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 CREDIT RATING CONSIDERATIONS
The ratings confirmation and Stable trend reflect 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 has increased the proportion of commercial lending to nearly half of loans, but maintained manageable levels of CRE exposures at about 16% of loans. Credit costs have remained low but with some normalization and a concurrent increase in reserves to address higher emerging risks, mainly in the CRE portfolio. The Company’s deposits remain skewed to retail (67% in 2Q23), with relatively stable deposit levels in the volatile period around bank failures earlier this year. The ratings also capture Citizens’ modest capital buffers relative to regulatory capital requirements, with the recently announced 2023/24 preliminary Stress Capital Buffer at 4%, and a total CET1 ratio requirement of 8.5%. Capital exceeded the expected requirement by 180 basis points in 2Q23, with management guiding capital level expectations near term to the upside to address upcoming Basel 4 related changes to requirements and potential new rules on regional bank total loss absorbing capital (TLAC). Finally the ratings consider the increased use of FHLB and wholesale funding to support balance sheet growth from the acquisitions.

CREDIT RATING DRIVERS
Continued measurable progress on advancing strategic priorities while maintaining conservative risk and capital management and strong earnings would result in ratings upgrade.

Conversely, missteps in implementation of strategy, sustained deterioration in asset quality or earnings would result in a ratings downgrade.

CREDIT RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Strong / Good
Citizens’ acquisitions of HSBC branches and Investors in 2022 drove the 27% year-over-year (YoY) increase in total assets to $226 billion as of December 31, 2022, 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 rising interest rates increased lending margins and net interest income, which remain Citizens’ main revenue source. Citizens’ continuing investments in its digital banking platforms provide further national growth potential, with existing leading national market shares in private student loans and home equity lines of credit. Citizens has also achieved a leading position in middle market corporate finance and sponsored lending, having broadened its investment banking capabilities to include debt and equity underwriting and lending in a range of industries. Citizens’ plans to build a private banking business, and optimize its balance sheet have potential to increase returns. We view the enhanced franchise as well-positioned to defend or expand its market shares.

Earnings Combined Building Block (BB) Assessment: Strong / Good
Citizens’ results for 2022 and in the 1H23 show strong revenue growth from higher interest rates, the acquisitions, and some organic loan growth, offset by lower non-interest income on reduced mortgage and capital markets volumes. Earnings performance has benefited from good underlying cost control and continued limited credit losses. Citizens continues to invest in strategic priorities to drive earnings growth, including building national coverage in wealth management, while also investing in its direct banking and buy now pay later (BNPL) businesses. Citizens, like peers, has faced cost headwinds from inflation on labor and operating expenses, while deposit and wholesale funding costs have increased. Net interest margins peaked in the 4Q22, with cumulative deposit beta of 42% as of the 2Q23, in line with regional peers. Citizens’ guidance for full year 2023 calls for lower growth in NII due to funding costs and tighter underwriting trends, offset by recovery in non-interest income and still strong expense control with stable to slightly higher credit losses. We view the Company’s performance as resilient, benefiting from a manageable level of CRE exposure, stickier deposits mainly from consumers, and a culture of cost control and innovation.

Risk Combined Building Block (BB) Assessment: Strong / Good
Citizens’ primary risk exposure, credit risk, is currently benefiting from the better than expected labor market trends, with consumer spending offsetting recessionary pressures in the economy from higher rates. Citizens is experiencing some of the expected normalization in credit losses, with recently increased net charge off levels and gradually increasing non-accrual loans, while management is building loss reserves, focused on higher coverage for commercial and CRE exposures. Citizens’ credit loss levels remain manageable given increased coverage levels, where the current focus on increasing risks in general office CRE is mitigated by the smaller size of this exposure, at 2.6% of total loans with limited central business district weaker properties exposures. We view Citizens’ market risk exposure as modest but likely to grow with increased capital markets activities, while interest rate risk is well-managed proactively through hedging and securities portfolio management.

Funding and Liquidity Combined Building Block (BB) Assessment: Strong / Good
Citizens’ stability through the recent period of three large bank failures showed resilience in deposit and funding levels, with recovery in deposit balances in 2Q23. Citizens’ deposits are largely consumer sourced, at 67% with 68% FDIC insured. Citizens’ plans to optimize its balance sheet composition, shedding lower yielding assets and higher cost funding will drive improved returns while maintaining good diversification in funding sources, although, like peers, these are migrating to higher cost deposit categories. Citizens returned to the capital markets in late 2022 and 1Q23 with subordinated holding company and senior unsecured operating bank issues. Citizens realized good deposit growth in 2Q23 and reduced FHLB borrowing by $6.8bn to $5 billion.

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. The higher SCB was in place at 3.4% from 2020 to September 2023, but was increased by 0.6% to a preliminary 4%, with a total CET1 ratio requirement of 8.5% following this year’s DFAST exercise. Citizens’ capital cushion of 180 basis points versus the coming higher requirement remains a slight weakness, with peers at lower SCB levels and buffers more commonly above 2%. Management plans to build capital levels above the current target range of 9.5-10% with the CET1 ratio expected to move as high as 10.5% in light of potential regulatory changes requiring higher capital.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/417601

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental There were no Environmental/Social/Governance factor(s) 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/416784/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 22, 2023): https://www.dbrsmorningstar.com/research/415978/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 (July 4, 2023): https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

The primary sources of information used for this credit rating include Morningstar Inc. and Company Documents. DBRS Morningstar considers the information available to it for the purposes of providing this credit rating was of satisfactory quality.

The credit rating was not initiated at the request of the rated entity.
The rated entity or its related entities did participate in the credit rating process for this credit rating action.
DBRS Morningstar did not have access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.
This is a solicited credit rating.

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 credit ratings are under regular surveillance.

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