DBRS: Citizens Shows Fee Revenue Growth Offset by Higher Provision and Restructuring

Summary:
• Excluding restructuring charges and special items, 2Q15 adjusted net income was solid at $215 million, unchanged from the linked quarter.
• Linked quarter adjusted results showed positive operating leverage, driven by fee revenue growth and flat expenses, offset by an increased provision expense as net charge off levels normalized.
• 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) 2Q15 adjusted results as sound with the Company continuing to make progress on its growth initiatives, as well expenses. The Company reported net income of $190 million, down from $209 million in the prior quarter. The decrease was driven by a $30 million increase in restructuring charges and special items as well as a $19 million increase in provision expense.

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 flat quarter-on-quarter (QoQ). This, combined with improved revenues, resulted in the Company’s adjusted efficiency ratio improving 95 basis points on a linked quarter basis. Meanwhile, the provision for credit losses was 33% largely reflecting the favorable impact of commercial recoveries in the previous quarter.

Citizens reported a 2% QoQ increase in average loans driven by growth in commercial, prime auto, residential mortgage and student balances. DBRS views this performance, in a highly competitive environment for asset growth, as resulting from previous actions taken by management to drive balance sheet growth.

Net interest income increased modestly QoQ reflecting a higher day count and 2% loan growth partially offset by some margin compression. Additionally, non-interest income increased 4% linked quarter with growth occurring largely across the board including strength in capital markets, card fees, trust & investment services fees and service charges.

Overall, Citizens’ balance sheet strength remains sound. Asset quality metrics are favorable with a manageable level of net charge-offs and a declining level of non-performing loans. Capital is solid with a Basel III common equity tier 1 ratio (transitional basis) of 11.8% at June 30, 2015. During the quarter, Citizens completed a $250 million preferred stock offering and share repurchase transaction with The Royal Bank of Scotland Group plc (“RBS”). Including this buyback and the follow-on stock offering completed in the prior 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.