2023-11-27 04:22:51 ET
Summary
- Citizens Financial Group's Series D preferred shares are expected to begin floating and offer a dividend yield approaching 9.5%.
- The bank has managed to increase its net interest income, despite higher interest expenses and has stabilized its deposit base.
- Investors should monitor the bank's leverage ratio, loan balance, and uninsured deposits as potential risks.
Citizens Financial Group ( CFG ) is a regional bank that has had its share of volatility related to the financial sector's problems this year. The bank's two preferred share offerings also sold off during the regional banking crisis. One issue, the Series D preferred (CFG.PR.D) has partially recovered this fall as its April 6th call date approaches. It is highly unexpected that the Series D preferred share will be called as the cost to substitute this capital would be higher than the initial 6.35% dividend rate, therefore I believe the shares will begin floating and offering a dividend yield approaching 9.5%.
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Like all banks, Citizens Financial has seen a notable increase in both interest income and interest expenses since the Fed began raising rates last year. Despite the higher interest expenses, Citizens Financial has managed to increase its net interest income (interest income less interest expense) to above pre-pandemic levels, although net interest income has been declining in recent quarters.
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Investors may be concerned about the bank's decreasing interest spread (average asset yield less average cost of borrowed funds), but this measure does not consider the volume of assets, which is greater than the volume of liabilities. To account for that, investors should look at the net interest margin, which remains above pandemic-era levels.
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One concern to monitor is the bank's leverage ratio, which rose notably last year in accordance with its acquisition of Investors Bancorp. Despite the increased leverage, the ratio of 8.85 to 1 is better than the industry average of 9.52 to 1. Additionally, the bank has stabilized its deposit base in back-to-back quarters after a decent amount of withdrawals in the first quarter.
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The bank is decreasing its loan balance at a faster pace than the industry benchmarks. While investors may look at the decrease in loans as problematic, the decrease in lending will help improve the bank's loan to deposit ratio, which is currently near 83%. The loan to deposit ratio is higher than the industry benchmark, but it is in line with regional banks. It will be important to monitor net interest margin in future quarters as the bank has taken on more borrowing through a variety of secured borrowing facilities and this could erode margins with a decreasing loan balance.
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Another risk to consider is uninsured deposits, which greatly contributed to the regional banking crisis this spring. Citizens Financial has over $53 billion in uninsured deposits, which accounts for approximately 30% of the bank's deposit base. Fortunately, the bank has more than $75 billion in liquidity available through several borrowing facilities including the Federal Reserve.
Another risk that this unrelated to the performance of the bank that investors should be aware of is interest rate risk. The implied floating rate of just under 9.5% on the Series D preferred shares assumes that the interest rate regimen will remain the same for 12 months following the April 2024 call date. Should interest rates drop, the dividend payout on these shares will drop accordingly. The lowest interest rate that the preferred share could pay would be 3.9% of par . Fortunately, barring an unforeseen event, the Federal Reserve sees interest rates remaining relatively the same through the end of next year and if rates plummet, it is possible that the bank will call the shares to eliminate future floating interest rate risk.
While Citizens Financial is not immune to failure, I view the probability of such as highly unlikely and the preferred share dividends will not be eliminated unless the life of the bank is immediately threatened. For investors who prefer a debt investment, Citizens Financial has a few high-yield bonds amongst its near-term maturities, including a 9% yielding bond maturing in August of 2025.
Overall, Citizens Financial Group's operations have stabilized following the volatility of the regional banking crisis in March. The bank has been able to maintain deposits and has kept its leverage ratio below that of the industry average. Additionally, net interest margin and net interest income remain above the pandemic levels. While waiting for interest rates to fall, investors can enjoy the elevated dividends offered by this floating rate preferred share.
For further details see:
Citizens Financial Group Preferred D Shares Set To Float At Yields Near 9.5%