DBRS Confirms Citizens Financial Group at BBB (high), Revises Trend to Positive

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 for Citizens Financial Group’s bank subsidiaries, Citizens Bank of Pennsylvania and Citizens Bank, N.A. DBRS has also confirmed the Short-Term Instruments rating of Citizens at R-2 (high). The trend on all ratings at the holding company and the long-term ratings at the bank subsidiaries have been revised to Positive. The short-term ratings at the bank subsidiaries have been confirmed with a Stable trend. The rating actions follow a detailed review of the Company’s operating performance, financial fundamentals, and future prospects.

The ratings reflect Citizens’ well-established regional banking franchise, which benefits from strong competitive positions in key markets across New England, the Mid-Atlantic, and Upper Midwest. Moreover, the Company’s sound asset quality, solid funding and liquidity positions, and robust capital profile help support the rating. While earnings were previously a constraint on the ratings, the Positive trend reflects the progress the Company has made in improving profitability metrics through various initiatives despite the challenging operating environment that includes low interest rates, heightened regulatory demands and modest economic growth. Indeed, Citizens has reported nine consecutive quarters of positive operating leverage, which if sustained, would likely lead to a ratings upgrade.

Citizens’ ratings are underpinned by the Company’s large, well-established regional banking franchise. Within the Company’s operating footprint, the Company maintains a strong and defensible deposit franchise, holding a top five deposit market share in nine of the ten largest MSAs that it serves and the second-largest deposit market share in New England. Moreover, the Company’s franchise strength benefits from its national lending platforms in retail, auto lending and education finance lending. While Citizens provides a strong mix of products, the Company is making investments in certain areas, including residential mortgage lending, wealth management, Treasury Solutions, and capital markets to further build out its franchise. DBRS expects that these investments will result in an improving revenue mix, while strengthening profitability.

Results in recent quarters have benefited from revenue generation and positive operating leverage, aided by a relatively stable net interest margin. Reflecting benefits of both revenue and expense initiatives, the Company’s efficiency ratio improved 314 basis points (bps) year-on-year to 62.9%. On an adjusted basis, the efficiency ratio improved 271 bps to 63.3%. 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 be relatively stable with manageable levels of non-performing assets (NPAs), and low net charge-offs (NCOs). Recently, NPAs increased modestly reflecting some weakening in energy and commodity-based credits, but DBRS continues to view these exposures as highly manageable at less than 2% of the loan portfolio. Meanwhile, NCOs remained a low 0.32% of average loans and leases in 3Q16. However, DBRS sees this as likely at, or near, the cyclical low, and that credit metrics will likely normalize at this point in the credit cycle. Finally, DBRS notes that Citizens’ level of loan loss reserves remains acceptable, and represented 1.18% 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. Regulatory capital ratios are sound and at the top of peer averages. However, DBRS expects capital ratios will trend downward towards the peer group over time. At September 30, 2016, the Company’s Basel III fully phased-in common equity tier 1 ratio was a strong 11.3%.

Headquartered in Providence, Rhode Island, Citizens Financial Group, Inc. is a bank holding company with subsidiaries Citizens Bank, NA and Citizens Bank of Pennsylvania. At September 30, 2016, Citizens Financial Group, Inc. reported $147.0 billion in total assets.

RATING DRIVERS
Continued momentum in improving profitability to levels that are more in line with higher rated peers while maintaining a sound balance sheet could lead to positive rating implications. Conversely, a reversion to weaker profitability metrics, 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.

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

The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations (July 2016), DBRS Criteria – Support Assessments for Banks and Banking Organisations (March 2016) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016), which can be found on our website under 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.

Lead Analyst: John Mackerey
Rating Committee Chair: William Schwartz
Initial Rating Date: 11 October 2005
Most Recent Rating Update: 2 November 2015

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.