Home Field Advantage  It Has Proven Difficult for Global Banks to Run a Successful Retail Banking Business Outside Their Core Domestic Markets

Sector: Banks Kathleen Shanley, CFA June 2, 2021 [email protected] Home Field Advantage  It has proven difficult for global banks to run a successful retail banking business outside their core domestic markets. Citigroup, which had been the most ambitious U.S. bank operating overseas, said in April that it would retreat from consumer banking in 13 primarily Asian countries including China, Indonesia, and Korea, as well as Australia, Poland, and Russia (see GC report dated 4/19/21). Foreign banks operating in the U.S. have fared no better, opening an opportunity for U.S.-based banks to extend their domestic franchises. Just yesterday, PNC Financial Services completed its $11.6 billion acquisition of BBVA USA Bancshares from its Spanish parent company Banco Bilbao Vizcaya Argentaria, S.A. (see GC report dated 4/27/21). Citizens Financial Group (CFG) is the latest regional bank to capitalize on this trend. Last week, the company said it will acquire 80 branches and an online deposit business, including $9.0 billion in deposits and $2.2 billion in loans, from HSBC Bank U.S.A.  HSBC is giving up on mass market retail banking in the U.S., ending relationships with retail clients maintaining balances below $75,000 and small businesses with less than $5 million in annual revenue. (It will continue to do wholesale business in the U.S.) The company had already signaled last year that it would shift its investments away from underperforming areas in the U.S. and Europe, to focus on higher growth markets, primarily in Asia. Within the U.S., its focus will be limited to international banking and wealth management. The company said it is selling 90 branches out of its current network of 148. The branches Citizens is buying are in the New York City Metro area (66), the Mid-Atlantic/District of Columbia (9) and in Southeast Florida (5). HSBC is also selling ten branches in Los Angeles to Cathay Bank and closing 35-40 branches. It will retain 20-25 locations as international wealth centers.  Detailed terms of the acquisition have not been disclosed, but Citizens is paying a 2% deposit premium (about $180 million). The deal is expected to close in the first quarter of 2022, subject to regulatory approvals. The deposits are primarily in savings (56%) and checking accounts (42%), with 2% in CDs. The New York market accounts for 63% of deposits, with 31% in online accounts. Most of the loans (80%) are secured by residential real estate. Citizens expects the deal to be immediately accretive to its earnings, with a projected internal rate of return of 20%.  Up until this transaction, Citizens had been concentrating on smaller, nonbank transactions, which have the potential to generate fee-based income. Noninterest income accounted for only one-third of revenue in the first quarter. For example, the company’s 2018 purchase of Franklin American Mortgage contributed to the growth in mortgage banking income last year. Citizens has previously told investors it would like to acquire a wealth management business, but since everyone is chasing wealth management, it has been difficult to identify a target that is priced at a reasonable valuation. While the HSBC transaction appears to be an opportunistic move, the added branches give a boost to the bank’s national expansion strategy, while the low-cost deposits (9 bps average cost) will provide funding flexibility to fund incremental loan growth. Loan growth has been weak, with commercial line utilization at record lows, but Citizens is optimistic that loan demand will begin picking up in the second half of the year.  The transaction will have a small impact on capital ratios, with a CET1 impact of 24 basis points. The CET1 ratio was 10.1% as of 3/31/21, net of $262 million in first quarter distributions to shareholders (dividends plus buybacks), up from 9.4% in the year-earlier period. Current period results (see datasheet) reflect the release of $298 million in reserves in the first quarter. On its earnings call, Citizens said that, assuming the macroeconomic outlook remains positive, it will likely be able to release additional reserves as the year progresses. It is telling investors to expect charge-offs in the range of 40 to 40 basis points in the second quarter. Our credit score for CFG remains stable, given the moderate cost of the HSBC transaction, and the potential benefits of expanded scale. The 3.25% notes due 4/30/30 are seen at T+71. Opinion: buy.

Gimme Credit LLC Analyst's Data Sheet

Regional Banks Citizens Financial Group Kathleen Shanley, CFA June 2, 2021 Five Quarter Financial Statistics $ millions 1Q21 4Q20 3Q20 1Q20 1Q20

Income Statement: Net interest income $ 1,117 $ 1,129 $ 1,137 $ 1,160 $ 1,160 Noninterest income 542 578 654 590 497 Net revenue 1,659 1,707 1,791 1,750 1,657 Noninterest expense 1,018 1,012 988 979 1,012 Pre-provision profit (pretax) 641 695 803 771 645 Provision for credit losses (140) 124 428 464 600 Income before taxes 781 571 375 307 45 Income tax expense 170 115 61 54 11 Net income $ 611 $ 456 $ 314 $ 253 $ 34

Segment Net Income: Consumer banking $ 302 $ 322 $ 407 $ 320 $ 236 Commercial banking 211 221 153 221 179 Other 98 (87) (246) (288) (381) Net income $ 611 $ 456 $ 314 $ 253 $ 34

Return on average assets 1.36% 1.00% 0.70% 0.57% 0.08% Return on average common equity 11.57% 8.20% 5.60% 4.44% 0.24% Noninterest income to total revenue 32.7% 33.9% 36.5% 33.7% 30.0% Net interest margin (FTE) 2.76% 2.75% 2.83% 2.88% 3.10% Efficiency ratio 61.4% 59.3% 55.2% 55.9% 61.1%

Balance Sheet (period end): Total assets $ 187,217 $ 183,349 $ 179,228 $ 179,874 $ 176,719 Commercial 60,413 60,793 62,362 64,930 66,032 Retail 61,782 62,297 61,709 60,783 61,496 Loans, net of unearned income 122,195 123,090 124,071 125,713 127,528 Allowance for loan losses (2,194) (2,443) (2,542) (2,448) (2,171) Net loans and leases 120,001 120,647 121,529 123,265 125,357 Loans held for sale, fair value 4,304 3,564 3,587 3,631 2,911 Deposits 151,349 147,164 142,921 143,618 133,475 Long-term borrowed funds 8,316 8,346 9,109 9,202 16,437 Total stockholders equity 22,653 22,673 22,469 22,418 21,950

Capital Ratios: CET1 capital ratio 10.1% 10.0% 9.8% 9.6% 9.4% Tier 1 capital ratio 11.4% 11.3% 11.2% 10.9% 10.5% Total capital ratio 13.4% 13.4% 13.3% 13.1% 12.5% Leverage ratio 9.5% 9.4% 9.5% 9.3% 9.6% Loans-to-deposits ratio 80.7% 83.6% 86.8% 87.5% 95.5% Dividend payout ratio 28% 39% 58% 74% 1398%

Asset Quality: Net chargeoffs $ 158 $ 190 $ 219 $ 147 $ 137 Net chargeoff rate 0.52% 0.61% 0.70% 0.46% 0.46% Nonperforming loans 1,008 1,019 1,277 990 780 Nonperforming assets 1,026 1,038 1,304 1,023 824 Total credit allowance (inc commitments) 2,372 2,670 2,736 2,527 2,210 NPAs/Loans & foreclosed RE 0.84% 0.84% 1.05% 0.81% 0.65% Allowance for credit losses/loans 1.94% 2.17% 2.21% 2.01% 1.73% Allowance for credit losses/NPLs 235% 262% 214% 255% 283%

Source: Company reports