DBRS: Citizens Solid 3Q14 Adjusted Results on Earning Asset Growth, Good Cost Control

Summary:
• Excluding restructuring charges and special items, 3Q14 adjusted net income was solid at $202 million, down slightly from $205 million in the prior quarter.
• Adjusted results benefited from solid growth in earning assets and lower adjusted non-interest expense.
• DBRS rates Citizens Financial Group, Inc. Issuer and Senior-Term Debt at A (low) with a Negative trend.

DBRS, Inc. (DBRS) views Citizens Financial Group, Inc.’s (Citizens or the Company) 3Q14 adjusted results as solid with the Company continuing to make progress on its growth initiatives, as well as improving operating efficiency. The Company reported net income of $189 million, down from $313 million in 2Q14, which benefited from a $180 million after-tax gain on the sale of its Chicago area Charter One branches and certain relationships (the Chicago Divesture). Excluding the impact of the net gain from the Chicago Divesture, costs related to efficiency initiatives, and separation related items, adjusted net income was $202 million, a slight reduction quarter-on-quarter (QoQ).

Disciplined cost management continues to benefit the Company’s earnings. Adjusted non-interest expense was 5% lower QoQ at $789 million, reflecting the impact of the Chicago Divesture, lower regulatory costs and the benefit of efficiency initiatives. As a result, the Company’s adjusted efficiency ratio improved over 200 basis points on a linked quarter basis to a still high 68%.

The Company noted that earning assets were up 1% QoQ, or nearly 2% excluding the $1.0 billion decrease due to the Chicago Divesture. Specifically, the Company’s reported growth in commercial and consumer loans with strength particularly evident in Asset Finance, Mid Corporate, Commercial Real Estate and Franchise Finance lines of business within the Commercial segment and auto and mortgage lending growth in the Consumer segment. DBRS sees this performance in a highly competitive environment for asset growth as demonstrating that the benefits of actions taken by management to drive balance sheet growth are being realized.

Excluding the Chicago Divesture, adjusted net interest income was stable and asset growth offset margin compression. Net interest margin declined 10 basis points (bps) QoQ to 2.77%, with 4 bps attributable to the Chicago Divesture and commercial loan recoveries in 2Q14. The remaining 6 bps largely reflects persistently low interest rates, spread compression in the Commercial loan book, and higher funding costs from the issuance of subordinated debt, partially offset by the benefit of lower pay-fixed swap costs. Meanwhile, adjusted non-interest income, excluding the Chicago Divesture and a 2Q14 student loan gain, was higher on a linked quarter reflecting growth in underlying service charges, higher mortgage banking fee income and higher foreign exchange fees, somewhat offset by lower leasing and capital market fees, which were strong in 2Q14.

Citizens’ asset quality remained sound with a modest level of net charge-offs and continued reduction in non-performing loans.

During the quarter, Citizens completed a $333 million capital exchange transaction with The Royal Bank of Scotland Group plc (“RBS”). Subsequent to quarter end, Citizens completed an additional $334 million subordinated debt issuance with RBS that included a concurrent share repurchase from RBS. As a result, 78% of Citizens’ capital is comprised of equity and 22% other capital instruments. Regarding regulatory capital, Citizens reported a Basel I Tier 1 common equity ratio of 12.9% at September 30, 2014.

DBRS rates Citizens Financial Group, Inc. Issuer and Senior Debt at A (low) with a Negative trend.

Note:
All figures are in U.S. dollars unless otherwise noted.