CITIZENS FINANCIAL GROUP INC quarterly report, Q1 FY2023

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Citizens Financial Group, Inc. — 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. The filing covers the quarter ended March 31, 2023. The company reported approximately $222.3 billion of assets at quarter-end and operates more than 1,100 branches and approximately 3,400 ATMs across 14 states and the District of Columbia.

Financial performance and condition

  • Revenue: Total revenue was $2.128 billion, up $483 million, or 29%, from $1.645 billion in the prior-year quarter. Net interest income increased 43% to $1.643 billion, while noninterest income declined 3% to $485 million.
  • Profitability: Net income was $511 million, compared with $420 million. Net income available to common stockholders was $488 million, or $1.00 diluted EPS, versus $396 million, or $0.93 diluted EPS. Underlying net income available to common stockholders was $537 million, or $1.10 diluted EPS.
  • Margins and efficiency: Fully taxable equivalent net interest margin increased 55 basis points to 3.30%. The GAAP efficiency ratio improved to 60.9% from 67.2%; the underlying ratio improved to 57.8% from 64.3%. ROTCE was 14.4%, compared with 11.4%.
  • Expenses: Noninterest expense increased 17% to $1.296 billion, primarily due to acquisition and integration costs, higher FDIC insurance expense and fraud losses. Underlying noninterest expense was $1.230 billion.
  • Credit costs: Provision for credit losses increased to $168 million from $3 million. Net charge-offs rose to $133 million from $59 million, and the net charge-off ratio increased to 0.34% from 0.19%.
  • Loans and credit quality: Loans and leases declined 1% from December 31, 2022 to $154.688 billion. The allowance for credit losses increased to $2.275 billion, or 1.47% of loans and leases including unfunded commitments. Nonaccrual loans increased 6% to $996 million, or 0.64% of loans and leases.
  • Assets and securities: Total assets were $222.256 billion, down from $226.733 billion at year-end. Debt securities had $32.909 billion of fair value, including $23.845 billion of available-for-sale securities and $9.064 billion of held-to-maturity securities.
  • Deposits and liquidity: Deposits declined to $172.194 billion from $180.724 billion, driven by seasonal and rate-related outflows. Estimated insured or secured deposits represented 68% of total deposits. Total available liquidity was approximately $66.0 billion, including $40.7 billion of contingent liquidity and $25.3 billion of available Federal Reserve discount-window capacity.
  • Debt: Total borrowed funds were approximately $19.9 billion at March 31, 2023, including $18.855 billion of long-term borrowed funds. Long-term borrowed funds increased primarily due to higher Federal Home Loan Bank advances.
  • Capital: CFG's CET1, tier 1, total capital and tier 1 leverage ratios were 10.0%, 11.1%, 12.9% and 9.4%, respectively. The company repurchased $400 million of common stock and paid $205 million of common dividends during the quarter.
  • Cash flow: Operating activities generated $1.158 billion and investing activities generated $1.492 billion, while financing activities used $5.223 billion. Cash and cash equivalents declined to $7.974 billion from $10.547 billion at the beginning of the year.

Material changes versus the prior comparable period

  • Net interest income benefited from higher market rates, a 20% increase in average interest-earning assets and the effects of the HSBC transaction and Investors acquisition. Average deposits increased 12% year over year, while average borrowed funds increased by $12.2 billion.
  • Noninterest income decreased because of lower mortgage production and capital-markets activity, partly offset by higher card fees.
  • Credit costs increased materially as charge-offs normalized from pandemic-era lows and management increased reserves, particularly for commercial real estate office exposure and other consumer portfolios.
  • Commercial criticized balances increased to $7.4 billion from $5.5 billion at year-end, including $3.7 billion of criticized commercial real estate balances. Approximately 24% of the company’s $4.1 billion general office portfolio was criticized at March 31, 2023.
  • Deposits declined $8.5 billion during the quarter, while long-term borrowed funds increased $3.0 billion. The company issued $450 million of senior notes and redeemed $750 million of senior notes due in March 2023.
  • Accumulated other comprehensive loss improved by $617 million during the quarter, primarily because of lower interest rates and reclassification of hedge and securities losses into earnings.

Guidance, outlook, commentary, risks and unusual items

  • The company did not provide a specific quantitative earnings or revenue outlook in the filing. Its allowance for credit losses incorporates a moderate recession forecast, including peak unemployment of approximately 6% and a peak-to-trough GDP decline of approximately 1% over the two-year reasonable-and-supportable forecast period.
  • A hypothetical more adverse economic scenario would increase the modeled period-end ACL by approximately $275 million, excluding qualitative adjustments. This is a sensitivity analysis, not management guidance.
  • Management highlighted risks from higher interest rates, deposit pricing and outflows, funding costs, economic deterioration, commercial real estate office and multifamily exposure, consumer credit normalization, inflation, geopolitical instability, cybersecurity, regulatory changes and litigation.
  • The Federal Reserve required CFG to participate in the 2023 CCAR stress test because of the Investors acquisition. The company expected its preliminary stress capital buffer in June and final buffer by August 31, 2023; the new buffer was expected to become effective October 1, 2023.
  • The FDIC was considering a special assessment related to recent bank failures. The filing states that the timing, amount and allocation were uncertain and could materially affect noninterest expense and results of operations.
  • Reported results included $49 million, or $0.10 per diluted share, of notable items net of tax benefit, primarily acquisition integration costs and transformation-related expenses. The company presents underlying results as non-GAAP measures.
  • Effective January 1, 2023, the company adopted accounting guidance for troubled-debt restructurings and vintage disclosures without a material financial-statement impact. It also adopted proportional amortization accounting for certain tax-credit investments, reducing retained earnings by $26 million.
  • Management stated that existing litigation and regulatory matters were not expected to have a material adverse effect based on currently available information, but acknowledged that outcomes, timing and potential losses may be uncertain.

Important facts for investors to verify

  • Whether deposit outflows stabilize and how deposit beta and funding costs affect future net interest margin.
  • Trends in criticized and nonaccrual commercial real estate loans, particularly office and multifamily exposure.
  • Whether net charge-offs and provision expense continue rising as consumer credit normalizes.
  • The final 2023 stress capital buffer and any resulting effects on dividends, share repurchases and capital ratios.
  • The amount and timing of any FDIC special assessment.
  • Progress in realizing acquisition-related and efficiency benefits, including the HSBC and Investors transactions.
  • The sensitivity of the allowance for credit losses to unemployment, GDP, interest rates and other macroeconomic assumptions.
  • The sustainability of reported earnings after excluding notable items and considering expected hedge-related reclassifications of approximately $514 million of pretax losses from AOCI to net interest income over the following 12 months.