10-Q: Citizens Financial Group Reports Lower Q1 2024 Earnings Amidst Net Interest Income Decline

Citizens Financial Group's first quarter 2024 earnings decreased due to a decline in net interest income and increased expenses, despite growth in some fee-based areas.

Summary

• Citizens Financial Group's net income for the first quarter of 2024 decreased by $177 million compared to the same period in 2023, with diluted earnings per share falling to $0.65.
• The decrease in net income was primarily driven by a $169 million decline in total revenue, including a 12% decrease in net interest income.
• On an underlying basis, which excludes notable items, net income available to common stockholders was $365 million, compared to $537 million in the first quarter of 2023.
• The company's efficiency ratio increased to 69.3% from 60.9% in the prior year, while the underlying efficiency ratio was 65.1% compared to 57.8% in the same period of 2023.
• Return on average tangible common equity (ROTCE) was 8.9%, down from 14.4% in the first quarter of 2023, with underlying ROTCE at 10.6% compared to 15.8% in the prior year.
• Tangible book value per common share decreased by 2% from December 31, 2023, to $30.19.
• Net interest margin on a fully taxable equivalent (FTE) basis decreased by 39 basis points, reflecting higher funding costs and swap impacts, partially offset by higher interest-earning asset yields.
• Average interest-earning assets decreased by $2.5 billion, or 1%, driven by a decline in total loans and leases, partially offset by an increase in investment securities and cash held in interest-bearing deposits.
• Average deposits increased by $1.8 billion, or 1%, reflecting growth in retail and Private Bank deposits.
• Average total borrowed funds decreased by $4.2 billion, reflecting a decline in Federal Home Loan Bank (FHLB) advances, partially offset by an increase in secured borrowings collateralized by auto loans.

Sentiment

Score: 4

Explanation: The document presents a mixed picture with some positive aspects, but the overall tone is negative due to the decline in key financial metrics and increased expenses. The company is facing challenges in net interest income and efficiency, which are significant concerns for investors.

Positives

• Capital markets fees increased due to higher bond and equity underwriting fees, and M&A advisory fees.
• Card fees increased primarily reflecting higher credit card fees, including favorable vendor contract negotiations.
• Trust and investment services fees reflect increased sales activity and asset management fees.
• Average deposits increased by $1.8 billion, or 1%, reflecting growth in retail and Private Bank deposits.

Negatives

• Net interest income decreased by $201 million, or 12%, due to lower net interest margin and a 1% decline in average interest-earning assets.
• The efficiency ratio increased to 69.3% from 60.9% in the prior year.
• Foreign exchange and derivative products revenue decreased given reduced client activity related to interest rate and commodities hedging.
• Mortgage banking fees declined reflecting lower servicing and production fees.
• Noninterest expense increased due to salaries and employee benefits, technology investments, and FDIC deposit insurance assessment.
• Net charge-offs increased by $48 million, with a higher net charge-off ratio of 0.50%.

Risks

• The company faces risks from negative economic conditions, including interest rate changes, supply chain disruptions, and inflationary pressures.
• Geopolitical instability, including the wars in Ukraine and the Middle East, could impact economic and market conditions.
• The company is subject to heightened supervisory requirements and expectations.
• There are potential liabilities and business restrictions resulting from litigation and regulatory investigations.
• Changes in interest rates could negatively affect net interest income, net interest margin, and mortgage-related activities.
• The company faces risks from environmental, social, and governance factors.
• Cyber-attacks and failures in compliance with laws pose operational and security risks.

Future Outlook

The company expects the FRB to provide a preliminary Stress Capital Buffer (SCB) requirement in June and a final SCB requirement by August 31, 2024, which will become effective as of October 1, 2024. The company's base case net interest income assumes the forward-rate path implied by the yield curve is realized, which reflects a Fed Funds rate of 5.00% at the end of 2024, reflecting two 25 basis point reductions beginning in the second half of 2024.

Management Comments

• Management believes FICO scores are the strongest indicator of credit losses over the contractual life of the loan and assist management in predicting the borrowers future payment performance.
• Management believes that the aggregate liabilities, if any, potentially arising from legal proceedings will not have a materially adverse effect on the Companys unaudited interim Consolidated Financial Statements.

Industry Context

The decrease in net interest income and increase in expenses reflect broader challenges in the banking industry, including higher funding costs and reduced client activity in certain areas. The company's focus on maintaining strong liquidity and managing credit risk aligns with industry trends.

Comparison to Industry Standards

• The decrease in net interest income is a common trend among banks facing higher funding costs and a flattening yield curve, similar to what has been reported by peers such as KeyCorp and Regions Financial.
• The increase in the efficiency ratio suggests that Citizens is facing challenges in controlling expenses, which is a concern also seen in other regional banks like M&T Bank.
• The ROTCE of 8.9% is below the average for large regional banks, which typically aim for double-digit returns, similar to what has been reported by PNC Financial Services.
• The company's focus on maintaining strong liquidity and managing credit risk aligns with industry best practices, similar to what is seen in banks like US Bancorp and Truist Financial.
• The increase in net charge-offs, particularly in the commercial real estate sector, is a trend seen across the industry, reflecting concerns about office space and rising interest rates, similar to what has been reported by Bank of America and Wells Fargo.

Stakeholder Impact

• Shareholders will be impacted by the decrease in earnings and ROTCE.
• Employees may be affected by cost-cutting measures and changes in compensation.
• Customers may experience changes in service offerings and pricing.
• Creditors may be concerned about the company's financial performance and credit quality.

Next Steps

• The company will continue to monitor and manage its liquidity and credit risk.
• The company will submit its 2024 Capital Plan to the FRB and expects to receive its final SCB requirement by August 31, 2024.
• The company will continue to evaluate the impact of regulatory changes on its operations.

Key Dates

Keywords

net interest income, earnings, financial results, credit quality, capital ratios, loan portfolio, deposits, noninterest income, noninterest expense, mortgage banking, commercial banking, consumer banking, risk management, regulatory capital