Citizens Financial Earnings: Short-Term Earnings Seeing Pressure, but in Bigger Picture, Citizens Is OK

No-moat Citizens Financial Group CFG reported second-quarter earnings per share of $0.92, missing FactSet consensus of $1.00 and falling more in line with our own estimate of $0.93. From a short-run perspective, we believe Citizens did not have the strongest quarter, as declining loan balances and increasing funding pressures led to a decline in the net interest income, or NII, outlook for the year. This has been a common pattern among the regional banks this quarter. A weaker capital markets environment also led to a decline in the annual fee outlook.

While the short-term pressures are there, we think the bigger picture takeaway is that the revisions to these outlooks are smaller than what we saw last quarter. While we are not completely done with the current rate cycle, we are seeing a deceleration in surprises as we get closer to some sort of equilibrium. Overall, deposit costs tracked our updated expectations, as did the shift into interest bearing balances, further fueling our confidence we are past having to worry about major deposit surprises for the industry.

We anticipate several offsetting factors as we update our projections. We expect to lower our NII outlook and fee outlook, while also lowering our expense outlook slightly. Also factoring in will be some of the bank’s initiatives to improve its balance sheet positioning—letting certain loans roll off while also letting certain higher cost funding sources roll off—and a potential boost from its latest wealth investments. As such, we do not anticipate a material change to our current fair value estimate of $39. We viewed shares as undervalued heading into earnings, and we felt the bar for expectations was pretty low, so it is not entirely surprising to us that simply “doing well enough” is a catalyst on its own in the current banking environment. We still expect to view shares as undervalued after our updates.