DBRS: Citizens Solid Results on Positive Operating Leverage, Execution on Initiatives

Summary:
• Excluding restructuring charges and special items, 4Q14 adjusted net income was solid at $217 million, improved from $202 million in the prior quarter.
• Adjusted results benefited from positive operating leverage and benign credit costs.
• 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) 4Q14 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 $197 million, improved from $189 million in the prior quarter. Excluding the impact of costs related to restructuring charges and special items in both quarters, 4Q14 adjusted net income was $217 million improved from $202 million in 3Q14 or 7.4%.

While still investing in its businesses Citizens demonstrated that disciplined expense control continues to be a focus for the Company as quarterly adjusted non-interest expenses were relatively flat at $791 million. This, combined with improved revenues, resulted in the Company’s adjusted efficiency ratio improving over 90 basis points (bps) on a linked quarter basis to a still relatively high 67%. Importantly, the solid cost control combined with good earning asset growth underpinned the generation of positive operating leverage.

Citizens reported a 3% QoQ increase in average loans driven by growth in commercial, auto, student and residential mortgage balances. DBRS views this performance, in a highly competitive environment for asset growth, as demonstrating the realization of previous actions taken by management to drive balance sheet growth.

Net interest income increased QoQ as growth in average interest earning assets and higher yields led to an improved net interest margin which increased three basis points QoQ to 2.80%. Meanwhile, non-interest income was relatively flat on a linked quarter basis reflecting growth in capital market fees offset by a decrease in mortgage servicing rights valuation.

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

During the quarter, Citizens broadened its funding profile issuing $1.5 billion of senior debt. Further, Citizens completed a $334 million capital transaction with The Royal Bank of Scotland Group plc (“RBS”) which included a subordinated debt issuance and a concurrent share repurchase from RBS. As a result, Citizens reported a Basel III Tier 1 common equity ratio of 12.1% at December 31, 2014 down approximately 40 bps from the end of 3Q14.

DBRS rates Citizens Financial Group, Inc. Issuer and Senior Debt at A (low) with a Negative trend. The Company’s bank subsidiaries, with a Deposit and Senior Debt rating at A (low), have a Stable trend.

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