Citizens Financial Group, Inc. — 2023 Q3 Form 10-Q Summary
Business context and reporting period
Citizens Financial Group, Inc. is a bank holding company headquartered in Providence, Rhode Island, with Consumer Banking, Commercial Banking, and Non-Core segments. It reported unaudited results for the three and nine months ended September 30, 2023. Assets were $225.3 billion at quarter-end, with approximately 1,100 branches, 3,300 ATMs, and operations across 14 states and the District of Columbia.
Financial performance and condition
| Metric | Q3 2023 | YTD 2023 | Comparable change |
|---|---|---|---|
| Net income | $430 million | $1.419 billion | Q3 down $206 million; YTD down $1 million |
| Net income available to common stockholders | $400 million | $1.332 billion | Q3 down $211 million; YTD down $7 million |
| Diluted EPS | $0.85 | $2.78 | Q3 down $0.38; YTD down $0.06 |
| Total revenue | $2.014 billion | $6.236 billion | Q3 down 7%; YTD up 7% |
| Net interest income | $1.522 billion | $4.753 billion | Q3 down 9%; YTD up 10% |
| Noninterest income | $492 million | $1.483 billion | Q3 down 4%; YTD down 1% |
| Noninterest expense | $1.293 billion | $3.895 billion | Q3 up 4%; YTD up 7% |
| Provision for credit losses | $172 million | $516 million | Q3 up $49 million; YTD up $174 million |
| Net interest margin | 3.03% | 3.16% | Q3 down 21 bps; YTD up 13 bps |
| Efficiency ratio | 64.2% | 62.5% | Q3 versus 57.0%; YTD versus 62.7% |
| ROTCE | 12.0% | 12.9% | Q3 versus 17.0%; YTD versus 12.5% |
Underlying net income available to common stockholders, excluding notable items, was $418 million for Q3 and $1.452 billion for the first nine months, versus $644 million and $1.659 billion, respectively, in the prior-year periods. Underlying diluted EPS was $0.89 for Q3 and $3.03 year to date.
- Loans and leases were $149.7 billion, down 4% from December 31, 2022. Commercial loans declined 6%, primarily from loan sales, lower utilization, and balance-sheet optimization. Retail loans declined 3%, reflecting planned Non-Core runoff.
- Deposits were $178.2 billion, down $2.5 billion from year-end. Noninterest-bearing deposits represented approximately 22% of total deposits, reflecting migration toward higher-yielding products.
- Total borrowed funds were $17.6 billion, up $1.7 billion from year-end, mainly due to secured borrowings collateralized by auto loans.
- Cash and cash equivalents were $15.4 billion at September 30, 2023, compared with $8.2 billion at September 30, 2022. Operating activities generated $2.3 billion and investing activities generated $5.0 billion during the first nine months; financing activities used $2.5 billion.
- Estimated available liquidity was approximately $75.2 billion, including $53.3 billion of contingent liquidity and $21.9 billion of available Federal Reserve discount-window capacity. The period-end loans-to-deposits ratio, excluding loans held for sale, was 84.0%.
- CFG’s regulatory CET1, tier 1, total capital, and tier 1 leverage ratios were 10.4%, 11.5%, 13.4%, and 9.4%, respectively. Including the reported securities and pension AOCI impact, the ratios were 8.3%, 9.4%, 11.3%, and not separately provided for leverage.
- The allowance for credit losses was $2.318 billion, or 1.55% of loans and leases plus unfunded commitments, versus $2.240 billion and 1.43% at year-end.
Material changes versus prior comparable periods
- Q3 profitability weakened as deposit funding costs rose faster than asset yields. Average interest-bearing deposit costs increased to 2.60% from 0.56%, while the net interest margin declined to 3.03% from 3.24%.
- Credit costs increased materially. Q3 net charge-offs were $153 million, or 0.40% of average loans, versus $74 million and 0.19% in the prior-year quarter. Nine-month net charge-offs were $438 million versus $182 million.
