The super-regional bank Citizens Financial Group (CFG 1.57%) significantly took down its full-year guidance after a difficult first quarter for the banking sector, and the stock has sold off pretty heavily this year.
Citizens is dealing with industry headwinds created by the banking crisis in March as well as the high-interest-rate environment, which will likely make earnings more challenging in the near term. But I still find the stock attractive when you look at its overall positioning and valuation. Here's why.
What happened to the Citizens' guidance
Most banks lowered their guidance in Q1, but Citizens' downward revision seemed to be pretty significant based on what it was in January.
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Back in January, management guided for net interest income (NII) to increase by 11% to 14% in 2023. NII is the money that banks make on loans and securities after funding those assets with liabilities such as deposits It's also a key revenue driver. Now, after the recent quarter, management is only guiding for a 5% to 7% increase in NII.
The obvious headwind is higher deposit and funding costs, as the high-interest-rate environment drove some customers to seek out yield in other risk-free assets. In the first quarter, Citizens saw its deposits drop 2.6% on an average basis and 4.7% on a period-end basis. Total deposit costs rose from 0.88% to 1.28% in the quarter, driving NII to decline by 3% in the quarter, although there were fewer days in Q1 than in the fourth quarter of 2022.
When asked about the lowered NII guidance, Citizens' CEO Bruce Van Saun said on the bank's recent earnings call, "we are going to be paying more for our funding than we thought coming into the year and that's pretty much the big driver." Van Saun added that the bank will also likely see less loan volume as it stays more cautious given the environment, and the bank is actively running down its auto loan portfolio.
Citizens is also expecting lower fee income and slightly higher projected loan losses this year, both of which will be headwinds to earnings.
Citizens is not in a bad position
Despite a disappointing reduction in guidance, I still think Citizens is sitting in a position of strength, all things considered.
The bank has very healthy levels of capital. Its common equity tier 1 (CET1) equity ratio, which looks at the bank's core capital expressed as a percentage of its risk-weighted assets as loans, ended the first quarter at 10%. That's the second-highest in its peer group.
Citizens also didn't invest too heavily in bonds during the pandemic, and if you incorporated its unrealized bond losses into its CET1 ratio, it would still be 8.7%, which is still well above its regulatory requirement of 7.9%. This positions the bank well for any upcoming regulatory capital changes that the super regional banks are expected to see as a result of the banking crisis.
I am also not overly concerned about the deposit outflows in the quarter. Management said deposits have stabilized and are even up slightly in April. Since Citizens' IPO in 2015, the bank has done a lot of work to improve the deposit franchise. Roughly 67% of consumer clients and 66% of clients in the commercial sector now use Citizens as their primary bank.
The bank still has work to do when it comes to catching up to some of its peers, but I'm optimistic about Citizens' entry into the New York Metro market, which the bank entered with its recent acquisitions of Investors Bancorp and the 80 branches it bought from HSBC.
Management seems extremely upbeat about the initial progress and has seen retail deposits grow by 3% in the HSBC branches between March 2022 and February 2023. Early customer acquisition rates in the HSBC and Investors Bancorp branches have also been promising. Also, despite the chaos in Q1, Citizens still managed to add 350 new commercial banking clients and 5,000 business banking clients in the quarter.
Citizens has an attractive valuation
Currently, Citizens stock trades right around tangible book value, which is definitely on the cheap end of where the bank has traded historically. I believe the difference is that management greatly improved the franchise since going public, and the deposit franchise is much better as well, not that it won't face near-term funding pressure.
The balance sheet looks rock-solid with the 10% CET1 ratio, and the bank also managed liquidity very well during the pandemic. Long term, I expect these fundamentals to pay off and translate into a much better valuation and stock price.
