Last month, the Royal Bank of Scotland Group (LSE:RBS) sold off 25% of its U.S. subsidiary Citizens Financial Group (NYSE:CFG) in the largest bank IPO since Goldman Sachs. The offering raised $3 billion in capital for RBS and gave U.S. investors a rare opportunity to buy an established, scaled bank stock as a spinoff.

After reviewing the IPO documents for this spinoff, I discovered three compelling reasons Citizens Financial Group could rise.

Let's break it down.

1. The main bear argument seems shortsighted

Source: Company website

Citizens Financial initially priced at $21.50 per share, well below the $23-$25 expected range. The market valued the bank at about $12 billion; RBS was hoping to raise an additional $500 million with the offering.

Its important that we remember at this point why RBS is selling. It is not because Citizens Financial is a troubled bank. It's not even because of the bank's lagging returns (we'll touch on those lagging returns below).

The reason is much more simple and selfish: RBS needs the capital. The U.K.-based bank has been hammered by scandal, problem assets, regulatory actions, and losses. The bank is 80% owned by the British government today after requiring a bailout after the financial crisis. Selling Citizens Financial in this IPO was RBS's best option to quickly raise capital without further crushing their shareholders.

Many investors have pointed to RBS's remaining 75% ownership as a headwind for the stock. On the surface that argument makes sense; RBS is selling its position in Citizens Financial, and as the largest shareholder, it could dump its shares in a hurry and exert a tremendous bearish pressure on the stock. 

But why would they do that? RBS's objective is to raise as much capital as possible. In the short and medium term, RBS has the exact same incentives as longer-term investors. Everyone wants to see the stock rise! 

There's even a recent precedent for this level of selling by a major shareholder. In the fall of 2008, AIG (NYSE:AIG) received a $182 billion bailout. Of course, the U.S. government intended to sell its stake in the company as soon as prudently possible thereafter.

Over a 19-month period from May 2011 to December 2012, the government actively sold its entire 92% stake in AIG. How did shareholders fair over that period, with the company's largest shareholder actively selling its stake?

AIG Chart

AIG data by YCharts

AIG returned 24% over that period, beating the S&P 500 (SNPINDEX:^GSPC) by 18%. 

That sale is obviously not apples to apples, but it does show that just because a large stakeholder is known to be selling shares, that does not necessarily mean a stock will underperform.

2. Citizens Financial Group's commercial division is already elite
Over the past several years, Citizens Financial Group has reported less than stellar earnings. Return on equity has hovered just below 5%, compared to average ROE of 9.7% for FDIC-insured institutions with more than $10 billion in total assets. Many investors pointed to that number as another reason to avoid the stock.

But if you dig a little deeper into the bank's S-1 filing with the SEC, you'll see that the bank's commercial business is producing an ROE of over 13%. The commercial business accomplished this by returning an impressive 1.46% on average assets, or ROAA, and an efficiency ratio of 44.6%. The average ROAA and efficiency ratio for U.S. banks with more than $10 billion in total assets was 1.08% and 59.5%, per the FDIC (remember, lower is better for the efficiency ratio).

You can slice and dice the numbers any way you want, but the conclusion will be the same. Citizens Finacial Group already has an elite commercial banking business. The key, then, is what management can do to bring its retail business up to that same standard.

3. Citizens Financial Group's retail business is ripe for a turnaround
Citizens Financial Group runs a relatively simple business model. The company doesn't feature the complex derivative and investment banking businesses you'll find at larger, Wall Street banks. Instead, the bank relies on mortgages, home equity lines of credit, auto loans, and commercial loans and services to businesses. The bank even avoids Wall Street like leverage, too -- the company maintains exceptionally strong Tier 1 capital levels, consistently above 13%.

Citizens Finacial's tier 1 capital ratio over the past 10 years. Source:

Thanks to that simplistic model, the game plan to turn around the bank's retail division is also straightforward, and management has laid out clear plans to correct its issues.

First, the retail division is very inefficient. The company's efficiency ratio on the retail side was 77% in 2013. The company has an expansive branch network in the Northeast and Midwest; this is a very powerful asset for the bank, but without careful management, costs can easily run out of control. The key, then, is to lower the costs of operating that network while simultaneously increasing productivity. 

Step one is to allocate capital to income-generating assets, like sales personnel. Company management has already announced plans to hire 350 new mortgage bankers. These hires should continue the rapid growth in the bank's mortgage portfolio -- Citizens Financial originated over $5.7 billion in mortgages in 2013 alone, per the company's S-1 filing.

Second, the bank is investing heavily in technology to increase automation, efficiency, and ultimately, to reduce costs. The company completed an overhaul of its ATM network, adding advanced deposit taking functionality and upgrades that allow much greater self-service capabilities for customers. The bank also rolled out new platforms that improve process efficiency in its auto lending, mortgage lending, and commercial loan businesses. In total, the company has invested $900 million since 2009, with plans to invest another $500 million over the next two years.

Foolish takeaway
Over the short term, it's impossible to know whether Citizens Financial Group will rise or fall. However, over the long term, I see several factors that could push this bank higher.

Source: Company website.

The spinoff from RBS opens up the bank to investment by long-term, value-oriented investors and frees the bank from distracted management overseas. The bank already has an elite commercial business that's growing and producing very strong returns. Management has laid out a well conceived strategic plan to turn around the struggling retail operation.

Banking is a tough business, and no investment in the market is ever assured, but in my view, Citizens Financial Group is well positioned to succeed over the long term.