Citizens Financial Group: Initiating Coverage With No-Moat Rating and $39 Fair Value Estimate

Citizens Financial Group CFG 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 has been on a journey of material improvement in its operating metrics over roughly the last decade. It operated as a wholly owned 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 it has greatly improved its performance over the years. A combination of efficiency improvements, building out additional product capabilities, and acquisitions (which have improved Citizens’ product capabilities, geographic coverage, and market share) has complemented the bank’s organic growth efforts to gain a better foothold in the New England and Mid-Atlantic regions. We view Citizens as a much stronger franchise today than it was a decade ago. The bank now has a much more complete retail and commercial product set, a stronger capital markets group, and an expanding wealth franchise.