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Citizens' Bottom Line Hit by Higher Costs: Should You Sell?

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Citizens Financial Group’s (CFG - Free Report) bottom line is affected by rising cost base and unimpressive fee income growth story. Also, pending legal issues remain a concern. However, the company currently displays solid top-line growth and a strong capital position. Also, rising loan and deposit balances act as a tailwind.

The company has an impressive earnings surprise history, having surpassed the Zacks Consensus Estimate in each of the trailing four quarters, with an average of 3.6%

The Providence, RI-based company’s fee income fails to support top-line growth. Therefore, reduced mortgage banking fees — on account of negative impact of lower rates on mortgage servicing rights valuations and a reduction in capital market fees — might limit its benefits from expansion initiatives in the quarters ahead.

Cost escalation is another downside for Citizens Financial. The company’s non-interest expenses have witnessed a CAGR of 3.9% over the last three years (2016-2018). Costs are likely to remain elevated due to the company’s investments in newer technologies and focus on building fee income capabilities organically.

It remains exposed to several pending legal hassles that are likely to keep legal costs high going forward. Also, significant exposure to commercial loans keeps us apprehensive.

However, the company remains committed in revamping profitability through ‘Tapping Our Potential’ (“TOP”) efficiency initiatives, which aim at enhancing revenues and efficiency. In July 2019, it introduced the TOP 6 Program, which is expected to achieve a pre-tax benefit of $300-$325 million by the end of 2021.

Notably, Citizens’s capital deployment activities are impressive. It has a share repurchase program of up to $1.28 million underway. Markedly, the company raised the common stock dividend by 12.5% in July 2019. On the back of its favorable debt/equity and dividend payout ratios compared with the industry, we expect these activities to be sustainable.

Notably, the company has been able to gain analysts’ confidence over the past 30 days. Its earnings estimates for the current year have been revised slightly upward to $3.82 over the past month.

Shares of Citizens Financial have lost 14% over the past six months compared with the industry’s 7.3% decline.

Zacks Rank & Key Picks

Currently, the stock carries a Zacks Rank #4 (Sell). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some better-ranked stocks in the same space are Meta Financial Group, Inc. (CASH - Free Report) , Great Southern Bancorp, Inc. (GSBC - Free Report) and Popular, Inc. (BPOP - Free Report) . All these stocks carry a Zacks Rank of 2 (Buy).

Meta Financial’s Zacks Consensus Estimate for earnings for the current year has been revised 11.6% upward in the past 20 days. Also, its share price has increased 56.2% so far this year.

Great Southern Bancorp’s earnings estimates for the current year have been revised 5.9% upward over the past 30 days. Further, the company’s shares have jumped 22.3% year to date.

Popular’s Zacks Consensus Estimate for earnings for the current year has been revised 2.1% upward over the past 30 days. Moreover, its shares have gained 11.3% so far this year.

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