DBRS Morningstar Confirms Citizens Financial Group at A (low), Trend Revised to Positive

DBRS, Inc. (DBRS Morningstar) confirmed the ratings of Citizens Financial Group, Inc. (Citizens or the Company), including the Company’s Long-Term Issuer Rating of A (low). At the same time, DBRS Morningstar confirmed the ratings of its primary banking subsidiary, Citizens Bank, National Association (the Bank). The trend for all long-term ratings at the Company has been revised to Positive from Stable and the trend for both long and short-term ratings at the Bank has been revised to Positive. The Intrinsic Assessment (IA) for the Bank is ‘A’, 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.

KEY RATING CONSIDERATIONS
The ratings confirmation and Positive trend reflects the ongoing momentum Citizens has realized building its franchise and growing earnings. Citizens has successfully implemented several strategic initiatives, including making franchise investments to build various aspects of its businesses, as well as ongoing expense initiatives, including streamlining customer facing processes. These initiatives have improved revenues and operating efficiency, leading to significant and consistent positive operating leverage. However, Citizens’ earnings remain more reliant on spread income, as compared to other regional banks. Positively, investments in several areas, including mortgage banking and capital markets, should lead to improvements in the level of fee income over time. The ratings also reflect the more challenging interest rate environment, a maturing credit cycle, with the expectation that provisioning will likely increase over time, as well as the maintenance of capital levels closer to peer medians.

RATING DRIVERS
Continued franchise momentum, as evidenced by growing core earnings, while maintaining a sound balance sheet could lead to an upgrade of the ratings. Conversely, a reversion to weaker profitability metrics, or a sustained increase in credit losses that exceed peer levels, especially should they result from a perceived increase in risk appetite or weak underwriting, could have negative ratings implications.

RATING RATIONALE
Citizens operates a strong regional banking franchise, with competitive positions in affluent and economically diverse markets across New England, the Mid-Atlantic, and Upper Midwest. Citizens maintains the second largest deposit market share in New England. The franchise also benefits from several national consumer lending platforms, including retail, auto and education finance lending, which are primarily focused on prime borrowers, as well as commercial lending. Citizens’ asset quality, solid funding and liquidity positions, and capital profile provide further support for the Company’s ratings.

Citizens’ operating results in recent periods have benefited from revenue growth and successful expense initiatives, which have both contributed to the achievement of positive operating leverage. Despite the pressure from a lower net interest margin in a more challenging rate environment, modest revenue growth and expense discipline has enabled the Company’s underlying efficiency ratio to stay around 58% in recent periods, with its mid-50% range medium-term target still in reach.

Reflecting the current benign credit environment and comparable to recent trends at most regional banks, asset quality at Citizens has shown resilience, with non-performing assets and net charge-offs remaining at, or nearing, cyclical lows. However, we expect credit metrics will likely continue to normalize at this point in the credit cycle, and as Citizens works to boost the risk-adjusted returns in its loan portfolio.

The Company’s well-established deposit franchise is the anchor of the funding profile. Additionally, Citizens’ digital bank, Citizens Access, creates an additional platform to raise deposit funding on a national level. Despite ongoing capital management activities, capital levels are considered strong. However, as expected, capital ratios have trended closer towards the peer group through ongoing buybacks, an increased dividend payout ratio, as well as organic growth. As of September 30, 2019, the Company’s Basel III fully phased-in Common Equity Tier 1 ratio was a still solid 10.3%.

Headquartered in Providence, Rhode Island, Citizens Financial Group, Inc. reported $164.4 billion in consolidated total assets as of September 30, 2019.

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

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

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2019), which can be found on our website under Methodologies & Criteria.

The primary sources of information used for this rating include Company Documents and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.

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

For more information on this credit or on this industry, visit www.dbrs.com.

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