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Inorganic Growth Aids Citizens Financial (CFG), High Costs Ail

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Citizens Financial Group, Inc.’s (CFG - Free Report) buyout efforts enable it to expand its product capabilities and geographic reach.Yet, rising costs due to investment franchise expansion might impede bottom-line growth in the near term.

The company announced a deal to acquire the online college planning platform, College Raptor, Inc., this September. In July, it announced the acquisition of Paladin Advisors, an independent, registered investment advisor, to strengthen its private wealth management business. In April, the company completed the acquisition of Investors for $3.39 billion, which strengthened its banking franchise and boosted its consumer customer base.

Citizens Financial remains on track to achieve $130 million of pre-tax run-rate net expense synergies by 2023, with 70% of the run rate expected to be achieved by 2022. Such buyouts will drive its growth momentum.

CFG’s organic growth story remains impressive, with loans and deposits seeing a compound annual growth rate (CAGR) of 3.7% and 11%, respectively, over the last three years (2019–2021). Further, the rising trend for both metrics continued in the first half of 2022.

The company has been enhancing its deposit base by advancing its deposit-gathering capabilities and digital-first model focused on national expansion. Its acquisition of HSBC branches added $6.3 billion of low-cost deposits. This, along with the acquisition of Investors, gives it a preeminent deposit ranking in the key New York City Metro market.

Also, the Fed’s aggressive monetary policy stance to tame inflation will support the net interest income (NII) of banks, including CFG, Webster Financial Corporation (WBS - Free Report) and Regions Financial Corporation (RF - Free Report) . Notably, banks have been reeling under near-zero interest rates since March 2020, which adversely impacted net interest margin (NIM) and NII.

Regions Financial’s NII witnessed a compound annual growth rate (CAGR) of 2.5% over the last five years (2017-2021) and increased in the first half of 2022. This has likely been supported by its solid loan growth trend and rising rates.

WBS’ NII witnessed a CAGR of 3.1% over the last five years (2017-2021) with some annual volatility. The metric witnessed a rising trend in the first half of 2022. Also, the trend is likely to continue on a decent economic scenario and higher rates.

CFG’s strong capital base enables it to enhance shareholder value. Following the clearance of the 2022 stress test, the company increased the authorization of common share repurchases to $1 billion from $750 million. This marks an increase of $545 million in addition to $455 million worth of remaining capacity under the prior $750-million January 2021 authorization.

This July, the company increased its common stock dividend by 8%. Given its steadily improving performance and strong liquidity position, Citizens Financial’s capital-deployment activities are sustainable.

However, CFG’s non-interest expenses witnessed a CAGR of 4.1% over the last four years (2018-2021), with an increasing trend in the first half of 2022. Costs are likely to remain elevated in the upcoming period due to franchise expansion nationally, as well as investments in newer technologies and building fee income capabilities. The investments might benefit the company over the long run but the increasing current expense level is limiting near-term bottom-line expansion.

The loan portfolio of Citizens Financial comprises a significant amount of commercial loans (52% of loans and leases as of Jun 30, 2022). Such a lack of diversification can be risky for the company amid an uncertain economy and competitive markets.


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