DBRS: Citizens Earnings Up on Mortgage Banking; Lower Provision

Summary:
• Excluding restructuring charges and special items, 1Q15 adjusted net income was solid at $215 million, modestly lower than $217 million in the linked quarter.
• Linked quarter adjusted results were relatively stable despite what is typically a seasonally weaker quarter, with fewer days and higher employee benefits expenses, reflecting offsetting efficiency initiatives, lower credit costs and improved mortgage banking results.
• DBRS rates Citizens Financial Group, Inc.’s Issuer and Senior-Term Debt at BBB (high) with a Stable trend.

DBRS, Inc. (DBRS) views Citizens Financial Group, Inc.’s (Citizens or the Company) 1Q15 adjusted results as sound with the Company continuing to make progress on its growth initiatives, as well expenses. The Company reported net income of $209 million, improved from $197 million in the prior quarter.

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 up just 1% quarter-on-quarter (QoQ). This, combined with largely stable revenues, resulted in the Company’s adjusted efficiency ratio increasing slightly on a linked quarter basis. Meanwhile, the provision for credit losses was 19% lower sequentially reflecting broadly stable credit performance and the benefit of a recovery on a large commercial real estate credit.

Citizens reported a 2% QoQ increase in average loans driven by growth in commercial, prime auto, student and residential mortgage balances. Indeed, mortgage origination volumes were up 87% year-over-year (YoY) underpinning a 60% YoY increase in underlying mortgage banking revenues to $23 million. DBRS views this performance, in a highly competitive environment for asset growth, as the Company benefiting from previous actions taken by management to drive balance sheet growth.

Net interest income declined modestly QoQ reflecting a lower day count as well as some margin compression partially offset by loan growth and a reduction in pay-fixed swap costs. Positively, non-interest income increased on a linked quarter basis largely reflecting growth in mortgage banking fees, an area that the Company has been expanding.

Overall, Citizens’ balance sheet strength remains sound. Asset quality metrics are favorable with a modest and improving level of net charge-offs and a relatively flat level of non-performing loans. Capital is solid with a Basel III common equity tier 1 ratio (transitional basis) of 12.2% at March 31, 2015. DBRS notes that the Company received a non-objection to its CCAR capital plan submitted to the Federal Reserve. Following the close of the quarter, Citizens completed a $250 million preferred stock offering and share repurchase transaction with The Royal Bank of Scotland Group plc (“RBS”). After this buyback and the follow-on stock offering completed in the quarter, RBS’s ownership in the Company has declined to 40.8%.

DBRS rates Citizens Financial Group, Inc. Issuer and Senior Debt at BBB (high) with a Stable trend.

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