Company Overview and History
Citizens Financial Group, Inc. (CFG) is one of the nation's oldest and largest financial institutions, with a rich history dating back to 1828. Headquartered in Providence, Rhode Island, the company offers a wide range of retail and commercial banking products and services to individuals, small businesses, middle-market companies, large corporations, and institutions across 14 states and the District of Columbia.
Founded in 1828 as the High Street Bank in Providence, Citizens Financial Group has evolved over the decades to become a diversified banking powerhouse. In the late 19th century, the bank expanded its presence throughout Rhode Island and eventually into neighboring states. During the late 1980s, the company faced challenges as it navigated the savings and loan crisis, which led to the failure of many banks across the country. However, Citizens Financial weathered the storm and emerged stronger, continuing to expand its footprint through acquisitions such as the purchase of UST Corp in 1988 and the merger with the National Bank of Rhode Island in 1995. In 2004, the company was acquired by the Royal Bank of Scotland, which helped propel its expansion into new markets. During this period, Citizens Financial also invested heavily in technology and digital banking capabilities to better serve its customers. The company's geographic reach grew to include 12 states across the Northeast and Midwest by 2010. In 2014, Citizens Financial underwent another major transition when it was spun off from the Royal Bank of Scotland and became an independent, publicly traded company once again. This move allowed the company to focus on its core business and strategic priorities. In 2015, Citizens Financial was listed on the New York Stock Exchange.
Business Segments
Citizens Financial Group operates through three main business segments: Consumer Banking, Commercial Banking, and Non-Core.
The Consumer Banking segment provides a broad range of retail and commercial banking products and services to individuals, small businesses, middle-market companies, large corporations, and institutions. Key offerings include a full range of banking, lending, savings, wealth management, and small business products. For the three months ended September 30, 2024, this segment reported net interest income of $1.16 billion, up 8.4% year-over-year, driven by higher net interest margin and growth in average interest-earning assets. Noninterest income for the segment was $285 million, up 2.5% compared to the prior year period, due to increases in wealth fees, credit card fees, and service charges and fees. The segment's noninterest expense was $916 million, relatively flat year-over-year.
The Commercial Banking segment offers a complementary set of financial products and solutions, including lending and leasing, deposit and treasury management services, foreign exchange, interest rate and commodity risk management, loan syndication, corporate finance, merger and acquisition support, and debt and equity capital markets capabilities. For the three months ended September 30, 2024, this segment reported a 14.6% decrease in net interest income to $478 million, reflecting lower net interest margin and a decline in average interest-earning assets. Noninterest income increased 15.0% to $207 million, driven by higher capital markets fees, partially offset by lower foreign exchange and derivative products revenue. Noninterest expense decreased 7.7% to $300 million, mainly due to lower salaries and employee benefits.
The Non-Core segment consists of the Company's run-off consumer business, including auto, education, and other retail loans. For the three months ended September 30, 2024, this segment reported a $12 million, or 29.3%, decrease in net interest income to $28 million, primarily due to the decline in average interest-earning assets from planned portfolio runoff. Noninterest income increased $6 million to $40 million.
Recent Performance
Despite the challenges posed by the COVID-19 pandemic and the broader macroeconomic uncertainty, Citizens Financial Group has demonstrated its resilience and adaptability. The company's financial performance has remained solid, with the latest quarterly results showcasing its ability to navigate the ever-changing landscape.
Financials
For the third quarter of 2024, Citizens Financial Group reported net income of $382 million, down from $430 million in the same period of 2023. Earnings per diluted share came in at $0.77, compared to $0.85 a year earlier. The decline in net income and earnings per share was primarily due to a $153 million, or 10%, decrease in net interest income, reflecting lower net interest margin and a slight decline in average interest-earning assets.
Despite the headwinds, the company's underlying performance remained strong. On an adjusted, or "underlying," basis, net income was $392 million, or $0.79 per diluted share, for the third quarter of 2024. The company's efficiency ratio, a measure of operating efficiency, improved to 66.2% on a GAAP basis and 65.6% on an underlying basis, compared to 64.2% and 63.1%, respectively, in the same period of the prior year.
