Executive Summary / Key Takeaways

• Citizens Financial Group is executing a multi-year strategic transformation focused on building a premier Private Bank, strengthening its Commercial Banking position, and enhancing its Consumer Banking franchise, aiming for a 16-18% ROTCE target by 2027.
• First quarter 2025 results demonstrated momentum, with net income rising 11.7% year-over-year to $373 million, driven by strong fee income growth (up 5%) and improved efficiency (efficiency ratio of 67.91% vs 69.33%).
• Net interest margin (NIM) is poised for expansion, projected to reach 3.05-3.10% by Q4 2025 and 3.25-3.50% by 2027, powered by time-based benefits from non-core asset runoff and reduced swap drag, alongside favorable fixed-rate asset repricing, rather than solely relying on interest rate movements.
• The Private Bank initiative is a significant growth engine, rapidly scaling deposits (reaching $8.7 billion in Q1 2025) and assets under management, contributing $0.04 to Q1 2025 EPS and tracking well towards its 2025 profitability and return targets.
• Citizens maintains a robust balance sheet with strong capital (CET1 10.60% at Q1 2025, 9.1% adjusted for AOCI) and liquidity (pro-forma LCR 122%), enabling continued strategic investments, capital returns (including $200 million in share repurchases in Q1 2025), and resilience against macroeconomic uncertainties and credit risks, particularly in the closely managed CRE office portfolio.

A Legacy Forged, A Future Defined

Citizens Financial Group, one of the nation's oldest financial institutions, traces its roots back to 1828. Over nearly two centuries, it has evolved from a local bank into a significant regional player, offering a comprehensive suite of retail and commercial banking products across 14 states and the District of Columbia. The company's journey has been marked by strategic expansions, notably its significant play in the New York City Metro market through the acquisition of HSBC (HSBC)'s East Coast branches and Investors Bank (ISBC) approximately three years ago, which continues to drive growth in households and deposits.

Today, Citizens operates through two primary segments: Consumer Banking and Commercial Banking, supported by a Non-Core portfolio designated for runoff. Its overarching strategy is a multi-year transformation built on three pillars: cultivating a transformed consumer bank, establishing the best-positioned super regional commercial bank, and aspiring to build the premier bank-owned private bank and wealth franchise. This strategic pivot is designed to enhance profitability, improve efficiency, and deliver attractive returns to shareholders over the medium term.

In the competitive landscape of U.S. regional banking, Citizens operates alongside peers like PNC Financial Services Group (PNC), Fifth Third Bancorp (FITB), Regions Financial Corporation (RF), and KeyCorp (KEY). While holding an estimated 2-3% market share, positioning it as a solid mid-tier player, Citizens faces larger rivals like PNC with greater scale and broader national presence. Competitors like FITB and KEY also present challenges in specific areas like fintech integration speed or niche corporate finance expertise. Citizens differentiates itself through its extensive branch network, integrated service model, and targeted investments in high-growth areas like private capital and wealth management. The company's strategic focus on deep customer relationships, particularly in commercial banking and the burgeoning Private Bank, aims to foster loyalty and cross-selling opportunities that can provide a competitive edge against rivals often focused on transactional business.

The Engine of Innovation: Powering Efficiency and Differentiation

Underpinning Citizens' strategic transformation is a commitment to leveraging technology to drive efficiency, enhance the customer experience, and create competitive advantages. The company is actively investing in its digital platforms, data analytics capabilities, and exploring new technologies like Artificial Intelligence (AI) and cloud migration.

Citizens' digital banking platforms, including mobile and online banking, are designed to provide an integrated and seamless customer experience. These platforms contribute to operational efficiency; for instance, digital deposit products are noted as being approximately 20% more efficient, leading to lower per-unit costs, partly attributed to the use of AI analytics. In commercial lending, their platforms offer approximately 15% faster processing for business loans compared to some legacy systems used by competitors like KeyCorp.

Strategic initiatives like the TOP programs (TOP 9 and the newly launched TOP 10) are explicitly linked to technology investments. TOP 9 achieved $150 million in pre-tax run rate benefits by the end of 2024, exceeding its target, partly through contributions from data and analytics initiatives. TOP 10, targeting another $100 million in run rate efficiencies by the end of 2025, is expected to push into new areas like generative AI and further expand data and analytics capabilities. These programs are crucial for self-funding growth initiatives and streamlining operations.

