Analysts' Choice: This Bank Has Plenty Left In Tank

1/9/2017


  Recent Price
$36
  Dividend
$0.48
  Yield
1.3%
  P/E Ratio
20
  Shares (millions)
521
  52-Week Price Range
$37.08 - $18.04

Citizens Financial Group ($36; CFG) has enjoyed a nice rally in the past two months, with the shares rising 35% since Nov. 1. The strong advance begs the question — are more gains ahead in 2017? The Forecasts believes the answer is yes, which is why we recently added the stock to our Focus List.

The macro environment — rising interest rates, stronger economy, likelihood of corporate tax reform, a more confident consumer, and potentially less-onerous regulatory climate — appears especially favorable for banks in 2017. Citizens should help its own cause with further efficiency improvements, better-than-peer-group loan growth, and continued widening in net interest margins.

Despite the recent price gains, the stock's valuation seems reasonable relative to peers and its historical valuation. The stock, which also carries our Long-Term Buy rating, should handily outperform the broad market in 2017.

Corporate profile

Citizens Financial is the 12th-largest bank in the United States in terms of assets, with $147 billion. It also ranks 12th in branches (approximately 1,200) and seventh in ATMs (around 3,200) across 11 states in the New England, Mid-Atlantic, and Midwest regions. Deposits of more than $108 billion put it 12th in the U.S. and in the top five in nine of its 10 largest markets.

Citizens enters 2017 with plenty of operating momentum. Net income rose 23% and revenue 8% through the first nine months of 2016. That the company showed impressive top- and bottom-line gains without help from rising interest rates speaks to the firm's ability to drive efficiencies though its system.

Indeed, the company's efficiency ratio, which basically measures the amount of resources used to generate a dollar in revenue, was 63% in the third quarter, three percentage points better than the year-earlier quarter and a full five percentage points better than the third quarter of 2013. Said differently, it now costs the bank roughly 63 cents to generate $1 in revenue, versus 68 cents in the third quarter of 2013.

That improved efficiency, combined with increased loan activity (loan growth of 7.5% in the third quarter was the highest in four quarters), higher interest rates (which boost net interest margins), and a steady rise in low-cost deposits, paints a pretty bullish picture for results in 2017.

Not surprisingly, 2017 earnings estimates have risen in the last 60 days and now stand at $2.19 per share, up 13% from the 2016 estimated results. Given Citizens has beaten the earnings estimate in each of the last three quarters, including a hefty 17% beat in the third quarter, the 2017 earnings estimate could go even higher. 

Conclusion

Trading at 16 times the 2017 earnings estimate, Citizens Financial's valuation is 11% below its peer group and in line with its 5-year average. Yielding 1.3%, Citizens raised the dividend 20% in 2016 and has announced plans to raise the dividend nearly 17% in 2017.

An annual report for Citizens Financial Group Inc. is available at One Citizens Plaza, Providence, RI  02903, (401) 456-7000, www.citizensbank.com.

CITIZENS FINANCIAL
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Sep '16
0.52
vs.
0.40
14%
25.11
-
18.58
15 - 11
Jun '16
0.46
vs.
0.40
7%
24.24
-
18.34
15 - 11
Mar '16
0.41
vs.
0.39
5%
25.99
-
18.04
16 - 11
Dec '15
0.42
vs.
0.39
5%
27.17
-
22.48
17 - 14
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2015
5.28
1.61
0.40
28.71
-
21.14
18 - 13
2014
5.05
1.42
0.10
25.60
-
21.35
18 - 15
2013
5.13
NA
NA
NA
NA
2012
5.44
NA
NA
NA
NA
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
97
94
74
61
97
98
97

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.
   NA Not available.


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