Here’s why you should own Citizens Financial (CFG) shares now
Citizens Financial Group CFG has taken inorganic steps to diversify its presence and business. This is supported by the company’s decent liquidity position. However, the continued escalation in costs limits the growth of its results, while the low interest rate environment affects the net interest margin (NIM).
In early September, the company signed a definitive merger agreement with JMP SARL Group JMP in an all-cash transaction. This is the company’s fourth purchase since May. The company also completed the acquisition of Willamette Management Associates, which is expected to amplify the corporate financial advisory skills of Citizens Financial.
As part of its strategy to move ahead of custodian acquisitions, Citizens Financial announced in July a definitive agreement to acquire Bancorp Investors, Inc., ISBC, and has entered into an agreement to acquire 80 East Coast branches and the national online deposit business of HSBC Bank USA, NA – the US subsidiary of the UK-based company HSBC Holdings plc HSBC – in May. The acquisitions of Investors combined with HSBC create a strong franchise in the New York and Philadelphia metropolitan areas, as well as New Jersey by adding 234 branches. Apart from that, the move is expected to add $ 29 billion in deposits and $ 24 billion in loans, creating a solid foundation for revenue growth.
The company’s organic growth measures also remain encouraging. Citizens Financial loans and deposits have experienced a compound annual growth rate (CAGR) of 3.4% and 7.6%, respectively, over the past five years (2016-2020). We believe it is well positioned to continue to grow, supported by the gradual improvement in the US economy.
Citizens Financial also remains on track to execute its revenue and efficiency initiatives. The most recent “Tapping Our Potential” (TOP) program – TOP 6 – is expected to generate pre-tax profit of $ 400 to $ 425 million by the end of 2021. By identifying better opportunities for transformational efficiency, she is expanding now the TOP 7 program. These efforts are likely to lead to cost savings and reduce the pressure on results.
The shares of this company Zacks Rank # 3 (Hold) have risen 26.9% in the past six months compared to the industry growth of 15.2% .You can see The full list of Zacks # 1 Rank (Strong Buy) stocks today here.
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However, the company’s NIM declined due to lowering interest rates to near zero in 2019 and 2020 in order to protect the economy from the chaos caused by the coronaviruses. Notably, the downward trend continued into the first six months of 2021. Despite decent loan demand, NIM is expected to continue to be hit in the near term due to the Federal Reserve’s accommodative policy.
A significant portion of Citizens Financial’s loan portfolio consists primarily of commercial and real estate loans (72% of loans and leases and loans held for sale as of June 30, 2021). Such lack of diversification and high exposure can be risky for the company if the real estate industry weakens.
Finally, Citizens Financial’s non-interest expense has seen a CAGR of 4.5% over the past five years (2016-2020), with an increasing trend in the first six months of this year. Costs are expected to remain high due to investments in new technology and building fee income capacity organically.
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