$ 185 billion in assets Citizens Financial Group (NYSE: CFG), based in Rhode Island, posted disappointing second quarter results, generating diluted earnings per share (EPS) of $ 1.46 on total revenue of $ 1.61 billion. EPS topped expectations by $ 0.37, but slightly missed revenue. However, EPS would have missed expectations if citizens had not freed up $ 291 million in reserve capital previously set aside for loan losses linked to the pandemic, but not used due to the improving macroeconomic outlook.
What was most disappointing about the report was the weaker-than-expected loan growth, despite the bank’s somewhat unique consumer loan mix that was expected to produce above-average loan growth for the industry. under current market conditions.
Despite the disappointing figures, there is still reason to believe that citizens can outperform in the coming quarters. Here’s why.
Disappointing results, but positive signs
Average citizen loan balances and end-of-period loan balances barely changed from the first quarter of the year. If you exclude Paycheck Protection Program (P3) loans, end-of-period loans increased 1.8% from the sequential quarter.
However, management in the last quarter had forecast 1.5% to 2% loan growth in the second quarter, and it did not say anything specifically about excluding PPP loans in its forecast. Citizens Financial CEO Bruce Van Saun said on the bank’s latest earnings call that repayments on PPP and other commercial loans are making up for strong origination levels.
The growth of physical loans was disappointing in the banking sector during the last quarter. But Citizens’ main differentiator is its unique combination of consumer loans, which includes mortgages, home equity, auto loans, student loan refinancing, and point-of-sale (POS) loans. This unique set of verticals should have benefited more than the industry in the second quarter, as the consumer is currently the engine of the economic recovery.
Favorable developments during the quarter
Management said the consumer loan portfolio saw record builds in the quarter, increasing total consumer loan balances by 3% from the first quarter. End-of-period loan balances relative to the sequential quarter jumped 7% in particular in residential mortgages, 4% in autos, 1% in student loan refinancing and minus 3% in residential mortgages. POS, so there was a positive movement. Van Saun said he remained optimistic about the second half of the year: âLooking at the second half of the year, we believe we will see a pickup in loan growth, especially from the consumer side in financing. students, points of sale and the automotive industry. . In the commercial sector, we should start to see a gradual increase in the use of lines from low levels, as well as a resumption of financing linked to the transactions. “
In January, management turned to end-of-period loan growth in mid to high single-digit percentages in 2021, accelerating in the second half of the year, so it’s not great to see the bank missing its forecast in the second quarter. Single-digit mid-percentage growth still seems very possible, with single-digit high growth looking more like a litter right now. Management also said it suspended share buybacks in the second quarter in part to prepare for accelerated loan growth, and management expected end-of-period loan balances to increase 2-3% in the third quarter. .
In addition to loans, Citizens continued to reduce its deposit costs during the quarter and generated record revenues in its capital markets and wealth management fee lines of business. Citizens expect total commission income to increase by 2% to 4% in the third quarter, with improvement in mortgage banking services, which slowed significantly in the second quarter. Credit quality remained excellent with management forecasting minimal losses for the year.
Citizens also became more asset sensitive during the quarter, meaning that when interest rates rise, more of its assets will be revalued higher than its liabilities. A gradual 2% increase in interest rates would translate into additional net interest income of 10.7% over a one-year period (approximately 9% taking into account the recently announced acquisition by Citizens of Bancorp Investors (NASDAQ: VSI)).
A good entry point
Despite disappointing second quarter loan growth, mid single-digit loan growth for the year still looks very achievable. If citizens can reach the high end of the mid single-digit range or reach the high single-digit percentage range, they will likely outperform their peers in terms of loan growth. There were some good signs in the consumer wallet, so I’m not ruling it out just yet.
Citizens also recently announced two acquisitions in the past two months – one of 80 HSBC Holdings branches and the other of Investors Bancorp ($ 27 billion in assets) in New Jersey. Along with the recent decline in stock prices over the past month, investors have the potential to buy Citizens shares at around 125% of tangible book value (TBV), which is a bank’s equity minus the goodwill and intangible assets, or a glimpse of what a bank would be worth if it were to be immediately liquidated. It is a good entry point on a bank that is going in the right direction.
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