450 million or 98 cents in the prior-year quarter.
In full-year 2020, net income totaled $1.06 billion or $2.22 per share, down from the prior year’s $1.79 billion or $3.81 per share. Full-year earnings, however, outpaced the Zacks Consensus Estimate of $2.16.
Fee Income Growth Aids Revenues, Costs Increase
In 2020, revenues were $6.91 billion, up 6.4% year over year. Also, the top line beat the Zacks Consensus Estimate of $6.9 billion.
Total revenues in the fourth quarter were $1.71 billion, surpassing the consensus estimate of $1.70 billion. Additionally, the top line moved up 4% year over year.
Citizens’ net interest income declined nearly 1% year over year to $1.13 billion. Also, net interest margin contracted 30 basis points (bps) to 2.75%. This was, however, partly mitigated by higher interest-earning asset yields and lower funding costs.
Non-interest income climbed 17% year over year to $578 million. The upside stemmed largely from a rise in mortgage banking, capital market fees and letter of credit and loan fees.
Non-interest expenses jumped 3% year over year to $1.01 billion. The upswing highlights higher equipment and software expense, given continued investments in technology along with rise in outside services and salaries and employee benefits tied to strong mortgage banking results. On an adjusted basis, expenses rose 2% during the quarter.
Efficiency ratio decreased to 59% in the fourth quarter from 60% in the prior-year quarter. Generally, a lower ratio is indicative of the bank’s increased efficiency.
As of Dec 31, 2020, period-end total loan and lease balances declined 1% sequentially to $123.1 billion. However, total deposits increased 3% to $147.2 billion.
Credit Quality Worsens
Provision for credit losses was $124 million compared with $110 million in the year-ago quarter. Also, net charge-offs jumped 56% to $190 million.
Non-accrual loans and leases were up 45% to $1.02 million. As of Dec 31, 2020, allowance for loan and lease losses increased 106% to $2.67 billion.
Capital Position
Citizens remained well capitalized in the fourth quarter. As of Dec 31, 2020, common equity tier-1 capital ratio was 10%, stable year over year. Further, Tier-1 leverage ratio was 9.4%, down 60 bps. Total capital ratio was 13.4%, up from 13%.
Citizens recorded an improvement in book value per share, which increased to $32.72 as of Dec 31, 2020, from $32.08 at the end of the year-earlier quarter.
Capital Deployment Update
The company made no share repurchases during the quarter. Notably, it returned $168 million to shareholders through dividends.
In 2020, the company returned $892 million to common shareholders, including share repurchases and common dividends compared with $1.84 billion last year.
Outlook
First-Quarter 2021 Outlook
NII is expected to decline slightly, on account of lower day count. NIM and earnings assets are expected to remain stable.
Fee income is expected to be down in high single digits reflecting lower mortgage banking fees as margins continue to tighten as far as seasonal impacts.
Non-interest expenses are expected to be up 2-3%, reflecting seasonal factors.
The company expects relatively stable net charge offs in the range of 50-60 bps of average loans.
Full-Year 2021
The company expects to drive interest bearing deposit costs down to the low to mid-teens by the end of the year as it makes efforts to manage costs down across all channels, while improving overall funding mix.
Loans are expected to be up mid to high single-digits on a spot basis with acceleration in the second half of the year. Average loans are anticipated to increase about 2%. Overall, interest earning assets might be up about 1.5% to 2%. This assumes elevated cash levels come down gradually over the course of 2021.
Management expects NII to be down slightly given NIM expected to be down in the high single digits compared to 2020, which might be largely offset by loan growth.
Non-interest income is expected to decline in high single-digits, reflecting lower mortgage banking fees from 2020 record levels.
Expenses are expected to increase 1.5-2%, given benefits from TOP program, partly offset by higher volume related expenses in mortgage and reinvestment in strategic initiatives.
Net charge-offs are likely to be in the range of 50-65 bps of average loans with a meaningful reserve release to provision.
Year-end Basel III common equity tier 1 ratio is estimated to be between 9.75% and 10%.
The tax rate is expected to be 21%.
