Shares of Citizens Financial Group, Inc. (CFG) gained 1.6% following its fourth-quarter 2014 earnings release. Adjusted earnings per share came in at 39 cents, beating the Zacks Consensus Estimate of 35 cents. Further, the reported figure compared favorably with the prior-year quarter adjusted earnings of 30 cents. The adjusted figures exclude restructuring charges and significant items.
Results were aided by higher net interest income and reduced provisions for credit losses, partially offset by lower non-interest income. Improved loan and deposit balances and a strong capital position were among the other positives.
Adjusted net income for the quarter was $217 million, up 28% year over year.
Including restructuring charges and significant items, net income of the company was $197 million or 36 cents per share compared to $152 million or 27 cents per share in the prior-year quarter.
For 2014, adjusted earnings per share came in at $1.42, which missed the Zacks Consensus Estimate by a penny. However, it came ahead of the prior-year adjusted earnings of $1.20 per share. Adjusted net income was $790 million, up 18% from the previous year.
Including restructuring charges and significant items, for 2014, net income was $865 million or $1.55 per share, compared to the prior-year net loss of $3.42 billion or $6.12 per share in the previous year.
Total adjusted revenue for the quarter came in at $1.18 billion, in line with the Zacks Consensus Estimate. However, it increased 2% year over year. The rise was driven by higher net interest income.
For 2014, total adjusted revenues were $4.69 billion, almost stable with the prior year.
Quarter in Detail
Citizens Financial’s net interest income came in at $840 million, up 8% year over year. The rise was primarily due to higher average interest-earning assets, lower pay-fixed swap costs and improved securities yields. These positives were partially offset by margin pressure in a low-rate environment on loan yields and mix, higher borrowing costs related to subordinated debt issuances. It also includes estimated $13 million impact of the Chicago branches divestiture. Net interest margin (NIM) was 2.80%, down 3 basis points (bps) from the prior-year quarter.
Non-interest income decreased 11% year over year to $339 million. The decline was mainly due to lower securities gains and other income, reduced service charges and fees and lower mortgage banking and trust and investment services fees. However, capital markets and foreign exchange and trade finance fees exhibited increase.
Adjusted non-interest expenses were almost stable with the prior-year quarter at $791 million. Reduced outside services and other expense was more than offset by higher salaries and employee benefits, occupancy, and amortization of software.
Efficiency ratio decreased to 67.1% from 68.4% in the prior-year quarter. A fall in efficiency ratio indicates improvement in profitability.
As of Dec 31, 2014, period end total loan and lease balances increased 9% year over year to $93.41 billion. Excluding loans and leases held for sale, period-end loans and leases, increased $7.6 billion from the prior year, driven by growth in commercial loans and leases and retail loans. Period end total deposits rose 10% from the prior-year quarter to $95.71 billion.
Credit Quality
Citizens Financial’s credit quality improved in the reported quarter. As of Dec 31, 2014, total nonperforming assets were $1.14 billion, down 22% from the year-ago period Allowance for loan and lease losses dropped 2% year over year to $1.20 billion.
Further, provisions for credit losses declined 45% year over year to $72 million. Net charge-offs for the quarter stood at $80 million or 35 bps of total loans and leases down from $115 million or 53 bps in the prior-year quarter.
Capital Position
Citizens Financial remained well capitalized in the quarter. Tier 1 capital ratio stood at 12.4% compared with 13.5% at the end of the prior-year quarter. Leverage ratio was 10.6% versus 11.6% at the end of the prior-year quarter.
As of Dec 31, 2014, pro-forma Basel III common equity Tier I capital ratio was 12.1%.
Outlook
First-quarter 2015
Earnings assets are expected to remain at the third/fourth quarter level. NIM is expected to remain stable on a sequential basis. Expenses will grow at the low single digits, reflecting seasonality. Restructuring costs are projected to be $15–$20 million in the quarter. Loan to deposit ratio at the end of the quarter is expected to be 98–99%.
Asset quality is expected to remain stable. However, provisions may exhibit a slight increase, assuming absence of reserve release.
Full-year 2015
Citizens Financial targets earnings asset growth in the range of 5% to 7% on a year-over-year basis. NIM is expected to remain stable year over year. The company expects moderate growth in adjusted expense and set a target of mid-single digit operating leverage. Restructuring costs are projected to be $30–$50 million to be incurred in first-half 2015. Asset quality is expected to remain stable.
Efficient ratio is expected in the mid 60s range for the year. Loan to deposit ratio at the end of the year is expected to be 100%.
Our Viewpoint
Results reflect a decent quarter for Citizens Financial. We believe, going forward, with a diversified traditional banking platform, Citizens Financial remains well poised to benefit from a recovery in the economy of regions where it has a footprint. The company’s efforts in reducing its nonperforming assets and expense management will serve as growth drivers. Also, the continuous improvement in loans and deposits boost its organic growth strategy.
However, continuous decline in mortgage banking revenues, a low interest-rate environment, regulatory issues as well as competitive pressure remain matters of concern.
Based in Providence, RI, Citizens Financial, with its strong presence in the market for more than 186 years, has evolved through meaningful acquisitions and organic growth. In 1988, The Royal Bank of Scotland acquired Citizens. Being one of the biggest regional banks in the U.S., Citizens Financial, marked its debut on the New York Stock Exchange (NYSE) on Sep 24, 2014. Following the completion of a capital transaction with RBS Group on Oct 8, 2014, RBS Group holds 70.5% of the outstanding common stock of Citizens Financial.
Currently, Citizens Financial carries a Zacks Rank #3 (Hold).
Among other financial savings and loan institutions, People's United Financial Inc.’s (PBCT) fourth-quarter 2014 operating earnings of 22 cents per share slivered past the Zacks Consensus Estimate by a penny. Moreover, the bottom line came in 10% higher than the prior-year quarter figure.
Hudson City Bancorp, Inc. (HCBK) is scheduled to report results on Jan 28 while Northfield Bancorp, Inc. (NFBK) is scheduled to report on Feb 4.
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