Executive Summary / Key Takeaways

• Citizens Financial Group is executing a multi-year strategic transformation focused on building a premier Private Bank, optimizing its balance sheet through Non-Core asset runoff, and driving efficiency via its TOP programs, positioning the company for enhanced profitability.
• The company delivered solid Q1 2025 results, characterized by sequential Net Interest Margin expansion, disciplined expense management, and favorable credit trends, signaling a positive trajectory after navigating a challenging rate environment.
• Significant progress in the Private Bank initiative, including rapid deposit and AUM growth and achieving profitability, is a key driver of future performance and enhances the company's competitive standing in serving high-net-worth clients.
• Management provides a positive outlook for Q2 and Full Year 2025, projecting continued Net Interest Income growth, strong fee income performance, positive operating leverage, and improving credit quality, underpinned by structural balance sheet tailwinds.
• Citizens maintains a robust balance sheet with strong capital, liquidity, and reserve levels, providing flexibility for strategic investments, supporting clients, and executing opportunistic share repurchases, reinforcing confidence in achieving its medium-term 16-18% Return on Average Tangible Common Equity target.

Strategic Transformation and Competitive Positioning

Citizens Financial Group, Inc., one of the nation's oldest and largest financial institutions with $220.1 billion in assets as of March 31, 2025, operates across a broad spectrum of retail and commercial banking. Headquartered in Providence, Rhode Island, the company serves individuals, small businesses, middle-market companies, large corporations, and institutions across 14 states and the District of Columbia. Citizens' strategic narrative is centered on a multi-year transformation aimed at enhancing profitability and competitive positioning. This strategy rests on three pillars: cultivating a transformed consumer bank, establishing the best-positioned super regional commercial bank, and building a premier bank-owned private bank and wealth franchise.

The banking landscape is intensely competitive, populated by national giants like JPMorgan Chase (JPM), Bank of America (BAC), and Wells Fargo (WFC), as well as regional peers such as PNC Financial Services (PNC), and increasingly, agile fintech firms. Compared to national competitors, Citizens operates with a more focused regional footprint, particularly emphasizing the Northeast and expanding into key growth markets like Florida and California. While lacking the global scale and extensive technological R&D budgets of the largest players, Citizens differentiates itself through a strong focus on middle-market commercial banking and a growing presence in the private capital ecosystem, areas where it has demonstrated competitive strength, often ranking high in league tables for sponsor-leveraged loan arrangements.

Citizens has also strategically invested in its deposit franchise, transforming it since its IPO to improve performance in competitive rate environments. This has resulted in deposit cost performance that management believes is better than the peer average, with a strong base of granular, stable consumer deposits. The company's differentiated lending platform prioritizes building durable relationships, particularly in secured retail segments and investment-grade equivalent commercial lending.

A critical component of Citizens' strategy and competitive edge lies in its investment in technology and operational efficiency. The company is leveraging advancements in areas like data analytics, digital platforms, and artificial intelligence (AI). While specific quantifiable benefits of all technological investments are not detailed, the company's TOP programs, which incorporate new areas like AI, target significant efficiency benefits, with TOP 9 delivering $150 million in annualized run rate benefits by the end of 2024 and TOP 10 targeting over $100 million by the end of 2025. These initiatives aim to streamline operations, enhance customer experience, and reduce costs, such as improving fraud detection. This focus on efficiency through technology is crucial for Citizens to narrow the profitability gap with larger, more technologically advanced competitors and counter the cost advantages of digital-first indirect competitors like online banks and fintechs.

The launch and rapid scaling of the Private Bank initiative, commencing in mid-2023, represents a direct strategic response to capitalize on market opportunities, particularly the disruption in the high-net-worth segment. By adding private banking teams and opening offices in key wealth centers, Citizens is building a new growth engine that is already contributing meaningfully to deposits, assets under management, and profitability. This initiative, coupled with the expansion of its wealth management capabilities, positions Citizens to capture a greater share of the lucrative wealth transfer trend.

Concurrent with growth initiatives, Citizens is actively optimizing its balance sheet through its Balance Sheet Optimization (BSO) program. This includes the planned runoff of a non-core loan portfolio, which saw a significant reduction in 2024 and an accelerated sale of $1.9 billion in Non-Core education loans in Q1 2025. This runoff frees up capital and liquidity, which can be redeployed into higher-returning assets or used for share repurchases, contributing to Net Interest Margin expansion and overall profitability. BSO also involves exiting lower-returning commercial relationships and a medium-term plan to reduce exposure in certain Commercial Real Estate (CRE) segments, particularly General Office, to improve the overall loan portfolio mix and risk profile.

Recent Performance and Financial Health

Citizens' financial performance in the first quarter of 2025 demonstrated resilience and a positive inflection point in key areas. Net income increased to $373 million, up $39 million from Q1 2024, with earnings per diluted common share rising to $0.77. Net income available to common stockholders also saw a notable increase. While total revenue decreased slightly by 4% year-over-year to $1.9 billion, primarily driven by a decrease in net interest income, the sequential trends and underlying drivers point to improving dynamics.