While specific quantitative metrics on the impact of all technology investments compared to all competitors are not publicly detailed, management emphasizes that these investments are improving operational speed, enhancing customer acquisition and retention (e.g., innovative investments in analytics and customer experience driving HELOC growth), and contributing to a more efficient operating model. The strategic intent is clear: use technology to lower the cost to serve, improve service delivery, and support the scalability of growth initiatives like the Private Bank and targeted commercial segments. This focus on leveraging technology for both efficiency and customer-facing improvements is a key part of Citizens' strategy to differentiate itself and improve its financial performance relative to peers, many of whom are also investing heavily but may face challenges with legacy infrastructure or integration speed.

Financial Performance Reflecting Strategic Shifts

Citizens' financial performance in the first quarter of 2025 provides a snapshot of its strategic execution amidst a dynamic macroeconomic backdrop. Net income increased to $373 million, up $39 million or 11.7% from the same period in 2024. Net income available to common stockholders also saw a healthy rise, increasing $36 million to $340 million. This improvement occurred despite a slight decrease in total revenue, which fell $24 million to $1.90 billion, primarily driven by a 4% decrease in net interest income.

The decline in net interest income to $1.39 billion was influenced by a decrease in average interest-earning assets (down 3% year-over-year), partially offset by a decrease in average interest-bearing liabilities (down 3%). Net interest margin on a fully taxable equivalent (FTE) basis saw a marginal decrease of 1 basis point year-over-year to 2.90%. However, management commentary highlights that the impact of variable-rate asset repricing was largely offset by the benefits of lower funding costs, the ongoing Non-Core portfolio runoff, and fixed-rate asset repricing. Average deposits decreased $3.40 billion year-over-year, primarily due to lower commercial and Treasury deposits, though this was partially mitigated by growth in consumer deposits, notably driven by the Private Bank. Average total borrowed funds also decreased, reflecting runoff in FHLB advances and auto-collateralized borrowings, offset by an increase in senior debt.

Noninterest income proved resilient, increasing $27 million, or 5%, year-over-year to $544 million. This growth was fueled by several key areas: service charges and fees saw an increase, driven by higher cash management and overdraft fees; wealth fees rose, reflecting the significant growth in Private Bank assets under management; and mortgage banking fees increased due to higher mortgage servicing rights (MSR) valuation. These gains were partially offset by a decrease in capital markets fees, which saw lower M&A activity, although this was partially cushioned by higher loan syndication and bond underwriting fees.

Expense management remained a focus, with noninterest expense decreasing $44 million, or 3%, year-over-year to $1.31 billion. This reduction was primarily attributable to lower other operating expenses, including a $35 million special assessment from the FDIC recognized in the prior year, and lower fraud losses. This expense discipline contributed to an improved efficiency ratio of 67.91% in Q1 2025, down from 69.33% in Q1 2024. Return on average tangible common equity (ROTCE) also saw an uptick, rising to 9.64% from 8.86% in the prior year period.

Credit quality metrics showed some mixed trends but were largely within expectations. The provision for credit losses decreased to $153 million from $171 million in the prior year, reflecting the benefits of Non-Core portfolio runoff and an improving loan mix. Net charge-offs increased year-over-year, influenced by a $25 million charge-off related to the sale of Non-Core education loans. Excluding this impact, net charge-offs were modestly lower, reflecting broadly stable retail and slightly improved commercial trends. Nonaccrual loans decreased 5% linked-quarter, driven by reductions in both commercial (particularly the general office CRE segment) and retail (due to the non-core sale and auto runoff). While commercial criticized balances saw a slight increase, primarily in the multi-family CRE sector, management notes that approximately 97% of commercial real estate loans remain current on payments. The allowance for credit losses (ACL) coverage ratio stood at 1.61% at March 31, 2025, slightly down from 1.62% at December 31, 2024, with the reserve for the general office portfolio at 12.3% coverage, broadly stable. Management's ACL forecast incorporates a mild recession scenario, with more severe assumptions applied to specific portfolios like general office CRE, indicating a proactive stance on potential credit deterioration.

Citizens maintains a strong liquidity position, with estimated insured/secured deposits comprising 67% of its $177.6 billion deposit base as of March 31, 2025. Total available liquidity, including contingent liquidity and discount window capacity, was approximately $87.7 billion. The company's CET1 capital ratio was 10.60% at March 31, 2025, decreasing slightly from 10.80% at year-end 2024, influenced by dividends, share repurchases, an increase in risk-weighted assets (driven by commercial and industrial loans), and the full phase-in of CECL transition amounts, partially offset by net income. Adjusted for the AOCI opt-out removal, the CET1 ratio remained stable at 9.1%. The company's pro-forma Category I LCR was a robust 122%. This strong capital and liquidity position supports ongoing strategic investments and capital returns.

