DBRS Confirms Citizens Financial Group at BBB (high), Trend Stable

DBRS, Inc. (DBRS) has today confirmed the Issuer & Senior Debt rating of Citizens Financial Group, Inc. (Citizens or the Company) at BBB (high), as well as the A (low) Deposits & Senior Debt ratings of both Citizens Financial Group’s banking subsidiaries, Citizens Bank of Pennsylvania and Citizens Bank, N.A. Additionally, DBRS has assigned a BBB Subordinated Debt rating to Citizens Financial Group, Inc. Concurrently, DBRS has also confirmed the Short-Term Instruments rating of Citizens at R-2 (high). The trend on all ratings is Stable. The rating actions follow a detailed review of the Company’s operating performance, financial fundamentals, and future prospects.

The ratings confirmation reflects Citizens’ well established, regional banking franchise, which benefits from strong competitive positions in key markets across New England, the Mid-Atlantic, and Upper Midwest. The ratings confirmation also considers the Company’s improving asset quality, solid funding and liquidity positions, and healthy capital profile. The ratings also consider a weak, albeit improving, earnings profile relative to its peer group.

The Stable trend reflects DBRS’s view that Citizens’ operating performance will remain solid in a still challenging operating environment that includes low interest rates and below-average economic growth. Sustained improvement in profitability that is more in line with higher rated peers while maintaining a sound balance sheet could lead to positive rating implications. Conversely, a sustained weakness in earnings indicating deterioration in the franchise, or an increase in credit losses that exceed normalized levels; especially should they result from a material loosening of Citizens’ risk appetite, could have negative rating implications.

Citizens’ ratings are underpinned by the Company’s large, well-established regional banking franchise led by a conservative and experienced management team. Within the Company’s operating footprint, the Company maintains a strong and defensible deposit franchise, holding a top five market position in nine of the ten largest MSAs that it serves. Moreover, the Company’s franchise strength benefits from its national lending platforms in retail auto lending where the Company ranks 7th, and in student lending, where the Company holds a top four position nationally. While Citizens provides a strong mix of products, the Company aspires to strengthen its position in certain areas including, residential mortgage lending, wealth management, treasury solutions, and Capital Markets. DBRS views the initiatives implemented by management towards these priorities positively, and expects, that over the medium-term, Citizens will be successful with benefits reflected in an improving revenue mix and strengthening profitability.

Despite early progress, the ratings continue to be constrained by the Company’s weaker earnings profile that continues to lag its peer group. For 9M15, the Company’s return on average tangible common equity, excluding restructuring charges and special items, was 6.67%, 75 basis points (bps) higher than in the comparable period a year ago, and a 159 bps improvement from full year 2013. Results for 9M15 benefited from growing core noninterest income generation and positive operating leverage, which offset a compression in the net interest margin (NIM). Positively, in 3Q15, Citizens was able to stabilize the NIM through improving portfolio yield reflecting mix shift in originations and improved deposit cost discipline. Meanwhile, the Company’s efficiency ratio, excluding restructuring charges and special items, improved 245 bps year-on-year (YoY) for 9M15 to 66.78%, reflecting benefits of both revenue and expense initiatives. DBRS notes that Citizens’ balance sheet is asset sensitive and expects earnings to benefit from any potential increase in short-term interest rates.

Citizens’ asset quality continues to improve reflecting lower levels of non-performing assets (NPAs), and low net charge-offs (NCOs). Specifically, NPAs decreased 4% over the last four quarters, but are notably lower than at year-end 2010, and represented a manageable, but still higher than peer average, 1.06% of loans and leases at September 30, 2015. NPAs were lower in the Commercial portfolio, while stable in the Retail portfolio. Within the Retail portfolio, lower NPAs in the residential and home equity portfolios were offset by higher NPAs in the auto and student lending portfolios reflecting natural seasoning of growing portfolios. Meanwhile, NCOs were a low 0.29% of average total loans and leases in 9M15. However, DBRS sees this as likely at, or near, the cyclical low, and that credit metrics will likely normalize as 2016 progresses. Finally, DBRS notes that Citizens’ level of loan loss reserves remains acceptable, and represented 1.23% of total loans and leases.

Citizens’ balance sheet remains solid. The Company’s sound and well-established deposit franchise is the anchor of the funding profile. At September 30, 2015, Citizens’ deposit base totaled $101.9 billion, resulting in a very solid loan-to-deposit ratio of 96.1%. Regulatory capital ratios are sound and above peer averages. However, DBRS expects capital ratios will trend downward towards the median of the peer group over time, but remain more than sufficient given the Company’s risk profile. At September 30, 2015, the Company’s Basel III fully phased-in common equity Tier 1 ratio was 11.7%.

DBRS notes that on October 30, 2015, Citizens’ former parent, The Royal Bank of Scotland Group plc (RBS), agreed to sell its remaining holdings of Citizens common stock, and as a result will fully exit its ownership of Citizens upon the closing of the transaction. The transaction has no impact on the ratings of Citizens; as DBRS previously changed its Support Assessment (SA) for Citizens to SA3 from SA1 on March 30, 2015 when RBS’s ownership of Citizens was reduced below 50%. As such, the ratings of Citizens reflect the intrinsic strength of the Company.

Headquartered in Providence, Rhode Island, Citizens Financial Group, Inc. is a commercial bank holding company for Citizens, NA and Citizens Bank of Pennsylvania. At September 30, 2015, Citizens reported $135.4 billion in assets.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2015). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organisations (March 2015) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015). These can be found at: http://www.dbrs.com/about/methodologies.

The primary sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: David Laterza
Rating Committee Chair: William Schwartz
Initial Rating Date: 11 October 2005
Most Recent Rating Update: 30 March 2015

For additional information on this rating, please refer to the linking document under Related Research.