This is a tough period here in April for stocks. You have the Dow at the time of this writing pacing for its worst month since 2022. The S&P 500 (SP500) and the NASDAQ (COMP:IND) are on pace for their worst month since September 2023. Can earnings season correct the ship, or will it add to the storms? We have begun our seasonal coverage of bank earnings, as they provide a tremendous insight into the real health of the economy. While, of course, every bank is different, as a whole, we get a picture of loan demand, what is going on with deposits, and in asset quality, if delinquencies are on the rise.
Today, we hone in on Citizens Financial Group, Inc. (NYSE:CFG). This is one of the first major regional banks to have reported earnings this year. We also are monitoring reports to see if bank margins have bottomed out, which bodes well for bank earnings power.
With that said, Citizens Financial just announced its Q1 earnings. Let us review the key metrics we look for in regional banks.
Citizens Financial Q1 earnings headline performance
In the just-reported Q1 earnings release, Citizens saw declines in both the deposit and loan base once again sequentially. Revenues fell in Q1 from a year ago, with Citizens generating $1.96 billion in revenue. These revenues of $1.96 billion were a small decrease sequentially from $1.99 billion, but down 8% from a year ago. The provision for credit losses was $171 million, which was flat from the sequential Q4, and up $3 million from last year’s Q1. As such, provisions for losses have been stable.
The bank also saw net income narrow to $189 million or $0.34 per share, while on an adjusted basis, they brought in $395 million or $0.79 per share, down from $426 million or $0.85 per share in the linked Q4, and down from $1.32 a year ago. The EPS beat consensus expectations by $0.03. While that was positive, overall, it was a mixed quarter. We believe investor patience will be required.
Deposits and loans both declined sequentially
Citizens Financial Group’s total deposits have been on the decline for some time now. While deposits were up some 2% from a year ago, total deposits of $176.4 billion were down slightly from the $177.3 billion in the sequential quarter. Unfortunately, loans also have dipped on lower demand and more stringent lending criteria.
The trends in deposits and loans are really bank-dependent. These balances are not falling from a cliff, but it clearly shows slowing growth of this major regional bank. This is in part due to competition and in part since rates are just so high, it’s tough for many to qualify for or afford debt servicing now.
That said, Citizens Financial Group’s management remains focused on increasing quality and liquidity, so it would seem they are focused more on better-performing loans than quantity. That is not necessarily bad, so long as asset quality metrics back this up. That said, loans at period end dipped to $143.2 billion, down from $146.0 billion from the sequential Q4, and down from $154.7 billion a year ago.
This is a trend we think is important to monitor for all regional banks. For Citizens Financial Group, Inc., the trend is clearly lower. Is asset quality holding up?
Asset quality worsens
While loans and deposits are on the decline, this focus on “quality” led us to closely look into asset quality. First, the net interest margin of 2.9% was flat from Q4, suggesting our theory that margins have bottomed is intact. However, net loan charge-offs rose from both Q4 and year ago results. These were $181 million, a $10 million increase from $171 million in the sequential Q4, and up from $133 million a year ago. Thus, net charge-offs were 0.50% and 0.34%, respectively, in Q1 2024, and Q1 2023. Nonaccrual loans totaled $1.47 billion at the end of Q1, up from $1.36 billion at the end of Q4, 2023. These are also up a whopping 47% from $996 million a year ago. As a percentage, nonaccrual loans were 1.02% of total loans, compared with 0.64% a year earlier. The allowance for credit losses jumped despite lower loans on the books.
Frankly, at this point, investors will need to be patient. There is nothing here that suggests this bank is in any way a buy.
Return metrics mixed
So we have a bank with lower loans, fewer deposits, declining revenue, lower net income, and worsening credit quality. That said, the efficiency ratio actually improved from the linked quarter’s 81.1%, hitting 69.3% in the quarter. The return on average assets and equity fell, however. The underlying return on average assets was just 0.75% vs. 0.78% in the sequential quarter. The underlying return on average equity dipped to 10.6% from 11.8% in the linked Q4, and is down from 15.8% a year ago.
Final thoughts
Well, Citizens Financial Group, Inc. margins look to have bottomed, but there are not too many other positive things to say. Liquidity looks good here. But declines are ongoing in most key metrics. A better efficiency ratio was not a surprise when we saw the EPS beat. But with a higher for longer narrative, investors will need to be patient before there is a better operating environment. For now, we remain neutral on Citizens Financial Group, Inc. stock.