Outlook and Path to Higher Returns

Citizens' outlook is anchored by its confidence in executing its strategic initiatives and capitalizing on anticipated improvements in the operating environment. Management reaffirmed its full-year 2025 EPS estimate, anticipating a pickup in loan demand and deal activity in the second half of the year, contingent on macro uncertainty subsiding.

For the second quarter of 2025, net interest income is projected to be up approximately 3%, driven by a 5 basis point improvement in net interest margin and favorable day count. Noninterest income is expected to rise mid- to high-single-digits, led by a rebound in capital markets activity, although this remains subject to market volatility. Expenses are projected to be broadly stable, reflecting continued discipline. Credit trends are expected to improve slightly from the first quarter 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% by the end of Q2, supporting approximately $200 million in share repurchases, with potential for increased buybacks if loan growth is weaker than anticipated.

Looking further ahead, the company projects significant net interest margin expansion. NIM is expected to reach 3.05% to 3.10% by the fourth quarter of 2025, 3.15% to 3.30% by the fourth quarter of 2026, and land in the 3.25% to 3.50% range by 2027. This trajectory is primarily driven by non-rate dependent factors, including the time-based benefits from the runoff of the Non-Core portfolio and the reduced drag from legacy terminated swaps, which management estimates will contribute a cumulative 35 basis points by 4Q 2027. Favorable fixed-rate asset repricing is expected to add another 15-20 basis points. While the balance sheet is slightly asset sensitive, management feels well-hedged through mid-2027 and comfortable with a range of rate scenarios, noting that a terminal Fed Funds rate around 3.50% would align with the middle of their 2027 NIM range, while 4% would support the upper end.

This projected NIM expansion is a crucial component of Citizens' path to achieving its medium-term ROTCE target of 16% to 18% by 2027. Beyond NIM, successful execution of strategic initiatives, particularly the Private Bank's growth and profitability, is expected to drive meaningful revenue growth and generate positive annual operating leverage. Credit costs are projected to improve year-on-year in 2025, with potential for reserve releases, as the portfolio mix shifts towards lower loss content assets and legacy issues are resolved. Management believes their current reserve levels already contemplate a recessionary scenario.

Key risks to the outlook include persistent macroeconomic uncertainty, which could delay the anticipated pickup in loan demand and deal activity, potentially impacting capital markets revenue and requiring higher credit provisions if a deeper recession materializes. Regulatory changes, including the finalization of capital and liquidity rules and the outcome of climate disclosure and CRA rule challenges, also pose potential impacts. However, management highlights levers to offset these risks, including further optimizing funding costs, increasing share repurchases, and leveraging cost transformation efforts through programs like TOP 10. The significant pent-up demand in M&A pipelines and the ongoing momentum in the Private Bank and other strategic initiatives provide potential upside to the outlook.

Conclusion

Citizens Financial Group is actively engaged in a strategic transformation designed to reposition the company for enhanced profitability and higher returns. Despite a challenging external environment characterized by macroeconomic uncertainty and competitive pressures, the company's first quarter 2025 results demonstrate progress, particularly in fee income growth and expense management. The core investment thesis rests on the successful execution of its three strategic pillars: a transformed Consumer Bank, a well-positioned Commercial Bank, and the scaling of a premier Private Bank.

The path to Citizens' medium-term ROTCE target of 16% to 18% by 2027 is clearly articulated, heavily reliant on significant net interest margin expansion driven by structural balance sheet improvements and favorable asset repricing, rather than solely on interest rate movements. The Private Bank is emerging as a key growth engine, rapidly accumulating deposits and assets and contributing meaningfully to earnings. Supported by ongoing investments in technology aimed at driving efficiency and enhancing customer experience, Citizens is building a competitive moat in key areas like digital deposits and specialized lending. While risks related to credit quality, particularly in the CRE office portfolio, and potential regulatory changes persist, management appears to have proactively reserved and maintains a strong capital and liquidity position, providing resilience and flexibility. The company's ability to leverage its strategic initiatives, maintain expense discipline, and opportunistically deploy capital will be critical in realizing its ambitious return targets and delivering value to shareholders.