- Commercial real estate office exposure drove higher criticized balances, nonaccrual loans, charge-offs, and reserves. Commercial real estate criticized balances increased to $5.1 billion from $2.4 billion at December 31, 2022.
- Total nonaccrual loans and leases rose to $1.296 billion from $944 million at year-end, primarily due to commercial real estate.
- Capital markets fees declined, particularly from lower loan syndication and underwriting activity. Card fees increased with transaction volumes, while mortgage banking fees were broadly stable in Q3 but lower year to date.
- Noninterest expense increased due to salaries and benefits, Private Bank start-up investment, software and maintenance costs, higher FDIC insurance expense, fraud losses, occupancy, advertising, and acquisition-related costs.
- During Q3, indirect auto and certain purchased consumer loans were transferred from Consumer Banking to a new Non-Core segment. Prior periods were revised to conform to the new presentation.
- The company repurchased $906 million of common stock and declared $609 million of common dividends during the first nine months. The quarterly common dividend was $0.42 per share.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide a clear formal earnings or revenue outlook. Management’s base-case interest-rate path assumes the Fed Funds rate at 5.50% at year-end 2023 and 4.75% at year-end 2024, including three 25-basis-point reductions beginning in mid-2024.
- Management is pursuing balance-sheet optimization, including runoff or discontinuation of certain non-strategic lending portfolios and related funding actions.
- The allowance forecast assumes a mild recession, with implied peak unemployment of approximately 6% and a peak-to-trough GDP decline of approximately 1.0%. A more adverse modeled scenario would increase the modeled period-end ACL by approximately $224 million, excluding qualitative adjustments.
- Management identified return-to-office conditions, elevated interest rates, commercial real estate office exposure, deposit pricing, and economic normalization of consumer losses as key credit considerations.
- Proposed Basel III Endgame rules could affect capital requirements and remove the company’s AOCI opt-out. The company estimated a pro forma CET1 ratio of 8.3% as of September 30, 2023 after adjusting for AOCI opt-out removal.
- A proposed FDIC special assessment was estimated to affect noninterest expense by approximately $210 million upon adoption; the final amount remains subject to rulemaking and revisions.
- Proposed long-term debt requirements could require approximately $4 billion of incremental eligible long-term debt if adopted as proposed.
- Q3 notable items totaled $18 million, or $0.04 per diluted common share, net of tax benefit. Nine-month notable items totaled $120 million, or $0.25 per diluted common share, primarily related to integration and transformation initiatives.
- Goodwill totaled $8.2 billion. A quantitative impairment assessment found no impairment, but continued banking-sector stress, financial-market deterioration, or a lower common stock price could result in future impairment.
- Key risks include interest-rate changes, deposit outflows and funding costs, credit deterioration, commercial real estate stress, regulatory capital and liquidity requirements, litigation and regulatory investigations, cybersecurity and operational failures, geopolitical instability, and changing economic conditions.
- The company stated that its disclosure controls and procedures were effective as of September 30, 2023, with no material changes in internal control over financial reporting.
Important facts for investors to verify
- Verify the pace of deposit migration, deposit pricing, uninsured deposit levels, and the resulting effect on net interest margin.
- Monitor commercial real estate office criticized balances, nonaccrual loans, charge-offs, collateral values, and reserve coverage.
- Assess whether consumer credit losses continue normalizing above pandemic-era lows, particularly in other retail, education, and auto portfolios.
- Review the effect of balance-sheet optimization and Non-Core runoff on revenue, funding costs, capital, and future loan growth.
- Track implementation and final impacts of the proposed FDIC assessment, Basel III Endgame rules, long-term debt requirements, and resolution-plan requirements.
- Reconcile GAAP results with the company’s Underlying non-GAAP measures and confirm the nature and recurrence of notable items.
- Evaluate liquidity using the composition of the $75.2 billion available liquidity figure, collateral availability, wholesale funding maturities, and credit-rating outlooks.
- Review contingent liabilities, commitments to extend credit of $94.4 billion, letters of credit of $2.0 billion, and the status of legal and regulatory proceedings.