Net Interest Income (NII) for Q1 2025 was $1.39 billion, a 4% decrease compared to Q1 2024. This was influenced by a decrease in average interest-earning assets. However, the Net Interest Margin (NIM) on an FTE basis saw only a marginal decrease of 1 basis point year-over-year to 2.90%. Importantly, sequential trends in NIM were positive, with a 3 basis point expansion from Q4 2024 to 2.90% in Q1 2025. This expansion was driven by the anticipated benefits of Non-Core portfolio runoff, reduced drag from terminated swaps, and improved deposit costs, largely offsetting the impact of variable-rate asset repricing. Average interest-bearing deposit costs decreased by 18 basis points linked-quarter in Q1 2025, translating to a cumulative down-beta of 53%.

Noninterest income increased by 5% year-over-year to $544 million in Q1 2025. This growth was fueled by strong performance in service charges and fees (driven by cash management and overdraft fees), wealth fees (reflecting growth in Private Bank assets under management), and mortgage banking fees (due to higher MSR valuation, net of hedging). This was partially offset by a decrease in capital markets fees, primarily due to lower M&A activity influenced by market uncertainty, although loan syndication and bond underwriting fees saw an increase.

Expense management remained disciplined. Total noninterest expense decreased by 3% year-over-year to $1.31 billion in Q1 2025, primarily benefiting from lower other operating expenses related to the absence of the FDIC special assessment recognized in Q1 2024 and lower fraud losses. Despite ongoing investments in strategic initiatives like the Private Bank build-out, the company achieved an improved efficiency ratio of 67.91% in Q1 2025, down from 69.33% in Q1 2024.

Credit quality metrics in Q1 2025 reflected a stable-to-improving trend, aligning with management's expectations. The provision for credit losses decreased to $153 million from $171 million in Q1 2024, reflecting the benefit of Non-Core portfolio runoff and an improving loan mix. Net charge-offs increased year-over-year to 0.58%, but this included a 7 basis point impact from the accelerated sale of Non-Core education loans. Excluding this transaction, net charge-offs were 0.51%, a modest decrease from 0.53% in Q1 2024, indicating broadly stable retail and modestly lower commercial charge-offs. Nonaccrual loans decreased by 5% linked-quarter to $1.58 billion, driven by resolutions in commercial (particularly General Office CRE) and runoff in retail (Non-Core sale, auto). The Allowance for Credit Losses (ACL) stood at 1.61% of loans, stable with Q4 2024, reflecting portfolio mix improvements offset by a slightly more conservative macroeconomic forecast embedded in the reserve methodology. The reserve for the General Office CRE portfolio remained robust at 12.3% coverage.

The balance sheet remains strong, with a CET1 ratio of 10.60% at March 31, 2025 (9.10% adjusted for AOCI opt-out removal), comfortably above regulatory requirements and competitive within its peer group. Tangible book value per common share increased by 5% from year-end 2024 to $33.97. Total deposits grew to $177.6 billion, with estimated insured/secured deposits comprising 67%. Total borrowed funds decreased slightly, reflecting a decline in secured borrowings offset by senior debt issuance. The company maintains ample liquidity, with a pro forma Category I LCR of 122% and significant unused secured borrowing capacity. Citizens actively manages its capital position, repurchasing $200 million of common stock in Q1 2025 and returning capital through dividends.

Outlook and Future Trajectory

Citizens' management expresses confidence in the company's trajectory, projecting continued improvement in financial performance driven by the execution of its strategic initiatives and favorable balance sheet dynamics.

For the second quarter of 2025, management guides for Net Interest Income to be up approximately 3% linked-quarter, primarily driven by a projected 5 basis point improvement in Net Interest Margin and the benefit of day count. Noninterest income is expected to increase by mid- to high-single-digits, led by a rebound in capital markets activity (though acknowledging potential risk from persistent market uncertainty), as well as contributions from FX/derivatives and wealth management. Expenses are projected to remain broadly stable, contributing to positive operating leverage. Credit trends are anticipated to improve slightly from the Q1 charge-off level (excluding the Non-Core sale impact). The CET1 ratio is expected to remain strong, in the range of 10.5% to 10.75%, with planned share repurchases of approximately $200 million, which could increase depending on loan growth.