Medium-Term Targets
Having achieved the medium-term targets set in 2018, the company raised them to following:
Return on common tangible equity of 14-16%
Efficiency ratio of 55%
Common equity tier 1 ratio of 9.75-10%
Dividend payout ratio of 35-40%
Efficiency Initiatives
In late 2014, Citizens Financial had announced its first efficiency program — TOP 1 — which resulted in $200 million costs savings. During the second quarter of 2015, the company announced Top 2 revenue and expense initiatives, which resulted in a pre-tax benefit of roughly $105 million in 2016. Following its success, Citizens Financial launched Top 3 program, which delivered a pre-tax benefit in excess of $115 million. Further, the company launched the Top 4 program, which delivered pre-tax benefit of $115 million by the end of 2018.
Finally, continuing with the trend, Citizens Financial announced TOP 5 program with fresh objectives targeting strong positive operating leverage with goal to self-finance growth initiatives and delivered pre-tax benefit of $125 million in 2019.
Further, it announced TOP 6 Program also, which is expected to deliver $400-$425 million in pre-tax run-rate benefit by 2021. Along with the traditional TOP objectives, the new program will also take into account ways to transform company’s operating manner and customers’ satisfaction in a better way. The cost of Top program implementation is expected to be between $50 million and $75 million in 2020-2021.
TOP 6 Program
The Program will consist of two elements:
The transformational program, which is designed to improve how it delivers for customers and how the bank is operated. The company also seeks to redefine cross-organizational operating model to deliver a more customer-centric, efficient and agile environment by modernizing IT practices. Through this, the company targets pre-tax run-rate benefits of $100-$125 million and $200-$225 million by 2020 and 2021, respectively.
The traditional program will be similar in nature and scope to TOP 2-5 programs and is anticipated to deliver $75-$100 million and $175-$225 million in benefits by 2020 and the rest in 2021.
The company mulls that the program will help offset interest-rate headwinds, maintain commitment to delivering positive operating leverage, improve efficiency ratio and ROTCE. Also, it plans to fund new strategic revenue initiatives such as significant expansion of digital strategies to increase customer reach and developing new digital offerings for commercial customers.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 14.04% due to these changes.
VGM Scores
Currently, 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 D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Citizens Financial Group has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.
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Why Is Citizens Financial Group (CFG) Up 5.1% Since Last Earnings Report?
It has been about a month since the last earnings report for Citizens Financial Group (CFG - Free Report) . Shares have added about 5.1% 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 Estimates on Fee Income Growth
Aided by higher revenues, Citizens Financial pulled off fourth-quarter 2020 positive earnings surprise of 39.4%. Adjusted earnings per share of $1.04 surpassed the Zacks Consensus Estimate of 91 cents. Also, the bottom line compares favorably with 99 cents in the year-ago quarter.
Increase in fee income on the back of a solid rise in mortgage banking and capital market fees supported revenue growth. Also, the capital position remained strong. However, rise in provisions and elevated expenses hurt the company’s results. Lower loans and contraction of margin were other headwinds.
Results excluded certain non-recurring items. After considering those, the company reported net income of $456 million or 99 cents per share compared with $450 million or 98 cents in the prior-year quarter.
In full-year 2020, net income totaled $1.06 billion or $2.22 per share, down from the prior year’s $1.79 billion or $3.81 per share. Full-year earnings, however, outpaced the Zacks Consensus Estimate of $2.16.
Fee Income Growth Aids Revenues, Costs Increase
In 2020, revenues were $6.91 billion, up 6.4% year over year. Also, the top line beat the Zacks Consensus Estimate of $6.9 billion.
Total revenues in the fourth quarter were $1.71 billion, surpassing the consensus estimate of $1.70 billion. Additionally, the top line moved up 4% year over year.
Citizens’ net interest income declined nearly 1% year over year to $1.13 billion. Also, net interest margin contracted 30 basis points (bps) to 2.75%. This was, however, partly mitigated by higher interest-earning asset yields and lower funding costs.
Non-interest income climbed 17% year over year to $578 million. The upside stemmed largely from a rise in mortgage banking, capital market fees and letter of credit and loan fees.
Non-interest expenses jumped 3% year over year to $1.01 billion. The upswing highlights higher equipment and software expense, given continued investments in technology along with rise in outside services and salaries and employee benefits tied to strong mortgage banking results. On an adjusted basis, expenses rose 2% during the quarter.
Efficiency ratio decreased to 59% in the fourth quarter from 60% in the prior-year quarter. Generally, a lower ratio is indicative of the bank’s increased efficiency.