Total revenue for the third quarter of 2024 was $1.90 billion, down 5.5% year-over-year, while noninterest expense decreased 2.6% to $1.26 billion. The company experienced year-over-year growth in the most recent quarter, driven by higher capital markets fees, card fees, and wealth fees. This was partially offset by declines in mortgage banking fees and foreign exchange and derivative products revenue. The company noted that some capital markets deals were pushed out to the fourth quarter, contributing to the quarterly decline in capital markets fees.
In terms of cash flow, Citizens Financial Group reported operating cash flow (OCF) of $130 million and free cash flow (FCF) of $96 million for the most recent quarter.
Liquidity and Capital Position
Citizens Financial Group's balance sheet and capital position remain robust. As of September 30, 2024, the company's Common Equity Tier 1 (CET1) ratio, a key measure of capital adequacy, stood at 10.6%, well above the regulatory minimum. Notably, when adjusted for the impact of accumulated other comprehensive income (AOCI), the CET1 ratio increased to 9.2%.
The company's deposit franchise also remains strong and well-diversified. As of September 30, 2024, total deposits were $175.2 billion, with 68% of the deposit base being insured or secured. The company's loan-to-deposit ratio stood at 80.8%, reflecting its disciplined approach to balance sheet management.
Strategic Initiatives and Future Outlook
Looking ahead, Citizens Financial Group remains cautiously optimistic about its prospects. The company has continued to execute on its strategic initiatives, including the ongoing transformation of its consumer banking business, the expansion of its commercial banking capabilities, and the build-out of its private banking and wealth management offerings.
In the third quarter, the company's private banking segment reached $5.6 billion in deposits, up from $4 billion in the prior quarter, and $2 billion in loans. The private banking business is on track to be profitable in the fourth quarter of 2024 and contribute meaningfully to earnings in 2025.
Additionally, the company's commercial banking team maintained its leading position in the middle-market sponsor finance space, ranking as the top middle-market lead arranger on a trailing 12-month basis. This underscores the strength of Citizens Financial Group's relationships with private equity firms and its ability to capitalize on market opportunities.
Challenges and Risk Management
Nonetheless, the company is not immune to the broader economic uncertainties. The ongoing challenges in the commercial real estate sector, particularly in the office segment, have weighed on the company's performance. Citizens Financial Group has proactively increased its reserves for the general office portfolio, which stood at $382 million, or 12.1% of the $3.2 billion portfolio, as of September 30, 2024.
The company has also faced headwinds from the impact of forward-starting swaps, which resulted in a $153 million, or 10%, decline in net interest income in the third quarter. However, Citizens Financial Group has taken steps to manage these pressures, including the opportunistic termination of $4 billion in short-dated swaps during the quarter.
Future Expectations
Looking ahead, the company expects to see a rebound in its financial performance in the fourth quarter of 2024, driven by a 5 basis point improvement in net interest margin, modest loan growth, and stronger fee income, particularly in its capital markets and wealth management businesses. The company also anticipates continued progress in its strategic initiatives, including the continued expansion of its private banking franchise.
For the fourth quarter of 2024, Citizens Financial Group provided detailed guidance. Net interest income is expected to increase by about 1.5% to 2.5%, primarily due to the anticipated 5 basis point improvement in net interest margin. Non-interest income is projected to grow by mid- to high-single-digits, reflecting expected seasonal strength in capital markets. Non-interest expense is forecasted to rise by about 2%, with the company expecting to achieve positive operating leverage. Net charge-offs are anticipated to remain broadly stable, while the Allowance for Credit Losses (ACL) should continue to benefit from non-core runoff and improving loan mix. The CET1 ratio is expected to be broadly stable, with about $200 million to $250 million of share repurchases planned.
In terms of full-year performance, Citizens Financial Group expects to meet most of its beginning-of-year guidance, with the exception of balance sheet volume impacting net interest income and a modestly higher ACL build.
Looking further ahead, the company remains confident in its ability to achieve its medium-term 16% to 18% return target. Citizens Financial Group has also provided an updated projection for its net interest margin, which is expected to be in the 3.25% to 3.40% range by 2027.
Conclusion
Despite the near-term challenges, Citizens Financial Group remains well-positioned to navigate the uncertain environment. The company's diversified business model, strong balance sheet, and disciplined approach to risk management provide a solid foundation for long-term growth and value creation. As the company continues to execute on its strategic priorities, investors can expect to see Citizens Financial Group remain a consistent performer in the regional banking landscape.