Looking at the full year 2025, Citizens reaffirms its EPS estimate and outlook, which anticipates a pickup in business activity, loan demand, and deal flow in the second half of the year. The company projects Net Interest Income to be up 3% to 5%, driven primarily by an increase in Net Interest Margin to about 3% for the year. Spot loan growth is expected in the low-single-digits overall, or mid-single-digits excluding the Non-Core portfolio runoff. Average loans are projected to be down roughly 2% to 3%, with overall earning assets down about 1%, reflecting the impact of prior period declines and ongoing Non-Core runoff. Non-interest income is expected to grow by 8% to 10%, led by strong performance in capital markets and wealth. Expenses are projected to be up about 4% (approximately 2.6% excluding investments in the Private Bank and Private Wealth build-out), reflecting continued investment in growth initiatives. This revenue and expense outlook is expected to deliver positive operating leverage of roughly 150 basis points for the full year. Credit quality is anticipated to improve, with net charge-offs trending down to approximately $650 million to $700 million (high-40s basis points), and ACL releases are considered likely over the course of the year, supported by portfolio mix improvements and the embedded macroeconomic forecast. The CET1 ratio is expected to end the year in the 10.5% to 10.75% range, providing flexibility for opportunistic share repurchases.

Over the medium term, Citizens maintains a clear path to achieving its 16% to 18% Return on Average Tangible Common Equity (ROTCE) target. A significant driver of this is the projected Net Interest Margin expansion, with targets of 3.05% to 3.10% in 4Q 2025, 3.15% to 3.30% in 4Q 2026, and 3.25% to 3.50% in 2027. This NIM progression is primarily driven by non-rate dependent tailwinds, including the amortization of terminated swaps and Non-Core runoff, which are expected to contribute significantly to ROTCE. Additional contributions are anticipated from the net impact of fixed asset repricing and the runoff of legacy active swaps. The successful execution of strategic initiatives, particularly the scaling of the Private Bank, is expected to drive meaningful revenue growth, generate positive annual operating leverage, and improve the efficiency ratio, further boosting ROTCE. Credit improvement, with charge-offs normalizing to the low to mid-30s basis points due to the improved portfolio mix, is also expected to contribute.

Risks and Challenges

Despite the positive outlook, Citizens faces several risks and challenges inherent in the banking industry and the current macroeconomic environment. These include negative economic, business, and political conditions, such as those stemming from interest rates, inflation, and labor shortages, which can adversely affect the economy, housing, jobs, and consumer/business confidence and spending. Geopolitical instability also contributes to market uncertainty and volatility.

Changes in interest rates and market liquidity remain a key sensitivity, impacting net interest income, funding costs, and the ability to originate and distribute financial products. While Citizens' balance sheet is positioned to be slightly asset sensitive, significant adverse rate movements could impact performance. The company actively manages this risk through hedging strategies, but these introduce complexity and potential for volatility in Accumulated Other Comprehensive Income (AOCI).

Credit risk, particularly within the Commercial Real Estate (CRE) portfolio, remains a focus. The General Office segment is undergoing a multi-year workout process, and while management feels well-reserved and is actively managing down exposure, continued deterioration in valuations or economic conditions could necessitate further provisions. Although overall criticized assets have trended down, the Multi-family sector has seen increased criticized balances due to interest rate impacts.

Regulatory changes pose ongoing risks. Financial services reform and new or amended regulations, including potential changes to capital and liquidity requirements (such as the inclusion of AOCI components in regulatory capital for Category IV firms like Citizens) and evolving rules around climate disclosure and the Community Reinvestment Act (CRA), could increase compliance costs, restrict business activities, or impact capital requirements.

Operational and compliance risks, including cybersecurity threats and adherence to an increasing volume and complexity of laws and regulations, require continuous investment and vigilance. Litigation and regulatory investigations are also inherent to the business and can result in significant liabilities or business restrictions.

While the outlook for loan growth is positive, particularly in the second half of 2025, a failure of market uncertainty to subside or a weaker-than-expected economic environment could dampen demand, impacting revenue growth. However, management has demonstrated the ability to leverage potential offsets, such as increased share repurchases and more disciplined deposit pricing, if loan growth is subdued.

Conclusion

Citizens Financial Group is strategically positioning itself for a future of enhanced profitability and competitive strength. The company's multi-year transformation, centered on building a premier Private Bank, optimizing its balance sheet through Non-Core asset runoff, and driving efficiency via its TOP programs, is yielding tangible results. The solid performance in Q1 2025, marked by sequential NIM expansion, disciplined expense control, and improving credit trends, underscores the positive momentum.

Management's confident outlook for 2025, projecting continued NII growth, robust fee income, positive operating leverage, and improving credit quality, is underpinned by structural balance sheet tailwinds and the anticipated benefits of strategic execution. The rapid growth and profitability of the Private Bank, coupled with the disciplined runoff of lower-returning assets, are key drivers of the expected financial trajectory. While macro uncertainties and specific portfolio risks like General Office CRE persist, Citizens maintains a strong balance sheet with ample capital, liquidity, and reserves, providing a solid foundation to navigate challenges and capitalize on opportunities. The company's commitment to opportunistic share repurchases further enhances shareholder value. Citizens' strategic focus, operational discipline, and built-in balance sheet tailwinds collectively support a compelling path towards achieving its medium-term 16-18% ROTCE target, making it a name worth watching for investors seeking exposure to a regional bank with a clear strategy for value creation.