Citizens Financial Group, Inc. — Q2 2023 Form 10-Q Summary
Business context and reporting period
Citizens Financial Group, Inc. is a bank holding company headquartered in Providence, Rhode Island, operating through Consumer Banking and Commercial Banking. It provides retail, commercial, capital markets, lending, deposit, wealth management and treasury services through more than 1,100 branches and approximately 3,400 ATMs. The filing covers the quarter and six months ended June 30, 2023. Total assets were $223.1 billion at quarter-end.
Financial performance and key metrics
| Metric | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 |
|---|---|---|---|---|
| Net income | $478 million | $364 million | $989 million | $784 million |
| Net income available to common stockholders | $444 million | $332 million | $932 million | $728 million |
| Diluted EPS | $0.92 | $0.67 | $1.92 | $1.58 |
| Total revenue | $2.094 billion | $1.999 billion | $4.222 billion | $3.644 billion |
| Net interest income | $1.588 billion | $1.505 billion | $3.231 billion | $2.652 billion |
| Noninterest income | $506 million | $494 million | $991 million | $992 million |
| Noninterest expense | $1.306 billion | $1.305 billion | $2.602 billion | $2.411 billion |
| Provision for credit losses | $176 million | $216 million | $344 million | $219 million |
| Net interest margin, FTE | 3.17% | 3.04% | 3.23% | 2.91% |
| Efficiency ratio | 62.3% | 65.3% | 61.6% | 66.2% |
| ROTCE | 12.4% | 9.1% | 13.4% | 10.2% |
Underlying diluted EPS, excluding notable items, was $1.04 in Q2 and $2.14 for the first half, compared with $1.14 and $2.21, respectively, in the comparable 2022 periods. Underlying net income available to common stockholders was $497 million in Q2 and $1.034 billion in the first half.
- Balance sheet: Total assets declined to $223.1 billion from $226.7 billion at December 31, 2022. Loans and leases declined 3% to $151.3 billion, primarily due to commercial loan sales, lower utilization and planned consumer loan runoff.
- Deposits: Deposits declined to $177.7 billion from $180.7 billion. Noninterest-bearing deposits declined to $40.3 billion from $49.3 billion, while term deposits increased to $20.0 billion from $12.0 billion. Estimated insured or secured deposits represented 70% of total deposits.
- Liquidity: Total available liquidity was approximately $78.8 billion, including $50.9 billion of contingent liquidity and $27.9 billion of available Federal Reserve discount-window capacity. The period-end loans-to-deposits ratio, excluding loans held for sale, was 85.2%.
- Debt: Total borrowed funds were $15.2 billion at June 30, 2023, down $691 million from year-end. Long-term borrowed funds were $14.1 billion, including $5.0 billion of FHLB advances and $2.0 billion of secured auto-loan borrowings.
- Capital: CFG reported CET1 capital of $18.4 billion and a CET1 ratio of 10.3%; total capital was $23.7 billion and the total capital ratio was 13.3%. The 2023 stress capital buffer of 4.0% becomes effective October 1, 2023, replacing the current 3.4% buffer.
- Shareholder returns: The company repurchased $656 million of common stock and paid $410 million of common dividends during the first half. The quarterly common dividend was $0.42 per share. The remaining repurchase authorization was approximately $1.344 billion at June 30.
- Cash flow: Cash provided by operating activities was $1.283 billion and cash provided by investing activities was $4.641 billion during the first half. Financing activities used $4.904 billion. Cash and cash equivalents ended at $11.567 billion.
Material changes versus prior comparable periods
- Net income increased 31% in Q2 and 26% for the first half; diluted EPS increased $0.25 and $0.34, respectively.
- Net interest income increased 6% in Q2 and 22% for the first half, reflecting higher asset yields, higher market rates and the effects of the HSBC transaction and Investors acquisition, partly offset by substantially higher deposit and borrowing costs.
- Average interest-bearing liability costs increased 217 basis points in Q2 and 201 basis points in the first half, while average total deposits declined 2% in Q2 but increased 5% for the first half.
- Noninterest income was broadly flat, with higher card fees and securities gains offset by lower mortgage banking, capital markets, foreign exchange and derivative revenue.
- First-half noninterest expense increased 8%, driven by acquisition-related costs, higher software and occupancy expense, advertising, fraud losses and higher FDIC insurance costs. Efficiency initiatives and lower variable compensation partially offset these increases.
- Net charge-offs increased to $152 million in Q2 and $285 million for the first half, compared with $49 million and $108 million, respectively, in 2022. The total net charge-off ratio rose to 0.40% in Q2 and 0.37% for the first half.
- The allowance for credit losses increased $59 million from year-end to $2.299 billion, or 1.52% of loans and leases including unfunded commitments. Nonaccrual loans increased 26% to $1.191 billion, driven primarily by commercial real estate.
Guidance, outlook, risks and unusual items
The filing does not provide a clear numerical earnings or revenue guidance forecast. Management’s allowance estimate incorporates a moderate recession scenario over a two-year forecast period, including peak unemployment of approximately 6% and a peak-to-trough GDP decline of approximately 1%. A more pessimistic modeled scenario would increase the quantitative ACL estimate by approximately $245 million before qualitative adjustments.
- Commercial real estate risk: Criticized commercial balances increased to $8.0 billion, including $4.3 billion of criticized commercial real estate balances. Office exposure is affected by higher interest rates and return-to-office trends. Approximately 99% of commercial real estate loans remained current on payments.
- Funding and interest-rate risk: Continued migration from low-cost deposits to higher-yielding products could pressure funding costs and net interest margin. The company is asset-sensitive, but its gradual +200-basis-point net interest income sensitivity declined to 1.3% from 2.7% at year-end.
- Regulatory capital: The proposed Basel III “Endgame” rules could increase capital requirements, with management identifying AOCI treatment as a significant potential driver. The company’s preliminary assessment is not final.
- FDIC special assessment: Based on the proposed rule in effect at filing, the company expected an approximately $210 million noninterest expense impact upon adoption. The amount remained subject to final rulemaking and revisions.
- Legal and regulatory matters: Citizens is subject to litigation, investigations, subpoenas and regulatory matters, including matters involving fair lending, consumer practices and mortgage-related issues. Management stated that currently established reserves and available information indicate no material adverse effect, although outcomes cannot be predicted with certainty.
- Other unusual items: Q2 2023 notable items totaled $53 million, or $0.12 per diluted common share, net of tax benefit, primarily related to integration, transformation and efficiency initiatives. The comparable Q2 2022 amount was $231 million, including acquisition-related credit provision and other items.
- Accounting changes: Adoption of the proportional amortization method for certain tax-credit investments reduced retained earnings by $26 million on January 1, 2023. The company also completed its LIBOR transition and continues monitoring instruments that reset to alternative rates.
Important facts for investors to verify
- Whether deposit outflows and deposit repricing continue to reduce net interest margin and increase funding costs.
- Trends in commercial real estate office criticized loans, nonaccrual balances, charge-offs and future credit-loss provisions.
- The final FDIC special assessment and its actual effect on noninterest expense.
- The final Basel III Endgame rules, the resulting capital requirements and the impact of including AOCI in regulatory capital.
- Whether the company can sustain its common dividend and planned share repurchases while maintaining capital buffers above regulatory requirements.
- The effect of lower mortgage production, capital markets activity and foreign exchange and derivative volumes on noninterest revenue.
- Reconciliations between GAAP and “Underlying” results, which are non-GAAP measures and may not be comparable with similarly named measures used by other banks.