Recently, Citizens Financial Group (CFG 1.57%), a $187 billion asset large regional bank based in Rhode Island, announced that it plans to extend its point-of-sale, buy-now-pay-later (BNPL) relationship with Microsoft (MSFT 0.37%). BNPL has been all the rage lately, with companies like Affirm (AFRM -2.08%) running up to huge valuations in a very short time period.
However, being a large regional bank, Citizens' stock enables people to get exposure to the space without the same kind of risk that has led to a big sell-off in high-growth tech stocks lately. Let's take a look at how Citizens offers this exposure with more stability.
Building Citizens Pay
Investors view Citizens as a more traditional bank stock, not that the bank hasn't gotten a lot more innovative from a digital banking perspective over the years. The bank has a large commercial loan portfolio and other fee income businesses like investment banking and wealth management.
Over the years, Citizens has worked to build a more diversified consumer portfolio that encompasses digital high-yield savings accounts, mortgage, home equity, student lending, and a growing BNPL portfolio. Long term, Citizens is looking to build a national digital consumer bank that better integrates and markets all of these products together.
Citizens Pay, the bank's BNPL and point-of-sale offering, essentially allows people to take out zero-interest 12- to 18-month installment loans on purchases and pay them down over time. The other neat thing about this product is that once a customer makes a purchase on Citizens Pay, there are no additional credit checks on future purchases.
Image source: Getty Images.
Citizens has formed some key partnerships over the years, and Citizens Pay can be used at many major retailers like Best Buy, Walmart, Target, and GameStop. The BNPL portfolio is up to about $4 billion to $5 billion in total loan balances on the balance sheet, and currently carries a nice 7.15% yield on the portfolio. During the bank's third-quarter earnings call, Citizens' CEO Bruce Van Saun said BNPL balances are up about 40% year over year.
With the expansion of the partnership with Microsoft, customers will be able to purchase all Microsoft hardware, such as the new Surface Pro or Xbox system, as well as accessories and subscription services, on Microsoft.com using the Citizens Pay platform.
The benefits of being a large bank
If you look over the past month, the fast-growing fintech Affirm has been hammered and is down more than 31%. Meanwhile, Citizens' stock has held steady and is up 35% year to date. Because Citizens is a larger bank that has many other businesses, it is going to trade in a much more stable manner than a stock like Affirm.
Fintechs have been sold off broadly over the last month as investors fret about the omicron variant and higher inflation, which has led the Federal Reserve to abandon the word "transitory" when it comes to inflation. The Fed also looks like it will ramp up the tapering on its bond-buying program and raise rates in 2022.
The market is worried that higher rates will lead to more BNPL borrowers defaulting and that higher rates could also potentially stymie consumer demand, especially if the economy keeps dealing with supply chain and labor issues, or future lockdowns. In September, Reuters reported that one-third of U.S. consumers who had entered a BNPL agreement had missed one or more payments.
A bank like Citizens with more than $123 billion of loans is a lot less concentrated in BNPL. Additionally, credit quality in Citizens' BNPL book looks to have held up pretty well at the end of the third quarter, with non-accrual loans, those in which borrowers have missed payments, and charge-offs, debt unlikely to be collected, both down from 2020 levels.
The other great thing about Citizens is that because it's a bank, it serves as a hedge against inflation because it is asset-sensitive. That means more of the yields on its assets (like loans) will reprice higher than its liabilities (like deposits) when the Fed raises rates. And Citizens is quite asset-sensitive. A gradual 1% hike in the federal funds rate would result in 5% more net interest income over the next year, which is the money banks make on loans and securities after covering their cost of funding and a major driver of revenue.
A less risky BNPL play
Ultimately, Citizens is in a different class than a company like Affirm. It's not going to offer nearly the same potential upside, but it will be more protected against the downside. As long as inflation doesn't get too intense, a stock like Citizens will benefit from higher rates.
I also think BNPL could be an interesting customer acquisition strategy for Citizens if it can use BNPL to reach customers nationally and then cross-sell other banking products, like a mortgage or a student loan, to these customers. Citizens is still viewed by investors as more of a traditional bank, but the bank is growing its BNPL portfolio, which is starting to stand out as a compelling digital retail strategy to differentiate itself from its peers.