As of Dec 31, 2020, period-end total loan and lease balances declined 1% sequentially to $123.1 billion. However, total deposits increased 3% to $147.2 billion.
Credit Quality Worsens
Provision for credit losses was $124 million compared with $110 million in the year-ago quarter. Also, net charge-offs jumped 56% to $190 million.
Non-accrual loans and leases were up 45% to $1.02 million. As of Dec 31, 2020, allowance for loan and lease losses increased 106% to $2.67 billion.
Capital Position
Citizens remained well capitalized in the fourth quarter. As of Dec 31, 2020, common equity tier-1 capital ratio was 10%, stable year over year. Further, Tier-1 leverage ratio was 9.4%, down 60 bps. Total capital ratio was 13.4%, up from 13%.
Citizens recorded an improvement in book value per share, which increased to $32.72 as of Dec 31, 2020, from $32.08 at the end of the year-earlier quarter.
Capital Deployment Update
The company made no share repurchases during the quarter. Notably, it returned $168 million to shareholders through dividends.
In 2020, the company returned $892 million to common shareholders, including share repurchases and common dividends compared with $1.84 billion last year.
Outlook
First-Quarter 2021 Outlook
NII is expected to decline slightly, on account of lower day count. NIM and earnings assets are expected to remain stable.
Fee income is expected to be down in high single digits reflecting lower mortgage banking fees as margins continue to tighten as far as seasonal impacts.
Non-interest expenses are expected to be up 2-3%, reflecting seasonal factors.
The company expects relatively stable net charge offs in the range of 50-60 bps of average loans.
Full-Year 2021
The company expects to drive interest bearing deposit costs down to the low to mid-teens by the end of the year as it makes efforts to manage costs down across all channels, while improving overall funding mix.
Loans are expected to be up mid to high single-digits on a spot basis with acceleration in the second half of the year. Average loans are anticipated to increase about 2%. Overall, interest earning assets might be up about 1.5% to 2%. This assumes elevated cash levels come down gradually over the course of 2021.
Management expects NII to be down slightly given NIM expected to be down in the high single digits compared to 2020, which might be largely offset by loan growth.
Non-interest income is expected to decline in high single-digits, reflecting lower mortgage banking fees from 2020 record levels.
Expenses are expected to increase 1.5-2%, given benefits from TOP program, partly offset by higher volume related expenses in mortgage and reinvestment in strategic initiatives.
Net charge-offs are likely to be in the range of 50-65 bps of average loans with a meaningful reserve release to provision.
Year-end Basel III common equity tier 1 ratio is estimated to be between 9.75% and 10%.
The tax rate is expected to be 21%.
Medium-Term Targets
Having achieved the medium-term targets set in 2018, the company raised them to following:
Efficiency Initiatives
In late 2014, Citizens Financial had announced its first efficiency program — TOP 1 — which resulted in $200 million costs savings. During the second quarter of 2015, the company announced Top 2 revenue and expense initiatives, which resulted in a pre-tax benefit of roughly $105 million in 2016. Following its success, Citizens Financial launched Top 3 program, which delivered a pre-tax benefit in excess of $115 million. Further, the company launched the Top 4 program, which delivered pre-tax benefit of $115 million by the end of 2018.
Finally, continuing with the trend, Citizens Financial announced TOP 5 program with fresh objectives targeting strong positive operating leverage with goal to self-finance growth initiatives and delivered pre-tax benefit of $125 million in 2019.
Further, it announced TOP 6 Program also, which is expected to deliver $400-$425 million in pre-tax run-rate benefit by 2021. Along with the traditional TOP objectives, the new program will also take into account ways to transform company’s operating manner and customers’ satisfaction in a better way. The cost of Top program implementation is expected to be between $50 million and $75 million in 2020-2021.
TOP 6 Program
The Program will consist of two elements:
The company mulls that the program will help offset interest-rate headwinds, maintain commitment to delivering positive operating leverage, improve efficiency ratio and ROTCE. Also, it plans to fund new strategic revenue initiatives such as significant expansion of digital strategies to increase customer reach and developing new digital offerings for commercial customers.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 14.04% due to these changes.
VGM Scores
Currently, 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 D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Citizens Financial Group has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.