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01/20/2017

Citizens Financial Group, Inc. Reports Fourth Quarter Net Income of $282 Million and Diluted EPS of $0.55

ROTCE of 8.4% in fourth quarter 2016 with 6% positive operating leverage year over year*

Fourth quarter 2016 net income up 28% and diluted EPS up 31% vs. year ago quarter

2016 net income of $1.0 billion up 24% and $1.97 diluted EPS up 27% from 2015

2016 Adjusted net income up 18% and diluted EPS up 20% from Adjusted 2015*

PROVIDENCE, R.I.--(BUSINESS WIRE)-- Citizens Financial Group, Inc. (NYSE: CFG or “Citizens”) today reported fourth quarter net income of $282 million, or $0.55 per diluted common share, up 28% and 31%, respectively, from $221 million and $0.42 per diluted common share in fourth quarter 2015. Compared with third quarter 2016 results, which included a $19 million after-tax benefit from notable items largely related to the TDR Transaction gain, net income decreased 5% from $297 million and diluted earnings per common share (“EPS”) decreased 2% from $0.56. Fourth quarter 2016 net income available to common stockholders increased $11 million, or 4%, from Adjusted third quarter 2016 levels* and diluted EPS increased $0.03, or 6%, from Adjusted third quarter 2016.

2016 net income available to common stockholders of $1.03 billion increased $198 million, or 24%, from 2015 with diluted EPS of $1.97 up $0.42, or 27%. 2016 Adjusted net income available to common stockholders* of $1.01 billion increased $148 million, or 17%, and Adjusted diluted EPS of $1.93 increased $0.32, or 20%, versus Adjusted 2015 results.

Fourth quarter 2016 Return on Average Tangible Common Equity* (“ROTCE”) of 8.4% compares to 8.6% in third quarter 2016, 8.0% on an Adjusted basis* and 6.7% in fourth quarter 2015.

“We are pleased to report another strong quarter with improving results, as we continue to run the bank better and deliver well for all stakeholders,” said Chairman and Chief Executive Officer Bruce Van Saun. “We remain focused on executing on our strategic initiatives that drive good top line growth, expanded capabilities and positive operating leverage. We enter 2017 with good momentum and believe we are well-positioned to capitalize on an improving economic and interest rate environment.”

Citizens also announced its board of directors declared a quarterly cash dividend of $0.14 per common share, an increase of $0.02 per share. The dividend is payable on February 16, 2017 to shareholders of record at the close of business on February 2, 2017.

*Please see important information on Key Performance Metrics and Non-GAAP Financial Measures at the end of this release for an explanation of our use of these metrics and non-GAAP financial measures and their reconciliation to GAAP financial measures. “Adjusted” results exclude restructuring charges, special items and/or notable items, as applicable. Where there is a reference to an “Adjusted” result in a paragraph, all measures that follow that “Adjusted” result are also “Adjusted” when applicable.

Fourth Quarter 2016 vs. Third Quarter 2016

Key Highlights

• Fourth quarter highlights include net interest income growth of 4%, reflecting 2% average loan growth and a six basis point improvement in net interest margin. Results also reflect continued focus on improving efficiency and returns with an efficiency ratio of 62% and ROTCE of 8.4%.*
• Tangible book value per common share of $25.69; common shares outstanding decreased 6.2 million, or 1%.

Results

• Total revenue of $1.4 billion decreased 1%, reflecting the impact of the third quarter $72 million TDR Transaction gain. On an Adjusted basis*, total revenue increased 4%.
  • Net interest income of $986 million increased $41 million, given 2% average loan growth and a six basis increase in net interest margin to 2.90%, driven by higher loan yields including the benefit of higher interest rates.
  • Noninterest income of $377 million decreased $58 million from third quarter levels that included the benefit of the TDR Transaction gain. On an Adjusted basis*, noninterest income was up 2%, reflecting higher mortgage banking income, foreign exchange and letter of credit fees, and an increase in interest rate products and leasing fees in other income.
• Noninterest expense of $847 million decreased $20 million, or 2%, from third quarter levels that included $36 million of notable items. On an Adjusted basis*, noninterest expense increased $16 million, or 2%, reflecting an increase in other expense, outside services and equipment expense with all other categories relatively stable.
• Efficiency ratio of 62% improved 70 basis points; on an Adjusted basis*, efficiency ratio improved 113 basis points.
• Provision for credit losses of $102 million increased $16 million, driven by a $14 million reduction in recoveries of prior-period charge-offs from relatively high third quarter levels.

