DBRS Morningstar Confirms Citizens Financial Group, Inc. at A (low); Trend Stable

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), including the Bank’s Long-term issuer rating of A. The trend for all ratings remains Stable. 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 Stable trends reflects Citizens’ strong franchise in the attractive New England, Mid-Atlantic and Mid-West regions that has recently been augmented by the acquisitions of Investors Bancorp (Investors) and the East Coast branches of HSBC. The acquisitions were both immediately accretive to earnings, and have had only a modest negative impact on capital levels. Citizens’ results for 1H22 show strong earnings uplift from higher interest rates, the acquisitions, and organic loan growth. Earnings are likely to continue to benefit from these forces in 2H22, providing the capital generation to restore capital levels. The ratings also consider a lower cushion over regulatory capital requirements relative to similarly rated peers, as well as using secured funding through the FHLB to fund part of the acquisitions, which modestly limits financial flexibility.

RATING DRIVERS
The successful integration of recent acquisitions with the realization of transaction assumptions, including improved profitability metrics, while retaining acquired customers, maintaining strong risk management, and rebuilding capital would result in an upgrade of the ratings.

Significant weakening in asset quality, financial performance, capital levels or operational issues with the integration of the acquisitions, would result in a ratings downgrade.

RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Strong / Good
Citizens’ recently completed acquisitions of HSBC branches and Investors drove the 27% year-over-year (YoY) increase in total assets to $226.7 billion and added 234 branches to the Company’s network. Citizens increased loans and deposits by 27% and 19% respectively, adding to the franchise strength at a time when the current up-cycle in interest rates will increase lending margins and net interest income, which remains Citizens’ main revenue source. Citizens’ recent investments in its digital banking platforms provide further national growth potential, and the Bank has leading national market shares in select lending categories, including private student loans and home equity lines of credit. We view the enhanced franchise as well-positioned to defend or expand its market share positions.

Earnings Combined Building Block (BB) Assessment: Strong / Good
Citizens’ 2Q22 earnings provided early insights into revenue gains and the potential for improved efficiency resulting from the acquisitions, with net interest income up 31% quarter-over-quarter (QoQ), fee income was up 5% QoQ, while the underlying efficiency ratio, excluding the impact of the acquisitions, improved to 58.4%. Moreover, Citizens is on track to achieve planned cost synergies. Benefiting from its asset-sensitive balance sheet and the acquisitions, Citizens’ net interest margin expanded a significant 29 basis points (bps) from 1Q22 to 3.04%, which presages solid earnings expansion for the Company. Meanwhile, Citizens’ technology enhancements have also contributed to current and potential future efficiency gains that will help support the cost of ongoing digital investments.

Risk Combined Building Block (BB) Assessment: Strong / Good
Citizens’ primary risk exposure, credit risk, is currently benefiting from the recovery in employment levels and the broader economy since the height of the pandemic in 2020. Citizens continues to report an improving trend in credit losses and non-performing loans, excluding the effects of acquisitions, while good loan demand is allowing the bank to be more selective in some consumer and commercial categories. Citizens intends to moderate its increased CRE exposure (due to Investors acquisition). We view Citizens’ market risk exposure as modest but likely to grow, while interest rate risk exposure is well-managed proactively through hedging and securities portfolio management.

Funding and Liquidity Combined Building Block (BB) Assessment: Strong / Good
Citizens has improved its funding profile with an increased share of non-interest bearing deposits, while it has lowered brokered and term CDs, following banking industry trends. Citizens’ acquisitions will modestly add to wholesale deposits, which will be mitigated by the expected improvement of deposit costs in Citizens’ pre-acquisition funding structure. Citizens has used the strong deposit growth of 2020 and 2021 to replace a substantial portion of its senior bond funding, which adds stability and lowers funding costs.

Capitalization Combined Building Block (BB) Assessment: Good
Citizens’ capital levels remain sound, but these lag peers on the measure of cushion over required levels of CET1 capital, due to Citizens’ higher stress capital buffer (SCB) requirement. This higher SCB has been in place at 3.4% since 2020, and was affirmed in 2022 following this year’s CCAR exercise. Citizens’ capital cushion will likely fall in the lower end of the range of peers, at about 160-175 bps, which is mitigated somewhat by the Company’s solid capital generation.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/400346.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

There were no Environmental, Social, or Governance factors that had a significant or relevant effect on the credit analysis

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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 23, 2022): https://www.dbrsmorningstar.com/research/398692/global-methodology-for-rating-banks-and-banking-organisations.
Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (May 17, 2022): https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

The primary sources of information used for this rating include Morningstar, Inc. and Company Documents. 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.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

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

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