2023-04-21 03:01:15 ET
Summary
- Regional banks have shown little signs of life over the last few weeks as earnings season progresses.
- I see intrinsic value in CFG, but high earnings uncertainly lies ahead.
- With a weak chart and shares about 20% underpriced, I reiterate my buy rating.
Regional banks just cannot find their footing. The group has not bounced much at all following the domestic regional banking turmoil from early to mid-March. While other niches of the broad market have recovered much of their late-Q1 declines, the [[KRE]] ETF suggests investors take caution with their bullish banking bets.
While I continue to see Citizens Financial Group (CFG) as a buy, the technicals are weak while its intrinsic value is likely re-rated much lower from earlier this year.
Regional Banks ETF: No Bounce Seen, Bears In Control For Now
According to Bank of America Global Research, Citizens Financial operates 1,200 branches primarily throughout 11 states across the New England, Mid-Atlantic, and Midwest regions. It has consolidated total assets of $227 billion. CFG offers a broad range of retail and commercial banking products and services to more than five million individuals, institutions, and companies.
The Providence-based $14.8 billion market cap Banks industry company within the Financials sector trades at a low 7.0 trailing 12-month GAAP price-to-earnings ratio and pays a high 5.5% dividend yield, according to The Wall Street Journal. Higher funding costs and a deterioration of the credit markets pose problems for the banking industry writ large.
On Thursday, April 20, BofA updated its stance on CFG stock to a cautious one. The change was due to CFG’s EPS miss and, more importantly, its cut to full-year earnings expectations. The management team reduced its net interest income forecast by about 5%, with a sequential drop in NII in Q2 foreseen. Deposits also fell in the previous quarter from $180.7 billion to $172.2 billion – another negative sign. On the plus side, Citizens maintained a strong 10.0% CET1 ratio.
On valuation , analysts at BofA see earnings dropping big this year to the tune of 15% versus 2022’s per-share profit total which was already a drop from 2021’s peak. EPS is then expected to trough next year before rebounding to $4.50 by 2025. These refreshed figures come after the regional bank missed its Q1 earnings forecast, so I am inclined to go with what BofA projects versus the more sanguine Bloomberg consensus estimate, which is likely stale.
Dividends, meanwhile, should continue to grow. Even with the slashed profitability outlook, shares still trade with single-digit P/E ratios. With lower net interest income in the quarters ahead, the firm was still net repurchaser of its shares – that should provide some cushion to further downside. Still, if we assign an industry-average 8.9 earnings multiple, then CFG should be near $35. Pricing the stock at 1x tangible book also yields a similar price target. Thus, I reiterate my buy rating but recognize a lower intrinsic value today versus back in January .
Citizens Financial: Earnings, Valuation, Dividend Forecasts
CFG: Valuation Remains Decent, But Earnings Uncertainty Ahead
Looking ahead, corporate event data provided by Wall Street Horizon show a confirmed Q2 2023 earnings date of Wednesday, July 19 BMO with a conference call later that morning. Before that, the bank holds its annual shareholder meeting on April 27 and has a dividend ex-date of Tuesday, May 2.
Corporate Event Risk Calendar
The Technical Take
With a fundamental valuation that suggests about 20% of upside, the technical situation is more precarious. Notice in the chart below that CFG has dropped to an area of potential support from the late 2018 bear market low which has confluence with an old gap from late 2020 when the value trade began to take off.
But with the stock barely off its March lows and with resistance just under $33 with another layer of support topping out at $45, the onus is on the bulls to reverse the downtrend. So, the chart is neutral at best. Long here with a stop under $27 could work, but I would like to see a basing pattern unfold with the long-term moving average halting its decline before getting long technically.
CFG: Bearish Downtrend In Place, $27-$28 Potential Support
The Bottom Line
I reiterate my buy rating on CFG based on the valuation but concede that there are bearish near-term technical risks.
For further details see:
Citizens Financial: Beaten Down, Undervalued, But Lower Profits Ahead