DBRS: Citizens Shows Positive Operating Leverage; Strategy Execution

Summary:
• For 3Q15, Citizens reported net income available to common shareholders of $213 million as compared to $190 million earned in 2Q15. However, excluding 2Q15 restructuring charges and special items, adjusted net income available to common shareholders was down modestly linked quarter.
• CFG did report positive operating leverage, driven by net interest income growth and flat adjusted expenses, partially offset by lower noninterest income.
• 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) 3Q15 results as sound, with the Company continuing to make progress on its growth initiatives. The Company reported net income available to common shareholders of $213 million, up from $190 million earned in the prior quarter. The increase was largely driven by the previous quarter’s restructuring charges and special items, which were not repeated this quarter.

Despite a relatively flat level of interest earning assets, net interest income increased 2% quarter-on-quarter (QoQ) reflecting improvement in the net interest margin (NIM) and a higher day count. The NIM benefitted from initiatives to improve balance sheet efficiency and higher loan yields, partially offset by slightly higher deposit costs. Non-interest income decreased 2% on a linked-quarter basis. Lower mortgage banking fees, including an $8 million decrease in mortgage servicing valuation, and capital market fees more than offset branch real estate gains, as well as improvement in service charges and fees.

While still investing in its businesses, Citizens demonstrated that disciplined expense control continues to be an ongoing focus for the Company as quarterly adjusted non-interest expenses were flat QoQ. This, combined with improved revenues, resulted in the Company’s adjusted efficiency ratio improving 68 basis points on a linked-quarter basis. Meanwhile, the provision for credit losses was stable as compared to the linked quarter.

Citizens reported a 1% QoQ increase in average loans driven by growth across a broad portion of the Company, including commercial real estate, franchise finance, corporate finance, prime auto, residential mortgage and student loan balances. DBRS considers the Company’s performance, in a highly competitive environment for asset growth, as demonstrating that the initiatives implemented by management to drive organic balance sheet growth are beginning to impact financial performance.

Citizens’ continues to maintain a sound balance sheet. Credit metrics remain favorable with a manageable level of net charge-offs and the balance of non-performing loans continuing to decline. At September 30, 2015, Citizens regulatory capital was solid with a Basel III common equity tier 1 ratio (transitional basis) of 11.8%.

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.