What drove the decline in earnings compared with a year ago?

Underlying net income available to common stockholders fell 32% YoY to $365M, driven by a $473M increase in nonaccrual loans (mostly commercial real estate), a 39 bp decline in NIM to 2.91% from higher funding costs, and a 12% drop in net interest income. These were partly offset by higher fee income and a 3% increase in underlying expenses.

Is the net interest margin likely to recover?

Management expects NIM to benefit from Non-Core loan run-off and receive-fixed swap roll-off, with an estimated ~62 bps tailwind by 4Q27 and a medium-term NIM target of 3.25% to 3.40%. The company estimates an incremental NII benefit of about $244M in 2025 and $438M in 2026. Its funded balance sheet is asset sensitive, which partly offsets these gains, and near-term NII is still expected to decline in 2Q24.

How concerning is the credit trend?

Credit trends are a watch item. Net charge-offs were 0.50% of average loans (up 4 bps QoQ), and nonaccrual loans rose to 1.02% of total loans from 0.64% a year ago. The General Office CRE reserve coverage increased to 10.6%, and management says the General Office portfolio is informed by a severe recession scenario. The allowance for credit losses covers 157% of nonaccrual loans, down from 229% a year earlier, so reserve coverage has thinned relative to problem loans.

Is the dividend and capital position secure?

The quarterly dividend of $0.42 per share was maintained, and CET1 of 10.6% is near the top of the peer group. Management noted that the adjusted CET1 ratio, excluding the AOCI opt-out removal, is 8.9%. Management expects both ratios to converge to 10.0% to 10.5% over the medium term, and AOCI burn-off is expected to add about 60 bps to CET1 by YE2026.

What is the Private Bank's impact on results?

The Private Bank is a current drag on earnings, with a 1Q24 net loss of about $15M on an underlying basis and $38M in start-up expenses. Management expects the business to reach breakeven in 2H2024 and to eventually generate returns above 20% ROTCE. Deposits in the Private Bank have reached $2.4B.

CFG 8-K: Earnings & Results & Regulation FD

01—Abstract

Summary

Summary of the 8-K filed April 17, 2024. Cited figures are marked; the original filing is the authoritative source.

Citizens Financial Group (CFG) reported first quarter 2024 GAAP net income of $334 million^a, or $0.65 per diluted share, and underlying net income of $395 million, or $0.79 per share (underlying ROTCE 10.6%).

Underlying pre-provision profit was $683 million^b, down 5% sequentially and 24% year over year. Results were pressured by a 3% sequential decline in net interest income to $1.44 billion, driven by a 2% drop in average interest-earning assets, while net interest margin held stable at 2.91%. Underlying noninterest income rose 3% quarter over quarter to $514 million, helped by a 36% jump in capital markets fees, and underlying expenses were broadly flat at $1.27 billion, including $38 million of Private Bank start-up costs.

Credit quality showed continued pressure. Net charge-offs rose to 0.50% of average loans from 0.46%, and nonaccrual loans climbed 8% sequentially to $1.47 billion^c, primarily from the General Office segment of commercial real estate. The allowance for credit losses increased to 1.61% of loans, though coverage of nonaccrual loans fell to 157% from 170%.

Balance sheet optimization continued, with period-end loans down 2% and FHLB advances cut to $2.0 billion^d. Capital remained solid, with a CET1 ratio of 10.6% and a TBV per share of $30.19, down 2% on AOCI losses from higher rates. Management reaffirmed FY2024 guidance and declared a $0.42 quarterly dividend.

For investors, the key takeaways are a stable margin and a strong capital and liquidity position, offset by a weaker revenue trajectory, elevated commercial real estate credit costs, and ongoing investment in the Private Bank. Management's medium-term outlook points to NII tailwinds from swap roll-off and Non-Core run-off, with a targeted NIM of 3.25% to 3.40% and ROTCE of roughly 16% to 18%.

02—Key points

Key Highlights

Underlying EPS of $0.79 (GAAP $0.65) and underlying ROTCE of 10.6%, versus $0.85 in 4Q23 and $1.10 in 1Q23
Net interest income fell 3% QoQ to $1.44B, with NIM stable at 2.91% as higher funding costs offset asset yield gains
Underlying noninterest income rose 3% QoQ to $514M, led by capital markets fees up 36% to $118M
Underlying expenses were stable at $1.27B, though they were up 3% YoY and included $38M of Private Bank start-up investment
Nonaccrual loans rose 8% QoQ to $1.47B (1.02% of loans), driven by commercial real estate General Office; net charge-offs rose to 0.50%
CET1 ratio held at 10.6%; the company repurchased $300M of shares and declared a $0.42 quarterly dividend
Management reaffirmed FY2024 guidance and projects 2Q24 underlying NII down about 2% and noninterest income up about 3-4%

03—Questions

Frequently Asked Questions

What drove the decline in earnings compared with a year ago?
Underlying net income available to common stockholders fell 32% YoY to $365M, driven by a $473M increase in nonaccrual loans (mostly commercial real estate), a 39 bp decline in NIM to 2.91% from higher funding costs, and a 12% drop in net interest income. These were partly offset by higher fee income and a 3% increase in underlying expenses.
Is the net interest margin likely to recover?
Management expects NIM to benefit from Non-Core loan run-off and receive-fixed swap roll-off, with an estimated ~62 bps tailwind by 4Q27 and a medium-term NIM target of 3.25% to 3.40%. The company estimates an incremental NII benefit of about $244M in 2025 and $438M in 2026. Its funded balance sheet is asset sensitive, which partly offsets these gains, and near-term NII is still expected to decline in 2Q24.
How concerning is the credit trend?
Credit trends are a watch item. Net charge-offs were 0.50% of average loans (up 4 bps QoQ), and nonaccrual loans rose to 1.02% of total loans from 0.64% a year ago. The General Office CRE reserve coverage increased to 10.6%, and management says the General Office portfolio is informed by a severe recession scenario. The allowance for credit losses covers 157% of nonaccrual loans, down from 229% a year earlier, so reserve coverage has thinned relative to problem loans.
Is the dividend and capital position secure?
The quarterly dividend of $0.42 per share was maintained, and CET1 of 10.6% is near the top of the peer group. Management noted that the adjusted CET1 ratio, excluding the AOCI opt-out removal, is 8.9%. Management expects both ratios to converge to 10.0% to 10.5% over the medium term, and AOCI burn-off is expected to add about 60 bps to CET1 by YE2026.
What is the Private Bank's impact on results?
The Private Bank is a current drag on earnings, with a 1Q24 net loss of about $15M on an underlying basis and $38M in start-up expenses. Management expects the business to reach breakeven in 2H2024 and to eventually generate returns above 20% ROTCE. Deposits in the Private Bank have reached $2.4B.

04—Continue

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