Balance Sheet

• Average interest-earning assets increased $3.1 billion, or 2%, driven by continued loan growth.
• Average deposits increased $2.5 billion, or 2%, reflecting growth in every category with particular strength in demand deposits, money market and term.
• Nonperforming loans and leases (“NPLs”) to total loans and leases ratio of 0.97% improved from 1.05%, reflecting a reduction in both retail and commercial nonperforming loans. Allowance coverage of NPLs was 118% compared with 112%.
• Net charge-offs of 39 basis points increased seven basis points from third quarter levels, driven by the reduction in recoveries of prior-period charge-offs and a methodology change in auto, which resulted in a $7 million, or 3 basis point, impact.
• Robust capital strength with a common equity tier 1 (“CET1”) risk-based capital ratio of 11.2%.
• Repurchased 6.3 million shares of common stock at an average price of $28.71, returning $180 million to shareholders.

Fourth Quarter 2016 vs. Fourth Quarter 2015

Key Highlights

• Fourth quarter results include a 28% increase in net income available to common stockholders, highlighted by strong revenue growth of 11%, driven by strength in net interest income with 8% average loan growth and a 13 basis point increase in net interest margin as well as noninterest income growth of 4%.
• Year-over-year operating leverage of 6.1%, a 358 basis point improvement in the efficiency ratio and a 168 basis point improvement in ROTCE, reflecting focus on top line growth and strong expense discipline, while reinvesting in technology and business initiatives to drive future growth.*

Results

• Total revenue of $1.4 billion increased $131 million, or 11%, reflecting solid net interest income and noninterest income growth.
  • Net interest income increased 13%, reflecting 8% average loan growth and a 13 basis point improvement in net interest margin.
  • Net interest margin of 2.90% reflects improved loan yields, driven by higher rates and balance sheet optimization initiatives, partially offset by a reduction in investment portfolio yields and higher deposit costs.
  • Noninterest income increased 4%, driven by strength in capital markets, mortgage banking, other income and foreign exchange and letter of credit fees. These results were partially offset by lower card fees, including the impact of the card reward accounting change, a reduction in securities gains and lower trust and investment services fees and service charges and fees.
• Noninterest expense increased 5%, driven by growth in salaries and employee benefits largely related to higher incentive compensation tied to revenue, as well as an increase in other expense.
• Provision for credit losses of $102 million increased $11 million, or 12%, reflecting higher net charge-offs in commercial, largely commodities-related credits and an increase in retail given a one-time methodology change in auto.
• ROTCE* of 8.4% improved 168 basis points.

Balance Sheet

• Average interest-earning assets increased $10.6 billion, or 8%, driven by strong loan growth and an increase in the securities portfolio.
• Average deposits increased $7.8 billion, or 8%, on strength in low-cost core deposits.
• NPLs to total loans and leases ratio of 0.97% improved from 1.07%, as an underlying reduction in retail nonperforming loans more than offset an increase in commercial nonperforming loans, largely commodities-related borrowers. Allowance coverage of NPLs of 118% compares with 115%.
• Net charge-offs of 39 basis points of loans increased eight basis points, reflecting an increase in both commercial and retail categories and included a methodology change in auto, which resulted in a $7 million, or 3 basis point, impact.

Update on Plan Execution

Consumer Banking

• Performance paced by solid loan growth with continued traction in student, other retail unsecured and mortgage loans, with improved consumer loan yields tied to the benefit of improved mix.
• Sales force expansion continued in 2016 with an increase of 96 mortgage loan officers to 538 at year end, with 43 in fourth quarter, and the addition of 42 financial consultants to 362 at year end, with 12 in fourth quarter.
• Citizens Checkup, our needs-based approach for serving retail customers, has resulted in approximately 400,000 scheduled appointments in 2016, with high levels of customer satisfaction.

Commercial Banking

• Delivered solid performance across most fee activities led by Capital Markets, Treasury Solutions and Interest Rate Products. Generated 10% average loan growth from the year-ago quarter, reflecting strength in Mid-corporate and Industry Verticals, Commercial Real Estate and Franchise Finance. Delivered total average deposit growth of 20% versus the prior-year quarter.

Efficiency and balance sheet optimization strategies

• Tapping Our Potential (“TOP”) initiatives remain on track. In 2016, TOP II delivered approximately $105 million of annual pre-tax benefits. TOP III is expected to deliver pre-tax revenue and expense run-rate benefits of $100 million to $115 million, including $20 million of tax benefits in 2017.
• Initiatives to shift loan portfolio mix to higher-return categories continue to deliver benefits to portfolio yields; have extracted capital from TDR and aircraft lease portfolios; managing deposit pricing to minimize cost while achieving growth objectives.

