Citizens Financial Group, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Citizens Financial Group, Inc. is one of the nation’s oldest and largest financial institutions, with $224.7 billion in assets as of September 30, 2024, providing retail and commercial banking products and services to individuals, small businesses, and corporations.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Citizens Financial Group (CFG) operates primarily in the New England, Mid-Atlantic, and Midwest regions, offering a mix of consumer and commercial banking services. It has been actively expanding its reach through digital platforms and acquisitions.

  • Consumer Banking: Provides services including checking and savings accounts, mortgages, home equity lines of credit, credit cards, and student loans to individuals and small businesses, with 1,120 branch locations and 3,300 ATMs across 14 states.
  • Commercial Banking: Focuses on providing lending and treasury management services, foreign exchange, investment management, and corporate finance to middle-market and large-market companies, as well as financial institutions.

Moat Analysis

CFG’s moat is limited and faces strong competition in the banking industry. While they have a strong franchise in their operating areas, they lack the dominant network effects and scale benefits of the big players. Therefore, the assessment of their moat is a 2 out of 5.

  • Switching Costs: Some switching costs exist in the form of customer inertia, particularly in retail banking, but they are relatively easy to overcome when better interest rates are provided by competing banks.
  • Intangible Assets: CFG’s brand is recognized regionally, however, it doesn’t have a national presence or reputation that would allow it to charge higher prices. Furthermore, there is a strong amount of competition and many banks are known and are offering the same services.
  • Cost Advantages: Although a regional player with some local competitive strengths, they are far from having the cost advantages that larger banks like JPMorgan possess.
  • Network Effects: The network effects are pretty weak for CFG, being a bank. They don’t provide unique user to user capabilities.
  • Size Advantage: CFG is a large bank but not large enough to benefit from economies of scale, unlike top players in the sector.

Risks to the Moat and Business Resilience

  • Interest Rate Risk: Changes in interest rates can significantly impact CFG’s net interest margin, affecting profitability. As mentioned in their latest reports, they are very sensitive to interest rate movements.
  • Credit Risk: Economic downturns can increase defaults on loans, requiring higher provisions for credit losses, that will impact profitability.
  • Competition: Banking is a highly competitive market, with large national banks, smaller regionals, and even the new-age fin-tech sector competing for similar products and services.
  • Regulatory Changes: The banking sector is heavily regulated, which can impact CFG’s operations, costs, and capital requirements. For example, one of the main factors that is impacting liquidity is regulatory change and they are monitoring how the regulations are going to evolve and will adapt to that.
  • Technological Disruption: FinTech companies are providing new and innovative digital platforms for managing money, these companies have better UI/UX compared to the more traditional banking apps. If CFG does not continue investing in technology, it could potentially lose market share.

Financial Analysis

CFG has recently reported a challenging quarter due to an increase in interest rate costs.

  • Net Interest Income (NII):
    • NII for the three and nine months ended September 30, 2024, decreased to $1.37 billion and $4.24 billion, compared to $1.59 billion and $4.61 billion for the same periods in 2023. This is due to a decrease in net interest margin and a decline in average interest-earning assets. The decrease in average interest-earning assets is driven primarily by a decline in the commercial loan portfolio, partly offset by growth in interest-earning deposits.
    • It should also be noted that the rate increases have contributed significantly in the net interest margins going down.
    • For the 3 and 9 months ended in September 2024, the NIM was 2.84% and 3.13%.
    • Management mentioned their target for NIM to be around 3.2%, for the next few years.
  • Noninterest Income:
    • Noninterest income has increased to $562 million and $1.6 billion, for the three and nine months ended September 30, 2024, compared to $487 million and $1.4 billion for the same periods in 2023, respectively. This is because of higher trading and capital markets fees.
  • Net income: Net income available to common shareholders has decreased to $456 million and $1.327 million for the three and nine months ended September 30, 2024, compared to $527 million and $1.53 billion for the same periods in 2023.
  • A large portion of this decline comes from their provision for credit losses.
  • Book Value:
    • Tangible book value per common share increased to $32.04 as of September 30, 2024, from $31.38 as of December 31, 2023. The bank also bought back its own stock for a net cost of $681 million during the quarter.
  • Efficiency Ratio: The efficiency ratio was 64.4% and 67.8% for the three and nine months ended September 30, 2024, respectively, compared to 64.2% and 62.5% for the same periods in 2023, respectively.
  • Capital and Liquidity:
    • CET1 capital ratio is at 11.3%, and the total capital ratio is at 13.6%. They have plenty of reserves.
  • Loans and Deposits:
    • Total loans are $169 Billion.
    • Total deposits are $172 Billion.
    • The total net interest margin has declined from high interest rates on their investments and not-so-great funding costs, which has put pressure on their profitability.

Management and Outlook

  • Management noted that they are trying to be cautious during economic uncertainty and are focused on reducing operational expenses and investing heavily in technology.
  • Management has set a long term target of maintaining a 3.2% net interest margin, and they are working on that.
  • Management emphasized that they want to be a relationship focused bank, rather than a traditional transactional focused bank.
  • Management talked about focusing on core banking business and trying to move away from non-core portfolio.

Understandability Rating: 3 / 5

The business model of CFG is moderately complex. The core banking operations are easy to understand, as are the financial statements of a bank, however, the financial risks involved in a bank such as credit risks, interest risks, etc make this more complicated. Their operations are influenced by a lot of external factors such as interest rates and global economy which makes the business harder to understand and predict.

Balance Sheet Health Rating: 4 / 5

CFG’s balance sheet is reasonably healthy. Although profitability is taking a hit in the current financial climate, the bank remains well capitalized and has good reserve coverage to take on the losses. Their liquidity is also very high. Their leverage is at a manageable range for a bank of this size.

Appendix

Here are the sources used to generate this report:

  • https://www.citizensfinancialgroup.com/investor-relations.aspx (Investor Relations Page)
  • https://www.citizensfinancialgroup.com/about-us/investor-relations/financial-information/quarterly-results.aspx (Latest Earnings)
  • https://www.citizensfinancialgroup.com/about-us/investor-relations/financial-information/financial-information-archive.aspx (Previous Earnings)
  • https://www.citizensfinancialgroup.com/investor-relations/presentations-and-webcasts.aspx (Earnings Calls and Presentations)
  • https://www.sec.gov/edgar/search/#/q=CFG&dateRange=all&category=form-cat1&entityName=Citizens%2520Financial%2520Group%252C%2520Inc. (SEC Filings)
  • https://www.bloomberg.com/quote/CFG:US (Bloomberg Quote)
  • Some News articles