Since its spinoff from the Royal Bank of Scotland (now NatWest Group) in 2015, the $188 billion asset Citizens Financial Group (CFG 1.25%), based in Rhode Island, has been working to become a top-performing national bank.
And it has made some real progress over the last five years to improve its fundamental business, as well as diversify its revenue and offer some real differentiation from its peers. The hard work looks to be paying off. Here are four reasons Citizens is well positioned this year.
1. It will benefit greatly from rising interest rates
Most banks benefit when the Federal Reserve raises its benchmark overnight lending rate (the federal funds rate) because they tend to see more of their loan yields reprice higher with this rate than their deposit rates.
Citizens, however, is more asset-sensitive than your average bank. At the end of the third quarter of 2021, Citizens disclosed that if there were to be an instant 1-percentage-point bump in the federal funds rate, its net interest income -- the money it makes on loans and securities after covering the cost of funding those assets -- would jump about 11% over the next year. Now, that's unlikely to happen because the Fed will probably raise the federal funds rate in quarter-percentage-point increments, but this still illustrates the extreme asset sensitivity of the bank. With Citizens projecting some solid loan growth this year, that should bode well for the bank's lending segment and associated revenue.
Image source: Citizens Financial Group.
2. It's diversifying revenue and adding scale
Citizens has also made a lot of moves in recent years to diversify its lending and fee revenue, as well as build scale. In 2018, it acquired Franklin American Mortgage to grow its home lending business. The bank has also been building its business in wealth management, capital markets, and investment banking. Assets under management at the bank are up more than threefold since 2015.
Citizens has also been adding to capital markets through bolt-on acquisitions, and in the fourth quarter of 2021, the division generated $184 million of fee income, up nearly $100 million from the fourth quarter of 2020. That pace will be difficult to sustain, but it shows that Citizens is continuing to take market share.
Lastly, it has added scale and built more of a national presence. Last year, the bank announced two big acquisitions: 80 U.S. branches from HSBC, which include a lot of digital customers, and the acquisition of Investors Bancorp. Both deals gave Citizens a strong presence in New York City, which had been a big gap in its geographic footprint.
3. It's building the national digital consumer bank
The big differentiation being developed by Citizens is the creation of the national digital consumer bank. It has built out a diverse array of consumer lending products including mortgages, home equity loans, student loans, auto loans, and its Citizens Pay buy now, pay later (BNPL) product.
Citizens Pay is a line of credit that consumers can draw down multiple times after they are approved. They can use it to purchase products for nothing up front and then pay it down over multiple zero-interest installment payments.
The bank has also started to build up a deposit base through digital customers called Citizens Access. This effort will get a nice boost from many of the digital customers coming from the HSBC acquisition.
The bank now plans to package all of these consumer lending and deposit products into one bundle to start banking customers early and then continue to provide them products and services throughout their lives. For instance, maybe Citizens can help customers refinance student debt. Then later down the line, the bank can offer them a mortgage, and then offer some of its wealth management services once they want to invest their savings.
The creation of this bundle will not happen overnight. The bank will need to get everything on the right tech platforms and figure out how to integrate the experience in the most efficient manner. But Citizens has the necessary pieces in place, so the strategy looks compelling.
4. A solid entry point
I do like bank stocks in general this year, but some have started to run up to pretty decent valuations. Citizens had a nice year last year, but still trades at the bottom of its peer group on the basis of price to tangible book value, which looks at a bank's market cap relative to what it would be worth if it were liquidated.
USB price to tangible book value. Data by YCharts.
Further study of its competitors is warranted to consider why Citizens is still at the bottom of the peer group in this metric, but I would contend that if the bank is doing a lot of things well and has a good strategy in place, then it probably merits consideration. Additionally, Citizens has a dividend yield of over 3%, so it's not like you will not be paid to wait for the stock to catch up.
