CFG - Citizens Financial Group: Setting A Tough Tone For Regional Bank Reports

2024-01-17 12:08:19 ET

Summary

• Citizens Financial Group, Inc. reported Q4 earnings with declines in deposits and loans and a 9.5% decrease in revenues.
• The bank saw net income fall and a decrease in adjusted earnings per share.
• Total deposits and loans have been on the decline, but the bank is focused on increasing quality and liquidity.
• Credit quality, however, also suffered in Q4.

Citizens Financial Group, Inc. ( CFG ) is one of the first major regional banks to have reported earnings this year. We follow the regional banks as a gauge for the overall health of the economy.

In our opinion, the greatest risk to investing in the space is ongoing solvency. This varies widely across banks. Some have faced challenges in growing their deposit base there is less liquidity for investment. In some cases, banks have massive unrealized losses sitting on the books.

However, there are positives, such as margins, which have in our opinion bottomed out. Credit quality metrics have held up coming into this quarter for many banks. Provisions for losses are coming down. That said, shares of CFG are up slightly following its just-reported Q4 earnings . Is this setting a tone for regional banks more broadly? Let us review the key metrics we look for in regional banks.

Citizens Financial just announced Q4 earnings

In the just-reported Q4 earnings release, Citizens saw declines in both the deposit and loan base. Revenues fell in Q4, with Citizens bringing in $2.0 billion. These revenues of $1.99 billion were a 9.5% decrease year-over-year. The provision for credit losses was $171 million in the recent quarter, rising $1 million from the sequential Q3, and up from $132 million last year.

The bank also saw net income narrow to $189 million or $0.34 per share, while on an adjusted basis they brought in $426 million or $0.85 per share, down from $0.89 per share in Q3, and down from $1.32 a year ago. This was about in line with consensus expectations, beating them by $0.01. It was a mixed quarter.

Deposits and loans

As we mentioned in the open, having more deposits on hand for investment is key, especially if banks are tied up in assets that are underperforming. If we look long term, having deposits for investment is a benefit, particularly now that it seems the pressure banks have been facing on the cost of deposits relative to loans being made is positive. That said, Citizens Financial Group's total deposits have been on the decline. Total deposits were $177.3 billion at the recent quarter-end, down slightly from $178.2 billion from the period-end of the sequential quarter, and down from $180.7 billion at the end of Q4 2022.

Unfortunately, loans also have dipped on lower demand and more stringent lending criteria. However, Citizens Financial Group's management apparently is focused on increasing quality and liquidity, so it would seem they are focused more on better-performing loans than quantity.

That said, loans at period end dipped to $146.0 million, down from $150.8 million from the sequential Q3, and down from $156.7 billion a year ago. This is a trend we think is important to monitor for all regional banks. Obviously, over time you want to see expanding deposits and loans, but with the Fed activity to slow activity, this report suggests that goal is being accomplished.

Asset quality

Now, we did mention that it seems the bank is focused on quality over quantity. Well, in Q4 net loan charge-offs rose from Q3 and a year ago. These were $171 million, a significant increase from $153 million in the sequential Q3, and up from $88 million a year ago. Thus, net charge-offs were 0.46% and 0.22%, respectively, in the fourth quarters of 2023 and 2022. Nonaccrual loans totaled $1.36 billion at the end of Q4 2023, up from $944 million a year ago, and $1.29 billion at the end of Q3 2023. As a percentage, nonaccrual loans were 0.93% of total loans compared with 0.60% a year earlier. The allowance for credit losses jumped despite lower loans on the books. They totaled $1.59 billion compared with $1.43 billion a year ago. This gives us some pause here.

Return metrics suffer

Over the years, Citizens Financial has been a highly efficient bank. However, with lower revenue, net income, and issues we saw with credit quality, return metrics have suffered. The efficiency ratio was dismal at 81.1%, versus a respectable 64.2% in Q3, and a stellar 56.4% a year ago. Perhaps unsurprisingly, the return on average assets and equity fell big time. The underlying return on average assets was just 0.78% vs. 0.84% in the sequential quarter. The underlying return on average equity fell hard, to 11.8% from 12.5% from Q3, and down heavily from 19.4% a year ago.

Final thoughts

From a pure metrics basis, this was a tough quarter for Citizens Financial Group, Inc. However, management indicated in the release that the balance sheet is strong, and expenses are well-controlled. But net interest income guidance was a decline of 9% for 2024. We expect this to trough this quarter. There is less pressure on funding costs as well, which is positive.

For now, we are neutral on Citizens Financial Group, Inc. stock, but believe it may be setting a precarious tone for other regional reports. That said, we think we are close to a bottom in performance for this particular bank, which may be why shares are up modestly at the time of this writing.

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