Why did reported earnings fall so sharply in the fourth quarter?

Reported net income dropped to $189 million from $430 million in 3Q23 mainly because of $345 million in pre-tax notable items, including the $225 million FDIC special assessment, integration costs, and TOP and other efficiency-related charges. A low effective tax rate of 7.6% in the quarter, driven by discrete items, also reduced the tax burden on the reported figure. Management's Underlying metrics, which exclude these items, show a smaller but still meaningful decline.

Is the decline in Underlying profitability a concern for investors?

Partly. Underlying pre-provision profit fell 3% QoQ and 28% YoY, and the Underlying efficiency ratio rose to 63.8% from 54.4% a year earlier. Margin compression, with NIM down 39 bps YoY, and rising deposit costs are the main drivers. Some of the margin decline reflects a deliberate liquidity build that management says is complete, so investors will want to see whether NIM stabilizes in 2024.

How healthy is the loan book, and is credit deteriorating?

Credit is weakening gradually but remains manageable. Nonaccrual loans rose to 0.93% of total loans from 0.60% a year ago, driven largely by the General Office commercial real estate segment. NCOs rose to 0.46% of loans. Management describes criticized loans as broadly stabilizing and reports that the ACL ratio increased to 1.59%. Investors should monitor the commercial real estate exposure and the coverage decline.

Why was the share buyback paused, and will it resume?

No repurchases occurred in 4Q23, which management attributed to pausing capital returns to absorb the industry-wide FDIC special assessment. The filing does not give a timeline for resuming buybacks. Its guidance notes that future dividends and repurchases depend on capital position, financial performance, and regulatory considerations, so the timing is uncertain.

What do the balance sheet trends signal for funding and liquidity?

Period-end deposits held roughly flat at $177.3 billion, but the mix shifted toward higher-cost term deposits, which rose 12% QoQ, while demand and interest-bearing checking balances declined. Borrowings fell 21% as FHLB advances dropped by $3.3 billion. The loan-to-deposit ratio improved to 82%, indicating a stronger funding position, though the shift toward costlier deposits continues to pressure margins.

CITIZENS FINANCIAL GROUP INC/RI 8-K SEC Disclosure

01—Abstract

Summary

Summary of the 8-K filed January 18, 2024. Cited figures are marked; the original filing is the authoritative source.

Citizens Financial Group (CFG) reported fourth quarter 2023 results on January 17, 2024, filed under Item 8.01 with the earnings release (Exhibit 99.1) and financial supplement (Exhibit 99.2).

Reported diluted EPS fell to $0.34^a from $0.85 in 3Q23 and $1.25 in 4Q22, driven by a $345 million pre-tax notable-item charge that includes a $225 million industry-wide FDIC special assessment. Excluding notable items, Underlying EPS was $0.85, down 4% sequentially and 36% year over year, with Underlying ROTCE of 11.8%. Full-year 2023 Underlying diluted EPS was $3.88 versus $4.84 in 2022, and reported diluted EPS was $3.13.

Core profitability pressure was visible across the income statement. Net interest income fell 2% sequentially to $1.49 billion^b as net interest margin compressed 12 basis points to 2.91%, reflecting a deliberate build in liquidity and higher funding costs. Total deposit costs rose 16 basis points.

Period-end loans declined 3% sequentially, partly from balance sheet optimization and the planned run-off of the Non-Core portfolio. Credit costs are normalizing: net charge-offs rose to 0.46% of average loans, nonaccrual loans reached 0.93% of loans (up from 0.60% a year earlier), and the allowance covered 170% of nonaccrual loans, down from 237%. Provision for credit losses was $171 million^c.

Offsetting these pressures, capital and balance sheet metrics improved. The CET1 ratio rose to 10.6% (preliminary), the tangible common equity ratio reached 6.7%, the loan-to-deposit ratio improved to 82%, and tangible book value per share increased 11% to $30.91^d, largely from lower AOCI losses.

The company declared a $0.42 quarterly dividend but made no share repurchases in the quarter, citing the pause to absorb the FDIC assessment. Underlying noninterest expense was $1.27 billion, and the company reduced headcount by roughly 650, or 3.5%, while exiting the Wholesale Mortgage and Auto businesses.

02—Key points

Key Highlights

Reported diluted EPS of $0.34 in 4Q23, versus $0.85 in 3Q23 and $1.25 in 4Q22, reflecting $345 million in pre-tax notable items ($0.51 per share).
Underlying EPS of $0.85 (down 4% QoQ, down 36% YoY); Underlying ROTCE of 11.8% versus 19.4% a year earlier.
A $225 million FDIC special assessment (about $0.35 per share) was the largest single notable item in the quarter.
Net interest margin fell 12 bps QoQ to 2.91% and net interest income declined 2% to $1.49 billion, reflecting liquidity build and higher deposit costs.
Credit normalization continued: NCOs rose to 0.46% of loans, nonaccrual loans rose 44% YoY to $1.36 billion, and the ACL-to-nonaccrual coverage ratio dropped to 170%.
Capital strengthened with CET1 at 10.6%, TCE at 6.7%, and TBV per share up 11% to $30.91, while the $0.42 dividend was maintained and buybacks were paused.

03—Questions

Frequently Asked Questions

Why did reported earnings fall so sharply in the fourth quarter?
Reported net income dropped to $189 million from $430 million in 3Q23 mainly because of $345 million in pre-tax notable items, including the $225 million FDIC special assessment, integration costs, and TOP and other efficiency-related charges. A low effective tax rate of 7.6% in the quarter, driven by discrete items, also reduced the tax burden on the reported figure. Management's Underlying metrics, which exclude these items, show a smaller but still meaningful decline.
Is the decline in Underlying profitability a concern for investors?
Partly. Underlying pre-provision profit fell 3% QoQ and 28% YoY, and the Underlying efficiency ratio rose to 63.8% from 54.4% a year earlier. Margin compression, with NIM down 39 bps YoY, and rising deposit costs are the main drivers. Some of the margin decline reflects a deliberate liquidity build that management says is complete, so investors will want to see whether NIM stabilizes in 2024.
How healthy is the loan book, and is credit deteriorating?
Credit is weakening gradually but remains manageable. Nonaccrual loans rose to 0.93% of total loans from 0.60% a year ago, driven largely by the General Office commercial real estate segment. NCOs rose to 0.46% of loans. Management describes criticized loans as broadly stabilizing and reports that the ACL ratio increased to 1.59%. Investors should monitor the commercial real estate exposure and the coverage decline.
Why was the share buyback paused, and will it resume?
No repurchases occurred in 4Q23, which management attributed to pausing capital returns to absorb the industry-wide FDIC special assessment. The filing does not give a timeline for resuming buybacks. Its guidance notes that future dividends and repurchases depend on capital position, financial performance, and regulatory considerations, so the timing is uncertain.
What do the balance sheet trends signal for funding and liquidity?
Period-end deposits held roughly flat at $177.3 billion, but the mix shifted toward higher-cost term deposits, which rose 12% QoQ, while demand and interest-bearing checking balances declined. Borrowings fell 21% as FHLB advances dropped by $3.3 billion. The loan-to-deposit ratio improved to 82%, indicating a stronger funding position, though the shift toward costlier deposits continues to pressure margins.

04—Continue

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