Citizens Financial Earnings: Still Hard to Tell Where NII Will Bottom, but We Don’t Think It’s Far

No-moat Citizens Financial Group CFG reported third-quarter earnings per share of $0.85, missing FactSet consensus of $0.91 but roughly in line with our estimate of $0.87. We are seeing continued pressure on net interest income, or NII, due to persistent funding cost headwinds and the decrease in the overall loan book. Deposit costs shot up a little bit higher than our forecasts, but absolute magnitude of change is slowing as rate hikes are also slowing. Arguably the biggest weakness in current results was fees, driven primarily by weaker capital markets fees. These fees are cyclical and we remain in a tough environment, so we would not read too much into this. Much of the updated guidance was also not far off from previous expectations, with hints at flat 2024 expenses essentially in line with our previous expectations, although it looks like fees will remain somewhat weak for the foreseeable future.

Perhaps the biggest uncertainty remaining is where NII will bottom. Management was not ready to commit to any sort of bottom just yet, including the potential 2024 exit rate. Further, the drag on NII from the bank’s swaps positions will keep worsening through 2025 before improving. While this does not create near-term confidence in quarterly NII, we still think our 2024 quarterly exit rate of $1.49 billion seems reasonable (roughly on par with the expected 2023 fourth quarter amount), and we did not have NII growing much beyond this quarterly run rate even through 2025. Big picture, we think over the longer term we are getting an idea of what a reasonable NII amount might look like, and we do not think we are far off with our current projections. While there will still be some uncertainty in short-term results, as we update our forecasts with a slightly weaker fee outlook and continually reevaluate our NII forecasts, we do not expect a material change in our current $39 fair value estimate and view shares as undervalued.