DBRS Upgrades Citizens Financial Group to A (low), Revises Trend to Stable

DBRS, Inc. (DBRS) upgraded most of the ratings for Citizens Financial Group, Inc. (Citizens or the Company), and its related entities, including the Company’s Long-Term Issuer Rating to A (low) from BBB (high). The trend on all ratings is now Stable. The Intrinsic Assessment (IA) for Citizens Bank, National Association (the Bank) was raised one notch, to ‘A’ from A (low), while its Support Assessment remains SA1. The Company’s Support Assessment is SA3 and its Long-Term Issuer Rating is positioned one notch below the Bank’s IA.

The ratings upgrade reflects the ongoing progress the Company has made growing its franchise and improving its profitability metrics following its IPO and complete separation from Royal Bank of Scotland’s ownership in November 2015. Over this period, Citizens has effectively achieved its medium-term targets as it executed on various strategic initiatives, including making franchise investments to build its residential mortgage lending, wealth management, Treasury Solutions and capital markets businesses, as well as ongoing expense initiatives. These initiatives have further diversified revenues and strengthened profitability. Indeed, for 3Q17, Citizens reported a strong 7% year-over-year adjusted positive operating leverage.

Citizens’ ratings also reflect its well-established and growing regional banking franchise, which benefits from strong competitive positions in key, highly diverse and affluent markets across New England, the Mid-Atlantic and Upper Midwest, including 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. Additionally, the Company’s sound asset quality, solid funding and liquidity positions, and strong capital profile further support the Company’s ratings.

Recent results have benefited from improved revenue generation and successful expense initiatives that have both contributed to positive operating leverage. As a result, the Company’s adjusted efficiency ratio improved 390 basis points (bps) to 59.4% in 3Q17 from 3Q16 meeting the Company’s goal of a sub-60% efficiency ratio. Already benefiting from the recent rate hikes that have bolstered the net interest margin, DBRS notes that Citizens’ balance sheet is asset sensitive and expects earnings to benefit from any additional increases in short-term interest rates.

Citizens’ asset quality has shown improvement with declining levels of non-performing assets (NPAs), and low net charge-offs (NCOs). Meanwhile, NCOs remained a low 0.28% of average loans and leases for 9M17. 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 and as Citizens’ works to improve the risk-adjusted returns in its loan portfolio. Finally, DBRS notes that Citizens’ level of loan loss reserves remains acceptable, and represented 1.11% 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 high-end of peer averages. However, DBRS expects capital ratios will trend lower towards the peer group over time. At September 30, 2017, the Company’s Basel III fully phased-in common equity tier 1 ratio was a strong 11.1%.

Headquartered in Providence, Rhode Island, Citizens Financial Group, Inc. is a bank holding company with banking subsidiaries, Citizens Bank, NA and Citizens Bank of Pennsylvania. At September 30, 2017, Citizens Financial Group, Inc. reported $151.4 billion in consolidated total assets.

The Grid Summary Grades for Citizens are as follows: Franchise Strength – Strong; Earnings Power – Good; Risk Profile – Good; Funding & Liquidity – Strong; Capitalisation – Strong.

RATING DRIVERS
While DBRS views Citizens’ current ratings as well-placed, over the longer-term, continued momentum building the franchise, diversifying and growing revenues, including building non-interest income, 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 (May 2017), 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, Vice President – Global FIG
Rating Committee Chair: Michael Driscoll, Managing Director, Head of NA FIG – Global FIG
Initial Rating Date: 11 October 2005
Most Recent Rating Update: 02 August 2017

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 in connection with this rating action.