Full-Year 2016 vs. Full-Year 2015

• Total revenue of $5.3 billion increased $431 million, or 9%, and Adjusted revenue growth* of 8% driven by strength in net interest income, reflecting 8% average loan growth and an 11 basis point improvement in net interest margin.
• Noninterest expense and Adjusted noninterest expense* increased 3%, with positive operating leverage of 4.2%.
• Efficiency ratio of 64% improved 376 basis points; 260 basis points on an Adjusted basis.*
• Net income increased 24% with Adjusted net income* up 18%.
• ROTCE of 7.7%, with Adjusted ROTCE of 7.6% higher by 91 basis points.*

Discussion of Results:

Fourth quarter 2016 and fourth quarter 2015 results included no net restructuring charges, special items or notable items. Third quarter 2016 results benefited from $31 million pre-tax or $19 million after-tax, of notable items.

2016 net income benefited from $31 million pre-tax, or $19 million after-tax, of notable items, compared with 2015 net income, which was reduced by a net $50 million pre-tax, or $31 million after-tax, of restructuring charges and special items.

All references to Adjusted results* exclude the impact of restructuring charges, special items and/or notable items.

Fourth quarter 2016 net income available to common stockholders of $282 million decreased $8 million, or 3%, while diluted EPS of $0.55 decreased $0.01, or 2%, versus third quarter 2016, which included a $19 million after-tax, or $0.04 EPS, benefit tied to the TDR transaction gain. Fourth quarter 2016 EPS reflects a 7.2 million reduction in average fully diluted shares outstanding.

Compared with fourth quarter 2015 levels, net income available to common stockholders increased $61 million, or 28%, as revenue growth of $131 million was partially offset by higher noninterest expense and provision for credit losses. Diluted EPS of $0.55 increased $0.13, or 31%, reflecting net income growth and a 16.4 million reduction in average fully diluted shares outstanding.

2016 net income available to common stockholders of $1.0 billion increased $198 million, or 24%, compared with 2015, reflecting 9% revenue growth, partially offset by growth in noninterest expense and provision for credit losses. 2016 diluted EPS of $1.97 increased $0.42, or 27%, and reflects a 14.3 million reduction in average fully diluted shares outstanding. Full-year 2016 EPS was impacted by $14 million in preferred dividends, or $0.03 per diluted common share, compared with $7 million, or $0.01 per diluted common share, of preferred dividends in 2015.

Fourth quarter 2016 net income available to common stockholders increased $11 million, or 4%, from Adjusted third quarter 2016 levels*, reflecting a $50 million increase in total revenue, partially offset by a $16 million increase in noninterest expense and $16 million increase in provision for credit losses. Fourth quarter 2016 diluted EPS of $0.55 increased $0.03, or 6%, compared to third quarter 2016 Adjusted diluted EPS, driven by net income growth and a 7.2 million reduction in average fully diluted shares outstanding.

Compared with fourth quarter 2015 levels, net income available to common stockholders increased $61 million, or 28%, as revenue growth of $131 million was partially offset by a $37 million increase in noninterest expense and an $11 million increase in provision for credit losses. Diluted EPS of $0.55 increased $0.13, or 31%, reflecting net income growth and a 16.4 million reduction in average fully diluted shares outstanding.

On an Adjusted basis*, 2016 net income available to common stockholders of $1.0 billion increased $148 million, or 17%, versus 2015, while 2016 Adjusted diluted EPS of $1.93, increased $0.32, or 20%, and reflected a 14.3 million reduction in average fully diluted shares outstanding.

Net interest income of $986 million increased $41 million, or 4%, from third quarter 2016, given 2% average loan growth and a six basis point improvement in net interest margin. Net interest margin improvement reflects improved commercial and consumer loan yields, including the benefit of an increase in LIBOR, and lower pay-fixed swap costs, partially offset by the impact of an increase in investment portfolio balances as well as the impact of higher deposit and borrowing costs.

Compared to fourth quarter 2015, net interest income increased $116 million, or 13%, reflecting 8% average loan growth and a 13 basis point improvement in net interest margin. Results were driven by improved loan yields, reflecting the benefit of higher rates and balance sheet optimization initiatives, as well as lower pay-fixed swap costs. Results also reflect lower investment portfolio yields, which included a reduction in Federal Reserve Bank stock dividends, and higher deposit and borrowing costs.

