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Citizens Financial (CFG) Q1 Earnings Can be Hurt by Low Fee Income

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Citizens Financial Group (CFG - Free Report) is scheduled to report first-quarter 2022 earnings results on Apr 19, before market opens. Its quarterly earnings and revenues are expected to have declined year over year.

In fourth-quarter 2021, this Providence, RI-based bank surpassed the Zacks Consensus Estimate on a significant provisions reversal and a rise in loan balance. Strong credit quality, backed by an improving economy, was a tailwind. However, a rise in expenses and declining net interest income (“NII”) were spoilsports.

Citizens Financial has an impressive earnings surprise history. The company’s earnings surpassed the Zacks Consensus Estimate in all of the trailing four quarters, the surprise being 21.1%, on average.

Factors at Play

Loans:  The ongoing economic expansion is expected to have supported the lending environment in the quarter under review. Amid this, loan growth is anticipated to have improved. Per the Fed’s latest data, loan demand, particularly commercial and industrial loans, commercial real estate loans, and residential real estate loans, improved in January and February compared with fourth-quarter end.

Management expects average loans in the first quarter to grow 2-3% sequentially, given the strong loan pipelines of the company.

NII: In March, the Federal Reserve hiked short-term interest rates by 25 basis points. However, a persistently low-interest-rate environment is expected to have had some adverse impact on its NII and net interest yield in the quarter. Further, the flattening of the yield curve (the difference between short and long-term interest rates) is likely to have hindered the bank’s net interest margin.

Improved deposit mix and low deposit costs are expected to have reduced the company's interest expenses. However, high levels of pay downs and payoffs, and stiff loan pricing competition are likely to have hurt CFG’s loan volumes. Further, fewer days during the quarter are likely to have affected NII. Management expects NII to be down approximately 1% sequentially, reflecting this and less paycheck protection program benefit, partially offset by the benefit of loan growth. Also, it anticipates average interest-earning assets to remain stable in the quarter under review.

Nonetheless, NII is expected to be stable if the HSBC Bank U.S.A. branch acquisition impact is included. The Zacks Consensus Estimate of $1.13 billion for NII indicates a marginal increase from the prior quarter.

Fee Income: While 2022 started on a positive note, the onset of the Russian-Ukraine war dampened the equity market performance. This is likely to have decreased the company’s fee income. Trust and investment services fees are likely to have been negatively impacted by a decrease in assets under management from outflows and lower equity market levels. The consensus mark for the same, $59 million, indicates a 1.7% fall from the prior quarter.

Mortgage rates increased sequentially in the to-be reported quarter. Also, mortgage origination activities are estimated to have decreased dramatically, with the rising rates dismaying refinancing activity. These factors are expected to have abated Citizens Financial’s mortgage banking fees in the to-be-reported quarter. The consensus estimate for the same, $65 million, suggests a 14.5% plunge sequentially.

Deposits for Citizens Financial are likely to have increased, given its acquisition of 80 HSBC branches in Q1. However, these are likely to be offset by the company’s eased overdraft fee policy, resulting in lower revenues from service charges and fees.

While improvement in the consumer spending scenario due to higher employee compensation is expected to have favorably impacted card fees in the quarter, the consensus mark for card fees of $64 million indicates a 1.5% fall sequentially, likely indicating a decline in debit and credit card volumes.

Capital market fees were at a record level in the fourth quarter of 2021 for CFG, which could be difficult to match in Q1.  Further, the macro environment for deal-making considerably reduced in first-quarter 2022. Hence, with a decrease in global merger and acquisition volumes, the company’s capital market fees are likely to have been negatively impacted on a sequential basis. This, along with seasonal impact, is the reason for management’s expectation of an 8-12% decline in non-interest income, sequentially.

The consensus estimate for non-interest income is pegged at $500 million, suggesting a 15.8% sequential decrease.

Expenses: Despite its TOP 7 efficiency initiatives, Citizens Financial’s expenses are expected to have flared up on investments in enhanced data analytics and technology to improve customer experience. Further, non-interest expenses are expected to grow approximately 6%, given seasonal compensation impacts as per management.

Key Developments During the Quarter

In March, Citizens Financial announced a new overdraft-free checking account named Citizens EverValue Checking. The account protects users from overdraft to help avoid overspending their money. This is particularly designed to increase banking access for underbanked and underserved communities.

On Feb 18, Citizens Financial closed the acquisition of 80 East Coast branches and the national online deposit business from HSBC. The acquisition, which was announced in May, expands Citizens Financial’s physical footprint in numerous strategic markets, including New York, and adds more than 800,000 customer accounts.

Earnings Whispers

Our proven model does not predict an earnings beat for CFG this time around. This is because Citizens Financial does not have the right combination of two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat this time around.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: Earnings ESP for Citizens is -2.58%.
Zacks Rank: The company currently carries a Zacks Rank of 3.

The Zacks Consensus Estimate for first-quarter earnings is pegged at 97 cents, suggesting 31.2% decline from the year-ago reported number.  The Zacks Consensus Estimate for CFG’s first-quarter earnings has moved 2% downward over the past month, reflecting bearish sentiments of analysts. Also, the consensus mark of $1.65 billion for first-quarter revenues indicates a marginal year-over-year decline.

Stocks That Warrant a Look

Banner Corporation (BANR - Free Report) , HomeStreet INC. (HMST - Free Report) and State Street (STT - Free Report) are a few stocks that you might want to consider, as these have the right combination of elements to post an earnings beat in their upcoming releases, per our model.

The Earnings ESP for BANR is +1.60% and the company carries a Zacks Rank #2 (Buy) at present. BANR is slated to report first-quarter 2022 results on Apr 20.

The Zacks Consensus Estimate for BANR’s first-quarter earnings has stayed constant over the past week.

HMST is scheduled to release first-quarter results on Apr 25. HMST currently has a Zacks Rank #2 and an Earnings ESP of +10.53%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for HMST’s first-quarter earnings has moved 1% downward over the past 30 days.

STT is scheduled to release earnings on Apr 14. The company, which carries a Zacks Rank #3 at present, has an Earnings ESP of +0.80%.

The Zacks Consensus Estimate for STT’s first-quarter earnings has been revised 2.8% north over the past month.

Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.