THE HEDGEYE EDGE
Relative to other comparable banks, we believe that Citizens Financial Group (CFG) is strongly positioned to take advantage of increasing rates and regulatory relief efforts expected under the Trump administration.
A northeast regional/super-regional bank spun out of RBS two years ago, CFG offers:
- An attractive valuation;
- Greater asset sensitivity;
- A strong capital position; and
- A properly incentivized management team ready to capitalize upon improving conditions.
Although the stock has already risen quite significantly following the election, it has done so in tandem with its peer group. Therefore, we maintain that CFG is still one of the more attractive buys as it is coming off of a lower starting point while possessing greater exposure to rising rates and a stronger ability to return excess capital.
INTERMEDIATE TERM (TREND)
CFG continues to trade at or near the bottom of the range of its regional/super-regional peer group, with a valuation of 1.4x tangible equity versus a group average of 2.1x –representing about 50% upside.
In addition, CFG expects to derive greater benefit from a steepening yield curve, with NII projected to increase by 5.8% from a gradual 200 bp increase in rates – well ahead of its peer group at 4.6%.
CFG is also overcapitalized relative to peers; Citizen’s CET1 ratio currently sits at 11.3% versus a peer group average of 10.3%, demonstrating a superior ability to return more capital to shareholders.
Having previously suffered from a poor management incentive structure under the RBS umbrella, CFG has now mitigated any past principal-agent dilemma and is poised to take advantage of an improving climate. As a result, CFG’s Return on Tangible Common Equity (ROTCE) has risen from 4% to approximately 8% since its IPO and is on a path towards 9-10%.
LONG TERM (TAIL)
As U.S. economic data continues to accelerate and as the Trump administration moves towards relaxing the regulatory restraints of previous governments, we expect these catalysts to serve CFG particularly well given its attractive valuation, greater asset sensitivity, and superior capital position relative to other regional/super-regional banks.
ONE-YEAR TRAILING CHART