Noninterest income of $377 million decreased $58 million, or 13%, from third quarter 2016 levels that reflected the benefit of the $72 million TDR Transaction gain in other income. Compared with Adjusted third quarter results*, fourth quarter noninterest income of $377 million increased $9 million, or 2%, largely reflecting higher other income and mortgage banking fees. Other income increased $5 million, driven by higher leasing and interest rate products income. Mortgage banking fees increased $3 million, reflecting improved mortgage servicing rights (“MSR”) valuations and modestly higher origination volumes partially offset by lower loan sale gains. Foreign exchange and letter of credit fees increased $2 million and service charges and fees were relatively flat compared to the prior quarter. Capital markets fees remained stable with robust third quarter 2016 levels driven by strong loan-syndications activity. Card fees declined $2 million given seasonally lower out-of-network ATM transaction fees, and trust and investment services fees declined $3 million, reflecting continued shift in product sales toward fee-based business and a reduction in overall sales volume. Securities gains of $3 million were recorded during the quarter compared to no securities gains in the prior quarter.

Noninterest income increased $15 million, or 4%, from fourth quarter 2015 levels, largely reflecting strength in capital markets and mortgage banking fees partially offset by lower card fees, trust and investment services fees and service charges and fees. Capital markets fees increased $19 million reflecting improved market conditions and further broadening of our capabilities. Mortgage banking fees increased $16 million, reflecting strength in applications and secondary origination volumes and an increase in MSR valuations. Other income increased $5 million driven by higher interest rate product revenue. Card fees decreased $10 million, largely reflecting the card reward accounting change impact. Trust and investment services fees decreased $5 million as the benefit of higher sales volume was more than offset by the impact of a shift in product sales toward fee-based business. Service charges and fees decreased $3 million, largely reflecting lower loan prepayment fees. Securities gains decreased by $7 million.

Noninterest expense of $847 million decreased $20 million, or 2%, from third quarter 2016 levels that included $36 million of notable items largely tied to salaries and employee benefits, outside services and other expense. Compared with Adjusted third quarter results*, fourth quarter noninterest expense increased $16 million, or 2%, driven by a $9 million increase in other expense largely reflecting higher fraud, legal and regulatory costs, a $4 million increase in outside services, largely tied to increased consumer loan origination and servicing costs and a $4 million increase in equipment expense, reflecting increased vendor contract licenses and maintenance costs. Results also reflect relatively stable salaries and benefits expense, as higher incentive compensation tied to revenue was largely offset by a reduction in benefits.

Compared with fourth quarter 2015, noninterest expense increased $37 million, or 5%, largely reflecting higher salaries and employee benefits expense, other expense and amortization of software expense partially offset by the card reward accounting change impact and lower outside services expense. Salary and employee benefits expense increased $18 million, reflecting merit increases and higher incentive compensation tied to revenue. Other expense increased $14 million related to higher FDIC insurance expense and higher fraud, legal and regulatory costs. Amortization of software expense increased $6 million, driven by technology investments. These increases were partially offset by the card reward accounting change impact in other expense and a $6 million reduction in outside services expense related to lower regulatory costs.

The effective tax rate for fourth quarter 2016 was 31.9% compared to 30.5% in third quarter 2016, which included benefits from our TOP efficiency initiatives, and 33.4% in fourth quarter 2015.

Total assets of $149.5 billion increased $2.5 billion, or 2%, from September 30, 2016, driven by 2% loan growth, including a $1.3 billion increase in commercial loans and leases and a $940 million increase in retail loans as well as a $374 million increase in investment portfolio assets. Compared with December 31, 2015, total assets increased $11.3 billion, or 8%, primarily reflecting loan growth of $5.4 billion in commercial and $3.2 billion in retail, as well as a $2.4 billion increase in investment portfolio assets.

Average interest-earning assets of $134.8 billion in fourth quarter 2016 increased $3.1 billion, or 2%, from the prior quarter, driven by a $577 million increase in investment portfolio assets, a $1.3 billion increase in commercial loans and leases and a $1.2 billion increase in retail loans. Compared to fourth quarter 2015, average interest-earning assets increased $10.6 billion, or 8%, driven by commercial loan growth of $5.2 billion, retail loan growth of $3.1 billion and a $2.0 billion increase in investment portfolio assets, including $1.6 billion growth in securities and $453 million in cash and equivalents.

