Company Reports

Our thesis on the U.S. banks following the Silicon Bank fallout was that all of the banks we covered, except for First Republic (which we downgraded to a $3 fair value estimate on March 20, 2023, and a $0 fair value on April 27, 2023), would be able to weather the storm. We believed that banks in trouble were in uniquely risky positions. We believe this thesis has largely held up, and sorting through banks based on their unique risk profiles remains necessary and valuable. To the extent that the market is selling off all banks because of what has happened to NYCB, we think there could be opportunities once again while acknowledging the significant time horizon risk (how long does it take for the banks to prove to the market they are fine) and the choppy waters that could occur in the meantime (we expect more commercial real estate related loan losses in the future).

We will discontinue analyst coverage of Citizens Financial Group on or about Dec. 13, 2023. We provide analyst research and ratings on over 1,500 companies globally and periodically adjust our coverage according to investor interest and staffing.

No-moat Citizens Financial Group reported third-quarter earnings per share of $0.85, missing FactSet consensus of $0.91 but roughly in line with our estimate of $0.87. We are seeing continued pressure on net interest income, or NII, due to persistent funding cost headwinds and the decrease in the overall loan book. Deposit costs shot up a little bit higher than our forecasts, but absolute magnitude of change is slowing as rate hikes are also slowing. Arguably the biggest weakness in current results was fees, driven primarily by weaker capital markets fees. These fees are cyclical and we remain in a tough environment, so we would not read too much into this. Much of the updated guidance was also not far off from previous expectations, with hints at flat 2024 expenses essentially in line with our previous expectations, although it looks like fees will remain somewhat weak for the foreseeable future.

No-moat Citizens Financial Group reported second-quarter earnings per share of $0.92, missing FactSet consensus of $1.00 and falling more in line with our own estimate of $0.93. From a short-run perspective, we believe Citizens did not have the strongest quarter, as declining loan balances and increasing funding pressures led to a decline in the net interest income, or NII, outlook for the year. This has been a common pattern among the regional banks this quarter. A weaker capital markets environment also led to a decline in the annual fee outlook.

The Federal Reserve has released the results of its annual stress tests. Our key takeaway is that the banking system remains well capitalized, and stress capital buffers, or SCBs, are likely to be declining for nearly half of the banks we cover who participated in the test this year. This will bring some capital relief to some key names under our coverage, including JPMorgan, Bank of America, M&T Bank, Goldman Sachs, and Morgan Stanley. Whether or not management teams will actually lower their internal common equity Tier 1 targets is another story. As they await other potential regulatory changes, we expect most would choose to err on the side of holding more capital rather than less. Even so, we would view these banks as the big winners from this year’s stress tests as results are set to give these banks more buffer space for now.

Citizens Financial Group is a midsize U.S. regional bank primarily concentrated in the Northeast with a mix of retail and commercial business and a growing wealth franchise. We view no-moat Citizens as a quintessential midsize regional bank and expect it to be a solid, roughly average regional operator in the future. Even after taking into account a ramp-up in funding costs, some deposit outflows, and higher provisioning in 2023 and 2024, our fair value estimate of $39 per share (1.3 times tangible book value, or 1 times when excluding the effects of accumulated other comprehensive income) is above the current mid-$20s market price. There is still a high degree of uncertainty, and no one knows for sure how funding costs, deposit bases, or profitability may develop. However, even after attempting to factor in these risks, we still think the shares are undervalued, similar to much of our regional banking coverage today.

Citizens Financial Group is a midsize U.S. regional bank concentrated in the Northeast with a mix of retail and commercial business and a growing wealth franchise. It operated as a subsidiary of Royal Bank of Scotland until its initial public offering in 2014. Citizens went public as an underperforming franchise with inefficient operations and lingering credit costs from the financial crisis. However, becoming independent has helped the bank focus its efforts and greatly improve its performance over the years. A combination of efficiency improvements, building out additional product capabilities, and acquisitions (which have improved the bank’s product capabilities, geographic coverage, and market share) has helped Citizens gain a better foothold in the New England and Mid-Atlantic regions.