Below is a note from Hedgeye CEO Keith McCullough on why we're adding the Citizens Financial Group (CFG) to the long side of Investing Ideas today:
"I didn't come into this latest pull-back in bond yields choking on long Financials exposure.
Nope, we said sell some of those when they were signaling overbought. And now I'm happy to signal buy on some of them as they become oversold.
Our Veteran Financials Analyst, Josh Steiner, likes Citizens Financial Group (CFG) as a value idea on the long side – a northeast regional/super-regional bank that was spun out of RBS (Royal Bank Scotland) two years ago.
Here are a few things to like about it:
- Cheap Valuation. It still trades at/near the bottom of the range of Regional/Super-regional peers on valuation at 1.4x tangible. The group is at 2.1x (PBCT, USB, PNC, BBT, ZION, FITB, MTB, RF, KEY, CMA, HBAN, CBSH, CFR, FHN, FRC, TCB, SIVB, SNV, GBCI, STI, SBNY). It has ~50% upside to the group average.
- More Asset Sensitivity. Citizens will see NII increase by 5.8% from a gradual 200 bps increase in rates, which is a good bit ahead of the peer group at 4.6%.
- Excess Capital. The CET1 ratio at Citizens at 11.3% vs the peer group at 10.3% so they have the ability to return more capital than peers.
- Proper Incentives. When CFG was under the RBS umbrella, returns were poor partly due to a lack of direct management incentive. Since the IPO, ROTCE has risen from 4% to ~8% and is on a path towards 9-10%.
The stock has risen significantly since the election but so has the group. Relative to other regionals, CFG is still one of the cheapest, has more exposure to rising rates, more excess capital to return and is coming off a lower starting point."