Period-end investments and interest-bearing deposits of $28.8 billion as of December 31, 2016 increased $374 million, or 1%, compared with September 30, 2016, driven by an increase in cash positions held at the Federal Reserve. Compared with December 31, 2015, investments and interest-bearing deposits increased $2.4 billion, or 9%, with $1.5 billion in securities and $846 million in cash and equivalents. At the end of fourth quarter 2016, the average effective duration of the securities portfolio increased to 4.3 years, compared with 2.7 years at September 30, 2016 and 3.5 years at December 31, 2015, reflecting the impact of higher long-term rates, which reduced prepayment speeds.

Period-end loans and leases of $107.7 billion at December 31, 2016 increased $2.2 billion, or 2%, from $105.5 billion at September 30, 2016 and $8.6 billion, or 9%, from $99.0 billion at December 31, 2015. The linked-quarter change was driven by a $1.3 billion increase in commercial loans and leases and a $940 million increase in retail loans. The change from the prior-year period reflects a $5.4 billion increase in commercial loans and leases and a $3.2 billion increase in retail loans.

Average loans and leases increased $2.5 billion, or 2%, from third quarter 2016, reflecting a $1.3 billion increase in commercial loans and leases and a $1.2 billion increase in retail loans. Commercial loan growth was driven by strength in Mid-corporate and Industry Verticals and Commercial Real Estate. Retail loan growth was largely driven by strength in residential mortgages, student and other unsecured retail loans, partially offset by lower home equity balances.

Compared with fourth quarter 2015, average loans and leases of $106.5 billion increased $8.3 billion, or 8%, reflecting a $5.2 billion increase in commercial loans and leases and a $3.1 billion increase in retail loans. Commercial loan and lease growth was driven by strength in Commercial Real Estate, Mid-corporate and Industry Verticals and Franchise Finance, partially offset by lower Asset Finance balances. Retail loan growth was driven by student loans, residential mortgages and unsecured retail loans, partially offset by lower home equity balances.

Period-end total deposits at December 31, 2016 of $109.8 billion increased $1.5 billion, or 1%, from September 30, 2016, driven by growth of $1.2 billion in demand deposits. Compared with December 31, 2015, period-end total deposits increased $7.3 billion, or 7%, reflecting growth across all categories led by strength in checking with interest, term deposits and money market accounts.

Fourth quarter 2016 average deposits of $109.1 billion increased $2.5 billion, or 2%, from third quarter 2016, driven by growth in demand deposits, money market and term deposits. Compared with fourth quarter 2015, average deposits increased $7.8 billion, or 8%, driven by growth in all categories.

Total borrowed funds of $17.1 billion at December 31, 2016 increased $1.8 billion from September 30, 2016, reflecting a $947 million increase in short-term borrowings, driven by $749 million in senior debt that now matures in less than one year, and fed funds purchased and an $888 million increase in net long-term funding, specifically Federal Home Loan Bank (“FHLB”) borrowings. Compared with December 31, 2015, total borrowed funds increased $3.8 billion, primarily reflecting a $2.9 billion increase in long-term borrowings and a $927 million increase in short-term borrowings, including the $749 million of senior debt that now matures in less than one year. Average borrowed funds of $15.2 billion increased $831 million from third quarter 2016, driven by higher short-term borrowings, which included the impact of senior debt migrating from long-term borrowings. Compared with fourth quarter 2015, average borrowed funds increased $2.6 billion, reflecting an increase in long-term senior debt and incremental long-term FHLB borrowings.

On December 31, 2016, our Basel III capital ratios on a transitional basis remained well in excess of applicable regulatory requirements with a CET1 capital ratio of 11.2% and a total capital ratio of 14.0%. Our capital ratios continue to reflect progress against our objective of realigning our capital profile to be more consistent with that of peer regional banks, while maintaining a strong capital base to support our growth aspirations, strategy and risk appetite.

As part of the CFG’s 2016 Capital Plan (the “Plan”), during the fourth quarter the company repurchased 6.3 million shares of common stock at an average price of $28.71 per share. Tangible book value per common share of $25.69 decreased 2% versus third quarter 2016 and increased 4% versus fourth quarter 2015. The decrease compared to the prior quarter largely reflects mark-to-market losses on the available for sale securities portfolio of $334 million, which reduced other comprehensive income. The Plan includes the repurchase of up to $690 million of Citizens’ outstanding common stock beginning in third quarter 2016 through second quarter 2017, with $260 million in remaining availability as of December 31, 2016. In accordance with the Plan, the company paid quarterly dividends of $0.12 per share in the third and fourth quarters of 2016, and has declared a dividend of $0.14 per share for the first quarter 2017. Future capital actions are subject to consideration and approval by CFG’s Board of Directors.